Each January, individuals who receive SSA disability or retirement benefits receive a Form SSA-1099. This form shows the amount of social security benefits you received in the previous year. You may have to pay federal income tax on these benefits if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends, or any other taxable income that you report on your tax return). According to Social Security and the IRS, about 40% of people who receive Social Security benefits, including retirees, have to pay income taxes on their benefits.
Taxation issues can be complex and vary significantly with each individual. Please discuss any questions with a tax professional.
Are my benefits taxable?
To find out whether any of the benefits on your SSA-1099 are taxable, you first need to determine your tax base amount. Your tax base is a total amount of income that can be taxed and is used to calculate which tax percentage will be applied.
Your base amount is:
- $25,000 if you are single, the head of household, or a qualified widower
- $25,000 if you are married filing separately and living apart from your spouse for all of 2018
- $32,000 if you are married and filing jointly or
- $0 if you are married filing separately and lived with your spouse at any time during 2018.
Next, you will need to compare your base amount with your combined income.
You combined income is:
- One-half of your benefits +
- All of your other income, including tax-exempt interest
Your benefits may be taxable if your combined income is more than your base amount.
How Much of My Benefits Are Taxable?
The taxable rate of your benefits is dependent upon the total amount of your benefits and your other income. The higher the total amount, the greater the taxable part of your benefits. For many of those who pay taxes on Social Security benefits because their total income exceeds the base amount, up to 50% of your benefits will be taxable at their tax rate. For higher income recipients, up to 85% of your Social Security benefits may be taxable. You will never pay taxes on more than 85% of your Social Security income. Here is a summary of the breakdown:
- You may have to pay income tax on up to 50% of your benefits if:
- You file a federal tax return as an individual and your combined income is between $25,000 and $34,000.
- You file a joint return and you and your spouse have a combined income that is between $32,00 and $44,000
- You may have to pay income tax on up to 85% of your benefits if:
- You file a federal tax return as an individual and your combined income is more than $34,000.
- You file a joint return and you and your spouse have a combined income that is more than $44,000.
- If you are married and file a separate tax return, you probably will pay taxes on your benefits.
What to do if you received a Lump-Sum of SSA benefits in 2018
Our clients who are approved for disability often receive a lump-sum of retroactive benefits which include SSA benefits which are accrued compensation for months of previous years. If you received a lump-sum payment in 2018 that includes benefits for one or more earlier years, it will be included in Box 3 of the Form SSA-1099. Your SSA-1099 lump-sum section breaks down the payment into what amount was payable for each preceding year.
You must include the lump-sum amount from 2018 that is taxable in your 2018 income, even if the payment includes benefits from an earlier year. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can choose this method as it often lowers your taxable benefits.
You might need to pay taxes on a small portion of your lump-sum payment. But depending on your total income, you may be able to avoid these taxes by apportioning prior year benefits to those previous years’ income. Under the lump-sum election method, you can first refigure the taxable part of all of your benefits for the earlier year using that year’s income. Then, subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add the remainder to the taxable part of your benefits for 2018.
While your lump-sum may include benefit payments for more than one year, the earlier year’s taxable benefits are included in your 2018 income so no adjustment is made to the earlier year’s return, and you do not need to file an amended tax return for the earlier year.
How to Report Your Benefits
Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. If part of your benefits is taxable, you must use Form 1040.
We hope this information makes it easier for you to determine if you need to pay taxes on your social security benefits. If you have additional questions about a tax issue, want additional instructions, or need help preparing your tax return, please go to the IRS Website, or consult a tax professional. If you have more questions about taxation of retroactive SSA benefits, there is an IRS publication here.