Ed note: Taxes on social security benefits are confusing. You report them on your tax return, but they are often not taxed. Here are a few general rules of thumb from our experts at the Tax Institute.
All social security benefits, whether in the form of retirement benefits, survivor benefits or disability benefits, are taxed in the same manner. This means that your age or the reason you are receiving the benefits plays no role in how the IRS will treat those benefits. However, even though you are required to report your social security benefits on your tax return, your benefits may still be excluded from taxation in many situations, mainly based on your income from other sources.
So will you pay taxes on your social security retirement, survivor or disability benefits?
Social Security Benefits
If social security benefits are your only source of income, then generally your benefits will not be taxable on your federal Form 1040.
If you have income from other sources, the easiest way to determine whether your social security benefits are taxable is to take one-half of your yearly social security income and add it your other income. If you are single and the amount exceeds $25,000, then at least a portion of your social security benefits may be taxable.
If you are married and file jointly with your spouse, you must do the same calculation for both you and your spouse. This means you should take half of your social security benefits and half of your spouse’s social security benefits, and add both halves to your combined income. If the resulting amount is more than $32,000, then at least portion of your social security benefits may be taxable.
If you are married and file separately from your spouse, part of your social security benefits may be taxable regardless of the calculation above. This is why it is advantageous for married taxpayers who are receiving social security benefits to file jointly with their spouse, rather than separately.
This calculation is just one step; there are many ways your taxable social security benefits can be affected by the types of income you have and your situation. Thankfully, the IRS website provides an interactive tool to help you determine whether your social security benefits are taxable.
From a state income tax perspective, the treatment of your social security benefits depends upon the laws of your particular state. Generally, states tax social security benefits in one of four ways: the state fully exempts Social Security benefits; (2) the state taxes Social Security benefits the same way in which the federal government taxes them; (3) the state bases benefit exemptions on certain factors such as age or income; or (4) the state does not tax income at all.
Supplemental Security Income
To contrast social security benefits, supplemental security income (SSI) is not taxable. The SSI program pays benefits to disabled adults and children who have limited income and resources. It is designed to help aged, blind and disabled people who have little or no income by providing cash to meet basic needs for food, clothing and shelter.
This income is different from the other types of social security benefits, as it is not funded by social security taxes paid on earnings. The IRS specifically “carves-out” these benefits from the definition of taxable social security benefits, so they should not be reported anywhere on your tax return.
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