Social Security and income taxes

 

Social Security benefits

After completing Schedule E we're back to Form 1040. If you receive Social Security benefits, you'll also receive a Form SSA-1099 that shows your total benefits for the past year. You'll have to list your total benefits on your 1040, and then you'll have to determine the amount of your benefits that are subject to income tax. This is the hard part.

History of Social Security benefit taxation

Social Security benefits were tax exempt through 1983. After 1983, up to 50 percent of Social Security benefits were subject to tax.

Further, the Clinton tax increase of 1993 raised the tax burden on Social Security recipients. With the Clinton tax increase, up to 85 percent of your Social Security benefits will be taxed.

Amount of Social Security benefits subject to taxation

Determination of the amount of Social Security benefits subject to taxation is complicated, but here's a guide for you.

If your so-called base income, which includes half of your Social Security and all of your otherwise tax-exempt interest, is under $25,000, your Social Security benefits won't be taxed at all.

If your base income is higher than $25,000, or $32,000 if you're married, anywhere from 50 to 85 percent of your Social Security benefits are subject to income tax. The exact calculation requires a one-page IRS spreadsheet, and is a great example of how Washington brainiacs cook up tax schemes that make perfect sense to them but leave the rest of us scratching our heads.

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