Most people are surprised to find out that sometimes Social Security income is taxable. For most people it isn’t subject to federal income tax, but if your income is high enough, Uncle Sam wants his cut. The limit isn’t that high, so many people do have to pay tax on some of it.
Each year in January the Social Security Administration mails Form SSA-1099 to anyone that has received Social Security income the prior year. This form shows the amount that may be subject to taxation in box 5. This amount goes on line 20A of the 2007 Form 1040. The taxable amount goes on line 20B. It also shows the amount of Medicare premium that has been withheld and also any federal income tax withholding. 85% of the amount in box 5 is the maximum subject to tax.
The IRS has a worksheet in the 1040 Forms and Instructions Booklet to use to see how much, if any, Social Security is taxable. Generally, for a single person, if half of your Social Security income plus your other income (wages, pension, interest, dividends, capital gains, tax exempt income, etc.) exceeds $25,000.00, then some of your Social Security is taxable. If you are married filing jointly and these things for both of you exceed $32,000.00, then some of your Social Security is taxable.
As with most income tax situations, there are exceptions. If you have an IRA deposit or withdrawal, the calculation becomes more complicated. Also if you repaid some Social Security benefits, the taxable calculation will be affected. Income tax return software will do the computation for you, but otherwise the worksheet will guide you or your tax preparer through it.
Sometimes minor children under the age of 18 receive Social Security benefits, perhaps due to the death of a parent. The minor will receive an SSA-1099 in their name and Social Security number and even this could be taxable. For this to be true, they would need to have other income just like an adult and the taxable amount would be computed the same way.
Most people’s tax situations do not change that much from one year to the next. If some of your or your spouse’s Social Security is taxable each year, it is a good idea to have some of it withheld for federal income tax. Contact your area Social Security office for a W-4V form to start withholding. Ohio and most if not all other states do not tax Social Security, even if the IRS does. Having taxes withheld can prevent penalties or the need for paying quarterly estimates.