Most Americans think that when it comes to paying income tax, Social Security benefits are off-limits. And in most cases, that may be true, but add a little income on the side, and those non-taxable benefits can shift onto the taxable side of the spreadsheet.
Social Security benefits include monthly retirement payments, as well as survivor and disability benefits. Supplemental security income payments (SSI), however, are not taxable—so they’re not included.
So, what’s taxable and what’s not? That depends on the income and filing status of the taxpayer.
Publication 915, Social Security and Equivalent Railroad Retirement Benefits, sums it up this way:
“If the only income you received during 2020 was your Social Security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally aren’t taxable and you probably don’t have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable.”
That’s an oversimplification, of course. In order to know if benefits are taxable, taxpayers should take half of their Social Security benefits for the year and add it to any other income they had.
“Other income” includes wages, pensions, interest, dividends, and capital gains.
If the total is more than $25,000 and the taxpayer is single, part of their Social Security benefits may be taxable.
Taxpayers who are married and file jointly should take half of their Social Security – and half of their spouse’s Social Security – and add the two amounts to their other income. If the total exceeds $32,000, then a part of their Social Security benefits may be taxable.
When making the comparison, Publication 915 says taxpayers shouldn’t reduce their other income by any exclusions for interest from qualified U.S. savings bonds, employer-provided adoption benefits, interest on education loans, foreign earned income or foreign housing, or income earned by bona fide residents of American Samoa or Puerto Rico.
Some could owe tax on a larger percentage of their Social Security benefits
Generally, up to half of a taxpayer’s Social Security benefits could be considered taxable if the taxpayer is:
- Filing single, head of household, or qualifying widow or widower with $25,000 to $34,000 income.
- Married filing separately and lived apart from their spouse for all of 2020 with $25,000 to $34,000 income.
- Married filing jointly with $32,000 to $44,000 income.
However, taxpayers who fit the following situations could have as much as 85% of their Social Security benefits considered taxable:
- Filing single, head of household, or qualifying widow or widower with more than $34,000 income.
- Married filing jointly with more than $44,000 income.
- Married filing separately and lived apart from their spouse for all of 2020 with more than $34,000 income.
- Married filing separately and lived with their spouse at any time during 2020.
Publication 915 says some U.S. citizens living abroad are exempt from American income tax on their benefits, but only if they live in these countries:
- Canada
- Egypt
- Germany
- Ireland
- Israel
- Italy (You must also be a citizen of Italy for the exemption to apply)
- Romania
- United Kingdom
The IRS website, IRS.gov, has an Interactive Tax Assistant that can help answer the question Are my Social Security or Railroad Retirement Tier 1 Benefits Taxable?
Sources: IRS Tax Tip 2021-66; Publication 915: Social Security and Equivalent Railroad Retirement Benefits.
Upstate Tax Professionals