I will share with you some facts regarding knowing what is taxable and also some often overlooked items in regards to the IRS rules.
The amount you pay in taxes on social security benefits will depend on your filing status and the other types of income you earn such as wages, interest, and dividends. Regardless of your other sources of income, no taxpayer will be required to pay taxes on more than 85% of the social security benefits received. Your combined income provides the basis for calculating your social security benefit tax liability. Your combined income is calculated by taking your adjusted gross income and adding one-half of both your non-taxable income and social security benefits received.
Breakdown by Filing Status:
- Single or Head of Household - For individual taxpayers with combined income below $25,000, no tax is owed on benefits paid. For combined income between $25,000 and $34,000, up to 50% of Social Security benefits are taxable. For combined income over $34,000, up to 85% of benefits are subject to taxation.
- Married Filing Jointly - Married couples filing a joint return with less than $32,000 in combined income are exempt from paying taxes on Social Security income. If your combined income ranges from $32,000 to $44,000, up to 50% of your social security benefits are taxable. For combined income greater than $44,000, up to 85% of benefits are taxable.
- Married Filing Separately - For married taxpayers filing a separate return, there are two methods for calculating the portion of your taxable social security benefits. If you lived with your spouse, up to 85% of the benefits are taxable no matter the amount of your combined income. For taxpayers who did not live with one another at any point during the year, they may use the individual income scale in determining the taxable amount.
What Happens If I Receive a Lump Sum Payment for Prior Years?
When you receive a lump sum payment for prior year benefits, the tax landscape gets a little more complex. You can’t amend your prior year tax returns for a lump sum payment received in the current year. You have two alternatives for determining the tax liability on your social security income. You may choose whichever method results in the lowest tax liability.
● You can calculate your benefits based on your current year’s combined income.
● You can separate out the portion of the lump sum payment attributable to the prior year and calculate the tax attributable to the prior year portion based on that year’s income.
Also, if your anticipating receiving a lump sum in the following year, some tax planning may be in order. For example, you could accelerate your medical payments in the current year and deduct them. That way these would not be phased out by the higher gross income when you receive the lump sum. Check with your tax preparer if you are expecting a large payout to see if this approach will work for you.
Earned Income Tax Credit (EITC):
This is a tax credit for certain people who work and have low to moderate earned income. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe and may also give you a refund, even if you haven’t paid in any tax. Many working individuals with a disability that have no qualifying children, who are at least 25 years of age but under 65 years of age, qualify for EITC. Earnings for EITC purposes can include disability benefits you receive from your employer's disability retirement plan, until you reach minimum retirement age.
- You must file a tax return to determine your eligibility to claim the EITC. Many people with disabilities miss out because they owe no tax so they do not file a tax return.
- What about EITC Refunds… Will they Increase my Income and Reduce my SSI check? No, refunds received from refundable credits are not considered income and is not counted as a resource for at least 12 months from when you receive it for benefits or assistance under any Federal program or under any State or local program financed in whole or in part with Federal funds. It is always best to check with your local benefit coordinator to find out if your benefits fall under this provision.
You can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of yourself, your spouse, or your dependent.
Tax Advantaged Savings Plan for Individuals With Disabilities: IRC Section 529A:
The Stephen Beck, Jr., Achieving a Better Life Experience Act (ABLE Act) was enacted on December 19, 2014, as part of The Tax Increase Prevention Act of 2014 (P.L. 113–295). Generally, the ABLE Act permits a state to establish and maintain a new type of tax-advantaged savings program (under Section 529A of the Internal Revenue Code). Contributions may be made to a 529A account established for a designated beneficiary to pay for qualified disability expenses. All states adopted this savings plan at different times. For example, in my home state of Arizona, this was adopted into state law in May of 2016.