Social Security and Railroad Retirement Benefits
Learning Objective
Be able to compute the taxable portion of Social Security and railroad retirement benefits.
Many taxpayers may exclude all of their Social Security benefits.from gross income. Middle- and upper-income Social Security recipients, however, may have to include up to 85% of their benefits in gross income. The amount of benefits taxable depends on modified AGImodified AGIUsually adding to AGI certain items as a basis for determining the taxability or deductibility of other items; e.g., to determine the taxability of Social Security benefits. and filing status. Modified AGI for Social Security benefits taxation is:
| Adjusted Gross Income (before Social Security benefits) | |
|---|---|
| + | Most tax-exempt interest |
| + | Employer provided adoption benefits |
| + | Excluded foreign income |
| + | Deducted interest on education loans |
| + | Deducted tuition and fees |
| + | 50% of Social Security benefits |
Based on upper and lower amounts of the modified AGI, the computation of the taxable portion follows the steps in Table 3.4, “Taxing Social Security Benefits”.
Table 3.4. Taxing Social Security Benefits
| Married Filing Jointly | Single, Head of Household, or Qualifying Widow(er)* | |
|---|---|---|
| * Married filing separately: If spouses lived apart the entire year, they would use the Single column. If the spouses lived together for part of the year, the lesser of 85% Social Security benefits or 85% of modified AGI is taxable. | ||
| Lower limit of modified AGI | $32,000 | $25,000 |
| Upper limit of modified AGI | $44,000 | $34,000 |
| Taxable portion of benefits if modified AGI is between the two limits | Lesser of 50% of benefits or 50% of the excess of modified AGI over $32,000. | Lesser of 50% of benefits or 50% of the excess of modified AGI over $25,000. |
| Taxable portion of benefits if modified AGI is above the upper limit | Lesser of (a) 85% of benefits or (b) 85% of the excess of modified AGI over $44,000 plus the lesser of $6,000 or 50% of benefits. | Lesser of (a) 85% of benefits or (b) 85% of the excess of modified AGI over $34,000 plus the lesser of $4,500 or 50% of benefits. |
Example
During this tax year, Wilma a single taxpayer received $10,000 in Social Security benefits. Her AGI was $20,000 and received $8,000 of tax-exempt municipal bond interest. Wilma must include $4,000 of her Social Security benefits in income. Wilma’s $33,000 modified AGI is between the low and upper limits of modified AGI ($33,000 = $20,000 + 8,000 + 5,000).
Example
Carrie, a widow, received Social Security benefits of $16,000. Her modified AGI was $48,000, which is above the upper limit of $34,000. Carrie must include $13,600 of her Social Security benefits in income. The amount included in income is determined as follows:
Go to Publication 17 and read Chapter 11: Social Security and Equivalent Railroad Retirement Benefits.
The computation of taxable Social Security in Publication 17 (and in the Form 1040 instructions) uses two worksheets to compute the modified AGI and then the taxable portion of Social Security (or railroad retirement benefits). At first, the worksheets do not appear to be the same as the formulas shown on the previous page, but the logic and results are the same.
Questions and Problem
The maximum percentage of Social Security benefits that must be included in a taxpayer’s gross income is?
85%
75%
65%
50%
25%
When computing the taxable portion of Social Security benefits, the modified adjusted gross income is adjusted gross income (without Social Security benefits) and
Less tax-exempt interest
Less any foreign income exclusion
Plus tax-exempt interest less foreign income exclusion
Plus foreign income exclusion less tax-exempt interest
Plus tax-exempt interest income and income exclusions
During the year, Lori, a single taxpayer, received $6,000 in Social Security benefits. Her AGI for the year was $16,000 (not including the Social Security benefits) and she received $28,000 in tax-exempt interest income. Calculate the amount of the Social Security benefits that Lori must include in gross income. $___________
