The most important thing you need to know about income tax on social security benefits is whether the benefits are taxable. Supplemental security income (SSI) are not taxable. Social security benefits (disability and survivor) may or may not be taxable. The Social Security Administration will send you a social security benefit statement (Form SSA – 1099). This Form will show the total amount of benefits you received during the year and any other transactions (tax withheld, repayments, etc.).
If social security benefits are your only income, your benefits are probably not taxable. First you will need to know who is taxed. According to the Internal Revenue Service (IRS) “the person who has the legal right to receive the benefits must determine whether the benefits are taxable. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you.” To find out whether you benefits are taxable, you will need to know what is involved in making the calculation. The Internal Revenue Service uses a base rate in determine whether benefits are taxable. Your base rate will depend on your your filing status. For instance, the base rate for single filing status is $25,000. To figure out whether your benefits are taxable: take one-half of the amount in box 5 of your Form SSA – 1099, add all other income plus tax exempt interest. Then compare this total with the base amount for your filing status. If this total is equal to or less than the base amount, your benefits are not taxable. If this total amount is greater than the base amount, your benefit may or may not be taxable. If the total is greater, you will need to do worksheet 1 in the Internal Revenue instruction book. The maximum amount of your benefits that may be taxable is 50% or 65%.
You may need to have tax withheld from you benefits in order to avoid a late penalty or you may make estimated payments during the year. IRS Publication 915 contains all the information you will need to know concerning income tax on your social security benefits. You can download this publication at: (www.irs.gov/pub/irs-pdf/p915.pdf).
Ref: www.irs.gov/publication 915