CAUTION: This column was written in 2016 and has not been updated for 2017 (although the 2017 results will not be too much different).
In another post I discussed how much someone can earn without having to file a federal tax return. I suggest you go back and look at that post first. Then I looked at North Carolina income tax filing requirements. They’re short posts!
You now realize Mom has to file a tax return because her gross income exceeds $11,850. Recall, if her income exceeds $8,250 she’ll need to file a North Carolina return, but North Carolina does not tax Social Security benefits, so we’re focusing on the feds.
Here’s how the feds tax (or not) Social Security benefits:
- If her non-Social Security income from all sources is more than $11,850, then she will have to file a tax return HOWEVER if ½ her Social Security benefits PLUS her income from all other sources is LESS than $25,000 (call it her “Combined Income”), her Social Security benefits will not be taxed at all.
- However, if her Combined Income (½ her Social Security benefits PLUS her income from all other sources) is greater than $25,000, then her Social Security benefits are going to be taxed to some extent.
The question is: If her Social Security is going to be taxed, just how much?
As a rule of thumb, if her Combined Income is between $25,000 and $34,000, then as much as 50% of the Social Security benefits will be considered taxable. If her Combined Income is more than $34,000, then as much as 85% of her Social Security benefits will be considered taxable.
NO! That does not mean that she must pay 50% or 85% of her benefits as taxes . . . it means that up to 50% or 85% of her benefits will be treated like taxable income from other sources (after having pushed through a worksheet, which I’ll discuss below).
To figure out the amount of benefits taxable, fill out the Social Security Benefits Worksheet that comes in the instruction package for Form 1040.
Example: Let’s say Mom worked constantly at Burt’s FastBurger and her W-2 shows gross income of $23,000. Her 1099-INTs show interest income of $3,000. Her 1099-SSA shows Social Security benefits of $19,200. Half her Social Security benefits is $9,600. When added to her other income ($26,000) the sum is $35,600 . . . which is, of course, more than $25,000 in fact, it’s more than $34,000). All that means is some of her Social Security will be taxed.
In fact, I filled out a worksheet for Mom and you can download it here (you can also mess around with it yourself). As you can see, $5,860 of Mom’s Social Security benefits are taxable.
That means that Mom’s gross income for the year will be: $23,000 (Burt’s) + $3,000 (Interest on the CDs) + $5,860 (Taxable part of Social Security) = $31,860.
What If You Are Drawing On An IRA?
Many people are drawing money out of IRAs. In fact, occasionally it may be necessary to cash in an IRA in order to qualify for Medicaid. How will IRA funds affect the taxation of Social Security benefits?
Let’s change the facts a bit.
Mom is not working. Mom and Dad have combined Social Security benefits of $25,000. Dad has an IRA, but because he is going into a nursing home they cashed in his $100,000 IRA. All of the IRA funds will be taxable on Mom’s and Dad’s joint tax return. The question is: How much of their Social Security will be taxable?
Their Combined Income is $112,500 (1/2 of $25,000 + $100,000). Clearly 85% of their Social Security ($21,250) will be considered gross income when calculating taxes.
Without any adjustments, their gross income is $121,250. Just for fun, I have completed a Social Security worksheet for this example for your viewing pleasure. By the way, this may not be a happy tax result, but Mom’s alternative was to start paying $8,500 a month to the nursing home on their, perhaps, meager savings.