Are Social Security Benefits Taxable?

Most workers have heard about Social Security their entire lives and laughed, “Ha! I’ll never see those benefits!” Then, suddenly, those workers are approaching retirement age and thinking about when that “free money” is going to start. But is it free money? Sure, it’s free, in the sense that you don’t need to work to get it. However, a portion of those Social Security benefits could cost you because they are taxable.

If Social Security is going to be your only income in 2021, your benefits will probably not be taxable. If you receive income other than Social Security, such as wages, interest, dividends, capital gains, or net business income, you must do a few calculations to determine whether any of your Social Security benefits are subject to federal tax.

Here’s a quick way to find out if a portion of your Social Security benefits are taxable:

  1. Determine the total Social Security benefits that you will receive in 2021.
  1. Multiply the total benefits by 50%.
  1. Add the 50% of your Social Security benefits received during 2021to all your other income received in 2021, including tax-exempt interest. 
  1. If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits, even if your spouse didn’t receive any Social Security benefits.
  1. Compare the total from #3 to the Base Amount for your tax filing status:
  • $25,000 – For single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2021
  • $32,000 – For married filing jointly
  • $0 – For couples married filing separately and lived with your spouse at any time during 2021
  1. If the total from #3 is higher than the Base Amount, a portion of the Social Security benefits above the Base Amount is taxable, up to 85% of the benefits. The higher your income, the higher the percentage of Social Security benefits subject to federal tax.

If you are approaching retirement age and thinking about your “free money” from Social Security, you need to check on whether it really is free. A portion of those Social Security benefits could be subject to federal tax, depending on your other income and your Base Amount.

Have questions? The IRS has answers for you at https://www.irs.gov/faqs/social-security-income.

Who Can be Claimed as a Tax Dependent?

At tax time, you want to take all the deductions you can, right? So you’re probably interested to know whether the people living under your roof and eating your food can be claimed as dependents on your tax return. For 2016, each dependent can reduce taxable income by $4,050.

 

Tax filers are allowed to claim a qualifying dependent, even if that dependent files an income tax return. A dependent is defined as a qualifying child or qualifying relative. Not surprisingly, a number of rules define who qualifies as a “child” or a “relative”.

 

Also no surprise — this space is limited and tax rules are complex. The following is merely a summary of the tax rules about dependents. It does not address all the exceptions and scenarios that could impact your situation.

 

General Rules

 

All dependents must be a qualifying child or a qualifying relative.

 

In all situations, tax filers cannot:

  • Claim any dependents if the tax filer is a qualifying dependent of another person.
  • Claim a married person who files a joint return, unless it is filed only to get a refund.
  • Claim a person who does not pass the residency test.

 

A Qualifying Child is defined as:

  • Your child, stepchild, foster child, sibling, half -sibling, step-sibling, or their descendants.
  • A person under age 19, under age 24 if a student, or any age if permanently and totally disabled.
  • A person who passes the residency test.
  • A child who did not provide more than half of his or her own support.

Even more rules apply if a child meets the rules to be a qualifying child of more than one person.

 

A Qualifying Relative is defined as:

 

  • A person who is not a qualified child of the tax filer or of another taxpayer.
  • A member of your household per local law.
  • A person with gross annual income less than the personal exemption amount.
  • A relative for whom the tax filer provided more than half of the total support.

 

Special rules may apply to relatives who do not live with the tax filer.

 

Confused yet? Need more details? Check out the IRS website here: http://bit.ly/2lXr9UM