Tax Experts
Social Security Tax Penalty for Filing Separately
By Kevin McCormally, Editorial Director, Kiplinger.com
April 2008
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Q: Why do I have to pay 85% on all my benefits because I am filing separately? On the worksheet, I must go directly to line 16. My benefits were $15,660 and the W2 from my job was $12,285. -- Jim L
Kevin's Answer
This is one of the many disadvantages of the married-filing-separately filing status. For singles, Social Security benefits are not taxed until income (which in this case includes half of the benefits) pass $25,000; for marrieds filing jointly, the threshold is $32,000. But for married taxpayers filing separately, the trigger point is $0.
Here's how I explained it in a book a few years ago (the book is out of print, but the info is still up to date).
Social Security Benefits
Congress seems determined to make this issue more and more complicated. Not so long ago, the tax rules for Social Security benefits were the epitome of simplicity: Benefits were tax-free. Period.
Now beneficiaries fall into one of three categories:
1. Those whose benefits remain totally tax-free.
2. Those who can have up to 50% of their benefits taxed.
3. Those who can have up to 85% of their benefits taxed.
If you’re among the 10 million or so retirees whose benefits are hit, you need to know the rules.
The first step in determining whether or not your benefits are vulnerable is to find your "provisional income." That’s basically your adjusted gross income plus any tax-exempt interest, plus 50% of your Social Security benefits.
Your benefits are totally tax-free if your provisional income is less than $25,000 and you file a single or head-of-household return. These benefits are also tax-free if your provisional income is less than $32,000 and you file a joint return. (Unlike many other thresholds in the tax law, these figures are not indexed to rise with inflation. And, that’s not an oversight. Congress did it deliberately so that, over time, more and more beneficiaries would be subject to this tax.)
If your provisional income exceeds the threshold for your filing status, what portion of your benefits can be taxed depends on how high your income is.
If your income is between $25,000 and $34,000 on a single or head-of-household return, or between $32,000 and $44,000 on a joint return, no more than half of your benefits can be taxed. The amount included in taxable income is the lesser of half of your benefits or half of the amount by which provisional income exceeds the trigger point.
Assume you and your spouse file a joint return. Your AGI for the year is $30,000, and you have an extra $4,000 of tax-free interest from municipal bonds and $5,000 of Social Security benefits.
Adding your AGI ($30,000), your tax-exempt interest ($4,000) and half of your benefits ($2,500) gives you $36,500. That’s $4,500 over the $32,000 threshold for joint returns. Since half of that amount ($2,250) is less than half your benefits ($2,500), the smaller amount is the part of your Social Security that is taxed. In the 28% bracket, the extra $2,250 of taxable income will cost $630.
The 85% Rule
When provisional income exceeds $34,000 on a single return or $44,000 on a joint return, things get more complicated, but the bottom line is this: In almost all cases, 85% of your benefits are taxed.,/p>
The IRS has devised an 18-line worksheet for figuring how much of your benefits are taxable. You’ll find it in the instructions for your tax return.
What about married couples who file separate returns? They can forget the $25,000/$32,000 and the $34,000/$44,000 thresholds. Their threshold is $0 -- and they can be certain that 85% of their Social Security benefits are taxable. -- Excerpted from Kiplinger Cut Your Taxes
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