 Income Tax 2023-2024 Social Security Benefits. Get ready and some coffee because we're setting our refund to the max with Income Tax Preparation 2023-2024. Most of this information can be found in the Line Instructions section of the Form 1040 Instructions tax shared 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at the Income Tax formula, we're focused on Line 1 income. Remember in the first half of the Income Tax formula is in essence a funny income statement. Income statements normally having income minus expenses resulting in net income. Here we have income minus various deductions resulting in taxable income. When looking at the income line item, for taxes we would like to have income as low as possible rather than as high as possible. And some of the income line items might be taxed at different rates other than the normal ordinary income, typically favorable rates. For example, with the qualified dividends and possibly long-term capital gains. Looking at page 1 of the Form 1040, we're focused on Line 6 for Social Security Benefits. Now quick note on Social Security Benefits because when we hear that term, we might be thinking of two sides of the coin. Which side of the coin are we talking about? One side of the coin is us putting money into the system and the other side of the coin is us taking money out of the system. When we're looking at income, we're thinking about us taking money out of the system at basically usually the retirement age. And at that point in time, the question would be, would it be something that is included in income? Now, how much we're going to get in Social Security? First, a word from our sponsor. Actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our CPA six-pack shirts, a must-have for any pool or beach time. Mixing money with muscle, always sure to attract attention. Even if you're not a CPA, you need this shirt so you can pull in that iconic CPA six-pack stomach muscle vibe, man. You know, that CPA six-pack everyone envisions in their mind when they think CPA. Yeah, as a CPA, I actually and unusually don't have tremendous abs. However, I was blessed with a whole lot of belly hair. Yeah, allowing me to sculpt the hair into a nice CPA six-pack-like shape, which is highly attractive. Yeah, maybe the shirt will help you generate some belly hair too. And if it does, make sure to let me know. Maybe I'll try wearing it on my head. And yes, I know six-pack isn't spelled right. But three letters is more efficient than four, so I trimmed it down a bit, okay? It's an improvement. With Social Security during our working years, we typically pay into Social Security when we have earned income. The most normal type of earned income is as an employee payroll taxes that takes out our taxes for us by the employer, which includes our federal income taxes, our Social Security, and our Medicare. And that is reported on the W-2, which is given to us. And it's also reported to the government, the Social Security Administration, as well as the IRS, so they have those records as well. And then as we pay into the system, then that's going to help to calculate what our Social Security benefits will be typically when we reach the retirement age and then we'll start receiving money from the Social Security system, which will be calculated in part on how much money we put into the system. Now, when you think about how much benefits you're going to get, you can get into tax planning questions, especially when you have people that have, like, businesses, for example, and they are paying into the system not with W-2, but possibly with self-employment tax for, say, a sole proprietorship. And you get into questions as to who is being allocated the income in a married kind of couple situation, for example, that have, say, a family business and what impact might that have in Social Security distributions at the point of retirement. So if that's a point of interest, then that's more of a tax planning kind of question, and you can drill down onto the details of that. From just a data input perspective, when we receive Social Security, you would expect that to be usually older clients. So when you're working with younger clients, you would expect them to be paying into the system, having W-2 income, self-employment income, and then when you have older clients, you would expect them to be living off of possibly money that's coming out of retirement plans, IRAs, 401K plans, in which case you'd get a 1099R, and possibly Social Security benefits. And so, and then the question is, are those going to be included in income? Okay. So for the tax year 2023, the portion of Social Security benefits that may be taxable depends on your filing status and the amount of your combined income. So combined income for this purpose is defined as the sum of your adjusted gross income, non-taxable interest, and one half of your Social Security benefits. So in other words, whenever we think about these phase out kind of things, that's basically what we have here. Oftentimes we think about it more on the deductions side, meaning if you get a deduction or a credit, oftentimes as your income goes up, then the amount of deduction or credit basically goes down with income, right? That would be the general idea. Here the question is, do you have to include this amount in income? Income is typically bad, and therefore the higher your income, the less that you would have to record, would be the general idea. People that have lower income might not have to include as much of the Social Security in income, which would be a benefit. Now that becomes a confusing calculation because one, they usually calculate income not on the top line of income, but on the adjusted gross income. So you have the adjusted gross income, and you're talking about something that would be included in income. So you get into the circular loop kind of thing. So usually they start with adjusted gross income, and then they make adjustments to it. So adjusted gross income, non-taxable income, and one half of your Social Security benefits. Okay. So for individual filers, and this is just an estimate, and this is going to be an idea that you want to kind of keep in your mind approximately how much of the Social Security will be included, and then I would suggest using the tax software to get more specific about the exact amount of Social Security benefits that are going to be included in income. Because you have two general objectives usually. One is going to be the idea of communicating with people and getting the general idea so that you can communicate the general idea, and the other is to get everything specifically completely correct to the detail, which can be more complicated than what you can usually do when you're trying to explain it with to somebody, and that, of course, will be useful with the tax software will help you with these calculations. So in general, an approximation, if your combined income is between like $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Now, that doesn't mean you pay 50% of your benefits in tax. We're talking about how much might be included in your taxable income, which then would be subject to usually the ordinary income tax brackets, and so then you'd have to apply the progressive tax brackets to that to see how much tax you would pay. So if your combined income is more than $34,000, up to 85% of your benefits may be taxable. So the general response would be, do I have to include this in income? Well, if your income is fairly significant, then up to 85% generally might be included then in income. If your income is lower than that, then you might have less of the social security benefits included say, for example, 50%. So for joint filers, this is an estimate once again, if you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. So if your combined income is more than $44,000, up to 85% of your benefits may be taxable. So it's a fairly low threshold for people that have earned income, in which case if they go over that amount, then they're going to have to be including in income 85% of the social security benefits that they are receiving. And again, that doesn't mean they're going to pay 85% in tax. That means they're going to include that in income and then apply the ordinary income tax rates on it. So for someone married filing separately, if you are married filing separately and live with your spouse at any time during the year, you will probably have to pay taxes on your benefits. So oftentimes when you file married filing separately, the IRS is skeptical about people doing that because they might take advantage or try to take advantage of phase outs such as this and therefore it's usually a less favorable status when you're looking at these type of things such as phase outs. Okay, so again, these are just basically estimates that give you a general idea and then of course you would want to punch this stuff into the software which has a little bit more complex calculation to determine precisely how much would be included in income. But the general idea, if you have significant income, up to 85%, if your income is lower than that, less possibly like 50%. So calculating combined income. So to determine your combined income for the purpose of figuring out how much of your social security benefits may be taxable, you can use the following formula. So the combined income as we saw, your adjusted gross income. So that's the income minus the above the line deductions which we'll talk about later. Oftentimes people might not have any above the line deductions or adjustments to income if they have a low income situation and are in retirement, for example, plus non-taxable interest. Now you might ask why do they add non-taxable interest? Non-taxable interest is not included in the adjusted gross income. It's just a reporting thing. We saw interest before. It's not actually included in income because it's non-taxable, but you still have to report it and still be reported on the 1099INT. Well, the idea would be if you have a significant amount of interest, whether it be taxable or not, then that would mean that you probably have a lot of money in a retirement account. Because the only way you would get a lot of interest, whether it be taxable or not, is that you have a whole lot of money sitting somewhere accumulating interest. So they want to pick that up, non-taxable interest to determine if you can basically support your own retirement. And just note that this gets back to this fundamental question that we have about these retirement programs or benefit programs like Social Security. Our problem in the United States is we don't really know whether we want to treat Social Security as like a federal mandated retirement program that everybody is going to be part of and it's going to support all of us in retirement. Or as it was originally put into place, you would think it was more like a safety net program. The idea being you save for your own retirement and we don't try to take all your money out of your paycheck and put it into Social Security, you save for your own retirement. And then if you don't do that or you couldn't do that or you live longer than you expected or something happened, then we have a safety net program that would be Social Security to help those people in later years that don't have the money to pay for their retirement. That's I think what the original thought was. But now more and more it's being thought of as basically just a retirement program that everybody pays into and they should all get benefits from no matter how wealthy they are. It's a retirement program for everyone. So we have this complex kind of interplay between those two things which means that the benefit calculations that you're receiving should go higher if you think about it as a 401k plan or something like that, kind of like a federal retirement plan. The more you pay into it, the more benefits you should get out of it if you're thinking of it as that kind of plan. But if you're thinking of it as a safety net program then you should really only get benefits from it if you need the benefits because you couldn't say for your own retirement. It's a safety net program in that sense. So that's one of the issues we kind of have. We have this in-between zone with this Social Security which is part of the reason it's basically going bankrupt. But in any case, then we're going to say plus one half of your Social Security benefits. So remember the Social Security benefits would be an adjusted gross income. So the question is do we include that when we're talking about the combined income which is basically an adjustment to adjusted gross income. So that's the calculation. So let's say you're single and in 2023 you received 18,000 in your Social Security benefits and had 20,000 in other income and had 500 in non-taxable interest. Your combined income would be the 20,000 plus the 500 plus one half of the 18,000. So let's just check that out see if I got that right. So we've got the 18,000 that we got from Social Security divided by 2 is going to be included plus the 20,000 and plus the interest of 5295. So since 29,500 is between 25,000 and 34,000 for an individual filer you may have to pay income tax on up to 50% of your Social Security benefits. So again this part of it is more simplified than the actual calculations just for explanation purposes. And we'll see an example in the software next time. Keep in mind that these rules can be quite complex and the actual taxation of your Social Security benefits may vary based on other factors specific to your tax situation. It's often advisable to consult with a tax professional or use tax preparation software to help accurately determine how much of your Social Security benefits are taxable which is of course what everybody does they use the tax software to help them to calculate it and then basically deconstruct often times to help them with the understanding and explaining. So lines 6A, 6B and 6C lines 6A and 6B Social Security benefits. So you should receive a form SSA 1099 so obviously you're getting paid this time from the government and the government wants to have the reporting requirements there so they already know that they gave you the money although it came from the Social Security administration and they're going to share that information with the IRS and with you therefore you have to make sure that you report the information on your tax return otherwise you will almost certainly get a letter or something because the IRS of course has this information on their side. So box 4 show the amount of any benefits you repaid in 2023 if you received railroad retirement benefits treated as Social Security you should receive a form RRB 1099 use the Social Security benefits worksheet and these instructions to see if any of your benefits are taxable. So exception do not use the Social Security benefits worksheet in these instructions if any of the following apply you made contributions to a traditional IRA for 2023 and you or your spouse were covered by a retirement plan at work or through self employment. Instead use the worksheet in publication 590A to see if any of the Social Security benefits are taxable. Why? Because that's going to complicate the calculation. So they're trying to do an easy calculation worksheet and then give you the more complicated worksheet in this particular scenario. So you repaid any benefits in 2023 and your total repayments box 4 were more than your total benefits for 2023 box 3. None of your benefits are taxable for 2023. Also if your total repayments in 2023 exceed your total benefits received in 2023 by more than $3,000 you may be able to take an itemized deduction or a credit for part of the excess payment if they were for benefits you included in income in an earlier year for more details that's somewhat of an unusual situation but if that applies you can take a look at publication 915 on the IRS website. So you file form 25554563 or 8815 or you exclude employer provided adoption benefits or income from sources within Puerto Rico. Instead use the worksheet and publication 915 in that case. Social security information, social security benefits can now get a variety of information from the SSA website with a My Social Security account including getting a replacement form SSA 1099 if needed. So the government is slowly but surely getting better at stepping up their communication process and getting more digital information which the business world is doing a lot more advanced work on typically so you can go to, people might not be used to go into the social security website and looking up their information possibly seeing if they can get another 1099 and you might not be as used to logging into the IRS website but the IRS website is trying to get it to the point where you can log into their website as well so they've gone through some complications with that. So for more information and to set up an account go to ssa.gov forward slash my account disability payments don't include in your income any disability payments including social security disability insurance SSDI payments. So normally when we think about social security we're thinking about the social security payments you receive normally in retirement but you also could have a situation where you have disability payments so don't include your income any disability payments including social security disability insurance SSDI payments you receive for injuries incurred as a direct result of a terrorist attack directed against the United States or its allies whether outside or within the United States so hopefully that doesn't apply to anyone but possibly it could if we keep the current situation the way it's going lately it seems more likely that it could we seem a little weak right now but anyway so in the case of the September 11th attacks injuries eligible for coverage by the September 11th victim compensation fund are treated as incurred as a direct result of the attack if these payments are incorrectly reported as taxable on form SSA 1099 don't include the non-taxable portion of income on your tax return you may receive a notice from the IRS regarding the omitted payments follow the instructions in the notice to explain that the excluded payments aren't taxable so for more information about that if it applies about these payments you could see publication 3920 Line 6C check the box on Line 6C if you elect to use the lump sum election method for your benefits if any of your benefits are taxable for 2023 and they include a lump sum benefit payment that was for an earlier year you may be able to reduce the taxable amount with the lump sum election see lump sum election publication 915 for details there