34.2 Social Security Benefits Subject to Tax

If you received or repaid Social Security benefits in 2012, you will receive Form SSA-1099 from the Social Security Administration, showing the total benefits paid to you and any benefits you repaid to the government in 2012. Box 3 of Form 1099-SSA shows the total benefits paid to you in 2012. This may include, in addition to Social Security retirement benefits, survivor and disability benefits, which are subject to the same tax rules as retirement benefits, but not Supplemental Social Security (SSI), which is not taxable. Included in the Box 3 total are amounts withheld from your benefits for Medicare premiums, workers’ compensation offset, or attorneys’ fees for handling your Social Security claim; these and other withholdings are itemized in the “description” section below Box 3.

The net benefit shown in Box 5 of Form SSA-1099 (benefits paid less benefits repaid) is the benefit amount used to determine the taxable portion of your benefits (if any) (34.3). Keep Form SSA-1099 for your records; do not attach it to your return.

Planning Reminder

Voluntary Withholding on Social Security Benefits

You can use your Social Security benefits to meet your estimated and final tax liability by electing on Form W-4V to have tax withheld from benefits at a 7%, 10%, 15%, or 25% rate.

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Railroad Retirement benefits.

The portion of your Tier 1 Railroad Retirement benefits that is equivalent to Social Security retirement benefits is subject to the computation for determining taxable benefits (34.3). If any part of your 2012 Tier 1 benefits is equivalent to Social Security benefits, you will receive Form RRB-1099 from the government. The net Social Security Equivalent Benefit shown on Form RRB-1099 is the amount used to determine taxable benefits (34.3). Other Tier 1 Railroad Retirement benefits, as well as Tier 2 benefits, are treated as pension income and not as Social Security benefits for tax purposes.

Benefits paid on behalf of child or incompetent.

If a child is entitled to Social Security benefits, such as after the death of a parent, the benefit is considered to be the child’s regardless of who actually receives the payment. Whether the child’s benefit is subject to tax will depend on the amount of the child’s income.

Medicare premiums deducted from benefits.

The Medicare premiums deducted from your benefits are included in the total for benefits paid in Box 3 of Form SSA-1099. This includes premiums for Medicare Parts B, C and D. The premiums do not reduce the net benefits in Box 5 used to figure taxable benefits (34.3).

Workers’ compensation.

If you are receiving Social Security disability payments and workers’ compensation for the same disability, your Social Security benefits may be reduced by the workers’ compensation. For example, you are entitled to Social Security disability benefits of $12,000 a year. After receiving a $5,000 workers’ compensation award, your disability benefits are reduced to $7,000. For purposes of the computation steps to determine taxability of benefits (34.3), you treat the full $12,000 as Social Security benefits.

In one case, a disabled worker whose Social Security disability benefits were reduced by workers’ compensation argued that since the workers’ compensation payments are tax free (2.13), the portion of Social Security benefits not paid to him because of the workers’ compensation should also be tax free. The Tax Court however agreed with the IRS that for purposes of figuring the tax on benefits (34.3), the specific terms of the tax code include the reduction for workers’ compensation as a Social Security benefit that must be taken into account.

Net benefits.

The net benefit shown in Box 5 of Form SSA-1099 is the amount used to determine the taxable portion of your benefits. If Box 5 shows a negative amount (a figure in parentheses), none of your benefits are taxable. If the negative amount is related to Social Security benefits included in gross income in a prior year, you may be entitled to a deduction or a credit; see IRS Publication 915 for further instructions on how to figure the deduction or credit when your repayments exceed your gross benefits.

Taxable Social Security benefits are not considered earnings and therefore may not be the basis of an IRA contribution (8.2), earned income credit (25.10), or foreign earned income exclusion (36.2).

Nonresident aliens.

Unless provided otherwise by tax treaty, 85% of a nonresident alien’s Social Security benefits will be subject to the 30% withholding tax imposed on U.S. source income that is not connected with a U.S. trade or business. See IRS Publication 915 for further details.

Worksheet 34-1 Figuring Your Taxable Benefits (Form IRS Publication 915; see Example 2 on page 586)