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Chapter 12. Social Security and Equivalent Railroad Retirement Benefits Introduction This chapter discusses the taxability of any social security or equivalent railroad retirement benefits you may have received. It also explains: ∙ How to figure whether your benefits are taxable, ∙ How to use the social security benefits worksheet, ∙ How to report your taxable benefits on Form 1040 and Form 1040A (with examples), and ∙ How to treat repayments that are more than the benefits you received during the year. Note. This chapter does not discuss the tax rules that apply to railroad retirement benefits other than the social security equivalent portion of tier 1 benefits (including special guaranty benefits). The tax rules that apply to the non-social security equivalent portion of tier 1 benefits, and to tier 2 benefits, vested dual benefits, and supplemental annuity benefits, are discussed in Chapter 11. Also see Publication 575, Pension and Annuity Income (Including Simplified General Rule). Also not discussed are the tax rules that apply to foreign social security benefits. These benefits are taxable as a pension or annuity unless exempt from U.S. tax under a treaty. For example, social security benefits received by a U.S. citizen or resident from the United Kingdom are taxable under the tax rules discussed in Chapter 11. Related publications and forms. This chapter refers to several forms and publications that you may need. The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more information, you may want to order the following: Publication 575, Pension and Annuity Income (Including Simplified General Rule) Publication 590, Individual Retirement Arrangements (IRAs) Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits Taxation of Benefits In figuring if any of your benefits are taxable, use the amount shown in Box 5 of the Form SSA─1099 or Form RRB─1099 you received. If you received more than one form, add together the amount in Box 5 of each form. Form SSA─1099. If you received or repaid social security benefits during 1992, you will receive Form SSA─1099, Social Security Benefit Statement. An IRS Notice 703 will be enclosed with your Form SSA─1099. This notice includes a worksheet you can use to determine if any of your benefits may be taxable. Keep this notice for your own records; do not mail it to either the IRS or the SSA. Every person who received social security benefits will receive a Form SSA─1099, even if the benefit is combined with another person's in a single check. If you receive benefits on more than one social security record, you may get more than one Form SSA─1099. Form RRB─1099. If you received or repaid the social security equivalent portion of tier 1 railroad retirement benefits or special guaranty benefits during 1992, you will receive Form RRB─1099, Payments by the Railroad Retirement Board. Each beneficiary will receive his or her own Form RRB─1099. If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB─1099. Who is taxed. The person who has the legal right to receive the benefits must determine if the benefits are taxable. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your portion of the benefits in figuring if any part is taxable to you. The portion of the benefits that belongs to your child must be added to your child's other income to see if any of those benefits are taxable. Are Any of Your Benefits Taxable? If the only income you received during 1992 was your social security or equivalent railroad retirement benefits, your benefits are not taxable and you probably do not have to file a return. Base amount. If you received income during 1992 in addition to social security or equivalent railroad retirement benefits, your benefits are generally not taxable if your income is not more than the following base amounts: ∙ $25,000 if you are single. ∙ $25,000 if you are married, do not file a joint return, and did not live with your spouse at any time during 1992. ∙ $32,000 if you are married and file a joint return. ∙ $0 if you are married, do not file a joint return, and did live with your spouse at any time during 1992. Note. The base amount of $25,000 is for any eligible person whose filing status or situation does not meet either the $32,000 (married filing jointly) or the $0 (married filing separately) category. This includes heads of household and qualifying widow(er)s, as well as the first two situations listed above. Joint return. If you are married and file a joint return for 1992, you and your spouse must combine your incomes and your benefits when figuring if any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring if any of your benefits are taxable. You can use the worksheet in the following example, substituting your own amounts, to figure whether your income is more than the base amount for your filing status. Similar worksheets are included in your Form SSA─1099 or Form RRB─1099 package. Example. You and your spouse are filing a joint return for 1992, and you both received social security benefits during the year. In January 1993, you received a Form SSA─1099 showing net benefits of $6,600 in Box 5. Your spouse received a Form SSA─1099 showing $2,400 in Box 5. You also received a taxable pension of $10,000 and interest income of $500 during 1992. You did not have any tax-exempt interest in 1992. Your benefits are not taxable for 1992 because your income, as figured in the following worksheet, is not more than your base amount ($32,000). A Write in the amount from Box 5 of all your Forms SSA─1099 and RRB─1099. Include the full amount of any lump-sum benefit payments received in 1992, attributable to both 1992 and earlier years, if you choose to report the full amount for the 1992 tax year. (If you received more than one form, combine the amounts from Box 5 and write in the total.). A $9,000 __________ Note: If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. B Divide the amount on line A by 2 and write in the result ......................... B 4,500 __________ C Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total ....... C 10,500 __________ D Write in any tax-exempt interest, such as interest on municipal bonds ......... D 0 __________ E Add lines B, C, and D and write in the total ....................................... E 15,000 =========== Note: If the amount on line E is not more than the base amount for your filing status, none of your benefits are taxable this year. Repayments. Any repayment of benefits you made during 1992 is automatically subtracted from the gross benefits you received in 1992. It does not matter if the repayment you made in 1992 was for a benefit you received before 1992. Your gross benefits are shown in Box 3 of Form SSA─1099 or RRB─1099 and your repayments are shown in Box 4. The amount in Box 5 shows your net benefits for 1992 (Box 3 minus Box 4). This is the amount you will use to figure if any of your benefits are taxable. How Much Is Taxable Your social security or equivalent tier 1 benefits may be taxable, depending on the amount of your income and your filing status. If you used Notice 703 and found that some of your benefits are taxable, figure the amount that is actually subject to tax. This is the smaller of: 1) One-half of the net benefits you received, or 2) One-half of the amount by which the sum of your modified AGI (adjusted gross income) plus one-half of your net benefits is more than the base amount (explained earlier) for your filing status. This means that the most that will be taxable is one-half of the net benefits you received. Net benefits. This is the amount that is shown in Box 5 of Form SSA─1099 and Box 5 of Form RRB─1099. If you received more than one form, you must add the amounts in Box 5 of each form to get your total net benefits. Modified adjusted gross income. This is the sum of your adjusted gross income plus any tax-exempt interest (explained later) you received in 1992. Your adjusted gross income is figured without including any of your social security or equivalent benefits and without subtracting: ∙ The interest exclusion for certain Series EE savings bonds that you redeem in the year you pay for qualified educational expenses, ∙ The foreign earned income exclusion and the foreign housing exclusion or deduction, ∙ The exclusion of income from U.S. possessions (for 1992, this applied only to bona fide residents of American Samoa), or ∙ The exclusion of income from Puerto Rico by bona fide residents of Puerto Rico. Form 1040EZ. If you usually file Form 1040EZ, figure modified adjusted gross income by adding: Adjusted gross income (line 3, Form 1040EZ), plus Any tax-exempt interest received in 1992. Note. If any of your benefits are taxable in 1992, you cannot file Form 1040EZ for 1992. Form 1040A. If you usually file Form 1040A, leave line 13b, Form 1040A, blank, and figure modified adjusted gross income by adding: Adjusted gross income (line 16, Form 1040A), plus Any qualified savings bond interest exclusion, plus Any tax-exempt interest received in 1992. Form 1040. If you usually file Form 1040, leave line 21b, Form 1040, blank, and figure modified adjusted gross income by adding: Adjusted gross income (line 31, Form 1040), plus Any qualified savings bond interest exclusion, foreign earned income exclusion, foreign housing exclusion or deduction, or exclusion of income from U.S. possessions or Puerto Rico, plus Any tax-exempt interest received in 1992. Figuring your IRA deduction. If you make contributions to an individual retirement arrangement (IRA) in 1992, your allowable deduction for those contributions is subtracted from your gross income in arriving at your modified AGI. Therefore, you must figure your IRA deduction before you can figure your taxable benefits. If your deductible IRA contributions limit is reduced because you or your spouse are covered by a retirement plan at work, you must use the special worksheets in Publication 590 to figure your IRA deduction and taxable benefits to be reported on your return. Tax-exempt interest. Even though you do not include tax-exempt interest in income, you must enter any tax-exempt interest you received on line 8b, Form 1040, or Form 1040A. You must add this interest to your adjusted gross income to arrive at your modified adjusted gross income. For this purpose, interest excluded on the redemption of certain U.S. savings bonds in the year you pay qualified higher educational expenses is not considered tax exempt. Interest you receive from municipal bonds and tax-exempt interest distributions you receive from mutual funds are examples of tax-exempt interest. Lump-sum benefits. If you received a lump-sum (or retroactive) payment of benefits during 1992 that is for benefits you should have received before 1992, it will be included in Box 3 of your Form SSA─1099 or Form RRB─1099. Special election. Generally, you include a lump-sum benefit payment in total benefits for the year in which you receive it. However, if you receive a lump-sum benefit payment in 1992 that is for one or more earlier years, you can choose to treat these benefits as received in the earlier year. You do this by figuring whether any part of the benefits is taxable based on the earlier year's income. Any part that is taxable is then added to your taxable benefits for the current year and the total is included in your current year's income. For more information on lump-sum benefits, see Publication 915. Estimated tax. Tax is not withheld from social security benefits or equivalent railroad retirement benefits. This means that you may have to make estimated tax payments during the year if these benefits are taxable and you do not have enough taxes withheld from other income. See Chapter 5 for more information on estimated tax. How to Report Report your taxable benefits on Form 1040 or Form 1040A. You cannot use Form 1040EZ. Report your net benefits (the amount in Box 5 of your Form SSA─1099 or RRB─1099) on line 21a, Form 1040, or line 13a, Form 1040A. Report the taxable part (from the last line of the worksheet) on line 21b, Form 1040, or line 13b, Form 1040A. To help you figure your taxable benefits, use the worksheet in the Form 1040 or Form 1040A instruction package, as long as you are not required to use the Publication 590 worksheets (see Figuring your IRA deduction, earlier). Publication 915 also has a worksheet (Worksheet #1) you can use. However, if you take the U.S. savings bond interest exclusion, the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from U.S. possessions, or the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico, you must use the worksheets in Publication 915 (unless you are required to use the Publication 590 worksheets). Lump-sum payment. If you received a lump-sum benefit payment in 1992 that is for one or more earlier years and choose to treat the payment as if it were received in those years, you must use the worksheets in Publication 915. Otherwise, you should treat the amount as if it were fully attributable to 1992 and include it in your total benefits received during that year. Examples Following are a few examples you can use as a guide to figure if any of your benefits are taxable. Example 1. George White is single and files Form 1040 for 1992. He received the following income in 1992: Fully Taxable pension ............... $18,600 Wages from part-time job ............ 9,400 Interest income ..................... 990 ---------- -------- Total ............................... $28,990 ========== ======== George also received social security benefits during 1992. The Form SSA─1099 he received in January 1993 shows $7,200 in Box 3, $1,220 in Box 4, and $5,980 in Box 5. To figure his taxable benefits, George completes the worksheet shown here (for Form 1040 filers). A similar worksheet appears in the Form 1040 tax instructions. Social Security and Equivalent Railroad Retirement Benefits Worksheet (Keep for your records) Check only one box _x_ A. Single - enter $25,000 on line 7 below. ___ B. Married filing a joint return - enter $32,000 on line 7 below. ___ C. Married not filing a joint return and lived with your spouse at any time during the year - enter 0 on line 7 below. ___ D. Married not filing a joint return and DID NOT live with your spouse at any time during the year - enter $25,000 on line 7 below. 1. Enter the total amount from Box 5 of ALL your Forms SSA─1099 and Forms RRB─1099 (if applicable) ............................. 5,980 __________ Note. If line 1 is zero or less, stop here; none of your benefits are taxable. Otherwise, go on to line 2. 2. Divide the amount on line 1 by 2 ........... 2,990 __________ 3. Add the amounts on Form 1040, lines 7, 8a, 8b, 9 through 15, 16b, 17b, 18 through 20, and line 22. Do not include here any amounts from Box 5 of Forms SSA─1099 or RRB─1099 ................................... 28,990 __________ 4. Add lines 2 and 3 ......................... 31,980 __________ 5. Enter the amount from Form 1040, line 30 ... 0 __________ 6. Subtract line 5 from line 4 ................ 31,980 __________ 7. Enter: $25,000 if you checked Box A or D, or $32,000 if you checked Box B, or 0 if you checked Box C ................ 25,000 __________ 8. Subtract line 7 from line 6. Enter the result, but not less than zero .............. 6,980 __________ Note. If line 8 is zero, stop here. None of your benefits are taxable. Do not enter any amounts on Form 1040, lines 21a or 21b. If you checked Box D, however, enter 0 on line 21b and write "D" on the dotted line next to line 21a. If line 8 is more than zero, go on to line 9. 9. Divide the amount on line 8 by 2 ............ 3,490 __________ 10. Taxable benefits. ∙ First, enter on Form 1040, line 21a, the amount from line 1 above. ∙ Then, compare amounts on lines 2 and 9 above, and enter the smaller of the two amounts on this line and also on Form 1040, line 21b ................................. 2,990 __________ The amount on line 10 of George's worksheet shows that $2,990 of his social security benefits are taxable. On line 21a of his Form 1040, George enters his net benefits of $5,980. On line 21b, he enters his taxable part of $2,990. Example 2. Joe and Betty Johnson are married and are filing a joint return on Form 1040A for 1992. Joe is retired and receives a fully taxable pension of $28,000. Joe and Betty both received social security benefits in 1992. Joe's Form SSA─1099 shows $6,600 in Box 3, $1,100 in Box 4, and $5,500 in Box 5. Betty's Form SSA─1099 shows $3,500 in Box 3 and the same amount in Box 5. The only other income Joe and Betty had in 1992 was $2,400 in interest income. They figure their taxable social security benefits by completing the worksheet for Form 1040A filers, shown below. They enter $9,000 on line 13a, Form 1040A, and $1,450 on line 13b, Form 1040A. Social Security and Equivalent Railroad Retirement Benefits Worksheet (Keep for your records) Check only one box. ___ A. Single - enter $25,000 on line 7 below. _x_ B. Married filing a joint return - enter $32,000 on line 7 below. ___ C. Married not filing a joint return and lived with your spouse at any time during the year - enter 0 on line 7 below. ___ D. Married not filing a joint return and DID NOT live with your spouse at any time during the year - enter $25,000 on line 7 below. 1. Enter the total amount from Box 5 of ALL your Forms SSA─1099 and Forms RRB─1099 (if applicable) ............................. 9,000 __________ Note. If line 1 is zero or less, stop here; none of your benefits are taxable. Otherwise, go on to line 2. 2. Divide the amount on line 1 by 2 ........... 4,500 __________ 3. Add the amounts on Form 1040, lines 7, 8a, 8b, 9 through 15, 16b, 17b, 18 through 20, and line 22. Do not include here any amounts from Box 5 of Forms SSA─1099 or RRB─1099 ................................... 30,400 __________ 4. Add lines 2 and 3 ......................... 34,900 __________ 5. Enter the amount from Form 1040, line 30 ... 0 __________ 6. Subtract line 5 from line 4 ................ 34,900 __________ 7. Enter: $25,000 if you checked Box A or D, or $32,000 if you checked Box B, or 0 if you checked Box C ............ 32,000 __________ 8. Subtract line 7 from line 6. Enter the result, but not less than zero .............. 2,900 __________ Note. If line 8 is zero, stop here. None of your benefits are taxable. Do not enter any amounts on Form 1040, lines 21a or 21b. If you checked Box D, however, enter 0 on line 21b and write "D" on the dotted line next to line 21a. If line 8 is more than zero, go on to line 9. 9. Divide the amount on line 8 by 2 ............ 1,450 __________ 10. Taxable benefits. ∙ First, enter on Form 1040, line 21a, the amount from line 1 above. ∙ Then, compare amounts on lines 2 and 9 above, and enter the smaller of the two amounts on this line and also on Form 1040, line 21b................................. 1,450 ========== Repayments More Than Gross Benefits In some situations, your Form SSA─1099 or Form RRB─1099 will show that the total benefits you repaid (Box 4) is more than the gross benefits (Box 3) you received. If this occurred, your net benefits in Box 5 will be a negative figure and none of your benefits will be taxable. If you receive more than one form, a negative figure in Box 5 of one form is used to offset a positive figure in Box 5 of another form. If you have any questions about this negative figure, contact your local Social Security Administration office or your local Railroad Retirement Board field office. Joint return. If you and your spouse file a joint return, and your Forms SSA─1099 or Forms RRB─1099 show that your repayments are more than your gross benefits, but your spouse's are not, subtract the amount in Box 5 of your form from the amount in Box 5 of your spouse's form to get your net benefits when figuring if your combined benefits are taxable. Example. John and Mary are married and file a joint return for 1992. John received Form SSA─1099 showing $3,000 in Box 5. Mary also received Form SSA─1099 and the amount in Box 5 was ($500). John and Mary will use $2,500 ($3,000 minus $500) as the amount of their net benefits when figuring if any of their combined benefits are taxable. Repayment of benefits received in an earlier year. If the sum of the amount shown in Box 5 of all of your Forms SSA─1099 and Forms RRB─1099 is a negative figure and part or all of this negative figure is for benefits you included in gross income in an earlier year, you can take an itemized deduction on Schedule A (Form 1040) for the amount of the negative figure that represents those benefits. This deduction, if $3,000 or less, is subject to the 2%-of-adjusted-gross -income limit that applies to certain miscellaneous itemized deductions and is claimed on line 20, Schedule A (Form 1040). If this deduction is more than $3,000, you should figure your tax two ways: 1) Figure your tax for 1992 with the itemized deduction. This deduction is not subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. 2) Figure your tax for 1992 without the deduction. If a portion of the negative figure represents a repayment of 1984 benefits, you must first recompute your 1984 tax, reducing your 1984 social security benefits by that portion. Recompute your 1985, 1986, etc. tax in the same manner, using any portion of the negative figure that represents a repayment of benefits for those years. Reduce your 1992 tax, figured without the deduction, by the total decrease in your 1984, 1985, 1986, etc. tax as recomputed. Compare the tax figured in methods (1) and (2). Your tax for 1992 is the lesser of the two amounts. If method (1) results in less tax, take the itemized deduction on line 25, Schedule A (Form 1040). If method (2) results in less tax, claim a credit for the applicable amount on line 59 of Form 1040 and write "I.R.C. 1341" in the margin to the left of line 59. If both methods produce the same tax, deduct the repayment in full on line 25, Schedule A (Form 1040).