CARL WATTS & ASSOCIATES

May 08, 2017

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Retirement Benefits Taxation
(2) Social Security
As familiar as Social Security seems to most people, let us specify from the beginning that Social Security isn't a pension or a retirement plan, although some aspects of it are similar. One of the benefits Social Security provides is a monthly retirement benefit. This benefit is based on your salary during your working years, similar to a pension.

When first created in 1935, the Social Security Act was meant to be a system of federal old-age benefits for workers and their families.

Amended many times throughout the years, the Social Security Act requires most individuals to participate in the program, with about 25% of state and local government workers exempted.

Since 1973 cost-of-living adjustments, or COLAs, have to be taken into account. With COLAs, Social Security and Supplemental Security Income (SSI) benefits keep pace with inflation. The Social Security Act specifies a formula for determining each COLA based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics. A COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.

As such, there was no increase in Social Security benefits payable in 2016, but monthly Social Security and SSI benefits for over 65 million Americans will increase 0.3 percent in 2017.


Eligibility to get Social Security retirement requires both reaching a certain age and earning enough Social Security credits. Credits are earned by working and paying Social Security taxes.


The amount of earnings required for a quarter of coverage (QC) in 2017 is $1,300. "Quarter of coverage" is a legal term, but you may also come across the term "Social Security credit" (or just "credit") used in general. A QC is the basic unit for determining whether a worker is insured under the Social Security program. No matter how high your earnings may be, you can not earn more than 4 QC's in one year.

For 2016, one work credit was $1,260 and the maximum of four credits a year was $5,040.


During your lifetime, you probably will earn more credits than the minimum number you need to be eligible for benefits. These extra credits do not increase your benefit amount. Your average earnings over your working years determine how much your monthly payment will be.

As far as age is concerned, you must be at least age 62 to start collecting Social Security retirement benefits. You can start collecting benefits anywhere from age 62 up to age 70.

Social Security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable.

The amount of Social Security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:

  • One-half of your benefits.
  • All of your other income, including
    tax-exempt interest.




The base amount for your filing status is:

$25,000 if you are single, head of household or qualifying widow(er),

$25,000 if you are married filing separately and lived apart from your spouse for the entire year,

$32,000 if you are married filing jointly,

$0 if you are married filing separately and lived with your spouse at any time during the tax year.

If you are 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 did not receive any benefits, you must add your spouse's income to yours when figuring on a joint return if any of your benefits are taxable.

If the only income you received during the tax year was your Social Security, your benefits may not be taxable and you may not have to file a tax return.


If you also received other income, your benefits will not be taxable unless your modified adjusted gross income (MAGI) is more than the base amount for your filing status. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. Your taxable benefits and MAGI are figured by completing a worksheet in the Form 1040 Instructions or Form 1040A Instructions.

If you received benefits in the current tax year that were for a prior year, you should know that you cannot amend returns for prior years to reflect Social Security benefits received in a single lump-sum in the current year. You must include the taxable part of a lump-sum payment of benefits received in the current year (reported to you on Form SSA-1099, Social Security Benefit Statement) in your current year's income, even if the payment includes benefits for an earlier year.

However, there are two ways to determine the amount of income to include:

  • You can use your current year's income to figure the taxable part of the total benefits received in the current year; or

  • You may make an election to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year.

You should receive your Form SSA-1099, Social Security Benefit Statement, by early February for the benefits paid in the prior calendar year. The form will show benefits paid to the person who has the legal right to receive them, and the amount of any benefits repaid. It will also show amounts by which the benefits were reduced because you received workers' compensation benefits. Substitute workers' compensation benefits would be taxable to the same extent.

If any part of your Social Security benefits will be taxable in the current tax year, you may request to have additional withholding from other income or pay estimated tax during the year. You may also choose to have income tax withheld from your Social Security benefits.

Here is a comment made by the Social Security Administration which my be of interest:

“Social Security is the largest source of income for most elderly Americans today, but Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”
With this, we wish you a long and happy retirement, and, if you have any doubts on whether you need to file a return or pay any taxes, your best option is to enroll help from a tax professional.

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