Are Social Security Benefits Taxable?

This is a very important subject as, according to AARP: “Social Security provides benefits to 52.5 million Americans. Nearly 14 percent of people 65 and older rely on Social Security for 100 percent of their family income. About 50 percent of the people in this age group count on benefits for 50 percent of their income.”

IRS Tax Tip 2011-26, February 07, 2011

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA-1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable.

How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.

Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

You can do the following quick computation to determine whether some of your benefits may be taxable:

• First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
• Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

The 2010 base amounts are:

• $32,000 for married couples filing jointly.
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
• $0 for married persons filing separately who lived together during the year.

For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Tax Topic 414  Rental Income and Expenses

Generally, cash or the fair market value of property you receive for the use of real estate or personal property is taxable to you as rental income. You can generally deduct expenses of renting property from your rental income. Income and expenses related to real estate rentals are usually reported on Form 1040, Schedule E (PDF). If you provide substantial services that are primarily for your tenant’s convenience, you report your income and expenses on Form 1040, Schedule C (PDF). Income and expenses related to personal property rentals are reported on Form 1040 (PDF).

Most individuals operate on a cash basis, which means they count their rental income as income when it is actually or constructively received, and deduct their expenses as they are paid. Some specific types of income are:

• Amounts paid to cancel a lease – If a tenant pays you to cancel a lease, this money is also rental income and is reported in the year you receive it.
• Advance rent – Generally you include any advance rent paid in income in the year you receive it regardless of the period covered or the method of accounting you use.
• Expenses paid by a tenant – If your tenant pays any of your expenses, those payments are rental income. You may be allowed to deduct the expenses if they are considered deductible expenses.
• Security deposits – Do not include a security deposit in your income if you may be required to return it to the tenant at the end of the lease. But if you keep part or all of the security deposit during any year because the tenant damaged the property or did not live up to the terms of the lease, this money is taxable income in the year this determination is made. If the security deposit is to be used as the tenant’s final month’s rent, you include the money as income when you receive it, rather than when you apply it to the last month’s rent.

Some examples of expenses that may be deducted from your total rental income are:

• Depreciation – You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and improvements by using Form 4562 (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.
• Repairs – Repairs just keep your property in good working condition but do not add to the value of the property.
• Operating Expenses
• Uncollected rents – If you are a cash basis taxpayer, you cannot deduct uncollected rents as an expense because you have not included those rents in income.

For information on depreciation, refer to Publication 946, How To Depreciate Property. Repair costs, such as materials, are usually deductible. For a discussion of the difference between repairs and improvements, refer to Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

There are special rules relating to the rental of real property that you also use as your main home or your vacation home. For information on income from these rentals, or from renting at an amount less than the fair market value, refer to Topic 415, Renting Residential and Vacation Property (formerly Renting Vacation Property and Renting to Relatives).

If you do not use the rental property as a home and you are renting to make a profit, your deductible rental expenses can be more than your gross rental income, subject to certain limits. For information on these limitations, refer to Topic 425, Passive Activities -Losses and Credits.

Medical and Dental Expenses Tax Deductions

This is one of the commonly overlooked tax deductions.

Medical and Dental Expenses as Tax Deductions can greatly reduce your income tax liability.

Please check to see if your Medical and Dental Expenses qualify as Tax Deductions.

IRS Tax Tip 2011-21, January 31, 2011

If you itemize your deductions on Form 1040, Schedule A, you may be able to deduct expenses you paid in 2010 for medical care – including dental – for yourself, your spouse, and your dependents. Here are six things the IRS wants you to know about medical and dental expenses and other benefits.

1. You may deduct only the amount by which your total medical care expenses for the year exceed 7.5 percent of your adjusted gross income. You do this calculation on Form 1040, Schedule A in computing the amount deductible.
2. You can only include the medical expenses you paid during the year. Your total medical expenses for the year must be reduced by any reimbursement. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.
3. You may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn’t meet the gross income or joint return test.
4. A deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription except for insulin.
5. You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance may be deducted. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.
6. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if you pay qualified medical expenses.

Top Ten Earned Income Tax Credit Tips

The Earned Income Tax Credit is a very important and helpful tax credit.

As a worker:

• You Earned It!
• You Keep It!
• You Save It!
• EITC – Don’t Overlook It

IRS Tax Tip 2011-20, January 28, 2011

The Earned Income Tax Credit is a financial boost for workers earning $48,362 or less a year.
Four of five eligible taxpayers filed for and received their EITC last year.
The IRS wants you to get what you earned also, if you are eligible.

Here are the top 10 things the IRS wants you to know about this valuable credit, which has been making the lives of working people a little easier for 36 years.

1. As your financial, marital or parental situations change from year to year, you should review the EITC eligibility rules to determine whether you qualify. Just because you didn’t qualify last year, doesn’t mean you won’t this year.
2. If you qualify, the credit could be worth up to $5,666. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on your earned income and whether or not there are qualifying children in your household. The average credit was around $2,100 last year.
3. If you are eligible for EITC, you must file a federal income tax return and specifically claim the credit – even if you are not otherwise required to file.  Remember to include Schedule EIC, Earned Income Credit when you file your Form 1040 or, if you file Form 1040A, use and retain the EIC worksheet.
4. You do not qualify for EITC if your filing status is Married Filing Separately.
5. You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.
6. You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.
7. Married couples and single people without children may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.
8. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
9. It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on the IRS website, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
10. Free help is available at Volunteer Income Tax Assistance sites and IRS Taxpayer Assistance Centers to help you prepare and claim your EITC. If you are preparing your taxes electronically, the software program you use will figure the credit for you. To find a VITA site or TAC near you, visit http://www.irs.gov.

Tax Topic 410 – Pensions and Annuities

If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, the amounts you receive may be fully taxable, or partially taxable.

Social security and equivalent railroad retirement benefits are not discussed here. For more information about these benefits, refer to Topic 423.

The pension or annuity payments that you receive are fully taxable if you have no cost in the contract because any of the following situations apply:

• You did not contribute anything or are not considered to have contributed anything for the pension or annuity
• Your employer did not withhold contributions from your salary, or
• You received all of your contributions (your basis) tax free in prior years

If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable to you when contributed. Partly taxable pensions are taxed under either the General Rule or the Simplified Method. For more information on the General Rule and Simplified Method refer to Topic 411. If the starting date of your pension or annuity payments is after November 18, 1996, you generally must use the Simplified Method to determine how much of your annuity payments are taxable and how much is tax free.

If you receive pension or annuity payments before age 59 1/2, you may be subject to an additional 10% tax on early distributions. The additional tax does not apply to any part of a distribution that is tax free. There are also general exceptions to the additional tax, including:

• Distributions made as a part of a series of substantially equal periodic payments from a qualified plan that begins after your separation from service
• Distributions made because you are totally and permanently disabled
• Distributions made on or after the death of the plan participant or contract holder, and
• Distributions made from a qualified retirement plan after your separation from service and in or after the year you reached age 55

For other exceptions to the tax, refer to Publication 575, Pension and Annuity Income.

If you are a survivor or beneficiary of a pension plan or annuity, refer to Publication 575 for rules on income and taxes.

The taxable part of your pension or annuity payments is generally subject to federal income tax withholding.

You may choose not to have income tax withheld from your pension or annuity payments (unless they are eligible rollover distributions) or want to specify how tax is withheld. If so, provide the payer Form W-4P (PDF), Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer. Withholding from periodic payments of a pension or annuity is generally figured the same way as for salaries and wages. If you do not submit the withholding certificate, the payer must withhold tax as if you were married and claiming three withholding allowances. If you do not provide the payer with your correct social security number, tax will be withheld as if you were single and claiming no withholding allowances.

If you pay your taxes through withholdings and not enough is withheld, you may also need to make estimated tax payments to ensure your taxes are not underpaid. For more information on increasing our withholdings, making estimated tax payments, and the consequences of not withholding the proper amount of tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Special rules apply to certain non-periodic payments from qualified retirement plans. For information on the special tax treatment of lump-sum distributions, refer to Topic 412. If an eligible rollover distribution is paid to you, the payer must withhold 20% of it, unless you choose the direct rollover option. For more information refer to Topic 413.

Tax Topic 306 – Penalty for Underpayment of Estimated Tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The penalty may be waived if:

1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Please refer to the Form 1040 Instructions or the Form 1040A Instructions for where to report the estimated tax penalty on your return.