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Taxing SSD benefits

Social Security recipients should not assume that Social Security Disability benefits are tax exempt. Factors such as income from other sources and filing status can impact federal tax liability. Calculating tax liability can help lower or eliminate potential taxes on Social Security benefits. When benefits are taxable, withholding is allowed from a taxpayer's benefit package or periodic estimated payments may be made to the IRS, such as quarterly payment of self-employment taxes.

Taxpayers should also run calculations to determine the amount of income they can receive outside their SSA benefits before federal taxes are triggered. Even if taxes are unavoidable, the recipient can determine whether the financial benefits of receiving additional money exceeds the tax liability. New Jersey does not tax Social Security benefits. These benefits should not be included on the state income tax return or property tax credit application.

When filing a joint federal return, however, combined income cannot exceed $32,000 if one is trying to avoid federal taxes. If the income is between $32,000 and $44,000, taxes may be levied up to 50 percent of the benefits. Income exceeding $44,000 may trigger the taxing of benefits at 85 percent. For all other filing statuses, the base income level is $25,000. SSD benefits are taxable for a recipient who is married and living with a spouse but filing separately.

Recipients of SSD benefits or Social Security income receive a Form SSA-1099 from the federal government. It contains the total amount of benefits but does not include information on whether the benefits are taxable and at what percentage.

For federal taxes, the software associated with the IRS Free File will calculate the taxable components of Social Security benefits for those making no more than $64,000. Taxpayers can also make a reasonable estimate by combining half of their Social Security benefits with all of their other income, including tax-exempt interest, and comparing it to any base amounts that are tax-excluded. Any figure that exceeds this base amount may be taxed.

Additionally, taxpayers can perform their own calculations using IRS Form SSA-1099 and a worksheet included with the SSA-1099, known as Notice 703, which contains guidance on potential tax liability from three income sources.

In addition to meeting federal requirements, an attorney can assist recipients with considering their options on SSD benefits. A lawyer can also help assure that recipients receive their entitled rights.

Source: The Morning Journal, "Are my Social Security benefits taxable?," Feb. 25, 2017

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