Generally, Social Security benefits are non-taxable or are partially taxable, depending on how much income the beneficiary receives from other sources. Social Security benefits will not form part of the beneficiary's taxable income if the said benefits are the only income that the latter receives. This equally applies with if the only income of the beneficiary is derived from any equivalent railroad retirement benefits.
If the beneficiary receives any other income outside Social Security benefits, a portion of the latter shall then be taxed. The taxable amount can be determined through the use of Social Security Benefits Worksheet which can be found on the Instructions for Form 1040. This can be found particularly on page 29 of the 2012 edition of the instruction booklet.
In determining the the taxable amount, the beneficiary must figure out his provisional income and compare the same to the base amounts. Provisional income refers to the beneficiary's total worldwide income which includes tax-exempt income. plus half of his Social Security benefits.
The base amount, on the other hand, differs on the status of the beneficiary. Generally, the following base amounts are used to determine the taxable income:
Status Base Additional
Single $25,000 $34,000
Head of Household
Married Filing Jointly $32,000 $44,000
Married Filing Separately $0
Qualifying Widow(er) $25,000 $34,000
For married couples who are filing separate returns, the following methods shall be used to compute the taxable portion of the spouses' Social Security benefits:
- If the spouses lived in the same household at any time during the year, the base amount shall be zero. 85% of their Social Security benefits will be subjected to taxation.
- If the spouses lived apart from each other for the entire year, the base amount to be used is $25,000 and the additional income amount of $34,000.
If the provisional income of the beneficiary is below the base amounts for his filing status, the Social Security benefits will not be taxed. If the beneficiary's provisional income is between the base amount and the additional amount, half of the benefits will be subjected to tax. And, if the provisional income is over the additional amount, $4,500 plus 85% of the benefits will be taxed. The taxable portion of the Social Security benefits will not be more than 85% of the total benefits.
The beneficiary may choose to allow withholding of the federal taxes from their Social Security benefits at the rate of 7%, 10%, 15%, or 25%.