NON-TAXABLE INCOME
Many taxpayers confuse taxable and non-taxable income. The most common examples of non-taxable income are:
- Accident and health proceeds
- Benefits under the G.I. Bill
- Borrowed money
- Child-support payments
- Death benefits
- Dividends on unmatured life insurance policies
- Gifts
- Inheritance
- Social Security and disability benefits
Gifts and inheritances may be subject to a transfer tax. However, any tax obligation would be the responsibility of the grantor or deceased's estate. In other words, the money should already be taxed. The only tax liabilities from gifts and inheritances are derived from reinvestment earnings, which are subject to normal income-tax laws.
In order to determine if any part of your Social Security benefits are subject to tax, you need to recalculate your adjusted gross income, including any non-taxable interest or dividends, plus HALF of your Social Security benefits (as reported on Form SSA-1099, Box 5). Let's call this your Social Security AGI (or SS-AGI).
At least some part of your Social Security benefits will be taxable if your SS-AGI exceeds the following:
$25,000 if you are unmarried
$32,000 if you are married, filing jointly
$25,000 if married, filing separately AND lived apart from your spouse the entire year
$-0- if married, filing separately and you lived with your spouse for any part of the year.
How much will be taxable? That depends by how much your SS-AGI exceeds those limits. To the extent that your SS-AGI is over the amount above, but less than the "second tier" limit ($34,000 for unmarried, $44,000 for married/joint, $25,000 or married/separate/lived apart all year, or $-0- again for married/separate/did not live apart), you pay tax on the lower of half of your benefits, or the amount by which SS-AGI is over the first group of numbers above. To the extent that your SS-AGI exceeds the "second tier" limits in this paragraph, 85% of your benefits are taxable.
Confusing? If your SS-AGI is over the amounts shown, you need to use the worksheet for this, which is provided in the instructions for the Form 1040 or Form 1040A. The worksheet is a long one, but it is easier to follow than the rules in narrative form, as they are here.
Taxpayers with questions on the taxability of income they have received are recommended to seek professional advice.
