Congress seems committed to saddling social security beneficiaries with ever-more complicated rules for figuring whether benefits are taxable and, if so, what portion of your payments the IRS gets a crack at.
Beneficiaries fall into three basic categories, based on their income:
Your benefits are vulnerable if your "provisional income" exceeds a threshold amount. Provisional income is adjusted gross income (income before subtracting deductions and exemptions) plus 50% of your benefits plus any tax-exempt interest income. If your provisional income is over $32,000 on a joint return, $25,000 on an individual return or $0 (that's right, zero) if you're married, lived together for any part of the year and file separately, then up to 50% of your benefits can be taxed. If your provisional income is over $44,000 on a joint return, $34,000 on a single return and, still, $0 if you're married filing separately, then up to 85% of your benefits can be included in taxable income . By the way, those trigger points are not indexed for inflation, so as retirees' income rises, more and more will be snared by this tax.
The rules are really complicated but the good news here is that TaxCut handles all the numbers crunching. Follow the Interview for this issue to make sure you don't report a dime more of your benefits than you have to.
If you're affected by this tax, some planning can help limit the bite. If your AGI includes amounts withdrawn from a traditional IRA, for example, you may be able to stagger your withdrawals and vary your income so that your Social Security benefits are taxed only in alternate years. The same goes for the sale of stocks or other appreciated property. By timing your sales, you may be able to boost your income in years when 85% of your benefits will be taxed anyway and limit income in intervening years to reduce the amount of your social security that fall prey to the IRS.
If you have municipal bonds, you may consider unloading them now that this "tax-free" income can trigger a tax on your Social Security benefits. That could backfire, however, because switching to a comparable taxable investment would probably give you a higher yield that could push even more of your benefits into the taxable range. Even though tax-exempt income is taken into account in the Social Security formula, the income itself is still not taxed.
Note this: You can now ask the Social Security Administration to withhold income taxes from your benefit checks. This could make sense if it allows you to avoid making quarterly estimated tax payments. To request voluntary withholding, you file a Form W4-V with Social Security.
This credit is for individuals who have more than one job or who change jobs during the year and whose combined salary is higher than the social security wage base--that is, the maximum amount to which the social security tax applies. The credit is designed to protect you from paying too much Social Security tax.
You don't have to worry about this if you had only one job in 2006 or if your total wages for the year are less than the amount to which the full Social Security and Medicare tax applies: $94,200 in 2006.
But if you earned more than that and had more than one job, you overpaid the tax and deserve the credit.
Consider this illustration: Say you switched jobs in mid-2006 and earned $50,000 at each job. Each employer withheld 7.65% of the full $50,000—$3,825. That means you paid a total of $7,650 in Social Security and Medicare tax on your $100,000 of earnings. And, that's too much.
For 2006, the full 7.65% rate was supposed to hit only to the first $94,200 of income. After that, only the 1.45% Medicare portion of the tax applied. So, the maximum tax in 2006 on $100,000 is $7,290.40. That's $7,206.30. (7.65% of $94,200) plus $84.10 (1.45% of the remaining $5,800).
In this example, you'd deserve a credit of $359.60 to refund the excess tax withheld from your paychecks.
You get a credit for that amount when you file your 2006 return. Based on the information you entered into TaxCut from your W-2 forms, the credit is automatically entered in the payments section of your Form 1040.
If a single employer goofs and withholds more than the maximum amount of Social Security from your pay, you can't recoup the difference with this credit. Instead, you'll have to get your employer to refund the overpayment to you.