Social Security benefits include monthly retirement, survivor, and disability benefits. They don’t include supplemental security income (SSI) payments, which aren’t taxable.
Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary is entitled to receive under the Social Security system. They are commonly called the Social Security equivalent benefit (SSEB) portion of tier 1 benefits. Tier 1 railroad retirement benefits are the equivalent of Social Security benefits and are treated the same way for income tax purposes.
If you receive benefits during the year, you will receive a Form 1099-SSA or Form 1099-RRB that shows the total payments that you received.
If the only income that you received during 2007 was your Social Security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally aren’t taxable and you probably don’t have to file a return.
If you have income in addition to your benefits,and your modified adjusted gross income (MAGI), the sum of one-half of your benefits, and the rest of your income (including tax-free interest) and other exclusions from income exceeds the base amount for your filing status, then up to 85% of your Social Security or SSEB payments can be taxed.
If you file a single return and your MAGI is less than $25,000 (single base amount), your benefits are tax-free.
If you and your spouse file a joint return, your MAGI must be less than $32,000 (joint base amount) for your benefits to be tax-free.
If you and your spouse file separate (MFS) returns and you lived apart during the year, your MAGI must be less than $25,000 (base amount for MFS living apart) for your benefits to be tax-free.
If you and your spouse file separate returns and you lived with your spouse during the year, 85% of your benefits are taxable (base amount is $0).
To find out whether any of your benefits are taxable, compare the base amount for your filing status with the total of:
One-half of your benefits, plus
All your other income, including tax-exempt interest and other exclusions from income, such as foreign earned income and some adjustments.
If your modified adjusted gross income (MAGI) is less than $34,000 for single filers or $44,000 for those who file joint returns, up to 50% of the benefits that you receive are taxable. If your MAGI exceeds $34,000 (single filers) or $44,000 (joint filers), then up to 85% of the amount that you receive is taxable. TaxCut will figure the taxable amount for you.
Example: You and your husband file a joint return. Your adjusted gross income (AGI) is $30,000, and you receive $4,000 of tax-exempt interest from municipal bonds and $5,000 in Social Security benefits:
$30,000 (AGI) + $4000 (Tax-exempt interest) + ($5,000 / 2) (One-half of Social Security) = $36,500
$36,500 (MAGI) - $32,000 (Base amount) = $4,500
The formula that you use to calculate what is taxed states that you will be taxed on the lesser of:
One-half of the amount over the base ($4,500 / 2 = $2,250), or
One-half of your Social Security benefits ($5,000 / 2 = $2,500).
In this case, you will be taxed on one-half of the Social Security benefits that you received, or $2,250.
For more information, see these resources:
IRS Publication 554, Older Americans’ Tax Guide
IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits