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Social Security Benefits Subject to Tax

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Social Security Benefits Subject to Tax

 

Do you know that part of your Social Security Benefits may be subject to paying federal taxes to the IRS?

 

The Federal Tax Reform of 2017, known as the Tax Cuts and Jobs Act (TCJA), brought changes that in general will not economically affect millions of taxpayers.  However, residents of Puerto Rico that receive Social Security benefits could be significantly affected. 

In 2018, the increase in the standard deduction from $6,350 to $12,000 came into effect for single or married taxpayers that file separately; and from $12,700 to $24,000 for married couples that file together. 

Federal Insurance Contributions Act (FICA) Medicare contributions are deducted from bimonthly salaries received by residents of Puerto Rico that work as salaried employees.  These are accumulated throughout their work life and are used to calculate the benefits they will be receiving upon retirement.  On the other hand, any self-employed person that renders services must annually file a federal tax return (Form 1040PR) on which the FICA and Medicare contributions are calculated in order to receive the Social Security benefits upon retirement.  For additional information you can visit the Social Security Administration’s website (https://www.ssa.gov/myaccount) where you can obtain an estimation of your future benefits, keep a register of your earnings, and monitor them each year. 

Income for rendered services in Puerto Rico are exempt from paying federal taxes as stated in section 933 of the Federal Internal Revenue Code.  However, part of the benefits received by an individual may be subject to federal taxes if the person receives different types of income and receives Social Security benefits.  Publication 915 (Social Security and Equivalent Railroad Retirement Benefits) of the Internal Revenue Service (IRS) provides work sheets for calculating which Social Security benefits are subject to paying taxes. 

Let us examine some examples: 

 

Example 1:  John is single, is 60 years old, he receives Social Security benefits of $12,000 and receives salaries from a private company in Puerto Rico of $25,000. 

John would be subject to paying taxes of $3,000, and, after including the total income received and the standard deduction, he would have to pay the IRS $171 for the Social Security benefits.  On the other hand, if John has no additional income, he would not have to pay any taxes for the Social Security benefits, as his income does not exceed $25,000, exempt amount established by the IRS.  See Table I in the Appendix section for calculating the taxable portion. 

 

Example 2: Carmelo and Edith are a married couple that file together, and both are 65 years old.  Carmelo is self-employed and receives an annual compensation of $22,000 for rendered services. Edith owns an apartment in Puerto Rico and collects a monthly rent of $750 for a total of $9,000 a year.  Both receive Social Security benefits of $12,000 each. See Table II in the Appendix section for calculating the taxable portion. 

In example 2, both have income sourced in Puerto Rico and receive Social Security benefits.  Following the steps we ran through in example 1, Carmelo and Edith would have taxable benefits of $5,500.  They would be subject to pay $169.

 

Example 3: José is single, 65 years old and receives and annual pension of the Government of Puerto of $45,000 and receives annual Social Security benefits of $23,500.  See Table III in the Appendix section for calculating the taxable portion. 

 

José receives a significant amount of income from both the pension and the Social Security benefits.  The federal taxable portion of his Social Security benefits would be $19,975. Using the standard deduction, the total amount of taxes due to the IRS would be $1,701. 

All Social Security beneficiaries must fill out these appendixes to determine whether there is any tax to be payed to the IRS.  They must include the total amount of the income they received during the year, including exempt income as these affect the calculation of the taxable portion. 

Individuals that only receive Social Security benefits do not have to worry.  The examples shown above only describe the type of person that receives income in addition to the Social Security benefits.  Therefore, if you receive only the Social Security benefits, you do not have to worry as your benefits ate not subject to federal taxes. 

Appendix

TABLE I

1) Enter the total of the box 5 of all SSA-1099 Forms.    $ 12,000
2) Multiplying Line 1 by 50%…………………………………………………………………………………..             6,000
3) Gross income taxed at a Federal level:
a. Wages …………..………..…………….……………………………………….               –  
b. Interests ………………..…………………………………………………………               –  
c. Dividends ………………..……………………………………………………….               –  
d. IRA’s, pensions & annuities ……….………………………………………….               –  
e. Professional Services ………………………………………………………..               –  
f. Capital Gains/(Losses) .………………….…….……………………………..               –  
g. Rent ……….…………………..……..………………………………………….               –  
h. Other Miscellaneous Income …..……………………………………………..               –  
i. Subtotal ……………………………………………………………………………….                   –  
4) Enter tax-exempt interests received (Line 2a of Form 1040) …………….…………….                   –  
5) Enter the total excluded income from Puerto Rico sources:
a. Wages …………..………..…………….……………………………………….       25,000
b. Interests ………………..…………………………………………………………               –  
c. Dividends ………………..……………………………………………………….               –  
d. IRA’s, pensions & annuities ……….………………………………………….               –  
e. Professional Services ………………………………………………………..               –  
f. Capital Gains/(Losses) .………………….…….……………………………..               –  
g. Rent ……….…………………..……..………………………………………….               –  
h. Other Miscellaneous Income …..……………………………………………..               –  
i. Subtotal ……………..……………………………………………………………………….           25,000
6) Add lines 2, 3i, 4, and 5i ……………………..……………………………………………………..           31,000
7) Enter the adjustments to the gross income (Schedule 1 Form 1040, Line 23 through 32):
a. Student Loan Interests ………………..……………………………………….               –  
b. Alimony Paid ………….………..………………………………………………               –  
c. Other Adjustments ……………..…………………………………………………               –  
d. Subtotal ………………………………………………………………………………….                   –  
8) Is the amount on line 7 less than the amount on line 6?
NO
       None of your social security benefits are taxable.
YES Subtract line 7 from line 6 ………..……..…………………………………………………           31,000
9) If your filing status is:
a. Married filing jointly, enter $32,000
b. Single, head of household, qualifying widow(er), or married filing separately
and you lived apart from your spouse for all of 2018, enter $25,000 ………………..           25,000
10) Is the amount on line 9 less than the amount on line 8?
NO
       None of your social security benefits are taxable.
YES Subtract line 9 from line 8 …………..………..……………………………………………             6,000
11) Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying 
widow(er),or married filing separately and you lived apart from your spouse for all of 2018             9,000
12) Subtract line 11 from line 10. If zero or less, enter -0- ………………..………………………….                   –  
13) Enter the smaller of line 10 or line 11 …………………………………………………………….             6,000
14) Multiply line 13 by 50% (0.50) ……………………………………………………………………..             3,000
15) Enter the smaller of line 2 or line 14 …………….………………………………………………..             3,000
16) Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0- ……………….…………………….                   –  
17) Add lines 15 and 16 …………….………………………………………………………………….             3,000
18) Multiply line 1 by 85% (0.85) ………….………………………………………………………….           10,200
19) Taxable benefits. Enter the smaller of line 17 or line 18 ………………………………………         $  3,000

TABLE II

1) Enter the total of the box 5 of all SSA-1099 Forms.      $24,000
2) Multiplying Line 1 by 50%………………………………………………………………………………………….           12,000
3) Gross income taxed at a Federal level:
a. Wages …………..………..……….……………………………………….               –  
b. Interests ………………..…………………………………………………               –  
c. Dividends ………………..……………………………………………….               –  
d. IRA’s, pensions & annuities …………………………………………….               –  
e. Professional Services …………………………………………………..               –  
f. Capital Gains/(Losses) .………………….…….………………………..               –  
g. Rent ……….…………………..……..…………………………………….               –  
h. Other Miscellaneous Income …..………………………………………..               –  
i. Subtotal ……………………………………………………………………………….                   –  
4) Enter tax-exempt interests received (Line 2a of Form 1040) …………….…………….                   –  
5) Enter the total excluded income from Puerto Rico sources:
a. Wages …………..………..…………….……………………………………….               –  
b. Interests ………………..…………………………………………………………               –  
c. Dividends ………………..……………………………………………………….               –  
d. IRA’s, pensions & annuities ……….………………………………………….               –  
e. Professional Services ………………………………………………………..       22,000
f. Capital Gains/(Losses) .………………….…….……………………………..               –  
g. Rent ……….…………………..……..………………………………………….         9,000
h. Other Miscellaneous Income …..……………………………………………..               –  
i. Subtotal ……………..……………………………………………………………………….           31,000
6) Add lines 2, 3i, 4, and 5i ……………………..……………………………………………………..           43,000
7) Enter the adjustments to the gross income (Schedule 1 Form 1040, Line 23 through 32):
a. Student Loan Interests ………………..……………………………………….               –  
b. Alimony Paid ………….………..………………………………………………               –  
c. Other Adjustments ……………..…………………………………………………               –  
d. Subtotal ………………………………………………………………………………….                   –  
8) Is the amount on line 7 less than the amount on line 6?
NO
       None of your social security benefits are taxable.
YES Subtract line 7 from line 6 ………..……..…………………………………………………           43,000
9) If your filing status is:
a. Married filing jointly, enter $32,000
b. Single, head of household, qualifying widow(er), or married filing separately
and you lived apart from your spouse for all of 2018, enter $25,000 ………………..           32,000
10) Is the amount on line 9 less than the amount on line 8?
NO
       None of your social security benefits are taxable.
YES Subtract line 9 from line 8 …………..………..……………………………………………           11,000
11) Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying 
widow(er),or married filing separately and you lived apart from your spouse for all of 2018           12,000
12) Subtract line 11 from line 10. If zero or less, enter -0- ………………..………………………….                   –  
13) Enter the smaller of line 10 or line 11 …………………………………………………………….           11,000
14) Multiply line 13 by 50% (0.50) ……………………………………………………………………..             5,500
15) Enter the smaller of line 2 or line 14 …………….………………………………………………..             5,500
16) Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0- ……………….…………………….                   –  
17) Add lines 15 and 16 …………….………………………………………………………………….             5,500
18) Multiply line 1 by 85% (0.85) ………….………………………………………………………….           20,400
19) Taxable benefits. Enter the smaller of line 17 or line 18 ………………………………………        $   5,500

TABLE III

1) Enter the total of the box 5 of all SSA-1099 Forms.     $23,500
2) Multiplying Line 1 by 50%………………………………………………………………………………………….           11,750
3) Gross income taxed at a Federal level:
a. Wages …………..………..…………….……………………………………….               –  
b. Interests ………………..…………………………………………………………               –  
c. Dividends ………………..……………………………………………………….               –  
d. IRA’s, pensions & annuities ……….………………………………………….               –  
e. Professional Services ………………………………………………………..               –  
f. Capital Gains/(Losses) .………………….…….……………………………..               –  
g. Rent ……….…………………..……..………………………………………….               –  
h. Other Miscellaneous Income …..……………………………………………..               –  
i. Subtotal ……………………………………………………………………………….                   –  
4) Enter tax-exempt interests received (Line 2a of Form 1040) …………….…………….                   –  
5) Enter the total excluded income from Puerto Rico sources:
a. Wages …………..………..…………….……………………………………….               –  
b. Interests ………………..…………………………………………………………               –  
c. Dividends ………………..……………………………………………………….               –  
d. IRA’s, pensions & annuities ……….………………………………………….       45,000
e. Professional Services ………………………………………………………..               –  
f. Capital Gains/(Losses) .………………….…….……………………………..               –  
g. Rent ……….…………………..……..………………………………………….               –  
h. Other Miscellaneous Income …..……………………………………………..               –  
i. Subtotal ……………..……………………………………………………………………….           45,000
6) Add lines 2, 3i, 4, and 5i ……………………..……………………………………………………..           56,750
7) Enter the adjustments to the gross income (Schedule 1 Form 1040, Line 23 through 32):
a. Student Loan Interests ………………..……………………………………….               –  
b. Alimony Paid ………….………..………………………………………………               –  
c. Other Adjustments ……………..…………………………………………………               –  
d. Subtotal ………………………………………………………………………………….                   –  
8) Is the amount on line 7 less than the amount on line 6?
NO
       None of your social security benefits are taxable.
YES Subtract line 7 from line 6 ………..……..…………………………………………………           56,750
9) If your filing status is:
a. Married filing jointly, enter $32,000
b. Single, head of household, qualifying widow(er), or married filing separately
and you lived apart from your spouse for all of 2018, enter $25,000 ………………..           25,000
10) Is the amount on line 9 less than the amount on line 8?
NO
       None of your social security benefits are taxable.
YES Subtract line 9 from line 8 …………..………..……………………………………………           31,750
11) Enter $12,000 if married filing jointly; $9,000 if single, head of household, qualifying 
widow(er),or married filing separately and you lived apart from your spouse for all of 2018             9,000
12) Subtract line 11 from line 10. If zero or less, enter -0- ………………..………………………….           22,750
13) Enter the smaller of line 10 or line 11 …………………………………………………………….             9,000
14) Multiply line 13 by 50% (0.50) ……………………………………………………………………..             4,500
15) Enter the smaller of line 2 or line 14 …………….………………………………………………..             4,500
16) Multiply line 12 by 85% (0.85). If line 12 is zero, enter -0- ……………….…………………….           19,338
17) Add lines 15 and 16 …………….………………………………………………………………….           23,838
18) Multiply line 1 by 85% (0.85) ………….………………………………………………………….           19,975
19) Taxable benefits. Enter the smaller of line 17 or line 18 ………………………………………         $19,975

 

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