One common tax myth is the belief that Social Security benefits are never taxed. This misconception can lead to incorrect assumptions about tax liabilities and potential issues with the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Historical Context: Social Security benefits were not taxed when the program was first introduced, leading to a lingering belief that they remain untaxed.

• Lack of Awareness: There is often confusion about the specific criteria that determine the taxability of Social Security benefits.

Reality of Taxing Social Security Benefits

• Combined Income Calculation: The IRS uses your combined income to determine the taxability of your Social Security benefits. Combined income includes:

• Adjusted Gross Income (AGI)

• Nontaxable interest

• Half of your Social Security benefits

• Tax Thresholds:

• Single Filers: If your combined income is below $25,000, your benefits are not taxable. If it is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If it exceeds $34,000, up to 85% of your benefits may be taxable.

• Married Filing Jointly: If your combined income is below $32,000, your benefits are not taxable. If it is between $32,000 and $44,000, up to 50% of your benefits may be taxable. If it exceeds $44,000, up to 85% of your benefits may be taxable.

IRS Guidelines on Taxing Social Security Benefits

• Form SSA-1099: You will receive Form SSA-1099, Social Security Benefit Statement, which reports the total benefits you received.

• Form 1040: Report the taxable portion of your Social Security benefits on Form 1040 or Form 1040-SR.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that Social Security benefits are completely exempt from taxes, regardless of income.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand the Taxability: Clearly understand the IRS rules for the taxability of Social Security benefits.

• Taxable: Based on your combined income and filing status.

• Non-Taxable: If your combined income is below the threshold for your filing status.

What You Need to Do

• Calculate Combined Income: Include your AGI, nontaxable interest, and half of your Social Security benefits to determine your combined income.

• Report Benefits: Use Form SSA-1099 to report the taxable portion of your Social Security benefits on your federal tax return.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can ensure you correctly calculate the taxable portion of your Social Security benefits and avoid errors.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of reporting Social Security benefits.