You now realize Mom has to file a tax return because her gross income exceeds $10,950. If ½ her Social Security benefits PLUS her income from all other sources is LESS than $25,000 (call it her “Combined Income”), but her non-Social Security income from all sources is more than $10,950, then she will have to file a tax return, although Social Security benefits will be untouched. However, if her Combined Income (½ her Social Security benefits PLUS her income from all other sources) is greater than $25,000, then Social Security benefits are going to be taxed.
The question is: If her Social Security is going to be taxed, just how much?
As a rule of thumb, if her Combined Income is between $25,000 and $34,000, then as much as 50% of the Social Security benefits will be considered taxable. If her Combined Income is more than $34,000, then as much as 85% of her Social Security benefits will be considered taxable.
NO! That does not mean that she must pay 50% or 85% of her benefits as taxes . . . it means that up to 50% or 85% of her benefits will be treated like taxable income from other sources.
To figure out the amount of benefits taxable, fill out the Social Security Benefits Worksheet that comes in the instruction package for Form 1040.
Example: Let’s say Mom worked constantly at Burt’s FastBurger and her W-2 shows gross income of $23,000. Her 1099-INTs show interest income of $3,000. Her 1099-SSA shows Social Security benefits of $19,200. Half her Social Security benefits is $9,600. When added to her other income ($26,000) the sum is $35,600 . . . which is, of course, more than $25,000. All that means is some of her Social Security will be taxed.
In fact, I filled out a worksheet for Mom and you can download it here (you can also mess around with it yourself). As you can see, $5,860 of Mom’s Social Security benefits are taxable.
That means that Mom’s gross income for the year will be: $23,000 (Burt’s) + $3,000 (Interest on the CDs) + $5,860 (Taxable part of Social Security) = $31,860.
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