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.

Mom (who is 70) is on Social Security and worked part time at Burt’s FastBurgers to earn a little extra and socialize a bit more than she might otherwise be able to (Dad died a few years ago and she likes to get out).

Of course, sometime in January she got a W-2 from Burt’s as well as a couple of 1099s with interest income on a number of CDs.  Being the good boy/girl that you always have been, you are gathering up a 1040, the 1099-SSA, the W-2, and other forms and getting ready to figure out Mom’s taxes.  But wait! Do you REALLY need to file?

You may not need to. If Mom’s “gross income” is less than $10,950 ($9,500 if she was under 65 . . . but she’s not) you might be able to find something else to do other than fill out Mom’s tax returns. By the way, had Mom been married, and both she and Hubby were over 65 and they were filing jointly, the magic “file/no file” number would have been $21,300, and if just one of them was over 65, the number would have been $20,150. But back to single Mom over 65: $10,950 is the magic number. The question is: How does the Social Security she received count?

Look at the 1099’s (except from Social Security) and the W-2 from Burt’s and add them up. Let’s say the Burt’s W-2 shows $6,500 gross income paid, and the 1099-INT forms from the banks show interest income on the CDs of $3,000. Mom’s total gross income from sources other than Social Security is $9,500.

Figure Out How Much The Social Security Might Count

Now take a look at Mom’s 1099-SSA. Let’s say Social Security paid Mom total benefits of $19,200 during the year. Divide that by half. That equals $9,600.

Add half the Social Security paid to the total of other income received by Mom. $9,600 + $9,500 = $19,100.

If half the Social Security benefits and the total of all other income is $25,000 or less, then none of the Social Security counts. In Mom’s case the number was $19,100 . . . which we all realize is less than $25,000. Therefore, Social Security will not enter the tax picture.

That Leaves Us With . . .

Mom had non-Social Security earnings of $9,500. You are able immediately to surmise that Mom’s “gross income” is less than $10,950. Stuff the W-2 and the 1099s back in the envelope to give back to Mom. Sweep the blank tax return forms into the trash. Go watch Dancing With the Stars . . . you’re off the hook!

What if Mom’s income from Burt’s and the CDs is $12,000, but when added to half her Social Security benefits is less than $25,000?  Or what if half of Mom’s Social Security and all other income exceeds $25,000? Turn off the TV, and read the next article. We have a little work to do.

Recent Question: Bob, is it OK for the trustee of a special needs trust to purchase a $2,000 pure bred spaniel for the trust beneficiary, Edwina?

Recent Answer: Only if Edwina is not planning on eating the dog. I’ll explain. First, you’ll need to understand the SSI income rules and what In Kind Support and Maintenance (ISM) is. Distributions from a special needs trust might be income! The trick is in understanding how income is counted and what it does.

What is SSI?

Supplemental Security Income, or SSI, supplements the income of disabled persons or those aged 65 and over who meet certain low asset tests and have countable income from all sources less than $698 monthly. SSI will insure that a person’s countable income from all sources, when combined with an SSI benefit, will equal the Federal Benefit Rate or “FBR” (which for a single person is $698). See the complete FBR chart elsewhere on this website. For example, if a single person’s countable income is $500, then SSI will pay $198.

Usually the amount of SSI is not as important as the fact that someone is eligible to receive any SSI. In most states (including North Carolina and Georgia) receiving even $1 SSI will entitle the person to Medicaid (which for a disabled individual can be a life saver).

How Income Counts in SSI

An SSI eligible individual may not have countable income in excess of the FBR. Countable income will reduce the amount, dollar-for-dollar, that SSI pays. Income includes all amounts received from wages, other public benefits, annuities, gifts (in the month of receipt) and other noncash items such as food and shelter (or payments made for those expenses).

When calculating countable income, the first $20 of income from all sources is disregarded. Thereafter, the first $65 of earned income is disregarded, and after that one-half of earned income in excess of $65.

SSI Earned Income: Can Edwina Work A Little?

Maybe a little. For example, if Edwina, a disabled individual, occasionally answers phones at a local charity and earns $1,200, she will be eligible for $55.50 monthly SSI payments. Let’s do the math: Edwina earns (meaning she works for it) $1,200. Subtract $20 from $1,200 to get $1,180. Subtract the first $65 of earned income from $1,180 to arrive at $1,115. One-half of $1,115 will be the income excluded ($557.50). So, in other words, Edwina’s countable income is $642.50 ($1,200 minus $557.50). Accordingly, Edwina’s SSI benefit is $698 (the maximum SSI benefit) less $642.50 (countable income). She will receive a monthly SSI check equal to $55.50.

SSI Unearned Income: Can Edwina Receive Cash?

Maybe a little . . . a VERY little. Instead of working, say Edwina receives a $1,200 cash distribution from a special needs trust (or even from a well-meaning friend or relative). SSI considers this unearned income (after all, she didn’t earn it). That means there are no earned income exclusions. $1,200 cash distribution, less the general $20 disregard yields $1,180. That is Edwina’s countable income. $698 (maximum SSI benefit) less $1,180 yields . . . TOAST. Edwina is toast! No SSI benefit.

What happens if instead of cash, the trust pays for certain items for Edwina?  Say, for example, the trust pays for clothing, food, computer equipment, prescription drugs or therapy, entertainment, travel . . . or even a pet.

In-kind Support and Maintenance (ISM): Can Edwina Receive “Other Stuff”?

Now to the matter at hand: Can the trustee of the special needs trust buy the fancy dog for Edwina? It depends. Is Edwina planning on Fricasse of Fido (er . . . a feast) or is she planning for the emotional comfort that can only come from the unqualified love of a furry companion? The answer to those questions will determine whether Fido is In-Kind Support and Maintenance or ISM.

Sometimes trusts and other people give a disabled beneficiary certain non-cash items, or pay for non-cash items on behalf of the individual. If such an item is classified as ISM it will reduce SSI benefits. The amount of the reduction may not matter . . . or it could result in the beneficiary losing all SSI (and Medicaid). Of course, if the item is not ISM, it doesn’t matter how much it is worth as long as it is a non-countable asset for SSI purposes.

Items related to food and shelter are ISM. For example, rent or mortgage payments (shelter), utility expenses (shelter), groceries (food), restaurant food certificates (food), property taxes (shelter), or a Christmas gift from Omaha steaks (food) are all ISM. (Interesting side note: Cable, phone, and internet are not ISM).

If Edwina is planning on eating Fido, Fido’s value ($2,000) will be ISM. On the other hand, if Edwina does not intend to eat Fido, he is not ISM.

What Does ISM Do To SSI Benefits?

It depends. One of two rules could apply, depending upon the beneficiary’s living arrangement. If the beneficiary is living in the home of another for at least one continuous month and receiving both food and shelter without contributing her pro rata share of those costs, her SSI benefit is lowered by one-third of the FBR (or $232.67 in 2012). This is called the “value of the one-third reduction” or “VTR” rule (I have no idea where they get “VTR”).

The problem with the VTR rule is it is “all or nothing.” If the rule applies, the beneficiary’s SSI is reduced $232.67 regardless of the actual value of the food and shelter received. If someone is receiving $698 SSI, the reduction to $465.33 might be a good deal (especially if the food and shelter is high quality).

Two conditions must be met for the VTR rule even to apply: (1) living in another’s home rent free, and (2) receiving free food. If those conditions aren’t met, the rule doesn’t apply.

If the VTR rule doesn’t apply, then the “presumed maximum value” or “PMV” rule applies. Under this rule, if the beneficiary receives any ISM during the month, the value of the ISM is “presumed” to be $232.67. “Presumed” means that if the beneficiary can prove that the ISM wasn’t worth $232.67, the SSI benefit will be reduced only by the actual value of the ISM. On the other hand, if the ISM is worth more, the value is still “presumed” to be $232.67 and the SSI will be reduced accordingly.

As For Fido . . .

So . . . if Fido (worth $2,000) is meant for the dinner table (gross), he is ISM. If Edwina’s SSI is more than $232.67 and she doesn’t have other offsetting earned or unearned income, then she’ll be OK (other than, I presume, a bit of indigestion). On the other hand, if Edwina’s SSI is less than $232.67 and Fido is ISM (food), she is . . . . 

 

FOR FURTHER READING ON TYPES OF SPECIAL NEEDS TRUSTS, SEE A GOOD ARTICLE ON THIS WEBSITE.