Income – Social Security Benets
14-1
Introduction
This lesson will help you assist taxpayers who have Social Security and equivalent railroad retirement
benets. These benets may or may not be taxable.
The intake and interview sheet lists Social Security and Railroad Retirement Benets in the Income section.
Ask the taxpayer about the receipt of either of these benets. The Social Security Administration issues
Form SSA-1099, Social Security Benet Statement, to Social Security benet recipients. The Railroad
Retirement Board issues Form RRB-1099, Payments by the Railroad Retirement Board, and Form
RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board.
See Publication 575, Pension and Annuity Income, and Publication 915,
Social Security and Equivalent Railroad Retirement Benets, for additional
information on the topics discussed in this lesson.
Objectives
At the end of this lesson, using your resource materials, you will be able to:
• Determine the taxable portion of Social Security and railroad retirement
benets
• Determine the most advantageous method of reporting lump sum
Social Security benets
• Report Social Security and railroad retirement benets on the tax return
Income – Social Security Benets
What do I need?
□ Form 13614-C
□ Publication 4012
□ Publication 17
Optional:
□ Publication 575
□ Publication 915
□ Form RRB-1099
□ Form RRB-1099-R
□ Form SSA-1099
What are Social Security and railroad retirement benets?
Social Security Benets
Social Security benets are payments made under Title II of the Social Security Act. They include Old-Age,
Survivor, and Disability Insurance (OASDI) benets.
Social Security benets include monthly retirement, survivor, and disability benets. They do not include
Supplemental Security Income (SSI). Certain government retirees who receive a pension from work are not
covered by Social Security.
Some portion of the Social Security benets received may be taxable. Generally, if Social Security benets
are the only source of income, then the benets are not taxable. In this instance, taxpayers may not be
required to le a return. However, if the taxpayers are Married Filing Separately and lived with their spouse
at any time during the tax year, 85% of the benets will be taxable.
Income – Social Security Benets
14-2
Railroad Retirement Benets (RRBs)
Railroad Retirement Benets (RRBs) are benets paid to railroad employees working in jobs that are
covered by the Railroad Retirement Act (RRA). The RRA benets have two components: tier 1 (Social
Security equivalent benets) and tier 2 (treated as a qualied employee plan). The tier 2 benets are
reported on Form RRB 1099-R. These funds are discussed in the previous lesson on Retirement Income.
How are these benets reported to the taxpayer?
Form SSA-1099
Social Security benets are reported on Form SSA-1099. Box 5 shows the amount of net benets.
Taxpayers who did not receive Form SSA-1099, or have misplaced it, may be able to get an instant printout
of benets from their personal “my Social Security” account on the Social Security Administration website at
SSA.gov. Or taxpayers may call toll-free to request a benet statement to be sent by mail. Social Security
no longer provides benet verication letters in their oces.
Form RRB-1099
Tier 1 railroad retirement benets are equal to the Social Security benet that a railroad employee or
beneciary would have been entitled to receive under the Social Security system. These benets are called
“Social Security equivalent benets” and, for tax purposes, are treated like Social Security benets. They
are shown on the blue Form RRB-1099. Box 5 shows the net Social Security equivalent benets for tier 1.
example
Jacob is a retired railroad switchyard operator. Using the intake and interview sheet, the volunteer
determined Jacob received Railroad Retirement Benets. He received Form RRB-1099 and Form
RRB-1099-R. The amount from Form RRB-1099 will be added to any amount of Social Security benets
that he may have received from other employment.
When are Social Security benets and tier 1 RRBs taxable?
Part of the following benets received by the taxpayer may be taxable:
• Social Security benets
• Railroad retirement benets, tier 1 (Social Security equivalent portion)
To correctly calculate the taxable portion, you need to know the amount in Box 5 of Form SSA-1099 or
Form RRB-1099. The taxable amount, if any, of a taxpayer’s Social Security benets depends upon ling
status and other reportable income. Generally, if Social Security (or Social Security equivalent) benets
were the taxpayer’s only source of income, the benets are not taxable and the taxpayer does not need to
le a federal income tax return.
A portion of the benets is taxable if total income (including tax-exempt interest), plus one-half of the
benets received, is more than certain base income amounts, which vary based upon the taxpayer’s ling
status. If the taxpayers are Married Filing Separately and lived with their spouse at any time during the year
85% of the benets are taxable.
The taxable portion of Social Security benets is never more than 85% of the net benets the taxpayer
received. In many cases, the taxable portion is less than 50%.
If the taxpayer les a joint return, enter the amounts from each Form SSA-1099 and the software will
compute the portion that is taxable, if any.
Income – Social Security Benets
14-3
EXERCISES
Answers follow the lesson summary.
Question 1: Hank comes to your site to get some help with his tax return. He is upset because his
neighbor told him that he would have to pay tax on all of his Social Security benets this year. After
talking to Hank, you learn that his wife died several years ago. This tax year, he sold all of his stock
and moved into senior housing. The sale of the stock created $31,896 of taxable income for Hank. His
neighbor told him, with that much income, the entire $11,724 of his Social Security benets would be
taxable. What is the maximum taxable amount of Hank’s benets?
A. $31,896
B. $20,172
C. $11,724
D. $9,965
Taxpayers can use Form W-4V, Voluntary Withholding Request, to request withholding from Social Security
benets.
example
Wanda and Dan are both retired and will le a joint return. Wanda received Form SSA-1099 with an
amount of $4,300 appearing in Box 5. Dan retired from the railroad, and Box 5 of his Form RRB-1099
shows an amount of $6,800. Wanda and Dan will use the combined benets of $11,100 and only one
calculation to see if any of their benets are taxable.
How do I report Social Security or railroad tier 1 benets?
Tax Software Hint: The tax software will perform all the calculations to determine the taxable amount
based on other information on the return. Be sure to enter all income, including tax-exempt interest, in order
for the software to correctly calculate taxability of benets. Medicare premiums (Part B and D) from Forms
SSA-1099 and RRB-1099 may be claimed as a self-employed health insurance deduction if the taxpayer is
ling Schedule C. Otherwise, enter medical premiums so they ow to Schedule A if the taxpayer is itemizing
deductions. Additionally, be sure to enter any federal income tax withholding. Go to the Volunteer Resource
Guide, Tab D, Income, for software entries.
What are lump-sum benet payments?
Some taxpayers may have received a lump-sum benet payment. This payment could be for the current
tax year and for prior tax years. Box 3 of the taxpayer’s Form SSA-1099 or Form RRB-1099 will include
the lump-sum payment. The form will also show the year, or years, for which the payment is made. The
additional information will be shown in Description of Amount in Box 3 on Form SSA-1099 or in Boxes 7–9
on Form RRB-1099.
Do not confuse this type of lump-sum benet payment with the lump-sum death benet that both the SSA and
RRB pay to many of their beneciaries. No part of the lump-sum death benet is subject to tax.
Income – Social Security Benets
14-4
example
Last year, Jane applied for Social Security disability benets but was told she was ineligible. She
appealed the decision and won. This year, she received a lump-sum payment of $6,000, of which
$2,000 was for last year and $4,000 was for the current year. Jane also received $5,000 in Social
Security benets in the current year, so her Form SSA-1099 shows benets paid of $11,000.
Jane had other taxable income in both the previous year and the current year. She should gure her
taxable benets under the lump-sum election method to see if it is lower.
When guring the taxable portion of Social Security benets, two options are available for lump-sum benet
payments:
• The rst option allows the taxpayer to report the whole payment the year it was received. When the
taxpayer chooses this option, complete the Social Security Benets Worksheet as usual by including
the entire lump-sum payment on line 1.
• The second option is to treat the payment as received in the earlier year or years. This is done by
guring whether any part of these benets is taxable, based on the earlier year’s income. Any part that
is taxable is then added to any taxable benets for the current year and included on Form 1040. The
taxpayer can elect this method if it lowers the taxable benets.
Will the lump-sum election method lower taxable benets?
Figuring the taxable benets under the lump-sum election method is in scope for the VITA/TCE programs.
If the taxpayer chooses the second option, only the current year income will be adjusted. You do not le
amended returns for the earlier years.
Under the lump-sum election method, regure the taxable part of all the benets for the earlier year
(including the lump-sum payment) using that year’s income and ling status; then subtract any taxable
benets for that year that were previously reported. The remainder is the taxable part of the lump-sum
payment and is added by the software to the taxable part of the benets for the current year (gured without
the lump-sum for the earlier year).
In order to compute the taxable benets, you will need copies of the taxpayer’s prior year returns.
For additional information on the lump-sum election, see Publication 915.
Because the earlier year’s taxable benets are included in the current year’s income, no adjustment is made to
the earlier year’s return. Do not le an amended return for the earlier year.
Once a taxpayer elects this method of guring the taxable part of a lump-sum payment, the election can only
be revoked with the consent of the IRS.
Tax Software Hint: The tax software will gure all the calculations after you enter the prior year
tax return information. Go to the Volunteer Resource Guide, Tab D, Income, Form SSA-1099 Lump Sum
Distributions, for software entries.
Income – Social Security Benets
14-5
TAX LAW APPLICATION
To gain a better understanding of the tax law, complete the practice return(s) for your course of study
using the Practice Lab on L<.
If you are unable to complete the entire exercise, complete as much as you can. Come back later to
nish the exercise after you cover all the technical topics in later lessons.
EXERCISE ANSWERS
Answer 1: D. $9,965 or 85% of the net benets is the maximum amount that could ever be taxable.
Summary
This lesson explained how to determine whether taxpayers’ Social Security benets and railroad retirement
benets are taxable.
Generally, if Social Security benets were the taxpayer’s only source of income, the benets are not taxable
and the taxpayer does not need to le a federal income tax return. If the taxpayer received Social Security
benets and other income, the Social Security Benets Worksheet found in the Form 1040 Instructions is
completed by the software to calculate the taxable portion.
When guring the taxable portion of Social Security benets, two options are available for lump-sum benet
payments. The taxpayer may report the whole payment in the year it was received or treat the payment as
received in the applicable earlier year or years to compute the amount of lump-sum payment that is taxable
in the current year.
Income – Social Security Benets
14-6
Notes
