Most Social Security recipients escape income taxes completely on all of their benefits. But middle- or upper-income retirees have to count benefits as reportable income.
Gift of the MAGI: When do taxes kick in? Only when your income - in tax jargon, your MAGI, short for modified adjusted gross income - EXCEEDS specified amounts. In calculating whether income exceeds the thresholds for benefits to be taxed, the MAGI rules require you to count not just salaries, pensions, dividends, capital gains, rents and the like, but ALSO whatever you receive as tax-exempt interest from obligations issued by state and local governments or from mutual funds, as well as 50 percent of your benefits.
For 1993, you were taxed on as much as 50 percent of those benefits when your MAGI exceeded $25,000 for singles and $32,000 for joint filers.
Starting with returns for 1994 to be filed in 1995, you are taxed on up to 50 percent of those benefits when your MAGI is between $25,000 and $34,000 for single persons or between $32,000 and $44,000 for couples filing jointly, which is no different than the rules for 1993. In addition, however, you are taxed on up to 85 percent of those benefits when your MAGI is above $34,000 for singles and $44,000 for joint filers.
Caution: If you are married and file separately, the $32,000 threshold drops to zero, unless you do not reside with your spouse at any time during the taxable year. Translation: A married couple who live together for just a day and file separate returns are not allowed a base amount of $25,000 each that is available to singles.
Help from IRS: If you expect the revised rules to increase your taxable benefits, you should take that increase into account when you figure your estimated tax payments for 1994. …