Showing posts with label Taxable Income. Show all posts
Showing posts with label Taxable Income. Show all posts

Monday, April 28, 2014


This past tax filing season I had to explain to one taxpayer in the 15% federal tax bracket why $8,000 in additional qualified dividends and long-term capital gains, which the IRS tells us is taxed at the rate of 0%, cost $1,097 in federal income tax (13.7%).   

And to another, in the 25% bracket, why $10,000 in additional rental income cost $4,625 in federal income tax (46.25%).

The reason lies in the way Social Security and Railroad Retirement benefits are taxed. 

This could also cause a taxpayer in the 15% bracket to pay $638 in federal income tax on $5,000 in tax-exempt municipal bond interest (12.75%).

If you are collecting Social Security or Railroad Retirement for every $1.00 of additional taxable income you could be paying tax on $1.50 to $1.85.  And for every $1.00 of tax-exempt municipal bond income you could be paying tax on 50 to 85 cents.

The amount of Social Security or Railroad Retirement benefits that are taxed by Uncle Sam depends on the amount of your other taxable and tax-exempt income.  The maximum amount of benefits that are taxed is 85%.  If your gross Social Security benefits, before deducting Medicare Part B and Part D premiums, is $18,000 the most you will be taxed on is $15.300. 

If, based on your other income, the maximum 85% of your benefits are already being taxed then every additional $1.00 in taxable income is taxed as $1.00, and every additional $1.00 in tax-exempt municipal income is totally tax free (unless you are a victim of the dreaded Alternative Minimum Tax and you have income from private activity bonds).  

It is important for Social Security and Railroad Retirement beneficiaries to know where they stand regarding the taxability of their benefits so that they can understand how much additional taxable and tax-exempt income will cost in terms of federal income tax.

And so that their tax preparer does not put them in shock at tax time if they did well in the market or had additional income from another source during the year.

So here is how Social Security and Railroad Retirement benefits are taxed –

Start with one-half (50%) of your gross Social Security or Railroad benefits (from Box 5 of Form SSA-1099 or RRB-1099) – combined if filing a joint return.

To this number you add all other taxable income (Form 1040 Lines 7, 8a, 9a, 10-14, 15b, 16b, 17-19, 21).

Next you add the amount of tax-exempt interest reported on Box 8b of Form 1040.  While municipal bond interest is exempt from federal income taxation, it is included in the calculation of taxable SS or RR benefits – so in reality up to 85% of tax-exempt municipal interest could be subject to federal income tax.

From the total of these three amounts you subtract the total “adjustments to income” from Form 1040 line 23 – 32 plus any write-in adjustments included in Line 36.  Deductions for student loan interest, tuition and fees, and domestic production activities, the adjustments reported on Form 1040 lines 33, 34, and 35, are not allowed in calculating taxable benefits.

If this amount (50% of benefits + other taxable income + tax-exempt interest – most adjustments to income) is more than $25,000 (but not more than $34,000) if you file as Single, Head of Household, or Qualifying Widow(er) or $32,000 (but not more than $44,000) if you are Married Filing Joint than you will pay federal income tax on up to 50% of your total gross benefits.

If the amount is more than $34,000 if Single, Head of Household, or Qualifying Widow(er) or $44,000 is Married Filing Joint you will pay federal income tax on up to 85% of your total gross benefits.

If you are filing as Married Filing Separately and you lived with your spouse at any time during the year you will pay tax on 85% of your Social Security or Railroad Retirement benefits.  If you file separately and you and your spouse lived apart for the entire year you calculate the taxable benefit as if you are a Single individual.

Click here to download the IRS Social Security Benefits Worksheet. 

Here is another example of how this method of taxing benefits screws taxpayers. Let’s say you itemized in 2013 and claimed a deduction for the full amount of state income taxes withheld or paid in via estimated tax during the year.  When you prepared your state return you find you are getting a $300 refund.  When you prepare your 2014 Form 1040 you will report this $300 refund as taxable income Line 10. If you are receiving Social Security this could cost an additional $255 of your benefits to be taxed. 

If you are in the 15% bracket for both 2013 and 2014 this $300 provided a tax benefit of $45 on your 2013 return, but will cost you $83 in federal income taxes in 2014.  The solution is to claim the exact amount of your state tax liability as a deduction on Schedule A instead of the total amount paid, or to claim a deduction for state and local sales tax.      

If we are going to tax Social Security and Railroad Retirement benefits how should they be taxed?  I have suggested we tax these benefits the same as any other retirement benefit with after-tax employee contributions. Use the “simplified method” to allocate a portion of each monthly benefit payment to the total employee Social Security withholdings, or for a self-employed taxpayer the Social Security share of self-employment tax, as a “return of contribution”. So a portion of each monthly payment would be tax free.


Tuesday, May 8, 2012


Many taxpayers believe that if you do not receive a Form 1099 (MISC, DIV, or INT) from the payer you do not have to report the income on your income tax return. 

This is one of the reasons for the $350 Billion “tax gap”.  The most recent study had determined that a large percentage of this gap is a result of underreporting of income by small business owners.  And this is why Schedule C businesses with minimal income or consistent losses have become an audit “red flag”.

Read my lips!  You must report taxable income if your received taxable income – regardless of whether or not you get a Form 1099.

Businesses that pay at least $600 to an independent contractor for services during the year are required to send that contractor a Form 1099-MISC.  But the independent contractor must report all income received for providing services during the year, from dollar one, whether or not they have received a Form 1099.

Some banks tell customers, when asked, that one does not have to report interest income on an account if the total for the year is less than $10.00.  This is an outright lie!  Banks are not required to issue a Form 1099 INT if the interest earned is less than $10.00, although I have seen 1099s issued for 6 cents.  But, again, bank interest is taxable from dollar one.

Just because you have not received a Form 1099 in the mail does not mean that one was not issued, and a copy sent to the IRS.  It could have been lost in the mail, or sent to a wrong address.  Do not rely on Form 1099s when determining what income to report - use your own records.

Conversely, just because you receive a Form 1099 does not mean that the income is taxable.  States will issue Form 1099-G for state tax refunds.  But the refund is only taxable if you received a “tax benefit” for it in the prior year.  Individuals who did not itemize, or who claimed a deduction for state sales tax instead of income tax, do not have to claim the refund as income. 

Many states have stopped mailing out Form 1099-Gs, and require the taxpayer to go online to download the form.  So many taxpayers, not receiving the form in the mail, do not report taxable state income tax refunds – and will very likely get a bill from the IRS down the road. 

And while we are on the subject of 1099s - do not automatically accept that the amount reported on a Form 1099 is correct.  Check it against your own records.  A few years back a client received a Form 1099 from his bank listing interest from several accounts.  One of the accounts reported on the Form 1099 belonged to another depositor, and not my client. It was included on the Form 1099 by mistake.  In such a situation contact the bank immediately and request a corrected form.

Businesses that receive payments via bank credit or debit cards, or third-party payers like Pay Pal, began to receive a 1099 series form this year (for payments made in 2011), and in the future will have to separately report the income from these 1099s on their Schedule C or entity tax return.  But the entire amount reported on the 1099 as paid by the bank or third-party is not necessarily taxable income.  Again you must rely on your own records to determine the correct amount of gross receipts to report on the total income line.

All the more reason to keep good, contemporaneous records of both income and expenses – and why you may need the help of a competent tax professional.


Tuesday, January 10, 2012


Many years ago I travelled cross country on an escorted rail trip on Amtrak.  Among my fellow travelers was a retired couple from a suburb of our capital city of Trenton (TRENTON MAKES - THE WORLD TAKES).

The husband’s doctor had told him he needed to walk more.  So every day he would take a walk through the streets of his town.  As he walked he kept his head down to see where he was going.  In the course of a year he found about $123.00 literally “at his feet”!  Money, coins and bills, on the ground.

I do not walk much, now less than then, but once I heard that story I, too, began to walk with my head down, looking for coinage on the street.  In a year I had accumulated a little over $12.00 in found money.  Hey – it equaled two free movie tickets at the time (when I went to the movies).  And even today it’s a free ham and cheese omelet breakfast at my local diner.

When you go to the drive-up window of a fast food joint to pay do not park too close to the window.  Leave enough room to be able to open your door a bit – you will usually find coins on the ground under the window.

You can also find coins, often quarters, on the ground underneath the basket at toll booths.  When I would travel late at night and come upon a Garden State Parkway toll that cost 35 cents I would often be able to pay the toll and pocket 25 cents with what I found on the ground.

Since this is a blog about taxes, to justify this post perhaps I should discuss if this found money is taxable.

Yes, it would be income, and you would have to report it as miscellaneous income, much like gambling winnings or a prize won on a tv game show, on Line 21 of Form 1040.

Generally increases in wealth are taxable.  I do believe there is a Tax Court case concerning a "hidden hoard".  A person bought a piano somewhere and later found a pile of money hidden inside, which was determined to be taxable.

The bottom line - found value is taxable.


Thursday, September 3, 2009


I admit it! I watch TLC’s WHAT NOT TO WEAR with Stacy and Clinton. I suppose you can say it is my “guilty pleasure”.
Wait now – I do not consider WNTW to be in the excremental genre improperly called “realty tv”. The purpose of the show is not to humiliate for the mere sake of humiliation. While participants’ fashion faux pas are initially laughed at by hosts, family and friends, the individual’s good side and good works are expressed and affirmed and the purpose of the hour is to show how much better she can, and eventually does, look by following “the rules”.

I think of it as a “wardrobe improvement” show, akin to the “home improvement” shows on HGTV and DYI and FLN.
My only concern with the show is that it says that, in exchange for throwing/giving away your current faulty wardrobe, you will get a free $5,000 brand new wardrobe from the show. This is not true. There ain’t no such thing as a totally free lunch!
What is really happening is that the participant is getting a $5,000 brand new wardrobe for only about $1,500 or so.
The $5,000 wardrobe that the participant receives is a “prize” and is fully taxable on the recipient’s federal and state income tax returns. Just like the “free” SUV that Oprah’s audience got a while back. The $5,000 value of the wardrobe is subject to perhaps 25% federal income tax and maybe 5% in state income tax. So the recipient will be “out of pocket” about $1,500.
Remember that the naked fat idiot Richard Hatch went to federal prison for forgetting to report his $1 Million prize from SURVIVOR on his 1040.
Before I end – just as with my love of the Broadway Musical, do not read anything into my watching WNTW. I am also a fan of Judy Garland and Bette Midler – but, believe me, I would rather sleep with Bette Midler than do her hair!