CPE Course Basics for Determining Taxable Social Security Benefits

CPE Course Basics for Determining Taxable Social Security Benefits

One of the elements addressed in enrolled agent continuing education is the tax impact of Social Security benefits. Payments from the SS system are not subject to income tax for taxpayers who receive these benefits as their only income source.

Determining when Social Security benefits are taxable is not based upon age. Rather, EA CPE teaches the income formula used to calculate whether SS payments are taxable. Even individuals who receive income other than Social Security payments are not subject to income tax unless their calculation using the income formula exceeds a base amount based upon their marital status.

The determination first requires adding 50 percent of a taxpayer’s Social Security benefits to adjusted gross income as reported on the tax return plus any tax-exempt income, such as municipal bond interest. The sum of these figures is then compared to a threshold amount that is adjusted annually to the cost-of-living. For 2010, some SS benefits are taxable for taxpayers having an income formula result that exceeds $32,000 for a married filing joint tax return or $25,000 for those with a filing status of single, head of household, or qualifying widow (or widower).

For individuals who are married filing separately and lived together during the tax year, all Social Security benefits are subject to income tax. Enrolled agents or any professional with tax preparer certification must be aware of the formula and income base amounts in order to make accurate determinations of tax treatment.

This is especially important when the recipient of Social Security benefits might be a dependency exemption for another taxpayer. The calculation for tax determination on SS payments affects the income test for the qualified relative dependency exemption. That is, the determination of taxable income is the applicable figure used for annual income of a potential dependent relative.

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Because taxpayers whose only income source is Social Security do not have taxable income, they will meet the income test for exemption as a qualifying relative. A CPE course therefore will include study about SS benefits relating to the tax impact on the recipient and the tax impact on someone who can claim the recipient as a dependent.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.