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Understanding taxes and Social Security benefits can be confusing for family caregivers who manage their loved one's finances. The good news is that the IRS generally does not tax Supplemental Security Income (SSI). However, Social Security retirement, survivor, and disability benefits can be taxed depending on your loved one's income. This article delves into filing taxes for Social Security benefits, the needed forms, and how to lower owed taxes.
Supplemental Security Income provides monthly payments to low-income adults and children with disabilities. Unlike Social Security retirement benefits, SSI is based on financial need rather than how much someone paid into the program while working. Even people who have never worked or paid taxes can qualify for SSI if they meet the income and disability requirements.
You might be responsible for managing your loved one's finances, including their Social Security benefits. It's important to understand that there are two distinct programs: Social Security and Supplemental Security Income (SSI). SSI is a needs-based program designed for low-income individuals, and the benefits from SSI are never taxable.
Caregivers should determine whether their care recipients owe taxes on their Social Security benefits. This tax liability depends on the total income they receive, which includes Social Security benefits, other sources of income such as pensions or wages, and any tax-exempt interest income.
The IRS uses a base amount to determine if the combined income is taxable. This base amount varies depending on the care recipient's filing status (e.g., single, married filing jointly, etc.).
If your loved one's combined income is below the base amount, they most likely will not owe taxes on their Social Security benefits. However, if their combined income exceeds the threshold, up to 85% of their Social Security benefits could become taxable.
How much of the Social Security Benefits your loved one receives is taxable depends mainly on their filing status. Each filing status has different base amounts to determine taxable income:
Provisional income includes wages, pensions, and interest from savings accounts - all your care recipient's income.
This is where things get interesting. The IRS adds up your loved one's provisional income and half of their Social Security benefits to get a combined income number. This number is then compared to the base amount for their filing status.
Some of their Social Security benefits may become taxable if the combined income exceeds the base amount.
Family caregivers filing taxes for their loved ones need to consider other forms of income when filing taxes.
Pensions and withdrawals from traditional IRAs can push your loved one's combined income higher, potentially increasing the taxable portion of their Social Security benefits.
Interest, dividends, and capital gains from investments count towards combined income.
Rental income, side gigs, and unemployment benefits contribute to a higher combined income and more taxes.
Family caregivers need the proper documents before filing taxes for their loved ones. They must provide identification, medical, and other essential forms to the Social Security Administration. Meeting with a tax preparer about what tax forms you need is also advisable.
After reviewing your loved one's taxable income, you might wonder whether your care recipient's owed taxes are too high. What are some ways to legally minimize their tax liability?
If your loved one overpays taxes throughout the year, adjusting withholdings or estimated tax payments can guarantee that they will not owe a large sum come tax time.
Exploring available tax deductions and credits can lower your loved one's overall taxable income, reducing the tax on Social Security benefits.
Chat with a tax expert about smart strategies like contributing to Roth IRAs, which can grow tax-free.
Fact: Only Social Security benefits are potentially taxable based on combined income. SSI benefits are never taxable.
Fact: You must report all income, including Social Security benefits, on your tax return.
Navigating Social Security taxes doesn't have to be a solitary trek. Information and assistance are available online, through government agencies, and from tax professionals.
Take charge of your loved one's financial well-being by familiarizing yourself with the resources and seeking help when needed. Empowered with knowledge, your loved one will keep more of their hard-earned benefits.
