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As a tax return preparer I often receive questions from tax clients who are receiving social security benefits regarding why their social security benefits (income) is being taxed. It’s an excellent question that is not always clearly explained, and understood. As is stated in this e-mail bulletin from the Internal Revenue Service, the taxation of your social security benefits is controlled by the other sources of your income:
“To find out if their benefits are taxable, taxpayers should take half of the Social Security money they collected during the year and add it to their “other income”. “Other income” includes pensions, wages, interest, dividends, and capital gains.” (emphasis added). “Pensions” usually means income reported to you from a 1099-R, that is often directly affected by your annual “Required Minimum Distribution (RMD)”. “Wages” is from a form W-2, although it could be from a 1099 MISC. “Interest” and “Dividends” are reported to you by either a 1099 INT or 1099 DIV, but can be reported from your investment firm via the form 1099 B. “Capital Gains” are also reported in the 1099 B. If you are a business owner, you should review your Schedule C (Sole Proprietor or Disregarded Entity”), Schedule E, Schedule F, and Schedule K-1.