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Taxes on Government Benefits – Unemployment, Social Security, Disability & More

By Kira Botkin

social security money government benefitsYou may think that government benefits are tax-free, but that isn’t necessarily the case. In fact, several of the most common benefits claimed by Americans – unemployment, Social Security, and disability – do generate a tax bill. If you receive government benefits, understanding and keeping track of what will be taxed is key to getting the most out of the program and not being in for any unpleasant surprises.

At first glance, this may seem difficult, but there are several fairly simple steps to understanding how much tax you must pay on your benefits each year.

Unemployment

Here are a few things to keep in mind if you’ve received unemployment benefits over the course of the past year:

1. Unemployment Benefits Are Taxable

In 2009, thanks to the The American Recovery and Reinvestment Act of 2009, you were able to receive up to $2,400 of unemployment payments without having to pay a penny in federal tax. However, this benefit lasted only for one year, and since 2010, all unemployment benefits are taxable as ordinary income. At the end of the year, you’ll receive Form 1099-G with the amount of benefits you received, which you need to report on your tax return.

2. Opt for Voluntary Tax Withholding

You can avoid a big tax bill at the end of the year by filling out Form W-4V, which is a voluntary tax withholding request form. In doing so, the Federal Government will withhold 10% of your unemployment check in the same way that a normal employer would withhold money from your paycheck for federal taxes. You can also request federal income tax to be withheld from your Social Security benefits, Social Security equivalent Tier 1 railroad retirement benefits, your Commodity Credit Corporation loans, or certain crop disaster payments under the Agricultural Act of 1949 or under Title II of the Disaster Assistance Act of 1988, at the rate of either 7%, 10%, 15%, or 25%.

If you aren’t currently having taxes withheld from your unemployment checks, it’s advisable to start. Fill out form W-4V and send it to the office that handles your unemployment payments. For unemployment benefits, 10% is the only amount you can have withheld.

3. Factor In Additional Money Received

Be aware that even though your employer may not have withheld taxes, any severance payments or money you received from unused sick days or vacation time is considered to be taxable income as well.

Social Security

Many individuals who receive Social Security benefits also have a pension, a second part-time job, investment income, or other money coming in from various  sources. This may raise your income such that your Social Security benefits become taxable.

Generally, if the only income you receive is from Social Security, you won’t owe any taxes. However, if you earned or received any other money during the year, you should determine whether any of the money you received from Social Security is going to be classified as taxable income.

1. Determine Your “Base Rate”

The base rate for your filing status helps determine whether some or all of your Social Security benefits are taxable. The base rates for 2013 are:

  • $32,000 for married couples who file jointly
  • $25,000 for single filers, head of household, or qualifying widow/widower with a dependent child, or if you are married and filing separately but did not live with your spouse  during the year
  • $0 for married persons who file separately and lived together at any time during the year

2. Do the Math

Next, take all of the income you earned from other sources (not Social Security income), including any income that is otherwise tax-exempt, and add half of the money you received from Social Security to this amount. If the total is more than your base rate (listed above), some of your Social Security benefits will be taxed. If it is less, they will not. The exact amount depends on your specific tax situation.

For example, consider Claire and Daniel, who both receive Social Security benefits. Claire received $10,000 in Social Security benefits, while Daniel received $13,000. Their investments produce an income of $11,000, and Daniel has a pension that paid him $15,000.

  • Claire’s Social Security: $10,000
  • Daniel’s Social Security: $13,000
  • Investments: $11,000
  • Pension: $15,000

To determine whether any of their benefits are taxable, take half of their total Social Security income:

($10,000 + $13,000) / 2 = $11,500

and add it to their other income:

$11,500 + $11,000 + $15,000 = $37,500

Recall that their base rate as a married couple filing jointly is $32,000. Since the total, $37,500, is above that amount, some of their benefits will be taxable.

3. Social Security Tax Limits

You will never be taxed on more than 85% of your Social Security benefits. To calculate exactly how much tax you will pay, fill out Worksheet 1 in IRS Publication 915.

  • For Individuals: If your total combined income from Social Security and other sources is between $25,000 and $34,000, you will generally pay income tax on about 50% of your Social Security benefits. If your total combined income is greater than $34,000, you may have to pay tax on up to 85% of your Social Security benefits.
  • For Married Couples Filing Jointly: If your total combined income from Social Security and other sources is between $32,000 and $44,000, you will generally pay income tax on about 50% of your Social Security benefits. If your total combined income is above $44,000, you may have to pay tax on up to 85% of your Social Security benefits.
  • For Married Couples Filing Separately (Who Also Lived Together): You likely must pay tax on your Social Security benefits no matter what.

social security payments

Disability

Disability payments can cause confusion during tax time. If you are receiving disability through the Federal Government, you must use the same rules as those for Social Security to determine whether they are taxable. However, if you participated in a disability insurance plan through your employer, you may be taxed on the proceeds.

Premiums vs. Payouts

The important distinction here is that the Federal Government taxes either the premiums you paid to the insurer, or the payouts you receive if you claim disability. You are not taxed on both.

Some employers provide disability insurance as a benefit to their employees at no cost. If you receive such an employee benefit and do not pay tax on the benefit received, you will be required to pay taxes on disability payments received. However, if you purchase additional disability coverage that you pay for with after-tax funds, any benefits you receive will not be taxable.

Assistance That Is Never Taxed

There are many kinds of government benefits that are never taxed. You should not include amounts for assistance in these categories in your income for tax purposes.

  • Welfare or other public assistance based on need
  • Work training payments, as long as they do not exceed what you would have received in welfare payments
  • Food stamps or other nutrition assistance programs, such as elderly assistance, or women, infants, and children programs
  • Disability rehabilitation training and assistance due to your disability, such as transportation
  • Disaster relief grants, disaster relief payments, or disaster mitigation payments
  • Mortgage assistance programs
  • Replacement housing payments or relocation payments
  • Winter energy bill reductions
  • Medicare part A or B benefits
  • Veterans’ benefits, such as medical care, disability payments, education, or death gratuities
  • Workers’ compensation benefits if paid under a workers’ compensation act

Final Word

If you receive any kind of government benefits, it is extremely important to keep track of what’s taxable and what’s not. While the amount of information and number of guidelines can be overwhelming, it’s worth taking the time to educate yourself. A little extra effort can help you avoid a big tax bill when the tax filing deadline rolls around.

Did you receive any government benefits this year?

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • http://yahoo.com roxie king

    I have this question an the answer that i recieve is some what confusing the enternet states that unemployment is not considered earned income i pay taxes on unemployment do i havee to add this to my earning for the year or is there a line to declare this an post the taxes that was payed as you know ss only allow you to make acertain amount i’m still getting uneployment what advice is there for me im 62 live in ill.
    i would appreciat a clear ans.

    thanks ms. kiong confused about the law an how it works

  • Kira

    Hi Roxie, if I understand the question correctly, you are asking if unemployment is considered earned income when you are trying to determine whether you are going to owe Social Security tax. (The government will not take away Social Security benefits if you earn too much money – they would just tax the benefits a lot.) You do need to add unemployment to the amount that you received during the year, because generally Social Security doesn’t care if you earned the money or not, just that you received it. However, if you are only receiving unemployment and Social Security, you probably didn’t make enough money to be taxed very much if at all, and you’ll probably get a lot of the money back that you already had withheld for taxes from your unemployment check. But I would recommend using one of the free tax programs – it’ll make the calculations for you.

  • Kira Botkin

    I did a bit more research this morning and wanted to clarify a little more. Your benefits do get reduced in the year that you earn too much money, but they aren’t reduced permanently, and it’ll reset when you get to full retirement age. However, unemployment is not considered earned income in this instance and the IRS says so: http://www.irs.gov/individuals/article/0,,id=176508,00.html

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