Interesting question

[Questionguy101]

Taxpayer received social security benefits (SSA) only. If he files a regular tax return and claims his own exemption, the social security benefits would not be taxable, so his gross income is $0. Assuming that the other requirements are fulfilled, his son can claim him as his dependent. Am I correct up to this point?

Now, however, if his son claims him as a dependent, he would have to file a tax return as a dependent. In this case, most of the social security benefits would become taxable. So, in his tax return as a dependent, his gross income would be more than $3,700. Does that mean he would not qualified as a dependent of someone else then?

Looks like a catch 22 issue to me here.

[Koss]

Social Security Benefits

Social Security benefits are not taxable if the taxpayer has no other income.

It does not matter whether the taxpayer is claimed as a dependent.

If there is no income except the social security benefits, then none of the social security is taxable.

This actually happens all the time. Children under 16 receive social security benefits when one parent dies. The amount is determined by the deceased parent's earnings record. The benefits belong to the child. The check is usually made out to the surviving parent as custodian of the funds. But legally the money belongs to the child.

Often the child has no other income. The social security is not taxable to the child or to the parent. The money does not belong to the parent. If it were taxable, it would be reported on the child's tax return.

In some cases, the social security benefits are substantial, based on the deceased parent's work record. If the money is used for ordinary living expenses for the child, the child may be paying more than half of his own support. The child may cease to be a dependent of the surviving parent.

In other cases, the benefits are very low, or they are not spent on the child, but rather socked away in a savings account, while the surviving parent supports the child. So the child is a dependent of the surviving parent.

In either case, the social security benefits are not taxable.

BMK

[dyne]

I have always believed that if a taxpayer had ONLY social security benefits they would not be required to file a return and that still appears to be the case. However my single sister received something like $55,000 social security benefits at one time. She had NO other income. She COULD calculate any tax by spreading the income over several years, etc. but I just assumed that she was not required to file because NONE of the social security benefits was taxable. However if you take HALF of her $55,000 of social security benefits which is $27,500 plus NO other income this exceeds the $25,000 threshold which makes $2,500 of the social security TAXABLE. That ruins my understanding of the computation. She STILL was NOT required to file as she had NO other income and her taxable income is less than the filing requirement of $10,950 or whatever it was when she received the social security benefits. And I thought I understood this computation. Interesting!

[Questionguy101]

Social Security benefits are not taxable if the taxpayer has no other income.

It does not matter whether the taxpayer is claimed as a dependent.

If there is no income except the social security benefits, then none of the social security is taxable.

This actually happens all the time. Children under 16 receive social security benefits when one parent dies. The amount is determined by the deceased parent's earnings record. The benefits belong to the child. The check is usually made out to the surviving parent as custodian of the funds. But legally the money belongs to the child.

Often the child has no other income. The social security is not taxable to the child or to the parent. The money does not belong to the parent. If it were taxable, it would be reported on the child's tax return.

In some cases, the social security benefits are substantial, based on the deceased parent's work record. If the money is used for ordinary living expenses for the child, the child may be paying more than half of his own support. The child may cease to be a dependent of the surviving parent.

In other cases, the benefits are very low, or they are not spent on the child, but rather socked away in a savings account, while the surviving parent supports the child. So the child is a dependent of the surviving parent.

In either case, the social security benefits are not taxable.

BMK

Well, if I tell my tax program that the taxpayer is a dependent, a large portion of the social security benefits become taxable and there is a balance due. Is it a mistake of the program or I am missing something?

[Koss]

Taxable Social Security

I stand corrected.

I knew this was a complicated formula, but I guess I didn't understand just how complicated it really is.

As dyne noted, it is indeed possible for some social security to become taxable when the amount of the benefits is very high, even if there is no other income.

This is because the formula basically says that you take half of the social security benefits, and if that amount plus all other income exceeds a certain threshold, then part of the social security becomes taxable. So even if "all other income" is zero, if half of the social security benefits is an amount that exceeds the threshold, then some of it will in fact become taxable.

I was wrong when I said that social security benefits are never taxable if there is no other income.

But you are still misinterpreting something. The amount of social security benefits that is taxable is the same, regardless of whether the person is claimed as a dependent by someone else. The formula doesn't change.

If you look carefully at both versions of the return, you'll see that all the numbers on the front page of Form 1040 are identical. The AGI is the same whether he's a dependent or not, and the taxable social security that is reported on line 20b is also the same.

The reason the tax liability increases when he's a dependent is because he loses his personal exemption and most of the standard deduction.

So I stand by my assertion that the portion of social security that is taxable will be the same, regardless of whether the taxpayer is claimed as a dependent.

Setting aside the question of whether any of the social security is taxable...

How are you getting past the support test?

As dyne noted, you have to get up around $55,000 before it becomes possible for any of the benefits to be taxable if there is no other income.

With benefits in that range, it seems very unlikely that someone else has paid more than half the cost of the guy's support.

Unless...

Is this someone with massive health care expenses? Living in a private nursing home or something, to the tune of $150,000 a year, with most of it paid for by his financially secure son... so if his only income is $55,000 in social security, his son would be paying more than half the cost of his support. Or something like that. So maybe the support test is not a problem after all.

But I don't see the catch-22 that you referred to.

As I noted above, the calculations that determine what portion of the social security is taxable are not affected by the taxpayer's status as a dependent.

The taxable amount of social security reported on the front page of Form 1040 will be the same either way. The AGI will also be the same.

So on the surface, it seems that if the taxable amount of social security reported on line 20b is $3,700 or greater, then he can't be a dependent because he fails the gross income test--even if his son spent half a million dollars supporting him.

But that's not my final answer.

I'm not sure that any amount of social security is really "counted" for purposes of the gross income test.

Hmmm... Suddenly I don't feel like such an idiot after all.

Page 82 of Publication 17 says:

TIP
If the only income you received during 2011 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable (emphasis supplied).

I love it when the IRS authors generalize. That means that there are a few weird cases where this may not be applicable. It looks like you found one of those cases.

I'll have to take a close look at the code on this one...

If a portion of the social security benefits are taxable only because the amount of social security benefits in and of itself exceeds a certain threshold, then the taxable portion might not be considered gross income for purposes of the support test.

BMK

[dyne]

IF the marital status is 3 for married filing separately then 85% or ALL of the social
security benefits are taxable. I forget which. I once had an older man who deserted his
wife and moved to Florida. He wanted me to prepare his return via mail. I remember his
tax went through the roof because MORE of his social security benefits were taxable.
This is ANOTHER exception. For a single person the threshold is $25,000 for a joint
return it is $32,000. Is'nt this fun?

[Questionguy101]

How are you getting past the support test?

As dyne noted, you have to get up around $55,000 before it becomes possible for any of the benefits to be taxable if there is no other income.

With benefits in that range, it seems very unlikely that someone else has paid more than half the cost of the guy's support.

Thanks BMK.

I forgot to mention that the taxpayer files a married filing separate tax return. That's why a large portion of the Social Security benefits is taxable.

Anyway, suppose his Social Security benefits is $6,000. And since he files a MFS tax return, $4,500 becomes taxable on line 20b. Does that mean he cannot be a dependent of anyone since his income is over $3,700 (the exemption amount)?

[Koss]

Gross Income Test

Since he files a MFS tax return, $4,500 becomes taxable on line 20b. Does that mean he cannot be a dependent of anyone since his income is over $3,700 (the exemption amount)?

That's the way I see it, after reviewing the relevant sections of the code.

Gross income has a formal definition within the IRC. The formula for determining the taxable portion of social security benefits is part of this definition. So I don't see any way around it.

An earlier comment in this thread (or the other one) said that it doesn't seem to make sense, i.e., if a parent gets a taxable pension, then a wealthy son or daughter supporting them can't take them as a dependent (because of the gross income test), but if the parent has nontaxable social security, then they can take them as a dependent, and that this doesn't seem fair.

I've got a better one. What about IRA distributions?

Roth vs. Traditional?

Parent supported by a wealthy son or daughter takes $5,000 in distributions from a traditional IRA, which he doesn't even want--it's a required minimum distribution. Parent fails the gross income test for dependency.

Another parent takes $20,000 in distributions from a Roth IRA, which are not required, and has zero gross income.

Unintended consequences.

Maybe Congress can fix this by establishing a some new rules... they could even come up with a catchy name for it, like... ummm... hmm...

Uniform Definition of a Parent?

Okay, never mind.

BMK

[Gary2]

Of course, the support rules will come into play. I suppose it's possible for someone to take $20K out of a Roth, put it entirely into investments, and still be supported by someone else. But the paper trail had better be good.