Retirement Benefits

Everyone wants a financially secure retirement, and most people take some steps to provide for their later years. Almost all employed and self-employed Americans are required to contribute to the social security system. In addition, many people belong to retirement plans where they work, contribute to individual retirement arrangements (IRAs), or buy annuities.

SOCIAL SECURITY AND EQUIVALENT RAILROAD RETIREMENT BENEFITS

Many taxpayers who are retired, disabled, or whose spouses or parents are deceased may receive social security or equivalent tier 1 rail road retirement benefits. The maximum benefit amount for 1999 is $1,373 per month. Some of these benefits may be taxable, depending upon the taxpayer's circumstances. Taxpayers above a certain income level will pay tax on a portion  of their social security income, while lower income taxpayers will enjoy tax-free social security benefits.

Note: For purposes of this section, the term "benefits" applies only to those payments made under the Old-Age, Survivors, and Disability Insurance program (OASDI), which is funded through the social security payroll tax and based on prior earnings. Social security benefits do not include SSI (Suplemental Security Income), which is federally funded program of income assistance based on financial need for the aged, blind, and disabled. The Social Security Administration administers both programs, but SSI benefits are not taxable. 

For 1999, up to 85 percent of a taxpayer's social security and equivalent tier 1 railroad retirement benefits may be taxable. Generally, however, if these benefits are the only source of a taxpayer's income, they won't be taxable. This also holds true if the taxpayer's other income is small.

Forms SSA-1099 (for social security) and RBB-1099 (for railroad retirement) are used to notify the taxpayer of total benefits received during the year. Also indicated is the amount of repayment of benefits the taxpayer made, if any.

Each individual recipient of social security and tier 1 railroad retirement of social security and tier 1 railroad retirement receives Form SSA-1099 or RRB-1099. For example, if a widowed parent receives one monthly benefits check that includes benefits for that parent as well as two minor children, each of them will receive a separate Form 1099 reporting his share of the year's benefits.

Computing Taxable Benefits

The amount of a taxpayer's social security or tier 1 railroad retirement benefits that is subject to federal income tax varies from zero to 85 percent of the taxpayer's benefits, depending on the taxpayer's income level and filing status. None of the benefits are taxable unless the taxpayer's modified adjusted gross income (defined below) plus half the taxpayer's benefits exceeds $32,000 (MFJ), $25,000 (S.HH, QW, or MFS and the taxpayer didn't live with his spouse at any time during the year), or $0 (MFS and the taxpayer lived with his spouse at any time during the year).

Note: the above amount is subject to change.(The amount it depend of current year stated)

Social security and equivalent railroad retirement benefits may be nontaxable or partially taxable, depending on the taxpayer's other income and filing status. 

PENSION AND ANNUITIES

Contribution - When a person puts money into retirement plan.

Distribution -When a person takes or receives money from a retirement plan.

When a taxpayer receives a distribution from a pension or annuity, he must sometimes determine how much of the amount he receives is taxable and how much is not.

If the taxpayer made no contribution to the pension plan or annuity (for example, his employer paid all the costs), or if the taxpayer made only pre-tax contributions to a plan such as a 401(K) plan, the entire amount received during the year is taxable.

If the taxpayer did make after-tax contributions to the pension plan or to the cost of the annuity, part of the amount received is a return of his cost (investment) and is nontaxable. The balance represents a return of his employer's cost and and amounts earned from the investment of the pension plan's funds.