Social security tax and lump sum payment of unemployment

[Lamirands]

So I filed for unemployment in October of 2020 but did not receive it until April of 2021. My husband draws a pension and Social Security. I feel that the social security is being taxed at a higher rate for the entire year. Is there a way that the social security can be estimated to be taxed quarterly? I have tried the Annualized estimated tax method but it doesn't make sense to me because it asks for the adjusted gross income which includes the higher percentage that is being taxed on the social security. Does that make sense?

[DianeW777]

Yes, I understand.  Since you already have taxable income before including the social security, first divide the amount of taxable social security by the total amount of social security received.  It's likely this same percentage or possibly higher/lower depending on future circumstances.  Most importantly, the maximum that can be taxed is 85% of social security.

Once you determine the percentage of your social security that is being taxed, you should do the following:

1. Based on your taxable income (Form 1040, Line 15) review the marginal tax rates below.  The rate where you income falls is the percentage that will be used for tax liability on your social security taxable income amount.
   • 2022 Marginal Tax Rates
2. Next, divide that by four installments and add that to the estimated tax you calculated on other income for 2022
3. Lastly, you are not required to pay more than 100% of 2021 tax to eliminate any underpayment penalty.*
   • *NOTE: Higher income taxpayers.

     If your adjusted gross income (AGI) for 2022 is more than $150,000 ($75,000 if your 2022 filing status was married filing separately), substitute 110% for 100% in (3) above.

Please update here is you need further assistance.

[Lamirands]

I am sorry but I dont understand what you are saying. How do I determine my taxable social security and can the tax rate vary depending on the income received per quarter? My example is that I have 32280 in SS for 2022, no tax paid on it. When I do my federal return my taxable amount of social security is 25570. I received a lump sum payment of unemployment in April 2022. Before I put the unemployment in turbo tax the social security is taxed a much lower rate. So then I decided to try and annualized estimated tax. When I do this in turbo tax, it ask for the agi for each period. My problem with this is the agi that I have is for the whole year and it is based on the input of the social security and unemployment for the whole year which makes no sense. Can you please explain further?

[AmyC]

The Social Security taxed amount changes with your income but will not exceed 85%. So the unemployment gave you more income and made more of your Social Security taxable. You can see the taxable Social Security of $25,570 which is more than it was before you added the unemployment.

The annualized method. Let me help with the quarterly AGI. The Social Security was received monthly, let's say $2,690 per month.

• This means for the first quarter (Jan -Mar) of the year, your income was Social Security of $8070 + 3 months of pension. 1st quarter AGI - $8070 + 3 months of pension income.
• The second quarter income would be 3 months Social Security $8070 + 3 months of pension + unemployment lump sum amount. The 2nd quarter AGI would be Jan- June total income so 1st quarter AGI + second quarter income
• Third quarter income (July- Sep) - 3 months Social Security and 3 months pension income. This quarter AGI (Jan-Sep) is 2nd quarter AGI plus 3rd quarter income.
• The fourth quarter, is the easy one, the totals for the year!

[Lamirands]

Okay, so I still am not understanding why when you annualize, the full amount of the social security is figured in the AGI. When you look at the form 1040 the AGI has the taxable portion of the Social Security not the full amount. When you are annualizing the AGI you are saying I have to use the full amount of the Social Security which is what I am saying I don't get. When I have no income other than pension income in the first quarter and last quater why is my social security still figured to be taxed at the full amount.  It seems like my AGI should include a lower percentage of taxable social security for those two quarters? Does that make sense? 

[Lamirands]

I guess what I am saying is shouldn't my AGI for the quarters that I did not receive unemployment, the Social Security be taxed at a rate that reflects that I did not have anything but pension and social security? And that amount be entered into the annualized amount instead of $8070?

[Lamirands]

• 1st quarter AGI - Taxable Social Security =$870 + 3 months of pension income.
• The second quarter income would be 3 months Taxable Social Security $8070 + 3 months of pension + unemployment lump sum amount. The 2nd quarter AGI would be Jan- June total income so 1st quarter AGI + second quarter income
• Third quarter income (July- Sep) - 3 months Taxable Social Security = $870and 3 months pension income. This quarter AGI (Jan-Sep) is 2nd quarter AGI plus 3rd quarter income.
• The fourth quarter, is the easy one, the totals for the year!

Based on the fact that I received all my unemployment in the second quarter?

Does this make more sense? But I cannot find anything to support this,

[DawnC · Accepted solution]

You can annualize your income to avoid under-payment penalties, but that will only change your penalty amount, not how much of your social security that is taxed.   The actual tax calculations are for the full year and depend on your total income.   Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.   

For those with additional sources of income, not just social security) the key figure is the Modified Adjusted Gross Income (MAGI).   The MAGI includes half of your Social Security, plus other sources of income. Once your MAGI exceeds the base amount for your filing status ($32,000 for Married Filing Jointly, otherwise $25,000), at least part of your Social Security income becomes taxable. The taxable portion of your Social Security income increases once you reach additional MAGI thresholds and maxes out at 85%.

You would think that when you finally retire and start collecting Social Security that you no longer have to pay income tax. But this isn't always true. Watch this video to find out more about income taxes for those on Social Security.   There is an example in the article attached as well.   

If you want to calculate estimated tax payments for 2022, see the instructions here.  

[Lamirands]

Okay, so looking into this further you are saying that my Social security is looked at for the whole year but when I go to other tax situations in Turbo Tax it states - Fo help figuring how much of the benefits are taxable during each period, see worksheet 2-2 in publication 505. When I pull up worksheet 2-2 in pub 505 it directs me to use the annualization amount on worksheet 2-7 line 2 for the same period before entering it on line 1. So it does seem to me that you can annualized the tax on the social security that is received during the year. Please correct me if I am wrong because as you go through the worksheet 2-2 it tells you the expected taxable social security for the period and to include the amount of line 20 with the total AGI on line 1 of worksheet 2-7. Which Turbo Tax is not doing .

[AmyC]

You can use the taxable amount of Social Security in figuring the annualized method. You are quite smart and able to do this! Determine how much of your Social Security was taxed. Use the guideline I gave above but instead of using the full amount, use the 3 months income $8070 minus the non-taxed portion.

Example:

Assume maxed out at 85% taxed.

$8070 x 85% = $6859.50

Use $6859.50 for monthly Social Security instead

Turbo Tax does not enter figures for your annualized income since it can't know if you got a lump sum payment and when.

[Lamirands]

That is still not what I am looking for. I already know that the taxable portion for the whole year is going to be 85%. What I am asking is that since my income fluctuated and there are two quarters where we only had a pension and social security is it possible to use pub 505 worksheets 2-1 and 2-7 to figure the current years taxable social security or is it just for figuring estimated tax for next year. It doesn't make sense to me that it would only be for the following year and not for the current year. I might be missing something but the wording is causing me to question it. There is a big difference in my taxes if we get taxed 85% for each quarter instead of only one quarter. 

[ErnieS0]

The IRS allows your to adjust the underpayment penalty if your income is uneven throughout the year, but the tax rate is based on the whole income for the year so there is no way to average that.

To annualize your penalty:

1. Type underpayment of taxes in Search in the top right
2. Select Jump to underpayment of taxes
3. Continue to Annualized Income Method, say Yes and follow the screens

[cpa1979]

My situation is that I rec'd a lump sum payment of unemployment benefits in 2021 of $32,450.  Of that amount $18,080 was related to delayed payments that were payable for bi weekly payment periods for 2020.

Had the payments related to 2020 been paid timely I would have been able to recognize them in my tax return for that year (2020) and effectively not paid any tax on them.  My only other income is social security and a small amount of residual income.  By allocating by the respective years I would how little or not tax.

But recognizing all of the delayed unemployment benefits in a lump sum in 2021 it creates a situation of making my social security taxable (85%) thus owing tax for 2021.  

Is there any method to recognize the 2020 delayed payment portion ($18,080) by amending my 2020 return and only recognize the 2021 unemployment benefits paid in 2021 tax return.

[Vanessa A]

No, there is no method that allows you to allocate the payment to 2020, since you received the payment in 2021. It is all counted as income received in 2021 even though you filed the claim in 2020.  For individual taxpayers income is taxed when received not when you earned it or claimed it.