Should the entire amount of social security benefits be excluded from net investment income tax.

[oldguy2u]

Kind of left in the dark on this as there doesn't seem to be consensus.  In the back of my mind I'm thinking the root of this confusion lies in the consideration that it's the taxable portion of SS benefits, but I have not seen one reference that would support that idea.

Any else?

Thanks...

[xmasbaby0]

TAX ON SOCIAL SECURITY

Up to 85% of your Social Security benefits can be taxable on your federal tax return.  There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits.  When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable. 

 What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit. (For 2021 it was  $18,960.  For 2022 it was  $19,560  —  for 2023 $21,240)  For 2024, $22,320.

After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare.  If you work as an independent contractor then you will pay self-employment tax for Social Security and Medicare.

To see how much of your Social Security was taxable, look at lines 6a and 6b of your 2024 Form 1040

https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable

You need to file a federal return if half your Social Security plus your other income is

Single or Head of Household      $25,000

Married Filing Jointly                  $32,000

Married Filing Separately            $0

Some additional information:  There are 9 states that tax Social Security—Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont  These states offer varying degrees of income exemptions, but two mirror the federal tax schedule: MN and VT.

[VolvoGirl]

It would just be the taxable amount of SS.  But I don’t know if it is excluded from your AGI.  There are 2 extra taxes forms 8959 and 8960.

IRS info on Net Investment Income Tax

https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

IRS Info on the Additional Medicare tax on high earners (for wages)

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additio...

[oldguy2u]

The above is fully understood, but it doesn't answer the question re: Net Investment Income Tax exclusions where it regards all, or just part, of the SS benefits.  There are a significant number of posts in this regard, but I found no consensus.  Even the IRS has failed to provide clarity.

Thanks...

[oldguy2u]

Hi Volvogirl,  here's some text from the IRS link you provided; thanks for that.

What is Included in Net Investment Income

8. What is included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).

9. What are some common types of income that are not Net Investment Income?

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b).

Note that the reference to Social Security Benefits in item 9 above makes no reference to a limitation of any kind.  That's the entire problem with this situation.

Many thanks...