You may not know that your Social Security payments and health insurance information affect your taxes. However, Social Security payments are taxable under certain circumstances, and health insurance information became an important part of your tax returns with the new health care law that went into effect last year.
Here’s everything you need to know to start getting prepared.
You may not always think about this, but Social Security payments from the federal government are taxable.
Disability, retirement and survivors benefits may be taxable above certain income thresholds. In no instance is Supplemental Security Income (SSI) for low-income beneficiaries taxable.
In order to figure out whether your benefits are subject to taxes, you compare your filing threshold with the results of this formula:
adjusted gross income (AGI) + nontaxable interest + half your Social Security benefits
To calculate your AGI, take your total gross income and subtract any tax deductions you’ve taken. You can deduct everything from mortgage insurance to volunteer mileage to work expenses (or any of these really weird ones).
The filing thresholds are as follows:
- $25,000 if you’re single, filing as head of household or a qualifying widow(er)
- $25,000 if you’re married and filing separately from your spouse whom you lived separately from for all of 2014
- $0 if you’re married and filing separately from your spouse whom you lived with at any point in 2014
- $32,000 if you’re married and filing jointly
If you make between $25,000 and $34,000 filing as an individual, or between $32,000 and $44,000 filing jointly, your Social Security benefits are taxed at a rate of 50%. Beyond those amounts, you’re taxed at a rate of 85%.
This is confusing stuff, so an example will probably be helpful.
Jim is a single, retired FBI agent who receives $11,000 a year in benefits from Social Security. He also made $20,000 last year doing freelance security consulting gigs for local businesses. He has no other investments.
In this example, Jim’s AGI is $20,000. Half of his Social Security benefits equal $5,500, for a total of $25,500. Because his income is greater than the $25,000 threshold for his filing status but less than $32,000, his Social Security benefits are taxed at a rate of 50%, meaning the government will take back half of his Social Security benefits.
Make sure to track any tax payments withheld from your Social Security checks. The amount is shown in box 6 of your 1099 from Social Security. As an additional note, if you have Medicare Part B, the cost is deducted from your Social Security check.
Your Health Insurance
Affordable Care Act
Health insurance is a bigger part of your taxes than ever, thanks to the Affordable Care Act. The tax penalty for not having health insurance is covered in detail here, but there are some updates in light of recent news.
There is a maximum penalty of $975 or 2% of your taxable income, whichever is greater, for not getting health insurance coverage in 2015. Andrew Slavitt, principal deputy administrator of the Centers for Medicare and Medicaid Services, was quoted in The New York Times saying that there will be a special enrollment period between March 15 and April 30 to help taxpayers avoid the fee.
But that’s not the only news the Obama administration made on the dual front of health care and taxes this week. If you got your health insurance through the marketplace this year, there’s a slight chance that the 1095-A form you received with the necessary information for your tax returns may be wrong. If it is, you should get a call if you haven’t already.
The government will be sending out replacement forms in early March. If you can’t wait that long to file your return, you can use the online tool or call (800) 318-2596.
The ACA isn’t the only health insurance issue that could intersect with your taxes.
Under certain circumstances, you can deduct your Medicare premiums and other medical expenses from your taxes. You can deduct Medicare A if you are voluntarily enrolled and not a government employee or covered under Social Security. Medicare B, C and D premiums may always be deducted as they are voluntary supplemental coverage programs. Just remember to look on your Social Security statements for the amounts taken out for Medicare.
You also may be able to take deductions for medical expenses depending on your age and filing status. If you’re 65 or younger, your medical expenses must total more than 10% of your AGI. If you’re over 65, the threshold drops to 7.5%. For a list of what you can and can’t deduct, look here.
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