Social Security & Retirement Income

If taxpayers receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and the plan participant was born before January 2, 1936, they may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.

A lump-sum distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distrubuted in order to be a lump-sum distribution.

If the lump-sum distribution qualifies, taxpayers can elect to treat the portion of the payment attributable to their active participation in the plan before 1974 as long-term capital gain taxed at a 20% rate. They can also elect to figure the tax on the rest of the distribution using the 10-year tax option.

It is important to enter all retirement income regardless of source on a tax return. Many times social security benefits may not be taxable for an individual, but not always. No one pays federal income tax on more than 85% of his or her social security benefits based on IRS rules.

If taxpayers:

File a federal tax return as an "individual" and their combined income is:

Between $25,000 and $34,000, they may have to pay income tax on 50% of their benefits

More than $34,000 up to 85% of their benefits may be taxable.

File a joint return, and they and their spouse have a combined income that is:


Between $32,000 and $44,000, they may have to pay income tax on 50% of their benefits

More than $44,000, up to 85% of their benefits may be taxable

Are married and file a separate tax return, they probably will pay taxes on their benefits.

Social security benefits are presented on Form 1099-SSA. Taxpayers of retirement age should always that this form with them when preparing tax returns. The information on this form should be entered on a return whether it is taxable or not.