Disability Pensions

If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.

You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit, see chapter 34.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040, or on lines 12a and 12b of Form 1040A.

For tax years ending after September 10, 2001, disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies), whether outside or within the United States, are not included in income. For more information about payments to survivors of terrorists attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 6.

Purchased Annuities

If you privately purchased an annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. For more information about the General Rule, get Publication 939. Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts.

Sale of annuity.   Gain on the exchange of an annuity contract is ordinary income to the extent that the gain is due to interest accumulated on the contract and the exchange is for a life insurance or endowment contract. You do not recognize gain or loss on an exchange of an annuity contract solely for another annuity contract if the insured or annuitant remains the same. See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts.

Social Security and Equivalent Railroad Retirement Benefits

Introduction

This chapter explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. It explains:

• How to figure whether your benefits are taxable,
• How to use the social security benefits worksheet (with examples),
• How to report your taxable benefits, and
• How to treat repayments that are more than the benefits you received during the year.

Social security benefits include monthly survivor and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable.

Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. They are commonly called the social security equivalent benefit (SSEB) portion of tier 1 benefits.

If you received these benefits during 2002, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien). These forms show the amounts received and repaid, and taxes withheld for the year. You may receive more than one of these forms for the same year. You should add the amounts shown on all forms you receive for the year to determine the total amounts received and repaid, and taxes withheld for that year. See the Appendix at the end of Publication 915 for more information.

Note.   When the term benefits is used in this chapter, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits.

What is not covered in this chapter.   This chapter does not cover the tax rules for the following railroad retirement benefits:

• Non-social security equivalent benefit (NSSEB) portion of tier 1 benefits,
• Tier 2 benefits,
• Vested dual benefits, and
• Supplemental annuity benefits.

For information on these benefits, see Publication 575, Pension and Annuity Income.

This chapter also does not cover the tax rules for foreign social security or railroad retirement benefits. These benefits are taxable as annuities, unless they are exempt from U.S. tax under a treaty. For more information, see Publication 915.

Useful Items You may want to see:

Publication

• 575   Pension and Annuity Income
• 590   Individual Retirement Arrangements (IRAs)
• 915   Social Security and Equivalent Railroad Retirement Benefits

Forms (and Instructions)

• 1040-ES   Estimated Tax for Individuals
• W-4V   Voluntary Withholding Request

Are Any of Your Benefits Taxable?

To find out whether any of your benefits are taxable, compare the base amount for your filing status with the total of:

1. One-half of your benefits, plus
2. All your other income, including tax-exempt interest.

When making this comparison, do not reduce your other income by any exclusions for:

• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned in American Samoa or Puerto Rico by bona fide residents.

Figuring total income.   To figure the total of one-half of your benefits plus your other income, use the worksheet later in this discussion. If the total is more than your base amount, part of your benefits may be taxable.

If you are married and file a joint return for 2002, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable.

If the only income you received during 2002 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable.

Base amount.   Your base amount is:

• $25,000 if you are single, head of household, or qualifying widow(er),
• $25,000 if you are married filing separately and lived apart from your spouse for all of 2002,
• $32,000 if you are married filing jointly, or
• $-0- if you are married filing separately and lived with your spouse at any time during 2002.

Worksheet. You can use the following worksheet to figure the amount of income to compare with your base amount. This is a quick way to check whether some of your benefits may be taxable.

A.	Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.)	A.
Note. If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of the amount on line A	B.
C.	Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total	C.
D.	Write in any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier).	D.
E.	Add lines B, C, and D and write in the total	E.
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You then need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instruction booklet).

Example.   You and your spouse (both over 65) are filing a joint return for 2002, and you both received social security benefits during the year. In January 2003, you received a Form SSA-1099 showing net benefits of $6,600 in box 5. Your spouse received a Form SSA-1099 showing net benefits of $2,400 in box 5. You also received a taxable pension of $17,000 and interest income of $500. You did not have any tax-exempt interest income. Your benefits are not taxable for 2002 because your income, as figured in the following worksheet, is not more than your base amount ($32,000) for married filing jointly.

Even though none of your benefits are taxable, you must file a return for 2002 because your taxable gross income ($17,500) exceeds the minimum filing requirement amount for your filing status.

A.	Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.)	A.	$ 9,000
Note. If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of the amount on line A	B.	4,500
C.	Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total	C.	17,500
D.	Write in any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier).	D.	-0-
E.	Add lines B, C, and D and write in the total	E.	$22,000
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You then need to complete Worksheet 1 in Publication 915 (or the Social Security Benefits Worksheet in your tax form instruction booklet).

Who is taxed.   The person who has the legal right to receive the benefits must determine whether the benefits are taxable. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you. One-half of the part that belongs to your child must be added to your child's other income to see whether any of those benefits are taxable to your child.

Repayment of benefits.   Any repayment of benefits you made during 2002 must be subtracted from the gross benefits you received in 2002. It does not matter whether the repayment was for a benefit you received in 2002 or in an earlier year. If you repaid more than the gross benefits you received in 2002, see Repayments More Than Gross Benefits, later.

Your gross benefits are shown in box 3 of Form SSA-1099 or RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2002 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.

Tax withholding and estimated tax.   You can choose to have federal income tax withheld from your social security benefits and/or the SSEB portion of your tier 1 railroad retirement benefits. If you choose to do this, you must complete a Form W-4V. For 2003, you can choose withholding at 7%, 10%, 15%, or 27% of your total benefit payment.

If you do not choose to have income tax withheld, you may have to request additional withholding from other income or pay estimated tax during the year. For details, get Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES.

How To Report Your Benefits

If part of your benefits are taxable, you must use Form 1040 or Form 1040A. You cannot use Form 1040EZ.

Reporting on Form 1040.   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. If you are married filing separately and you lived apart from your spouse for all of 2002, also enter D to the right of the word benefits on line 20a.

Reporting on Form 1040A.   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. If you are married filing separately and you lived apart from your spouse for all of 2002, also enter D to the right of the word benefits on line 14a.

Benefits not taxable.   If none of your benefits are taxable, do not report any of them on your tax return. But if you are married filing separately and you lived apart from your spouse for all of 2002, make the following entries. On Form 1040, enter D to the right of the word benefits on line 20a and -0- on line 20b. On Form 1040A, enter D to the right of the word benefits on line 14a and -0- on line 14b.

How Much Is Taxable?

If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits.

Maximum taxable part.   Generally, up to 50% of your benefits will be taxable. However, up to 85% of your benefits can be taxable if either of the following situations applies to you.

1. The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
2. You are married filing separately and lived with your spouse at any time during 2002.

Which worksheet to use.   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or Form 1040A. You can use either that worksheet or Worksheet 1 in Publication 915, unless any of the following situations applies to you.

1. You contributed to a traditional individual retirement arrangement (IRA) and your IRA deduction is limited because you or your spouse is covered by a retirement plan at work. In this situation you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits.
2. Situation (1) does not apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. In this situation, you must use Worksheet 1 in Publication 915 to figure your taxable benefits.
3. You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. See Lump-sum election.

Lump-sum election.   You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2002 in your 2002 income, even if the payment includes benefits for an earlier year.

This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.

Generally, you use your 2002 income to figure the taxable part of the total benefits received in 2002. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.

Making the election.   If you received a lump-sum benefit payment in 2002 that includes benefits for one or more earlier years, follow the instructions in Publication 915 under Lump-Sum Electionto see whether making the election will lower your taxable benefits. That discussion also explains how to make the election.

Since the earlier year's taxable benefits are included in your 2002 income, no adjustment is made to the earlier year's return. Do not file an amended return for the earlier year.

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