If you are getting a settlement from a lawsuit and you are on Social Security Disabilty you were told something about a 25000 cap does anyone know why and how this works?

Answer 1

Social security disability insurance and social security benefits (SSB) payments are the same thing and from 50% to 85% of the amount received can become taxable income on your income tax return at your marginal tax rate when your income tax return is completed correctly and you have other worldwide gross income to be reported on your 1040 income tax return.

The SSB would ONLY be free of federal income tax when you do NOT have any other worldwide income to be reported on your 1040 income tax return.

If you have other worldwide income, tax exempt interest, tax exempt dividends, etc it is possible that from 50% to 85% of your social security benefits could become taxable income on your income tax return at your marginal tax rate.

Go to the IRS gov website and use the search box for IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on the IRS Web site

Use the search box for 1040 and choose the 1040 instructions

Page 28 of the 1040 instructions book has the Social Security Benefits Worksheet for Lines 20a and 20b of the 1040 tax form.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

For a single taxpayer the base amount (cap) is 25000.

Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

You can do the following quick computation to determine whether some of your benefits may be taxable:

*.First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.

*.Then, compare this total to the base amount for your filing status, if the total is more than your base amount, then some of your benefits may be taxable. From 50% to 85% of your SSB can become taxable income on your 1040 income tax return and would be added to all of your other gross income and taxed at your marginal tax rate.

For additional information on the taxability of Social Security benefits, Go to the IRS gov website and use the search box for IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.