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Federal Free Printable 2020 Publication 554 for 2021 Federal Tax Guide for Seniors

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Tax Guide for Seniors
2020 Publication 554

Department of the Treasury Internal Revenue Service Publication 554 Contents What's New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Cat. No. 15102R Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Tax Guide for Seniors Chapter 1. 2020 Filing Requirements . . . . . . . . . . 5 General Requirements . . . . . . . . . . . . . . . . . . . . 5 For use in preparing 2020 Returns Chapter 2. Taxable and Nontaxable Income Compensation for Services . . . . . . . . . . . . Retirement Plan Distributions . . . . . . . . . . . Social Security and Equivalent Railroad Retirement Benefits . . . . . . . . . . . . . . . Sickness and Injury Benefits . . . . . . . . . . . Life Insurance Proceeds . . . . . . . . . . . . . . Sale of Home . . . . . . . . . . . . . . . . . . . . . . Reverse Mortgages . . . . . . . . . . . . . . . . . Other Items . . . . . . . . . . . . . . . . . . . . . . . ..... 6 ..... 6 ..... 7 . . . . . . . . . . . . . . . . . . . . . . . . 13 16 17 18 20 20 Chapter 3. Adjustments to Income . . . . . . . . . . . 21 Individual Retirement Arrangement (IRA) Contributions and Deductions . . . . . . . . . . . . 21 Chapter 4. Deductions . . . . . . . . . . . . . . . . . . . . 22 Standard Deduction . . . . . . . . . . . . . . . . . . . . . 22 Itemized Deductions . . . . . . . . . . . . . . . . . . . . . 23 Chapter 5. Credits . . . . . . . . . . . . . . Credit for the Elderly or the Disabled Child and Dependent Care Credit . Earned Income Credit (EIC) . . . . . . .. . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 27 30 30 Chapter 6. Estimated Tax . . . . . . . . . . . . . . . . . . 32 Who Must Make Estimated Tax Payments . . . . . 32 Chapter 7. How To Get Tax Help . . . . . . . . . . . . . 32 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Future Developments For the latest information about developments related to Pub. 554, such as legislation enacted after it was published, go to IRS.gov/Pub554. What's New Get forms and other information faster and easier at: • IRS.gov (English) • IRS.gov/Spanish (Español) • IRS.gov/Chinese (中文) Jan 14, 2021 • IRS.gov/Korean (한국어) • IRS.gov/Russian (Pусский) • IRS.gov/Vietnamese (TiếngViệt) Coronavirus-related distributions. The additional tax on early distributions doesn’t apply to coronavirus-related distributions. See Pub. 590-B, Distributions from Individual Retirement Arrangements, and Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, for more details. Maximum age for traditional IRA contributions. The age restriction for contributions to a traditional IRA has been eliminated. Increase in age for mandatory distributions. Individuals who reach age 701/2 on January 1, 2020, or later may delay distributions until April 1 of the year following the year in which they turn age 72. Temporary waiver of minimum required distributions from certain retirement plans. The requirement to receive a minimum distribution has been waived for 2020 for defined contribution plans and IRAs (but not for defined benefit plans). This includes distributions for those who have a beginning year for required minimum distributions starting in 2020. Contribution deadline extension. The 2019 traditional and Roth IRA contribution deadline was extended to July 15, 2020. Standard deduction amount increased. For 2020, the standard deduction amount has been increased for all filers. The amounts are: • Single or Married filing separately — $12,400. • Married filing jointly or Qualifying widow(er) — $24,800. • Head of household — $18,650. Alternative minimum tax exemption increased. The AMT exemption amount has increased to $72,900 ($113,400 if married filing jointly or qualifying widow(er); $56,700 if married filing separately). Earned income credit. The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if you earn less than: • $15,820 ($21,710 if married filing jointly), don't have a qualifying child, and are at least 25 years old and under 65; • $41,756 ($47,646 if married filing jointly), and you have one qualifying child; • $47,440 ($53,330 if married filing jointly), and you have two qualifying children; or • $50,954 ($56,844 if married filing jointly), and you have three or more qualifying children. For more information, see Earned Income Credit, later. Standard mileage rate. For 2020, the standard mileage rate allowed for operating expenses for a car when you use it for medical reasons decreased to 17 cents a mile. Reminders Form 1040-SR. Form 1040-SR, U.S. Tax Return for Seniors, was introduced in 2019. You can use this form if you are age 65 or older at the end of 2020. The form generally mirrors Form 1040. However, the Form 1040-SR has larger text and some helpful tips for older taxpayers. See the Instructions for Forms 1040 and 1040-SR for more information. Tax return preparers. Choose your preparer carefully. If you pay someone to prepare your return, the preparer is required, under the law, to sign the return and fill in the Page 2 other blanks in the Paid Preparer's area of your return. Remember, however, that you are still responsible for the accuracy of every item entered on your return. If there is any underpayment, you are responsible for paying it, plus any interest and penalty that may be due. Third party designee. You can check the “Yes” box in the Third Party Designee area of your return to authorize the IRS to discuss your return with your preparer, a friend, a family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax return instructions for details. Employment tax withholding. Your wages are subject to withholding for income tax, social security tax, and Medicare tax even if you are receiving social security benefits. Social security benefits information. Social security beneficiaries may quickly and easily obtain various information from SSA’s website with a my Social Security account, including getting a replacement SSA-1099 or SSA1042S. For more information, go to SSA.gov/myaccount. See Obtaining social security information, later. Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800-843-5678) if you recognize a child. Introduction The purpose of this publication is to provide a general overview of selected topics that are of interest to older taxpayers. The publication will help you determine if you need to file a return and, if so, what items to report on your return. Each topic is discussed only briefly, so you will find references to other free IRS publications that provide more detail on these topics if you need it. Table I has a list of questions you may have about filing your federal tax return. To the right of each question is the location of the answer in this publication. Also, at the back of this publication there is an index to help you search for the topic you need. While most federal income tax laws apply equally to all taxpayers, regardless of age, there are some provisions that give special treatment to older taxpayers. The following are some examples. • Higher gross income threshold for filing. You must be age 65 or older at the end of the year to get this benefit. You are considered age 65 on the day before your 65th birthday. Therefore, you are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Publication 554 (2020) • Higher standard deduction. If you don't itemize de- ductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. You are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. • Credit for the elderly or the disabled. If you qualify, you may benefit from the credit for the elderly or the disabled. To determine if you qualify and how to figure this credit, see Credit for the Elderly or the Disabled, later. Return preparation assistance. The IRS wants to make it easier for you to file your federal tax return. You may find it helpful to visit a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or American Association of Retired Persons (AARP) Tax-Aide site near you. Volunteer Income Tax Assistance and Tax Counseling for the Elderly. These programs provide free help for low-income taxpayers and taxpayers age 60 or older to prepare and file their returns. For the VITA/TCE site nearest you, contact your local IRS office. For more information, see Preparing and filing your tax return under How To Get Tax Help. AARP Tax-Aide. AARP Foundation Tax-Aide offers free tax preparation and has more than 5,000 locations in neighborhood libraries, malls, banks, community centers, and senior centers annually during the filing season. Visit AARP.org/TaxAide or call 888-OUR-AARP (888-687-2277) for more information. Publication 554 (2020) Comments and suggestions. We welcome your comments about this publication and suggestions for future editions. You can send us comments through IRS.gov/ FormComments. Or, you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Do not send tax questions, tax returns, or payments to the above address. Getting answers to your tax questions. If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/ Help/ITA where you can find topics by using the search feature or viewing the categories listed. Getting tax forms, instructions, and publications. Visit IRS.gov/Forms to download current and prior-year forms, instructions, and publications. Ordering tax forms, instructions, and publications. Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Do not resubmit requests you’ve already sent us. You can get forms and publications faster online. Page 3 Table I. What You Should Know About Federal Taxes Note. The following is a list of questions you may have about filling out your federal income tax return. To the right of each question is the location of the answer in this publication. What I Should Know Where To Find the Answer Do I need to file a return? See chapter 1. Is my income taxable or nontaxable? If it is nontaxable, must I still report it? How do I report benefits I received from the Social Security Administration or the Railroad Retirement Board? Are these benefits taxable? Must I report the sale of my home? If I had a gain, is any part of it taxable? See chapter 2. See Social Security and Equivalent Railroad Retirement Benefits in chapter 2. See Sale of Home in chapter 2. What are some of the items that I can deduct to reduce my income? See chapters 3 and 4. How do I report the amounts I set aside for my IRA? See Individual Retirement Arrangement Contributions and Deductions in chapter 3. Would it be better for me to claim the standard deduction or itemize my deductions? See chapter 4. What are some of the credits I can claim to reduce my tax? See chapter 5 for discussions on the credit for the elderly or the disabled, the child and dependent care credit, and the earned income credit. Must I make estimated tax payments? See chapter 6. How do I contact the IRS or get more information? See chapter 7. Page 4 Publication 554 (2020) 1. 2020 Filing Requirements If income tax was withheld from your pay, or if you qualify for a refundable credit (such as the earned income credit, the additional child tax credit, or the American opportunity credit), you should file a return to get a refund even if you aren't otherwise required to file a return. Don't file a federal income tax return if you don't TIP meet the filing requirements and aren't due a re- fund. If you need assistance to determine if you need to file a federal income tax return for 2020, go to IRS.gov/ITA and use the Interactive Tax Assistant (ITA). General Requirements If you are a U.S. citizen or resident alien, you must file a return if your gross income for the year was at least the amount shown on the appropriate line in Table 1-1. For other filing requirements, see your tax return instructions or Pub. 501, Dependents, Standard Deduction, and Filing Information. If you were a nonresident alien at any time during the year, the filing requirements that apply to you may be different from those that apply to U.S. citizens. See Pub. 519, U.S. Tax Guide for Aliens. Gross income. Gross income is all income you receive in the form of money, goods, property, and services that isn't exempt from tax. If you are married and live with your spouse in a community property state, half of any income defined by state law as community income may be considered yours. States with community property laws include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A registered domestic partner in Nevada, Washington, or California generally must report half the combined community income of the individual and his or her domestic partner. For more information about community property, see Pub. 555, Community Property. For more information on what to include in gross income, see chapter 2. Table 1-1. 2020 Filing Requirements Chart for Most Taxpayers Note. You must file a return if your gross income was at least the amount shown in the last column. AND at the end of 2020 you were*. . . THEN file a return if your gross income** was at least. . . Single under 65 $12,400 65 or older $14,050 under 65 $18,650 65 or older $20,300 under 65 (both spouses) $24,800 65 or older (one spouse) $26,100 65 or older (both spouses) $27,400 . IF your filing status is. . . Head of household Married filing jointly*** Married filing separately any age Qualifying widow(er) under 65 $24,800 65 or older $26,100 * ** *** $ 5 If you were born before January 2, 1956, you are considered to be 65 or older at the end of 2020. (If your spouse died in 2020 or if you are preparing a return for someone who died in 2020, see Pub. 501.) Gross income means all income you receive in the form of money, goods, property, and services that isn't exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). It also includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, don't reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9. Don't include any social security benefits unless (a) you are married filing separately and you lived with your spouse at any time in 2020, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the Instructions for Forms 1040 and 1040-SR or Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, to figure the taxable part of social security benefits you must include in gross income. If you didn't live with your spouse at the end of 2020 (or on the date your spouse died) and your gross income was at least $5, you must file a return regardless of your age. Chapter 1 2020 Filing Requirements Page 5 Self-employed persons. If you are self-employed in a business that provides services (where the production, purchase, or sale of merchandise isn't an income-producing factor), gross income from that business is the gross receipts. If you are self-employed in a business involving manufacturing, merchandising, or mining, gross income from that business is the total sales minus the cost of goods sold. In either case, you must add any income from investments and from incidental or outside operations or sources. See Pub. 334, Tax Guide for Small Business, for more information. Dependents. If you could be claimed as a dependent by another taxpayer (that is, you meet the dependency tests in Pub. 501), special filing requirements apply. See Pub. 501. Decedents A personal representative of a decedent's estate can be an executor, administrator, or anyone who is in charge of the decedent's property. If you are acting as the personal representative of a person who died during the year, you may have to file a final return for that decedent. You also have other duties, such as notifying the IRS that you are acting as the personal representative. Form 56, Notice Concerning Fiduciary Relationship, is available for this purpose. When you file a return for the decedent, either as the personal representative or as the surviving spouse, you should write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. If no personal representative has been appointed by the due date for filing the return, the surviving spouse (on a joint return) should sign the return and write in the signature area “Filing as surviving spouse.” For more information, see Pub. 559, Survivors, Executors, and Administrators. Surviving spouse. If you are the surviving spouse, the year your spouse died is the last year for which you can file a joint return with that spouse. After that, if you don't remarry, you must file as a qualifying widow(er), head of household, or single. For more information about each of these filing statuses, see Pub. 501. If you remarry before the end of the year in which your spouse died, a final joint return with the deceased spouse can't be filed. You can, however, file a joint return with your new spouse. In that case, the filing status of your deceased spouse for his or her final return is married filing separately. The level of income that requires you to file an income tax return changes when your filing status CAUTION changes (see Table 1-1). Even if you and your deceased spouse weren't required to file a return for several years, you may have to file a return for tax years after the year of death. For example, if your filing status changes from filing jointly in 2019 to single in 2020 because of the death of your spouse, and your gross income is $17,500 ! Page 6 Chapter 2 Taxable and Nontaxable Income for both years, you must file a return for 2020 even though you didn't have to file a return for 2019. 2. Taxable and Nontaxable Income Generally, income is taxable unless it is specifically exempt (not taxed) by law. Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. Under special provisions of the law, certain items are partially or fully exempt from tax. Provisions that are of special interest to older taxpayers are discussed in this chapter. Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. You don’t need to receive the compensation in cash for it to be taxable. Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. Volunteer work. Don't include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. • • • • Retired Senior Volunteer Program (RSVP). Foster Grandparent Program. Senior Companion Program. Service Corps of Retired Executives (SCORE). Unemployment compensation. You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. More information. See Pub. 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. A traditional IRA is any IRA that isn't a Roth or SIMPLE IRA. A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. More detailed information can be found in Pub. 590-A, Contributions to Individual Retirement Arrangements; Pub. 590-B, Distributions from Individual Retirement Arrangements; and Pub. 575, Pension and Annuity Income. Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. These are discussed in Pub. 590-B. If you made nondeductible contributions to a tra- TIP ditional IRA, you must file Form 8606, Nondeduc- tible IRAs. If you don't file Form 8606 with your return, you may have to pay a $50 penalty. Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Early distributions. Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 591/2, or amounts you receive when you cash in retirement bonds before you are age 591/2. You must include early distributions of taxable amounts in your gross income. These taxable amounts also are subject to an additional 10% tax unless the distribution qualifies for an exception. For purposes of the additional 10% tax, an IRA is a qualified retirement plan. For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. Tax benefits of a coronavirus-related distribution. If a distribution meets the requirements to be a “coronavirus-related distribution” (defined below), you can elect to include the taxable amounts as income ratably over 3 years and recontribute the amount of the distribution to an eligible retirement plan within 3 years. Such distributions are also not subject to the 10% additional tax on distributions that generally applies before age 591/2. For more information concerning the reporting of the distribution and the ability to recontribute the distribution, see Form 8915-E and its instructions. Coronavirus-related distribution. A coronavirus-related distribution is any distribution from an eligible retirement plan that meets the following requirements. 1. The distribution was made after December 31, 2019, and before December 31, 2020. 2. The distribution was made to an individual that was diagnosed with either SARS-CoV-2 or coronavirus disease 2019 (COVID-19) by the Centers for Disease Control and Prevention (CDCP), or whose spouse or dependent was diagnosed with SARS-CoV-2 or COVID-19 by the CDCP. 3. The individual, the individual’s spouse, or a member of the individual’s household (as defined below) experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or had work hours reduced or a reduction in pay (or self-employment income) due to coronavirus, was unable to work due to lack of childcare resulting from coronavirus, closed or reduced hours of a business owned or operated by the individual, or had a job offer rescinded or start date delayed (including for a spouse or member of the household) due to coronavirus. For purposes of applying the factors in 3 above, a member of the individual’s household is someone who shares the individual’s principal residence. See Pub. 575 and Form 8915-E and its instructions for more information. IRA distributions as income. If the distribution meets the “coronavirus-related distribution” definition, you can elect to include the taxable amounts as income ratably over 3 years and recontribute the amount of the distribution to an eligible retirement plan within 3 years. After age 591/2. After you reach age 591/2, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Required Distributions No Required Minimum Distributions for 2020 from Defined Contribution Plans and IRAs. For 2020, required distributions from defined contributions plans and IRAs are waived. General Required Minimum Distribution Rule. If you are the owner of a traditional IRA, you must generally receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 72 (70 1/2 for those individuals that reach age 70 1/2 before January 1, 2020). See When Must You Withdraw Assets? (Required Minimum Distributions) in Pub. 590-B. If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. For purposes of the 50% excise tax, an IRA is a qualified retirement plan. For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. See also Excess Accumulations (Insufficient Distributions) in Pub. 590-B. Chapter 2 Taxable and Nontaxable Income Page 7 Pensions and Annuities Generally, if you didn't pay any part of the cost of your employee pension or annuity, and your employer didn't withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. However, see Insurance Premiums for Retired Public Safety Officers, later. If you paid part of the cost of your pension or annuity plan (see Cost, later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. The rest of each payment is taxable. However, see Insurance Premiums for Retired Public Safety Officers, later. You figure the tax-free part of the payment using one of the following methods. • Simplified Method. You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). You can't use this method if your annuity is paid under a nonqualified plan. • General Rule. You must use this method if your an- nuity is paid under a nonqualified plan. You generally can't use this method if your annuity is paid under a qualified plan. Contact your employer or plan administrator to TIP find out if your pension or annuity is paid under a qualified or nonqualified plan. You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. Exclusion limit. If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost can't exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as an “other itemized deduction” on the final return of the decedent. If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost. Cost. Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Your total cost in the plan includes everything that you paid. It also includes amounts your employer contributed that were taxable to you when paid. However, see Foreign employment contributions, later. From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free Page 8 Chapter 2 Taxable and Nontaxable Income amounts you received by the later of the annuity starting date or the date on which you received your first payment. Annuity starting date. The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. The amount of your contributions to the plan may TIP be shown in box 9b of any Form 1099-R, Distribu- tions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that you receive. Foreign employment contributions. If you worked abroad, certain amounts your employer paid into your retirement plan that weren't includible in your gross income may be considered part of your cost. For details, see Foreign employment contributions in Pub. 575. Withholding. The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. (These are distributions that are eligible for rollover treatment but aren't paid directly to another qualified retirement plan or to a traditional IRA.) See Withholding Tax and Estimated Tax and Rollovers in Pub. 575 for more information. For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. Simplified Method. Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract. Who must use the Simplified Method. You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you meet both of the following conditions. 1. You receive your pension or annuity payments from a qualified plan. 2. On your annuity starting date, at least one of the following conditions applies to you. a. You are under age 75. b. You are entitled to less than 5 years of guaranteed payments. If your annuity starting date is after July 1, 1986, and before November 19, 1996, and you previously chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. You could have chosen to use the Simplified Method if your annuity is payable for your life (or the lives of you and your survivor annuitant) and you met both of the conditions listed above. Guaranteed payments. Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant don't live to receive the minimum. If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Who can't use the Simplified Method. You can't use the Simplified Method and must use the General Rule if you receive pension or annuity payments from: • A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan; or • A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above). In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. You also had to use it for any fixed-period annuity. If you didn't have to use the General Rule, you could have chosen to use it. You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you didn't qualify to use the Three-Year Rule. If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. Complete information on the General Rule, including the actuarial tables you need, is contained in Pub. 939, General Rule for Pensions and Annuities. How to use the Simplified Method. Complete the Simplified Method Worksheet in the Instructions for Forms 1040 and 1040-SR, or Instructions for Form 1040-NR, or in Pub. 575 to figure your taxable annuity for 2020. Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. You don't need to complete line 3 of the work- TIP sheet or make the computation on line 4 if you re- ceived annuity payments last year and used last year's worksheet to figure your taxable annuity. Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. Single-life annuity. If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for your age on your annuity starting date. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Multiple-lives annuity. If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Don't treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. However, if your annuity starting date is before 1998, don't use Table 2 and don't combine the annuitants' ages. Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. Fixed-period annuities. If your annuity doesn't depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. Line 6. The amount on line 6 should include all amounts that could have been recovered in prior years. If you didn't recover an amount in a prior year, you may be able to amend your returns for the affected years. Be sure to keep a copy of the completed work- TIP sheet; it will help you figure your taxable annuity in later years. Example. Bill Smith, age 65, began receiving retirement benefits in 2020, under a joint and survivor annuity. Bill's annuity starting date is January 1, 2020. The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Chapter 2 Taxable and Nontaxable Income Page 9 Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. You can find a blank version of this worksheet in Pub. 575. (The references in the illustrated worksheet are to sections in Pub. 575.) His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. He finds the line 3 amount to be 310. Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Upon Bill's death, if Bill hasn't recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments generally must be included in gross income. If Bill and Kathy die before 310 payments are made, an other itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Survivors of retirees. Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. The retiree's cost has already been recovered tax free. If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully taxable. If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. See Simplified Method, earlier. How to report. If you file Form 1040, 1040-SR, or 1040-NR, report your total annuity on line 5a, and the taxable part on line 5b. If your pension or annuity is fully taxable, enter it on line 5b. Don't make an entry on line 5a. Example. You are a Form 1040 or 1040-SR filer and you received monthly payments totaling $1,200 (12 months x $100) during 2020 from a pension plan that was completely financed by your employer. You had paid no tax on the payments that your employer made to the plan, and the payments weren't used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers). The entire $1,200 is taxable. You include $1,200 only on Form 1040 or 1040-SR, line 5b. Joint return. If you file a joint return and you and your spouse each receive one or more pensions or annuities, Page 10 Chapter 2 Taxable and Nontaxable Income report the total of the pensions and annuities on line 5a of Form 1040, 1040-SR, or 1040-NR. Report the total of the taxable parts on line 5b of Form 1040, 1040-SR, or 1040-NR. Form 1099-R. You should receive a Form 1099-R for your pension or annuity. Form 1099-R shows your pension or annuity for the year and any income tax withheld. You should receive a Form W-2, Wage and Tax Statement, if you receive distributions from certain nonqualified plans. You must attach Forms 1099-R or Forms W-2 to your 2020 tax return if federal income tax was CAUTION withheld. Generally, you should be sent these forms by February 1, 2021. ! Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Pub. 575. ! CAUTION The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. See Tax on Early Distributions, later. Lump-sum distributions. If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you don't report as capital gain) is ordinary income. You may be able to use the 10-year tax option (explained in Pub. 575) to figure tax on the ordinary income part. Form 1099-R. If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. More information. For more detailed information on lump-sum distributions, see Pub. 575 or Form 4972, Tax on Lump-Sum Distributions. Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 591/2 are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution. Worksheet 2-A. Simplified Method Worksheet—Illustrated Keep for Your Records 1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, 1040-SR, or 1040-NR, line 5a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion.* See Cost (Investment in the Contract), earlier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Otherwise, go to line 3. 3. Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Divide line 2 by the number on line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Enter any amount previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Subtract line 6 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Enter the smaller of line 5 or line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, 1040-SR, or 1040-NR, line 5b. Note. If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. Was your annuity starting date before 1987? Yes. STOP. Don't complete the rest of this worksheet. 1. $ 14,400 2. 31,000 3. 310 4. 100 5. 1,200 6. 0 7. 31,000 8. 1,200 9. $ 13,200 No. Add lines 6 and 8. This is the amount you have recovered tax free through 2020. You will need this number if you need to fill out this worksheet next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 11. Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you won't have to complete this worksheet next year. The payments you receive next year generally will be fully taxable . . . . . . . . 11. 1,200 $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Table 1 for Line 3 Above AND your annuity starting date was— IF your age on your annuity starting date was . . . BEFORE November 19, 1996, enter on line 3 . . . 55 or under 56 – 60 61 – 65 66 – 70 71 or over 300 260 240 170 120 AFTER November 18, 1996, enter on line 3 . . . 360 310 260 210 160 Table 2 for Line 3 Above IF the annuitants' combined ages on your annuity starting date were . . . THEN enter on line 3 . . . 110 or under 111 – 120 121 – 130 131 – 140 141 or over 410 360 310 260 210 Chapter 2 Taxable and Nontaxable Income Page 11 For this purpose, a qualified retirement plan is: • A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), • A qualified employee annuity plan, • A tax-sheltered annuity plan (section 403(b) plan), • An eligible state or local government section 457 de- ferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA), or • An IRA. You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a CAUTION SIMPLE IRA before you are age 591/2. See Pub. 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). ! General exceptions to tax. The early distribution tax doesn't apply to any distributions that are: • Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service); • Made because you are totally and permanently disabled; • Made on or after the death of the plan participant or contract holder; or • Distributions that meet the definition of a “coronavi- rus-related distribution,” discussed earlier. See Pub. 575 and Form 8915-E and its instructions for more information. Additional exceptions. There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. See Pub. 575 and Pub. 590-B for details. Reporting tax. If you owe the tax on early distributions, you must generally attach Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to your 2020 income tax return. If you don’t have to file a 2020 income tax return, you may file Form 5329 by itself. See the Instructions for Form 5329. In addition, you don’t have to attach Form 5329 to your income tax return if distribution code 1 (early distribution, no known exception) is correctly shown in box 7 of all your Forms 1099-R, and you owe the additional tax on each Form 1099-R. Instead, multiply the taxable part of the early distribution by 10% (0.10) and enter the result on Schedule 2 (Form 1040), line 6. See the Instructions for Schedule 2 (Form 1040), line 6, for more information about reporting the early distribution tax. Page 12 Chapter 2 Taxable and Nontaxable Income Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of: • The calendar year in which you reach age 701/2, or • The calendar year in which you retire from employment with the employer maintaining the plan. However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 701/2, even if you haven't retired. If you reach age 72 in 2020, you may be required to receive your first distribution by April 1, 2021. Your required distribution then must be made for 2021 by December 31, 2021. For this purpose, a qualified retirement plan includes: • • • • A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, A tax-sheltered annuity plan (section 403(b) plan) (for benefits accruing after 1986), or • An IRA. An excess accumulation is the undistributed re- TIP mainder of the required minimum distribution that was left in your qualified retirement plan. 5% owners. If you are a 5% owner, see Pub. 575 for more information on distribution dates. Amount of tax. If you don't receive the required minimum distribution, you are subject to an additional tax. The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Form 5329. You must file a Form 5329 if you owe a tax because you didn't receive a minimum required distribution from your qualified retirement plan. Additional information. For more detailed information on the tax on excess accumulation, see Pub. 575. Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage for you, your spouse, or dependent(s). The distribution must be made directly from the plan to the insurance provider. You can exclude from income the smaller of the amount of the insurance premiums or $3,000. You can only make this election for amounts that would otherwise be included in your income. The amount excluded from your income can't be used to claim a medical expense deduction. An eligible retirement plan is a governmental plan that is a: • • • • Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. The taxable amount shown in box 2a of any Form 1099-R that you receive doesn't reflect the exclusion. Report your total distributions on Form 1040, 1040-SR, or 1040-NR, line 5a. Report the taxable amount on Form 1040, 1040-SR, or 1040-NR, line 5b. Enter “PSO” next to the appropriate line on which you report the taxable amount. Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes. Social security equivalent benefits. The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. (See Social Security and Equivalent Railroad Retirement Benefits, later.) Non-social security equivalent benefits. The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits is treated as an amount received from a qualified employee plan. This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. VDBs and supplemental annuity benefits are non-contributory pensions and are fully taxable. More information. For more information about railroad retirement benefits, see Pub. 575. Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, 1040-SR, or 1040-NR, lines 5a and 5b. But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally aren't taxable. For more information, including information about veterans' benefits and insurance, see Pub. 525. Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. Social security benefits include monthly retirement, survivor, and disability benefits. They don't include supplemental security income (SSI) payments, which aren't 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 commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. If you received these benefits during 2020, 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), showing the amount of the benefits. Social Security Information Obtaining social security information. Social security beneficiaries may quickly and easily obtain various information from the SSA's website with a my Social Security account to: • Keep track of your earnings and verify them every year, • Get an estimate of your future benefits if you are still working, • Get a letter with proof of your benefits if you currently receive them, • • • • Change your address, Start or change your direct deposit, Get a replacement Medicare card, and Get a replacement SSA-1099 or SSA-1042S for the tax season. For more information and to set up an account, go to SSA.gov/myaccount. Chapter 2 Taxable and Nontaxable Income Page 13 Worksheet 2-B. A Quick Way To Check if Your Benefits May Be Taxable A. Keep for Your Records Enter 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 2020, for 2020 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter 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. Enter your taxable pensions, wages, interest, dividends, and other taxable income . . . . . . . . C. D. Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income 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 . . . . . . . . . . . . . . D. E. Add lines B, C, and D and enter the total .......................................... E. F. If you are: • Married filing jointly, enter $32,000; • Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of 2020, enter $25,000; or • Married filing separately and you lived with your spouse at any time during 2020, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. G. Is the amount on line F less than or equal to the amount on line E? No. None of your benefits are taxable this year. Yes. Some of your benefits may be taxable. To figure how much of your benefits are taxable, see Which worksheet to use under How Much Is Taxable. Are Any of Your Benefits Taxable? Note. When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: • One-half of your benefits; plus • All your other income, including tax-exempt interest. When making this comparison, don't 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. are taxable. Even if your spouse didn't 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 2020 was TIP your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally aren't taxable and you probably don't 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 2020; • $32,000 if you are married filing jointly; or • $0 if you are married filing separately and lived with Figuring total income. To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. If that total amount is more than your base amount, part of your benefits may be taxable. Repayment of Benefits If you are married and file a joint return for 2020, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits Any repayment of benefits you made during 2020 must be subtracted from the gross benefits you received in 2020. It doesn't matter whether the repayment was for a benefit Page 14 Chapter 2 Taxable and Nontaxable Income your spouse at any time during 2020. you received in 2020 or in an earlier year. If you repaid more than the gross benefits you received in 2020, see Repayments More Than Gross Benefits, later. Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2020 (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 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, Voluntary Withholding Request. If you don't 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, see Pub. 505, Tax Withholding and Estimated Tax, or the Instructions for Form 1040-ES, Estimated Tax for Individuals. How Much Is Taxable? If part of your benefits is 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. The taxable part of your benefits usually can't be more than 50%. However, up to 85% of your benefits can be taxable if either of the following situations applies to you. • 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). • You are married filing separately and lived with your spouse at any time during 2020. If you are a nonresident alien, 85% of your benefits are taxable. However, this income is exempt under some tax treaties. Which worksheet to use. A worksheet to figure your taxable benefits is in the Instructions for Forms 1040 and 1040-SR. However, you will need to use a different worksheet(s) if any of the following situations applies to you. 1. You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. In this situation, you must use the special worksheets in Pub. 590-A to figure both your IRA deduction and your taxable benefits. 2. Situation (1) doesn't apply and you take one or more of the following exclusions. • Interest from qualified U.S. savings bonds (Form 8815, Exclusion of Interests From Series EE and I U.S. Savings Bonds Issued After 1989). • Employer-provided adoption benefits (Form 8839, Qualified Adoption Expenses). • Foreign earned income or housing (Form 2555, Foreign Earned Income). • Income earned in American Samoa (Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa) or Puerto Rico by bona fide residents. In these situations, you must use Worksheet 1 in Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, 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 Pub. 915. See Lump-Sum Election, later. How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, 1040-SR, or 1040-NR. Reporting on Form 1040 or 1040-SR. Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 6a and the taxable part on line 6b. If you are married filing separately and you lived apart from your spouse for all of 2020, also enter “D” to the right of the word “benefits” on line 6a. Reporting on Form 1040-NR. Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Schedule NEC (Form 1040-NR), line 8. Benefits not taxable. Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040 or 1040-SR, line 6a.
Extracted from PDF file 2020-federal-publication-554.pdf, last modified January 2021

More about the Federal Publication 554 Individual Income Tax TY 2020

Pub 554 is a yearly IRS publication that contains hundreds of pages of income tax information and instructions specifically tailored towards seniors and retired taxpayers.

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1040 (Schedule B) Interest and Ordinary Dividends
Form 1040 U.S. Individual Income Tax Return
Form 1040-V Payment Voucher
1040 (Schedule A) Itemized Deductions
Form 8822 IRS Change of Address

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About the Individual Income Tax

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