How to Calculate Modified Income
QUESTION: I know you have written before about the unfair taxation of Social Security benefits and how a taxpayer goes about determining what part is taxed and what isn’t. But when I go back through your columns, the only pertinent reference I find simply points out that the computation is based on one’s “modified adjusted gross income.” Since so many elderly people read your column and we’re confused by this every time we have to refigure it, could you explain once again what this modified adjusted gross income nonsense is?--M. C.
ANSWER: You’re right. It is confusing. Start with the number on this year’s tax return that represents your adjusted gross income for Internal Revenue Service purposes. Then modify that figure by adding to it several items you deducted or excluded elsewhere on your tax return. Those items are: (1) the deduction available to a married couple when both work for wages, (2) the foreign earned income exclusion or foreign housing exclusion and (3) any income received from sources in Puerto Rico or in territories that are U.S. possessions.
Once you have arrived at this so-called modified adjusted gross income, you add that number to any interest income you received on tax-exempt securities.
Then add that sum to 50% of the Social Security benefits and Tier 1 railroad retirement benefits you received during the year. For purposes of this computation, Social Security benefits include old age, survivor and disability benefits.
You should not include in this calculation any supplemental income (SSI) payments or Medicare benefits you received. Nor should you include any Social Security benefits that you were entitled to receive before 1986 but didn’t actually receive until last year.
Next, compare the resulting figure to a so-called base amount provided by the IRS. If you are married and file a joint tax return, the base amount is $32,000. If you are married and lived with your spouse for as little as one day last year but file separate tax returns, your base is zero. For all other taxpayers, the base is $25,000.
If the sum of your modified adjusted gross income, your tax-exempt interest income and half of your Social Security and Tier 1 railroad retirement benefits is less than the appropriate base amount, go no further. Your benefits won’t be taxed.
But if that sum is greater than the base, up to half of your Social Security benefits will be taxed. To figure out what portion is subject to taxation, you make just one more calculation.
Subtract the base amount from the sum you computed earlier. Divide it in half. Now, compare the result with the amount that represents half of your Social Security and Tier 1 railroad retirement benefits. Whichever number is smaller is the one you include in your taxable income and pay taxes on.
Q: At my initiation, I was legally separated from my husband in June. We are still on good terms, and neither of us is considering divorce at this point. Can we still file a joint tax return?--N. V.
A: No. If you are legally separated under a decree of separate maintenance, you are prohibited from filing a joint tax return with your husband.
Conversely, if you simply live apart, without the benefit of any legal document, you are entitled to file a joint return. That is true regardless of whether you lived in separate households all year or for just a single day.
Married couples are almost always better off filing a joint return whenever they are entitled to do so. That is because the tax rate is higher for married taxpayers who file separate returns than it is for those who file jointly.
As always, however, there are some exceptions to that rule. One that might be pertinent in your case occurs when the couple is living apart and one spouse is paying the other alimony--a cost-of-living expense that is tax deductible by the spouse who pays it and must be reported as income by the spouse who receives it.
As we said before, if the separation is legally mandated, you have no choice. You must file separate returns. But even if it isn’t a legal separation and alimony is being paid, tax advisers say the couple usually stands to pay less tax overall if they file separate returns.
The same is true in cases where the lower-paid spouse incurs large medical expenses or casualty losses that are tax deductible. If their income was combined on a joint return, the couple may not be able to meet the IRS stringent deductibility tests. But if the two incomes are kept separate and the large expenses are assigned to the spouse with the lower income, the tests become easier to meet.
