Tax Planning for Retirees

Social Security Tax Developments

Social Security Disability for Combat-Related Injuries May Be Partly Taxable. – The nontaxable percentage of a retiree’s social security benefits is based on the overall level of the retiree’s income. A disabled veteran may not avoid tax on the remainder of the benefits by trying to rely on the rule that disability payments for combat-related injuries are generally nontaxable. (Reimels v. Commissioner, 123 T.C. No. 13 (2004).) See Chapter 13 of the treatise for an explanation of nontaxable combat disability pay. See Chapter 17 for an explanation of the nontaxable portion of social security benefits.

IRS May Levy on Social Security Benefits. – Although social security benefits are generally not subject to execution, levy, attachment, garnishment, bankruptcy or insolvency laws, etc., the IRS may nevertheless levy on social security benefits for recovery of unpaid taxes. A single levy may attach the retiree’s right to receive all future social security payments. (Acevedo v. United States, 2008-1 U.S.T.C. Para. 50,355 (E.D. Mo. 2008); Ltr. Rul. 200909037.) See Chapter 17 of the treatise for a discussion of the taxation of social security benefits.

Tax Treatment of Lump Sum Payment of Prior Year Social Security Benefits. – If a retiree receives a lump sum payment of social security benefits for prior tax years, the retiree must generally treat the lump sum payment as part of current year benefits. However, the retiree may elect to make an alternative computation if that will yield a more favorable result. (Pollard v. Commissioner, T.C. Memo. 2011-132.) See Chapter 17 of the treatise.