Taxing Social Security Benefits

TAX CASE

Under IRC section 86 a taxpayer must reach a certain income level before his or her Social Security benefits are taxable. For married taxpayers filing separately and living apart, that threshold is $25,000. But if the taxpayer files separately and lives with his or her spouse, the threshold is zero.

For example, a taxpayer is 72 years old and earns $20,000 in 2002. He also receives $10,000 in Social Security benefits. The taxpayer is married filing separately and did not live with his wife for the entire year. His base amount is $25,000; thus, none of his Social Security benefits are taxable. If he lived with his wife the entire year, his base amount would be zero and $8,500 of his Social Security benefits would be taxable.

In 1998 Thomas McAdams claimed the $25,000 married filing separately Social Security base amount because he was married and believed he lived apart from his wife, Norma, for the entire year. He also claimed married filing separately status because he and his wife were not legally separated or divorced. McAdams used her address in Boise, Idaho, as a mailing address and kept things at her home. Although he lived in different parts of the country during most of the year, he stayed at his wife’s home when he was in Boise. In 1998 this amounted to more than 30 days. The IRS issued a deficiency notice, claiming McAdams was not entitled to the $25,000 base amount. The taxpayer appealed.

Result. For the IRS. The Tax Court, in a case of first impression, determined that an individual estranged from his wife who lived in her home for more than 30 days during the tax year at issue did not “live apart” from her at all times during the tax year. Thus, his base amount for computing Social Security benefits includable in his gross income was zero, maximizing the taxability of these benefits.

Neither the code nor its legislative history defines “live apart”; thus, the Tax Court looked to case law, which generally held that any time spent living under the same roof was not “living apart.” Therefore, the taxpayer was not entitled to any base amount other than zero.

Thomas W. McAdams, 118 TC no. 24, 2002.

Prepared by Lesli S. Laffie, JD, LLM, editor, The Tax Adviser.