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Readers` Mail: Would Lump-Sum Be Tax-Free? In your booklet regarding Notch Victims and pending Lump-Sum bills before Congress, I see no mention whether such remuneration would be considered tax-free. Would it be subject to IRS taxation as income? On page 4 of the same booklet there is a letter from a Notch Victim living on $163 a month. I note that she is the widow of another Notch Baby. She cannot possibly be receiving her own Social Security benefits, plus a widow's benefit for a total so low. She must not know she is entitled to widow's benefits. Has anyone from your offices informed this unfortunate lady to apply for widow's benefits, plus possible retroactive benefits? -M.B.T., Santa Ana, CA Editor's reply: In answer to your first question: as the legislation is currently written, Notch Reform Lump-Sum benefits, if passed, would be treated like other Social Security benefits. Currently Social Security benefits may be subject to tax if your "provisional" income exceeds certain levels. Your "provisional income" is (roughly) your Adjusted Gross Income (AGI), plus your tax-exempt interest (not normally included with your AGI), plus one-half your Social Security benefits. If your provisional income is less than $25,000 for single filers, or $32,000 for couples filing jointly, then none of your Social Security benefits are taxable. If you are single and your provisional income is $25,000 to $34,000, or a couple and your income is $32,000 to $44,000, then up to 50% of your benefits may be subject to tax. If your provisional income is more than $34,000 (single), or $44,000 (couples), then up to 85% of your benefits may be taxable. In answer to your second question regarding the widow of another Notch baby living on $163 a month; you are right. "She cannot possibly be receiving her own Social Security benefits, plus a widow's benefits for a total so low." Even when an individual is entitled to more than one benefit, that person can only receive one, usually the higher of the two. If eligible for widow's (also known as survivors') benefits she would need to apply. The benefits are not automatic. Usually when the death of a beneficiary is reported to Social Security, the spouse is informed about the eligibility for survivors' benefits at that time. If for some reason she did not apply for benefits right away, she may be eligible for up to six months retroactive benefits. As discouraging as it may seem, it's entirely possible that the $163 per month survivors benefit is correct. The full retirement age benefit for someone with average earnings and who was born in 1917 for example, is only $535 per month. If her husband had low earnings, and started his benefits at age 62, his benefits would have been reduced by about 20%. When her husband died, if our Notch baby widow started survivors benefits before she turned 65, her benefits would have also been reduced. Remember a Medicare premium of $45.50 per month would be deducted as well, making her "gross benefit amount $208.50 monthly. TSCL attempts to assist as many members as possible receive all the benefits they are entitled to. About 300,000 TSCL members receive The Social Security and Medicare Advisor. TSCL has provided millions of booklets and other publications that provide information about Social Security and Medicare benefits to members, as well. This article first appeared in Volume 6, Issue 2 of "The Social Security and Medicare Advisor" newsletter (December/January/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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