The Wall Street Journal, based on Census Bureau data, reported recently that nearly half (49.1%) of the population now lives in a household that receives government benefits and that this is up from 30% in the early 1980s and 44.4% as recently as the third quarter of 2008. These benefits include Social Security and Medicare coverage, food stamps, unemployment benefits, disaster relief assistance, and other types of government assistance. From a tax perspective, the treatment of government benefits is all over the map—some are fully taxable, some are fully tax free, and some may be partially taxable depending on the recipient’s income. Here is a roundup of the tax treatment of common government benefits.
Social Security benefits may be fully tax free or included in gross income at 50% (with 50% excludable) or 85% (so that only 15% is excludable). It all depends on filing status and a special income formula that takes into account tax-exempt interest and half of the Social Security benefits received. The following chart shows the portion of benefits, if any, included in income based on the special income formula:
|Filing status||100% excludable||50% excludable||15% excludable|
|Married filing jointly||Up to $32,000||Over $32,000 but not over $44,000||Over $44,000|
|Married filing separately||—||—||Automatically applies|
|Other taxpayers||Up to $25,000||Over $25,000 but not over $34,000||Over $34,000|
Medical costs covered by Medicare are tax free. There is no situation in which this medical coverage becomes taxable.
What’s more, premiums paid for this coverage are tax deductible by individuals who itemize deductions (and by self-employed individuals who deduct health insurance from gross income).
These benefits are fully included in gross income. In the past there had been an exclusion for a limited amount of benefits; this break no longer applies.
Disaster relief and disaster mitigation grants
Following a disaster, payments may be received under the Disaster Relief and Emergency Assistance Act. These payments are not includable in income if they are made to help you meet your necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses.
However, you cannot deduct a casualty loss or medical expenses that are specifically reimbursed by these disaster relief payments.
Foster care payments
Individuals who care for foster children may receive government benefits to help defray the cost of housing, food, clothing, and other expenses. The government payments are excluded from gross income if the child is placed by the state or a local agency. The exclusion is limited for foster care payments for five qualifying individuals over age 18, or 10 individuals in the case of difficulty-of-care payments made to account for the additional care required for someone with a physical, mental, or emotional handicap. There is no limit for payments on behalf of someone under age 18.
Foster Grandparent Program payments for supportive services or reimbursement for out-of-pocket expenses are tax free.
However, foster care payments made to the biological parent of a child cannot be excluded. Because care of one’s own child is a nondeductible personal expense, government assistance for this care does not alter the personal nature of the payments; they are taxable.
Jury duty pay
While it’s a civic duty to serve on a jury when called, the payment received for this service is taxable. You cannot exclude the payments from gross income.
If you are employed when called for jury duty and continue to receive your regular pay on the condition that you turn over your jury duty check to the employer, then you can deduct the jury duty pay from gross income (no itemizing required). This enables you to offset the inclusion in gross income of the jury duty pay; it’s a wash.
About 46.5 million Americans are now on food stamps. Taxwise, the receipt of this benefit is tax free.
These are only a smattering of the numerous government programs helping individuals with various needs. Again, the tax treatment of the benefits from these programs varies. Check with your tax advisor.
From 1997 to 2007, federal income tax credits claimed by individuals rose from $15.7 billion in 1997 to $63.8 billion in 2007. The child tax credit, created in 1998, accounted for about half ($31.6 billion) of the total credits in 2007 in terms of dollars.
Source: Statistics of Income Bulletin Spring 2011View all factoids