Taxes on Social Security Benefits for Dependent Students

Do you have a dependent child attending college who also receives Social Security Benefits? How does this affect financial aid and income taxes?  These types of questions come up from time to time.  I have several college planning clients whose children are receiving Social Security survivor benefits and this affects them directly.

The Quick Answer

For the most part, students with incomes below $25,000 will not have their Social Security benefits taxed.  And this type of benefit is exempt from assessment for financial aid formulas as well.

All About Provisional Income

According to IRS Pub 915 on Social Security benefits are included in the taxable income of the person who has the legal right to receive the benefits. So if a parent and dependent child receive benefits, but the check for the child is made out in the parent’s name, the parent must use only the parental portion of the benefits to see whether any benefits are taxable to either parent or child. One-half of the part that belongs to your child must be added to your child’s other income to see whether any of those benefits are taxable to your child. As long as your child’s combined income is below $25,000 it is unlikely that these benefits would be taxable.

For the most part Social Security benefits are reportable on Form 1040, line 20a. Taxation of benefits for widows and survivors is calculated the same way as that for retirement benefits received.  It is the combined income figure that determines the taxation of benefits. This combined provisional income includes all earned income from wages, self-employment, rental income and 50% of the Social Security benefits received (but possibly 85% depending on total income). Most tax preparation software will determine if you have to pay taxes on your benefits and the IRS provides a worksheet on Form 1040 to calculate this as well. (You may go to IRS Publication 925 to also get a worksheet).

Further note from H&R Block:

You aren’t taxed on your child’s Social Security benefits. Since your child is the person with the legal right to receive the benefits, they’re only taxable to her. This is true even if the benefits are deposited in your account.

Your child’s Social Security benefits are tax-free as long as her provisional income is less than the base amount. The base amount is $25,000 for a single person. Provisional income is the total of:

  • 50% of her Social Security benefits
  • Other taxable and tax-exempt income

So, if your child has other income besides Social Security, she might be taxed on some of her benefits. Her other income might include taxable scholarships and wages from a job. Also, your child’s Social Security benefits might be a factor if you can claim her as a dependent. For the support test, the Social Security benefits your child spends on her own support are considered provided by her. This is regardless of whether the benefits are taxable.