As the 2024 tax returns start to pour into Holistiplan, we have noticed an unusual pattern within the returns prepared in TurboTax. A sizable number of returns with social security benefits are reporting those benefits as tax free. Our own calculations suggest that these benefits should indeed be taxable. There is therefore a chance that some filers using TurboTax have a mistake on their returns, causing them to under-report taxable income for 2024.
How We Spot This
We run a parallel tax calculation on every tax return that gets uploaded into our system. This helps in two ways: we can find patterns like this one, and we can use a mismatched calculation to flag if the OCR technology read in a certain field incorrectly. An incorrectly recorded field will throw off the tax calculation, which flags the document for our team to review.
In this particular case, over and over again, we are seeing returns where our OCR technology read in the data correctly, but we are seeing a calculation mismatch due to the social security calculation issue described above. Our manual review team informs the uploading advisor when a return has a potential problem like this, so if you have uploaded such a return and if our automated checks flagged it, you will have received an email from us about it.
Actions You Might Take
If this is a bug in the TurboTax calculation engine, we suspect it has already been fixed or will be soon. There is a good chance only the clients who prepared their returns early this year will have been impacted. We would hope TurboTax would find a way to identify the impacted taxpayers and contact them, but your clients might appreciate hearing from you as well. If this is indeed a bug that has been fixed or will be fixed, the best path forward for clients is likely to wait a while longer before filing. Whether this is a bug, a change in interface causing user error, or an unusually high number of taxpayers making the same error on their return, it's probably best that before they do file, they check the taxable social security field (pictured above).
A Reminder on How Social Security is Taxed
There are cases where Social Security is indeed tax free, but that is only true when total income is under a very low threshold of $25,000 (single filers) or $32,000 (MFJ). (In some rare cases, benefits may not be taxable if the recipient is living in a foreign country where taxation of those benefits is governed by treaty.) In this case "income" is a Modified Adjusted Gross Income calculation that takes total income, adds back tax free bonds, and includes half of the social security benefits themselves. If income exceeds this threshold, more and more of the Social Security benefit is taxed as income rises. At maximum, up to 85% of the social security benefit can be included in taxable income.