In this step, you have to determine the total amount of your nontaxable social security and other benefits. There are worksheets in the instructions for Form 1040 and 1040A to determine any taxable portion of your social security or railroad retirement benefits. The difference would be the nontaxable portion to be included here. Or all your benefits may be nontaxable.
In addition to nontaxable social security and railroad retirement benefits, you must include any nontaxable pension or annuity benefits or disability payments you receive from the Department of Veterans Affairs. But you do not have to include pensions, annuities, or similar allowances for personal injuries or sickness resulting from active service in the armed forces of any country, the National Oceanic and Atmospheric Administration, the Public Health Service, or the Foreign Service. You would also have to include any pension, annuity, or disability benefits that you receive and that are exempt from income tax under any federal law other than the Internal Revenue Code.
If you have an investment in a pension or annuity contract, you do not have to include any portion of the benefits that represent a return of your cost.
Step 3 – Excess Adjusted Gross Income
In this step you are reducing your initial amount from Step 1 by your excess adjusted gross income. This excess is the difference between your adjusted gross income as reported on your tax return and a fixed dollar amount based on your filing status. These amounts are shown on the tax form itself, alongside the line for calculating this excess. Once you determine the excess, you divide that amount by 2.