Social Security benefits may be tax exempt, depending on the retiree's marital status and amount of income. If the individual's modified adjusted gross income for the year is less than the base income designated by the IRS for his or her marital status, the individual will not owe taxes on the Social Security benefits for that year. For example, for the 2008 tax year, Social Security benefits were tax exempt for married couples who filed jointly and earned less than $32,000 or for single people who earned less than $25,000.

When determining total income, take into account other sources of income in addition to Social Security, including tax exempt income. If the sole source of income is Social Security benefits, the individual probably will not owe any federal taxes.

If modified adjusted gross income is more than the base income designated for the retiree's marital status, he or she will need to figure what portion of his or her Social Security benefits can be taxed.

Each year, the Social Security Administration issues a form SSA-1099 to benefits recipients, detailing the amount of benefits received during the past year. If total income earned is more than the base income, usually up to half of the Social Security benefits can be taxed. However, for married couples filing separately who lived together for any part of the tax year, up to 85% of the benefits can be taxed. Likewise, if the individual earned more than a specified amount of income ($34,000 in 2008 or $44,000 if married filing jointly), up to 85% of the benefits can be taxed. No more than 85% of Social Security benefits will be taxed.

Please refer to the IRS Web site for the most recent information about income guidelines.