Tax Implications of Social Security Death Benefits for Children

Social Security will pay survivors benefits to the eligible children of a covered worker. If you have worked and paid in to the Social Security system, these benefits can assist your family, in a similar way to a benefit paid out from a life insurance company. Social Security's rules govern eligibility, while the IRS levies income tax on the benefits depending on the amount of the survivors benefit and income from other sources.

Eligibility for Survivors Benefits

Social Security requires a minimum number of "work credits" for retirement benefits. For most workers, 40 work credits are required; you earn a single credit by earning a specified amount of money ($1,160 in 2013) and paying Social Security taxes on those earnings (the work credit requirement for survivors benefits is less for younger workers). You can earn a maximum of four credits a year. If you have met retirement eligibility, your children can draw survivors benefits in the event of your death.

Age Limits and Benefit Amount

If your children are under the age of 18 and unmarried, they can draw monthly survivors benefits from Social Security, as long as you have attained retirement eligibility. The age limit extends to 19 if your children are still in school full-time; if they were disabled before the age of 22, there is no age limit for survivors benefits. Children's survivors benefits are paid at 75 percent of your full retirement benefit, calculated on your lifetime earnings record; there is also a one-time death benefit of $255. Social Security sets a family maximum amount of up to 180 percent of the retirement benefit.

The IRS and Social Security

The IRS requires Social Security beneficiaries to report their survivors benefit income. The agency does not discriminate based on the type of benefit -- retirement, disability, survivors or spouse benefits are all considered taxable income. The IRS does not require a return if a dependent's "unearned" income -- which includes any Social Security benefits -- is less than $950 over the course of a year. The IRS varies this threshold for married or blind dependents.

Figuring Tax on Benefits

Social Security reports payment of survivors benefits on Form 1099-SSA. These benefits may be taxable; to calculate the tax rate, the beneficiary must add one-half of the benefits to other earned and unearned income, including tax-exempt interest. If the result is less than $25,000 and the beneficiary is single, the survivors benefits are not taxed. With a "combined income" between $25,000 and $34,000, 50 percent of the survivors benefits are subject to tax. Above $34,000, 85 percent of the benefits are taxed. The taxable amount of survivors benefits is added to other taxable income, and the beneficiary pays income tax at whatever the appropriate rate is for that income level.