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Social Security Benefits
Social Security income used to be tax-free to all, but that's no longer so.
Depending on your other income, you could wind up paying tax on up to 85% of
your Social Security benefits, at a time when you need steady income the most.
However, we may be able to help you map out a strategy that will reduce your
exposure to federal income tax on your Social Security benefits.
First, you need to know whether your Social Security income will be taxed, and
if so, to what extent. Here are the rules in brief:
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Social Security benefits completely escape federal income taxes if adjusted
income for the year doesn't exceed $32,000 for marrieds filing a joint return,
or $25,000 for singles and heads of households. |
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Up to one-half of Social Security benefits will be subject to federal income
taxes if adjusted income for the year is over $32,000 but doesn't exceed $44,000
(for marrieds filing a joint return), or is over $25,000 but doesn't exceed
$34,000 (for singles and heads of households). |
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If adjusted income for the year is over $44,000 (marrieds filing a joint return)
or over $34,000 (singles and heads of households), more than 50% of the benefits
will be subject to federal income tax. Depending on income and benefit levels,
you may pay tax on more than 50% but less than 85% of your Social Security
benefits, or in some cases may pay tax on a full 85% of your benefits.
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For most people, "adjusted income" for purposes of determining how much of the
benefits is taxed is (1) regular adjusted gross income, plus (2) tax-exempt
income (such as tax-exempt bond income), plus (3) one-half of the Social
Security benefits.
If there is a chance that your Social Security income will be subject to federal
income tax, you may be able to reduce your exposure by using the following
techniques:
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Consider switching some funds into investments (such as annuities) that pay
monthly amounts that include a tax-free return of capital component. That part
of each annuity payment representing your investment is not currently taxed and
is not factored into the calculation of how much Social Security income is
subject to tax. |
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If you currently are not expending all of your investment income on living
expenses, defer as much income as possible. For example, the interest buildup in
U.S. Government Series EE bonds isn't taxed until the bonds are redeemed. In
addition, defer taking cash out of your IRAs and qualified plan accounts as long
as possible. |
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If you have the choice, consider withdrawing interest from your municipal bond
funds before withdrawing cash from IRAs for living expenses. This helps because
municipal bond interest you earn is taken into account when computing the tax on
Social Security benefits, but interest and dividends accumulating in an IRA
account are not taken into account. |
Of course, always bear in mind that taxes should never be the motivating factor
behind an investment decision. It's important to consider your financial,
investment, and tax situation in detail before you use one of these techniques.
If we can help you with your decision, call us for an appointment at your
convenience.
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