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When Is Social Security Income Taxable?

Provided by Rajesh Jyotishi Email Provided by Rajesh Jyotishi
December 2016
When Is Social Security Income Taxable?

The answer depends on your income.

Your Social Security income could be taxed. That may seem unfair, or unfathomable, but it is a possibility.

Seniors have had to contend with this possibility since 1984, when Social Security benefits became taxable above certain yearly income thresholds. Frustratingly for retirees, these income thresholds have been left at the same levels for 32 years.1

Those frozen income limits have exposed many more people to the tax over time. In 1984, just 8% of Social Security recipients had total incomes high enough to trigger the tax. In contrast, the Social Security Administration estimates that 52% of households receiving benefits in 2015 had to claim some of those benefits as taxable income.1

Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your adjusted gross income (AGI), any nontaxable interest earned, and 50% of your Social Security benefit income. (Your combined income is a form of modified adjusted gross income, or MAGI.)2

Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive.2

You may be able to estimate these taxes in advance. Search Google for an online calculator or use the worksheet in IRS Publication 915.2

You can have these taxes withheld from your Social Security income by choosing 7%, 10%, 15%, or 25% withholding per payment—or you can make estimated tax payments per quarter, like a business owner.2

Some states also tax Social Security payments. North Dakota, Minnesota, West Virginia, and Vermont use the same formula as the federal government for this. Nine other states use more lenient formulas: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Utah.2

What can you do if it appears your benefits will be taxed? If your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

You could opt to try and revise your portfolio, so that less income and tax-exempt interest are produced annually.

You can make a charitable IRA gift, up to $100,000 in a single year, if you are 70½ or older in the year of the donation. The amount of the gift may be used to fully or partly satisfy your Required Minimum Distribution (RMD), and the amount will not be counted in your AGI.3

You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax-exempt if you are age 59½ or older and have held the account for at least five tax years.4

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees hope so.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note: investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1. ssa.gov/policy/docs/issuepapers/ip2015-02.html [12/15]
2. fool.com/retirement/general/2016/04/30/is-social-security-taxable.aspx [4/30/16]
3. kiplinger.com/article/retirement/T051-C001-S003-how-to-limit-taxes-on-social-security-benefits.html [7/16]
4. irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]


RajeshJyotishi100.jpg Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. Rajesh Jyotishi is a registered representative of Dempsey Lord Smith, LLC, which is a registered broker-dealer and a member of FINRA/SIPC. Advisory Services are offered through Dempsey Lord Smith, LLC. Rajesh has been a resident of Atlanta since 1975 and in the financial services industry since 1991. For questions, he can be reached at 770-884-8175 or at RJ@shalinfinancial.com.   

 


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