Many new retirees assume that Social Security income is tax-free. That is not always the case. The Social Security Amendments of 1983 opened the door to taxes on some SSI, depending on the amount of income someone earns in a calendar year.1
How much of your SSI is potentially taxable? As much as 85% of it, under certain conditions. Four factors determine how much of your SSI will be taxed:
How is provisional income determined? In simple terms, this is calculated using your AGI, minus one-half of your Social Security benefits. (Tax-free interest from investments such as muni bonds also becomes provisional income.)3
How much income can you earn before your SSI is taxed? The 2011 limits are pretty straightforward:
Who doesn’t have to worry about this? If your only source of income is Social Security or equivalent retirement railroad benefits, it is unlikely that your SSI will be taxed and you may not even need to file a federal return. In 2011, Social Security benefits are tax-exempt for single taxpayers with provisional incomes under $25,000 and married/head of household taxpayers with provisional incomes under $32,000.4,6
What can be done to reduce (or avoid) the tax? If you are close to hitting either the 50% or 85% tax levels, you may want to think twice about moves that could take your provisional income over the threshold – for example, receiving a sizable chunk of profit from selling a stock, or converting a traditional IRA to a Roth IRA. Here are some common moves people make with the input of a qualified tax or financial professional:
Before April rolls around, it might be wise to consider the different ways to manage taxes on your Social Security benefits. Some new SSI recipients may be taken aback by the tax they end up paying; alternatively, you can plan to reduce it.
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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. All indices are unmanaged and are not illustrative of any particular investment.
1 – ssa.gov/history/InternetMyths2.html [3/22/11]
2 – investopedia.com/terms/p/provisional-income.asp#ixzz1ZTtLY5zk [9/30/11]
3 – www.house.leg.state.mn.us/hrd/issinfo/sstaxes.htm [2/11]
4 – www.irs.gov/taxtopics/tc423.html [9/23/11]
5 – montoyaregistry.com/Financial-Market.aspx?financial-market=what-is-tax-efficiency-and-why-does-it-matter&category=31
6 – kiplinger.com/features/archives/krr-strategies-to-reduce-taxes-on-social-security.html [9/1/10]
7 – investopedia.com/articles/pf/08/social-security-tax.asp#axzz1ZTpgvAFu [2/14/08]