Social Security and Income Taxes

Will I have to pay taxes on my Social Security retirement benefit?

Possibly!

Most retirees enjoying their 2nd Half collect Social Security retirement benefits. Up to 85% of your Social Security benefits could be taxed as ordinary income.

Since 1984 Federal income taxes have applied to Social Security benefits above a threshold. This threshold has NOT been adjusted for inflation.  Each year as cost-of-living-adjustments increase your Social Security benefit, more of your benefit becomes taxable.

How much of your benefit that is taxed depends on the Social Security “combined income” formula.

Combined Income = Adjustable Gross Income (AGI) + Non-taxable interest + ½ Social Security Benefits

Filing status	If Combined Income is greater than,	If Combined Income is greater than,
Single filers	$25,000, tax on 50% of benefit	$34,000, tax on 85% of benefit
Married filing jointly	$32,000, tax on 50% of benefit	$44,000, tax on 85% of benefit
Married filing separately	$0, tax on 100% of benefit

Many retirees receive income from fixed income sources, such as bonds. Interest on state and municipal bonds is generally excluded from federal income tax.  Non-taxable interest is included in the combined income formula.  Be advised, if interest rates rise in the future, so could your tax liability on Social Security benefits.

How can I minimize taxes on my Social Security benefits?

Several strategies could help you minimize the federal tax you pay on Social Security benefits. Talk these over with your financial advisor before implementing.

• A qualified distribution from a Roth IRA is excluded from the combined income formula. You may want to consider a Roth conversion which will re-characterize existing funds in Traditional IRA into a Roth IRA.
• Life Insurance: If you have a life insurance policy with a large cash value, consider taking a loan or a withdrawal from the cash basis on the policy. By doing so, not only is the income tax-free, but will not be included in your combined income calculation for Social Security benefits.
• Deferred Annuities: Deferred annuities offer the possibility of tax deferral. If you are collecting Social Security benefits but do not need the annual interest and dividends from your annuity, you might benefit. Annuity dividends and interest that are automatically reinvested are not included in the combined income formula.

Since most retirees have to pay some income taxes on their Social Security benefit, it may be best to have federal taxes withheld from your benefit; or you can make quarterly estimated tax payments to the IRS.

Your Social Security benefits are complicated with respect to taxes paid and other sources of income. Many factors impact this decision.   Discuss it with your financial advisor and your tax professional; both can help you weigh all the factors.   As always we are here to help create your best 2nd Half.

As always we are here to help create your best 2nd Half.

Contact us by email or call the office at (719) 630-0600 to set up an appointment.

See the index showing all of our Social Security Strategies and Tips.

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1-434120 10/29/2015

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.