Could it be your Social Security income will be taxed?
Many new retirees today assume that Social Security income (SSI) is tax-free. Unfortunately, that is not always the case these days. This is because the door to taxation was opened in 1983 when Congress passed a law in which some might have to pay . . . depending on the amount of income earned.
How much of your SSI is potentially taxable? As much as 85% under certain conditions. There are four primary factors that determine how much of your SSI will be taxed:
1: The total amount of income that you earn
2: Where this income comes from
3: Your taxpayer filing status
4: Your “provisional” income which is an income calculation you can figure out by using Worksheet 34-1 in IRS Publication 915 or the Social Security Benefits
Worksheet in the instruction booklets for IRS Form 1040 and Form 1040A
This provisional income is determined, in simple terms, by calculating your adjusted gross income minus one-half of your Social Security benefits. Interestingly enough, tax-free interest from investments such as muni bonds can also be considered provisional income. Take note, however, that 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.
Here are the current limits on how much income you can earn before having your SSI taxed:
>> Single person: up to 50 percent of your SSI can be taxed if you provisional income is greater than $25,000, and up to 85% of your SSI can be taxed if your provisional income exceeds $34,000.
>> Married / Head of Household: up to 50% of your SSI can be taxed if your if your provisional income is greater than $32,000, and up to 85 percent of your SSI can be taxed if your provisional income exceeds $44,000.
What can be done to reduce or avoid the tax? If you are close to hitting either the 50 percent or 85 percent tax levels, you may want to think twice about financial opportunities that could take your provisional income over the threshold. For example; what happens if you realize a sizable chunk of profit from selling a stock or converting a traditional IRA to a Roth IRA? Here are a few options some have found useful in that regard:
>> Delay some investment income, rental income or pension income until the following tax year
>> Shift assets from accounts or investments producing reportable income (such as CDs) into tax deferred alternatives
>> Work Less (easier said than done!?!)
>> Increase your pre-tax contributions to an IRA, 401(k) or 403(b) plan
There are five months left before the end of taxable year 2012. And, as I mentioned at the top of this article, many new SSI recipients are quite surprised when they find out they owe taxes on income most assume to be “untaxed”. That makes it even more important that you get started now to manage the “potential” tax load generated from your Social Security check. Believe me, taking the time to reduce its impact is time well spent.
To sign up for Mississippi Business Daily Updates, click here.
One Response to “Could it be your Social Security income will be taxed?”
Top Posts & Pages
- DAVID DALLAS — Roger Wicker: Profile in discouragement
- Tommy Robertson indicted on five counts of embezzlement
- BILL CRAWFORD — More jobs, but fewer with jobs, huh?
- Despite obstacles, craft beer industry growing
- ANITA MODAK-TRURAN — Mississippi’s motion picture renaissance
- Finding your flexible space — Regus banks on high demand for customizable work spaces
- Watch out for wildlife while driving on roads, highways
- Miss. children's hospital plans $150 million expansion
- State's ventures into alt-fuel markets net few jobs