Most of our clients look forward to receiving Social Security benefits during retirement, but many are unaware that their Social Security retirement benefits may be subject to income taxation. This usually happens when the individual has other substantial income. Fortunately, strategies are available to avoid or decrease that taxation.
When the Social Security program went into effect in the 1930s, the benefits were not subject to income taxes; however, in 1983, Congress made up to 50 percent of each individual’s benefits subject to income taxes. In 1994, Congress made up to 85 percent of benefits subject to taxation.
The portion of an individual’s Social Security benefits that are taxable depends on how much the taxpayer’s provisional income exceeds a certain level.
Provisional income is essentially the sum of adjusted gross income (AGI), nontaxable interest, and half of the individual’s Social Security benefits.
For example, if an individual’s AGI is $22,000, and he earns $3,000 interest from tax-exempt bonds, and $14,000 from Social Security, his provisional income is $32,000 ($22,000 AGI + $3,000 tax-exempt interest + 1/2 of the individual’s $14,000 Social Security benefits).
Next, the taxpayer compares his provisional income to the appropriate income level, which depends on whether married or filing as an individual.
If the provisional income exceeds the taxpayer’s base amount, up to 50 percent of their Social Security retirement benefits could be taxed. If provisional income exceeds the taxpayer’s adjusted base amount, up to 85 percent of benefits may be taxed.
One way to lower or eliminate this might be to change the type of investments that you have.
Note that interest on both a bank CD and tax-exempt municipal bond is added into the determination of provisional income.
If the money invested in these vehicles were moved into a nonqualified deferred annuity (NQDA) or cash-value life insurance, the provisional income would drop, as long as no taxable withdrawals are taken.
Withdrawals from the NQDA would dampen the strategy, but in the case of cash-value life insurance, withdrawals from the investment in the contract or tax-free loans would not hurt.
Right about now, you might be wondering why golf was in the title of this article. Aside from being a tease to get all the golfers to read about Social Security, I wanted to let you know that Wolf Wealth Advisors now has a corporate golf membership at The Wild Marsh in Buffalo.
So, this is my plea to you; rescue me from a long summer stuck in my office. Every year I tell myself that I want to get out on the course more, and every year, I only make it out a few times. So, this year save me from my long hours at the office with a few hours on the golf course. Give us a call and say “I’d like Brian to take me golfing, because he needs to get out of the office.”