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How To Determine If Your Social Security Retirement Benefits Are Taxed

Up to 85% of your Social Security retirement benefits may be taxable. Here’s how to find out how much is taxable and what you can do to reduce or eliminate any tax.

Of all the financial issues surrounding being a senior, the one that tops the list in terms of anger is the fact that, depending on the situation, Social Security retirement benefits are taxable. My experience indicates that some seniors are completely unaware of this fact. I have also had to sit and listen to ...

finance, tax, social security, retirement, provisional income

Up to 85% of your Social Security retirement benefits may be taxable. Here’s how to find out how much is taxable and what you can do to reduce or eliminate any tax.

Of all the financial issues surrounding being a senior, the one that tops the list in terms of anger is the fact that, depending on the situation, Social Security retirement benefits are taxable. My experience indicates that some seniors are completely unaware of this fact. I have also had to sit and listen to the ranting of those who are aware. It goes something like this: “I already paid tax on the earnings during my working years. The Social Security withdrawn from my income each pay check was a tax. This sounds like a tax on a tax.” And on and on…

After letting the person blow off some steam, my response typically was, “Hey, don’t shoot the messenger! I’m here to see if any of your Social Security benefits are taxed, if so, how much and what we can do to reduce or eliminate that tax.” So let me take you through the first part of our conversation.

Whether or not you are taxed depends on:

1. The amount of your income.
2. Whether or not you have income from sources other than Social Security.

The amount of your tax depends on:

1. Your marital filing status: single or married.
2. The amount of your income.

The tax on Social Security retirement benefits was put into effect in 1983. Tax was applied on up to 50% of benefits. In 1993 this was increased to 85%. Here’s how the calculation goes…

The first step is to calculate your “provisional income”. So grab last year’s tax return.

1. Subtract your taxable S.S. benefits (line 20b) from your Adjust Gross Income (line 37).
2. Add one half of your total S.S. benefits (line 20a).
3. Add any tax exempt interest (line 8b).
4. The result is your “provisional income”.

Once you know this number, you can apply the rules to determine how much of your S.S. is taxed. Again, this depends on whether you are married or single and the amount of your income.

Let’s look first at a married couple filing jointly. Here is the math…

1. If your provisional income is below $32,000, you don’t have a problem.
2. For provisional income over $32,000:
a. Take the provisional income between $32,000 and $44,000 and divide it by two.
b. If your provisional income is above $44,000, take the total provisional income, subtract $44,000 and multiply by 0.85.
c. Add 2a and 2b.
d. Multiply your total S.S. benefits (line 20a) by 0.85.
e. The lesser of your result on 2c and 2e above is the amount of your S.S. benefit taxed.

Now let’s look at the calculation for a single person…

1. If your provisional income is below $25,000, none of your S.S. benefits are taxable.
2. For provisional incomes over $25,000:
a. Take the provisional income between $34,000 and $25,000 and divide it by two.
b. If your provisional income is above $34,000, subtract $34,000 from your total provisional income and multiply by 0.85.
c. Add 2a and 2b.
d. Multiply your total S.S. benefit (line 20) by 0.85.
e. The lesser of your result on 2c and 2d above is the amount of your S.S. benefit taxed.

Now that you know whether or not any of your Social Security benefits are taxable, and if so, how much, the next step is to take a look at the ways you can reduce or eliminate this tax. In general, there are three solution categories:

1. Reduce your interest income. The most common is interest on CDs.
2. Reduce your dividend income.
3. Reduce your tax exempt interest income.

Note: The calculations above use a very simplified approach. Your situation may have other factors that would affect the math. It is strongly advised that you consult with a qualified tax professional.

 

Taxes Q&A: Understanding What Is And Is Not Taxable

* Is Social Security retirement income taxable?

Social Security retirement benefits are taxable, although it depends on your total income and civil status. Federal law states that an individual must pay taxes if he/she has annual Social Security retirement income of more than $25,000. If he/she has a married status, they must pay such taxes if the income is more than $32,000.

However, if the Social Security retirement benefit is the recipient’s only source of income, th...

taxes,tax,turbo tax,income tax,state tax,business taxes,tax preparation,tax software,IRS

* Is Social Security retirement income taxable?

Social Security retirement benefits are taxable, although it depends on your total income and civil status. Federal law states that an individual must pay taxes if he/she has annual Social Security retirement income of more than $25,000. If he/she has a married status, they must pay such taxes if the income is more than $32,000.

However, if the Social Security retirement benefit is the recipient’s only source of income, then it is rendered to be non-taxable and there is no need to file a federal income tax return.

* Are other pension payments (not SS) taxable?

Just like Social Security benefit payments, other pension payments are taxable, although it is dependent on the recipient’s income and marital status. If such payment is only his source of income, then it may be tax-free. Other conditions are also stipulated on the Instruction Booklet of the Internal Revenue Services (IRS).

* Are tips taxable?

Tips are not taxable if they are given for a service not correlated with a taxable sale. For instance, the tip that you give when your luggage is carried or your hotel room is cleaned is not taxable.

Another perfect example is the tip that you leave your waiter after your meal at a restaurant. In these instances, tips are not taxable.

However, there are taxable tips. These are called mandatory tips, where it is given on a service that is associated in taxable sale.

An example of such a tip is the amount that you have added to a certain meal or beverage (such as a bottomless ice tea which you need to add a certain amount). Such tips are printed in the restaurant’s menu or placed in their advertisement, if any.

* Is child support taxable?

Child support is not taxable. This is neither deductible by the payor nor taxable to the payee. Topic 422 of the Non-taxable Income determined by the Internal Revenue Services (IRS) stipulates that child support payments are not included in taxable income. Thus, it is not included in filing a tax return.

* Are gifts taxable?

Gifts are taxable. It depends on the equivalent amount of the gift to be given. For instance, if you have given somebody a cash gift worth $11,000.00, it has an equivalent deductible tax charged to the giver.

However, there are also stipulations in the law that allow you to give certain amounts, whether in cash or property, which do not have gift tax consequences. Gifts to charities or raffle draw winners have a corresponding deductible tax depending on the cash gift that they have received.

 

Early Distributions From Retirement Plans

An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a “taxing” experience. Fortunately, there are exceptions to early distributions.

early distributions, retirement plans

An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a “taxing” experience. Fortunately, there are exceptions to early distributions.

Any payment that you receive from your IRA or qualified retirement plan before you reach age 59½ is normally called an “early” or “premature” distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59½ rule that you should investigate if you make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.

In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to “elective deferrals” that you contributed from your pay, your employer’s contribution and any income earned on all contributions to the account. If you made any nondeductible contributions, their portion of the distribution is not taxed, since you’ve already paid tax on this amount.

There is a way to avoid paying any tax on early distributions, however. It is called a “rollover.” Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to an eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days of when you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.

If the early distribution from an employer’s plan is paid directly to you, your plan administrator will normally withhold income tax at a 20 percent rate. If you roll over the distribution to a new plan, you must replace that 20 percent of the funds that were withheld and deposit that amount in the new plan or you will owe taxes on that amount. To avoid the inconvenience of this withholding, you can have your old plan’s administrator transfer the rollover amount directly to the new plan or a traditional IRA.

All early distributions must be reported to the IRS. You will report tax-free rollovers on lines 15a and 16a of Form 1040 along with any taxable distributions, but you will enter on line 15b or 16b only the taxable amounts you don’t roll over.

Early distributions from retirement plans can involve complex tax issues. Make sure you understand the issues or get competent tax advice.

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