Show #277, Airing Sunday, December 26th, 2004 at 12:30pm
Could your Social Security be taxed? It seems unfair, but yes, Social Security benefits can be taxed. Thankfully, there are steps you can take to avoid these taxes-- if you understand the complicated rules. Here to simplify the solutions, is a man who’s no simpleton, Tony Mercuri from Ta-Check Tax Service.
Question: Are Social Security benefits taxable?
Answer: The answer is they can be taxable. I know it sounds like an easy question, but it’s not. Unfortunately, Washington has made this very complicated, and it causes people to make many costly mistakes.
Question: Can you explain?
Answer: Sure. Whether or not your Social Security is taxable depends on the amount of income you have. Basically, you take ½ of your Social Security income and add that to all other income. If that amount exceeds certain limits, then benefits are taxable.
The limits depend on whether or not you are filing single or joint. For a single person, the limit is $25,000. Joint is $32,000.
Qustion: So is all of the Social Security income taxed at these levels?
Answer: No. Those are the limits where they start to be taxed. The good news is that only a maximum of 85% of your Social Security can be taxed. That does not mean you lose 85% of your Social Security. That means you pay tax on 85% of the amount you received.
Question: Why does the government do this?
Answer: It really makes no sense. It’s just a way to generate more money for them to spend.
Question: What can we do to avoid these taxes?
Answer: You need to do some good tax planning. Don’t wait until April, right before you file, and expect us to save you from these taxes. St art planning now for next year. Some general ideas would be:
- Defer your income – use tax-deferred vehicles. This lets you defer the income until you cash in the funds.
- Stagger your income – buy 2-year Treasury notes so your Social Security won’t be taxed every year. Stagger how you cash in EE bonds. This may keep you under the limits.
- Switch some investments to a more growth-oriented position. This way there will not be as much interest or dividends. Also, some of it will be taxed at capital gains rates which will be a lower tax rate.
By doing some careful planning before your April tax “return” is due, you can make sure you won’t “return” too much of your Social Security to the government. For more information, give Ta-Check a ring. They’ll “return” your call, at no charge. My thanks to Tony Mercuri, who I hope will “return” soon.
