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Every March I try to focus a lot of attention on tax issues because they can have a profound impact on your finances. Moreover, our nation’s tax code is so convoluted that people often find themselves in tough spots after it’s too late to do anything differently.
Take Social Security. I’ve repeatedly explained how the system is in trouble, and why we should expect big changes coming in the near future. And I’ve also suggested that Washington will find more aggressive ways to claw back money that has already been promised to retirees.
But make no mistake — that is ALREADY taking place as more than 15 million Americans pay taxes on their Social Security payments.
A lot of seniors are surprised when this happens to them, but under current law, you could owe federal taxes on as much as 85% of the Social Security benefits you receive!
It all depends on how much “provisional income” you earn during retirement.
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| Uncle Sam taxes millions of Social Security payments. |
To figure this number out, you add up your adjusted gross income (not including S.S. payments), additional tax-exempt interest you’ll collect, plus half of your S.S. benefits.
If you file a joint return:
- Your benefits are tax free if your provisional income is less than $32,000 …
- No more than half your benefits can be taxed if your provisional income is between $32,000 and $44,000 …
- And if your provisional income exceeds $44,000, it’s almost certain that 85% of your benefits will be taxed.
A couple of things to note:
First, if you file single or head of household, these thresholds go DOWN significantly — i.e. taxation begins at provisional income of $25,000.
Second, in that middle range the actual methodology and exact amounts get tricky but the end result is that you will likely owe a good amount of money back to Uncle Sam.
I’m going to tell you flat out that I don’t think this is right.
I believe it punishes people who have planned adequately for retirement, and only raises more questions about the overall fairness of our current Social Security system.
But based on the rapidly deteriorating condition of our nation’s retirement system, I think this is just the beginning of a larger trend.
Translation: Things are going to get a lot worse for wealthier retirees!
So Is There Anything You Can Do To
Avoid Having Social Security Payments Taxed?
You may be able to shift around certain retirement distributions and use certain types of investment accounts to control how much provisional income you receive in any given year.
I would recommend working with a tax advisor or financial planner to figure out what’s right for your particular situation, but here are a couple starting points:
#1. Consider a Roth IRA over a traditional IRA since the former’s distributions are not taxable income.
#2. Take distributions from your retirement accounts in such a way that they only push you into taxable range every other year.
#3. Be careful how and when you sell stocks, real estate, or other major assets.
Also, be sure to watch my most recent video alert — The Death of Social Security.
It gives you more background on why Social Security has become so problematic, and other ideas you can use to protect yourself from other impending changes to the system.
Best wishes,
Nilus
P.S. If you haven’t yet signed up for my new Easy Street Investing e-letter, be sure and do that by clicking here. It’s absolutely FREE and I’m going to continue covering important retirement issues like this one in future articles. So don’t miss out. Sign up today.
