How to Stop The Taxation Of Your Social Security Income

Transcription

1 How to Stop The Taation Of Your Social Security Income

2 The History of Social Security Taation Prior to 1983 your Social Security benefits were not being taed by the U.S. Government. All of that changed in 1983 when Congress passed a law that made up to 85% of Social Security benefits subject to income taes. The result being that many people who receive Social Security benefits today pay income taes on their benefits. This may be happening to you, and this report will help determine if you are paying income taes on your Social Security. If you are paying taes on your Social Security Income, we at Marriott Wealth Advisors, Inc. want to help determine if there is anything you can do to reduce the negative impact of these taes on your spendable income. Social Security Ta Base Amounts How do you know if your Social Security benefits are taed and if so how much is being taed? The first step is to determine if your Social Security Income eceeds the Base Amount. The levels are as follows: Single Return - If your combined income is between $25,000 (base amount) and $34,000, up to 50% of benefits are taable. If combined income is above $34,000, 85% of benefits are taable. Joint Return - If combined income* is between $32,000 (base amount) and $44,000, up to 50% of benefits are taable. If combined income is above $44,000, 85% of benefits are taable. Each year, in January, the Social Security Administration will send you Form SSA showing the amount of benefits you received in the previous year. 1

3 Social Security Ta Calculation The amount of income taes paid on Social Security depends on how much taable interest, ta free interest, pension income and dividends are received in a given year, combined with 1/2 of the amount received from Social Security. For eample, a single, retired person who receives $950 per month ($11,400 annually) from Social Security a pension of $1,600 per month ($19,200 annually) and $1,200 a month ($14,400 annually) from interest on a combination of CD s Money Market Accounts, Trust Mortgages, Bonds, Savings, etc. can epect to pay ta on their Social Security as follows: ½ of Social Security Pension + Taable Accounts Total Combined Income Threshold (Single) Eceeded Threshold $ 5,700 $ 33,600 $ 39,300-25,000 $ 14,300 Income in Ecess of Threshold 50% $9,000 = $4,500 85% $5,300 = $4,505 Social Security Subject to Ta $9,005 Estimated Additional Ta Due *$1,664 *This is an additional ta that was created because Social Security became taable. It s a potential ta increase of $1, (18.48% of $9, = $1, in taes) 2

4 What is Threshold Income? Threshold income is any income that puts your Combined Income over the Base Amount and causes your Social Security income to be taed. Almost every type of earnings, dividends or interest is included as threshold income ecept two. Included Income YES NO Pension Income From Annuity Mortgage Income US Treasuries Certificate Of Deposit Money Market Accounts Passbook Savings Dividends - Mutual Funds Ta Free Municipal Bonds Annuity - Deferred Annuity Withdrawals Immediate Annuity Payments Deferred Annuities are the only asset that allows interest to grow without being included as Threshold Income. Immediate Annuities pay out principal and interest, so only a small portion of the income is included. 3

5 Eliminating Taes on Social Security By using Deferred Annuities you may eliminate the ta on Social Security. Using the previous eample, simply deferring interest can potentially eliminate the ta increase of $1, caused by Social Security becoming taable. Also, there is a ta decrease because interest on the Annuity is now deferred and is not subject to current ta. A total ta savings of $4, is possible if taable interest accounts are transferred into an annuity. 1/2 of security $ 5,700 Pension $19,200 Taable Interest $14,400 Total Combined Income $39,300 Eclude Annuity Interest (deferred) $14,000 Income Subject to Threshold $24,900 Threshold $25,000 Social Security Subject to Ta $ 0.00 You just eliminated the taes on Social Security If your taable interest accounts are transferred into an Annuity, you might have deferred enough interest so that your combined income would be below the threshold amount. This could result in your Social Security not being taed. Annuities can help control the amount pay in income taes and help you to stop paying taes of Social Security Income. 4

6 Taation of Social Security Benefits A Portion of Social Security benefits may be subject to income taation. The following worksheet will assist you in determining that ta. 1. Social Security benefits for the year $ 2. 50% of line 1 $ 3. Modified adjusted gross income: a. AGI less net Social Security benefits received b. Ta eempt interest and dividends received c. Line 3a plus line 3b 4. Provisional Income (line 2 plus line 3c) 5. Applicable First Tier threshold (Column 1) 6. Line 4 less line 5 (not less than zero) 7. 50% of line 6 8. Amount of benefits subject to ta (smaller of line 2 or line 7) If the provisional income (line 4, above) does not eceed the corresponding first- tier threshold, shown in the table at the bottom of the page, no amount is taable. However, if provisional income eceeds the corresponding threshold, continue with the worksheet below. 9. Applicable second- tier threshold (Column 2 ) $ 10. Line 4 less line 9 (not less than zero) % of line Amount taable under first- tier (from line above 8, above) 13. Applicable dollar amount (Column 3) 14. Smaller of line 12 or line Line 11 plus line % of line Amount of benefits subject to ta (smaller of line 15 or line 16) 5

7 Filing Status First Tier Threshold (for line 5) Second Tier Threshold (for line 9) Applicable Dollar Amount (for line 13) Married filing jointly $32,000 $44,000 $6,000 Married filing Separately (but lived together part of the year) $0 $0 $0 All Others $25,000 $34,000 $4,500 Note: This is not an official IRS worksheet Caution: Any increase in income, such as from the sale of stock or a retirement plan distribution, may subject one to an unepected ta on the Social Security benefits. How the 3 Step Review Can Determine if You Can Save Income Taes on Your Social Security Historically, investors have purchased financial or insurance products and then found out how they affected their ta and investment planning later. Marriott Wealth Advisors, Inc. (MWA) has learned through eperience in working with retired and pre- retired clients that the correct course of action is to discover a client s need first, and then build the proper plan, much like building a house. MWA educates their clients on the right questions to ask before they buy any financial product or implement any investment strategy. Surveys of affluent Americans consistently tell us that their major frustration is their advisors should be more proactive about future issues that might affect their financial well being. As a client of MWA you will be kept informed of changes and economic trends that may impact your future. Each investment product has a place and a specific purpose where it may fit properly into someone s retirement planning. However, without a complete review of your personal situation, understanding your tolerance to losses, income 6

8 needs, ta situation, long- term care needs, and estate and charitable desires, no one can or should have an opinion on whether a specific product is right for you. It is the discovery of your true desires and needs that is the first step you should take not the choice of investment products. Our simple, easy to understand, 3 Step Review is a great way of helping you determine whether or not your current strategies match up with your plans. The first step is a complete review of your ta return to find out your current ta situation. The second step is an income analysis to determine if you are using your income sources correctly. The third step is a risk analysis to assess your risk eposure. There is no better time to look forward and take control with a 3 Step Review. Find out if you have problems like phantom income taation or other ta issues. Are you preparing to sell real estate? Do you need to increase your income stream or lower your risk level? Have you lost a spouse and now have all the financial decisions to make? Are you retiring or rolling over a large sum of money? A complete discovery of what you want your money to do for you is the most important first step. The wonderful benefit of our 3 Step Review is that it applies to any financial decision or concern you have, it helps you stop your money from falling through the cracks, and it assures that any major financial decision is right for you. In other words, learn what questions to ask before making any financial decision and identify ways to assure your decisions are in your best interest. Investment Advisory Service offered through Global Financial Private Capital an SEC Registered Investment Advisor. Global Financial Private Capital LLC is not affiliated with Marriott Wealth Advisors, Inc. Marriott Wealth Advisors, Inc. makes every reasonable effort to ensure the accuracy and validity of the information provided at the time of publication, however, it is to be used solely for informational purposes. Marriott Wealth Advisors does not provide ta or legal advice. Please consult with a qualified ta or legal professional for these matters. Arkansas License #