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Social Security Can Have Taxable Benefits
Tips for Senior Citizens on Filing Income Tax
March 16, 2005 - Debate rages and battle lines are
being drawn about changing Social Security. Federal Reserve Chair Alan
Greenspan is even urging senior citizens to work longer. Meanwhile,
off to the sidelines, Americans already receiving benefits will struggle
to deal with them by April 15 - or by their extended filing date, if
they need more time to struggle. A news release promoting J.K. Lasser’s
Your Income Tax 2005 points out that seniors citizens need to understand
that Social Security can be taxable.
“Every Social Security beneficiary should have
received Form SSA-1099 by now, reporting the amount to the beneficiary
and to the IRS. The big question: How much is taxable?
“The bottom line answer: Up to 85 per cent of your
benefits could be taxable. Or none.
“Because the rules and computations are complex,
you would do well to consult J.K. Lasser’s Your Income Tax 2005 for
guidance. The box below gives a quick overview.
“The result you have to deal with depends on your
filing status and the amount of your “provisional” income. And it is in
the meaning of “provisional” that land mines lay.
“Provisional income includes:
> your otherwise taxable income,
> plus a few usually non-taxable items like
tax-exempt interest,
> plus ˝ of your Social Security benefits,
> minus most (but not all) adjustments like
alimony and moving expense,
> but before deductions and exemptions.
Going forward (2005 and onward), two decisions are immediately affected,
one in lifestyle (or workstyle) and one in investing:
Do you want to work while getting Social Security
benefits?
If you work and also decide to take benefits early,
then until your full retirement age each $2 of your income will reduce
your benefits by $1 if your overall income is above a certain amount.
In 2004, that amount was $11,640.
After your full retirement age, you can work
without reducing your benefits, although more income may make more of
your benefits taxable, as the box shows. So your after-tax cash flow
from working could be lower.
Do you want to invest in tax-exempt “municipal”
bonds or funds.
Provisional income includes tax exempt interest and
that may put you over the line for bad news. That interest is not
taxable itself, but it can make more of your Social Security taxable.
Some taxpayers will lose the advantages of
municipals; others will not -- it all depends on the math. If the
interest isn’t much, not to worry. If your provisional income already
reaches the level where 85 per cent of your benefits are taxable (and
that’s the top percentage) , it’s a moot point. If, however, the
municipal interest would put your provisional income over the formula’s
cliff, do worry and think about another investment.
“To avoid Catch 22’s and other unhappy tax results,
don’t wing it, says the news release, “Take a very good look at J.K.
Lasser’s Your Income Tax 2005.”
|
Taxation of Social Security
Benefits by Amount of Provisional Income |
|
Single* |
Married Filing
Jointly |
Percentage of
Benefit Taxed |
|
$25,000 or less |
$32,000 or less |
None |
|
Over $25,000 to $34,000 |
Over $32,000 to $44,000 |
Up to 50% |
|
Over $34,000 |
Over $44,000 |
50% to 85%** |
|
* For this purpose, the “single”
column also applies to persons filing as heads of household, as
married but separate and having lived apart for the entire year,
or as qualified widows/widowers. Those filing as married but
separate and living together should consult J.K. Lasser’s
Your Income Tax 2005 for a special rule.
** To find the taxable
percentage in this bracket use the worksheet at page 560 of
J.K. Lasser’s Your Income Tax 2005. (A
picture may be worth a thousand words, and a tax worksheet is
worth at least that many.)
Note: Non-resident aliens are
subject to special rules. |
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