| Up to 85% of your Social Security retirement | | | | Once you know this number, you can apply the |
| benefits may be taxable. Here's how to find out | | | | rules to determine how much of your S.S. is |
| how much is taxable and what you can do to | | | | taxed. Again, this depends on whether you are |
| reduce or eliminate any tax. | | | | married or single and the amount of your income. |
| Of all the financial issues surrounding being a | | | | Let's look first at a married couple filing jointly. |
| senior, the one that tops the list in terms of | | | | Here is the math... |
| anger is the fact that, depending on the situation, | | | | 1. If your provisional income is below $32,000, you |
| Social Security retirement benefits are taxable. My | | | | don't have a problem. |
| experience indicates that some seniors are | | | | 2. For provisional income over $32,000:a. Take the |
| completely unaware of this fact. I have also had | | | | provisional income between $32,000 and $44,000 |
| to sit and listen to the ranting of those who are | | | | and divide it by two.b. If your provisional income is |
| aware. It goes something like this: "I already paid | | | | above $44,000, take the total provisional income, |
| tax on the earnings during my working years. The | | | | subtract $44,000 and multiply by 0.85.c. Add 2a |
| Social Security withdrawn from my income each | | | | and 2b.d. Multiply your total S.S. benefits (line 20a) |
| pay check was a tax. This sounds like a tax on a | | | | by 0.85.e. The lesser of your result on 2c and 2e |
| tax." And on and on... | | | | above is the amount of your S.S. benefit taxed. |
| After letting the person blow off some steam, | | | | Now let's look at the calculation for a single |
| my response typically was, "Hey, don't shoot the | | | | person... |
| messenger! I'm here to see if any of your Social | | | | 1. If your provisional income is below $25,000, |
| Security benefits are taxed, if so, how much and | | | | none of your S.S. benefits are taxable. |
| what we can do to reduce or eliminate that tax." | | | | 2. For provisional incomes over $25,000:a. Take |
| So let me take you through the first part of our | | | | the provisional income between $34,000 and |
| conversation. | | | | $25,000 and divide it by two.b. If your provisional |
| Whether or not you are taxed depends on: | | | | income is above $34,000, subtract $34,000 from |
| 1. The amount of your income. | | | | your total provisional income and multiply by |
| 2. Whether or not you have income from sources | | | | 0.85.c. Add 2a and 2b.d. Multiply your total S.S. |
| other than Social Security. | | | | benefit (line 20) by 0.85.e. The lesser of your |
| The amount of your tax depends on: | | | | result on 2c and 2d above is the amount of your |
| 1. Your marital filing status: single or married. | | | | S.S. benefit taxed. |
| 2. The amount of your income. | | | | Now that you know whether or not any of your |
| The tax on Social Security retirement benefits | | | | Social Security benefits are taxable, and if so, |
| was put into effect in 1983. Tax was applied on | | | | how much, the next step is to take a look at the |
| up to 50% of benefits. In 1993 this was increased | | | | ways you can reduce or eliminate this tax. In |
| to 85%. Here's how the calculation goes... | | | | general, there are three solution categories: |
| The first step is to calculate your "provisional | | | | 1. Reduce your interest income. The most |
| income". So grab last year's tax return. | | | | common is interest on CDs. |
| 1. Subtract your taxable S.S. benefits (line 20b) | | | | 2. Reduce your dividend income. |
| from your Adjust Gross Income (line 37). | | | | 3. Reduce your tax exempt interest income. |
| 2. Add one half of your total S.S. benefits (line | | | | Note: The calculations above use a very simplified |
| 20a). | | | | approach. Your situation may have other factors |
| 3. Add any tax exempt interest (line 8b). | | | | that would affect the math. It is strongly advised |
| 4. The result is your "provisional income". | | | | that you consult with a qualified tax professional. |