For years, the amount of social security benefits you could collect was limited by how much money you earned, as social security benefits were reduced for each dollar you earned above an annually increasing threshold (for workers under age 70). Now, you can earn unlimited amounts of earned income and still collect your full social security benefit. This only makes common sense, as now there is no disincentive for someone collecting social security benefits to work as much as they like.
However, many social security recipients pay taxes on their social security income unnecessarily. The rule works as follows:
A single person with "modified adjusted gross income" over $25,000 will pay tax on up to half of their social security income. The same rule applies to married couples with " modified adjusted gross income" over $32,000. If their income exceeds $34,000 and $44,000 (respectively for singles and couples), the tax bite jumps up to 85% of social security income. You cannot beat the tax on social security benefits by investing in tax-free bonds or EE bonds as the IRS forces you to include these when calculating "modified adjusted gross income."
The only shelter from this tax is to convert income to tax deferred income (other than EE bonds). That leaves annuities and any account where the 1099 is sent only upon maturity.
Therefore, annuities continue to provide a special tax advantage for retirees. Not only is the income tax deferred, the deferred income is not included for social security tax calculations and there can be a permanent savings for the retiree. Look at this example:
|
Scenario #1 Interest from CDs |
Scenario #2 Interest from Deferred Fixed Annuities |
Scenario #3 Interest from Tax Free Bonds |
Interest |
$10,000 |
$10,000 |
$10,000 |
Pensions |
$25,000 |
$25,000 |
$25,000 |
Social Security Income |
$20,000 |
$20,000 |
$20,000 |
|
|
|
|
Total Income |
$55,000 |
$55,000 |
$55,000 |
Social Security Subject to tax |
$6850 |
$1500 |
$6850 |
Adjusted Gross Income |
$41,850 |
$26,500 |
$31,850 |
Total Federal Tax |
$4151 |
$1849 |
$2651 |
Above figures are a hypothetical example of a married couple receiving social security income and how their tax liability changes under various investment scenarios substituting a deferred annuity or municipal bond for a CD. Note that CDs are protected by FDIC insurance and other investments are not. Figures are calculated by Turbotax 1040 1999.
Would you like to find out if you could reduce or eliminate tax on your social security income? Call to set a time to bring in your tax return and we'll calculate the available tax savings for you.