Retirees were glad to learn of the recent change in the social security rules, as they can now earn unlimited amounts from working and still collect their full social security benefits. But 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 "modified adjusted gross 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.
Want to know more about how this works?
Just check off on the coupon for answers to common questions and an illustration.