While social security was never intended to be taxable income when the benefit was enacted by Congress, it appears that there are over 15 million taxpayers who reported social security as taxable income on their 2009 federal income tax return. Only a portion of social security income is taxable, and it is based on the amount of other income (taxable and non-taxable) that a person receives.
Social security benefits are not taxable if a person’s income is less than $25,000, or less than $32,000 for a married taxpayer who files jointly with their spouse.
Up to 50% of benefits are taxable if income is between $25,000 and $34,000 for a single person, and $32,000 and $44,000 for married taxpayers.
Up to 85% of benefits are taxable if income exceeds $34,000 for a single person and $44,000 for a married taxpayer.
Please note that the government does not “take” 85% of a person’s social security benefit, but rather, this is the maximum amount that could be taxed at the incremental tax bracket of the taxpayer.
There are several things that you may consider when attempting to lower the tax rate or eliminate the taxation of social security benefits.
You may pay off debt, which may or may not be an itemized deductible expense. But in any event, reducing the taxable income of investments will reduce your total taxable income, thereby possibly lowering the portion of your taxable social security income.
The purchase of tax deferred investments, such as stock for capital gain, a tax deferred annuity, U.S. savings bonds, etc., will eliminate the initial impact of taxable income, which may lower a social security sum from being taxable. (Note that purchasing tax exempt securities, such as municipal bonds, does not benefit, as this income is considered part of taxable income for social security purposes, although these investments may produce a lower rate of taxable income.)
By shifting income from one year to another, and by taking more deductions that are otherwise not deductible into one year, such as pre-paying real estate taxes and charitable contributions, one may be able to itemize deductions in one year, where the ongoing payment of these expenses on a yearly basis may not produce any tax benefit.
It is important review these issues before year-end so that action may be take. If you find that you may have significant taxable income in a particular year, you may wish to make an estimated tax payment so that you will not have a penalty or incur a large tax payment on April 15th.
About Hyman Darling, Featured Attorney, Springfield, Massachusetts
Hyman Darling is a shareholder in the Springfield, Massachusets law firm of Bacon Wilson, P.C., where he is Chairman of the Estate Planning, Elder Law Department. Attorney Darling is recognized as the area's preeminent estate planner. His areas of expertise include all areas of estate planning, probate and elder law. Additional specialties include: Adoption and Real Estate. You may contact him at (413) 781-0560.