Taxes and Social Security Benefits

Do I have to pay income tax on my Social Security benefits?

The answer is no if below a base income amount. Some people who receive Social Security benefits will have to pay taxes on their benefits. Less than one-third of our current beneficiaries pay taxes on their benefits.

You will have to pay federal taxes on your benefits if you file a federal tax return as an "individual" and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income that is more than $32,000. For more information review IRS Publication Number 915.

Many states and local authorities do not tax Social Security benefits. You should contact your state or local taxing authority for more information

Can I have state or local tax withheld from my Social Security benefit?

No. The Social Security Administration has no authority to withhold state or local taxes from your benefit.

What should you do if you are required to pay tax federal income taxes on some or all of your social security benefits? Be thankful that you make enough money that this is a concern.

Age To Take Social Security Benefits

Starting at Age 62 a person is eligible to take Social Security benefits. You can start receiving these benefits anytime until age 70. The question is when should you take them?

A penalty exists for taking benefits early:

• When collecting Social Security before the normal retirement age the benefit is reduced.
• If benefits are received early, the reduction is 1/180 per month for the duration
• For a person retiring 3 years early this is a 20% reduction, 2 years is a 13% reduction, and 1 year is a 7 % reduction.

A bonus exists for taking benefits later:

• If benefits are received at a later date, the benefit is increased.
• This increase is 1/240th per month for the duration
• For a person retiring 3 years later this is a 15% increase, 2 years is a 10% increase, and 1 year is a 5 % increase.

If you do the math all of the option converge when a person is in their mid 80's. Taking benefits early gives the most money for a person living only up to the mid 80's. Taking benefits later gives the most money for a person living after the mid 80's.

What is the best time to take benefits? The above info suggests that it only depends on how long you are going to live and nobody knows the answer to the question. This is a tough question.

Actually, the best thing to do is to have a retirement plan and consider a number of factors before making this decision. Get guidance from a professional on this issue.

Income Sources & Social Security Benefits

Yesterday's blog showed the impact of income levels on receiving Social Security Benefits starting at age 62. This begs the question of what is and is not considered income. Obviously, wages and tips are considered income. What is excluded from income?

Income items that are not counted as earnings include:

· Payments from tax exempt accounts including: annuities, 401(k), IRA’s, trust funds, and Keogh Plans
· Pension and retirement pay
· Interest, dividends, and capital gains on stocks, bonds, and capital assets

This means that distributions and withdrawals from tax exempt and taxable account will not count toward reducing Social Security benefits. If you have been disciplined in saving for retirement, you have lots of options that does not impact Social Security benefits.

Bottom Line: Another reason to start saving now.

Social Security Earning Limits

Social Security Earning Limits and Losing Benefits

People receiving Social Security benefits can have earning limitations where benefits are taken away. It is important to know these limits and stay below them. The limits for 2007 were:

· Starting at Age 62, income during years prior to retirement = $12,960/year without a penalty. If above this income level a $1 loss of benefit is incurred for every $2 above the limit.
· Income in the months of the year prior to attaining normal retirement age = $34,440 without a penalty. If above this income level a $1 loss of benefit is incurred for every $3 above the limit.
· Income after normal retirement age = No limit on the amount of income.

This limit is increased annually at the rate of inflation. The 2008 limits were increased above the level of 2007. The limit for 2009 will be higher than that for 2008.

What happens to your Social Security Benefit at retirement if you continue to work and receive benefits? No significant impact since you continue to pay FICA and Medicare taxes while you are working.

Bottom Line: If you are at least 62 years of age, working and can receive Social Security benefits, even at a reduced level, you should do it. Contact your local Social Security office for details. What do you do with the extra money? Use it to prepare for retirement and do things like pay off debt or invest for the future.

Biblical Perspective on Paying Yourself First

The last topic in this series on the Bible and financial teaching is the importance of paying yourself first. A verse on this principle is Ecclesiastes 11:6.

"Sow your seed in the morning, and at evening let not your hands be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well."

The key part of this verse is sow your seed in the morning. If you want a crop you must plant seeds and these seeds have a defined growing season. If you never plant the seeds you never get a crop. Since it takes a fixed amount of time for a seed to grow to a mature plant the earlier you plant the seed the sooner you get to a mature plant.

When you have been given money, invest a portion of it and give it time to grow. The more seeds you plant the bigger the harvest.

Investments take time to grow so start investing now.

Biblical Perspective on Paying Yourself First

The last topic in this series is the Bibli

Biblical Perspective on Diversification

What does the Bible teach on the importance of diversification for your investment portfolio. The best verse on this topic is Ecclesiastes 11:2.

"Give portions to seven, yes to eight, for you do not know what disaster may come upon the land."

This verse states that nobody can not predict the future and can not predict when an investment will run into a problem. Since we do not know the future the best way to keep you portfolio on a more even keel and in the correct direction is to diversify into 7 or 8 investments rather than have a single investment.

In today's terms this has been called Modern Portfolio Theory. Here are some specifics on this theory.

• Harry Markowitz won Nobel Peace Prize in Economics in 1990 for his theory published in 1950.
• Principal of Co-Variance: Risky higher returning investments, each having their own variance, when combined in certain amounts will have an overall lower amount of risk and maintain higher returns.
• Example: Blend of International and US Equities give a better return and lower risk than just US Equities alone.
• Why is this important? Because money moves between stocks and bonds and between different parts of the world.

A Nobel Peace Prize winner has proven that what the Bible documents makes really good sense.

Biblical Perspective of a Long Term Investor

The Bible talks about the long term investor. Proverbs 13:22 states:

"A good man leaves an inheritance to his children's children, but a sinner's wealth is stored up for the righteous."

This means that:

• A solid investment plan will pass the test of time even to the grandchildren.
• A biblical perspective financial steward will prosper while those with the opposite perspective will act in a manner to lose money.
• Who gains the money? The person who has a biblical perspective financial steward.

A great idea for a grandparent who has a grandchild is to start a Uniform Gift to Minors Act, UGMA, account for this child. This act sets up the grandchild for college or a first house or retirement. If you give $5,000 to a grandchild at birth it can grow to a large amount with time.

Example: A UGMA account with $5,000 that doubles every 10 years will double 7 times by retirement.

$5,000 doubles to $10,000

$10,000 doubles to $20,000

$20,000 doubles to $40,000

$40,000 doubles to $80,000

$80,000 doubles to $160,000

$160,000 doubles to $320,000

$320,000 doubles to $640,000

Having money that grows with a long term focus can yield great wealth.

Biblical Perspective of Financial Stewardship

The company name is Christian Stewardship Retirement derived from Bible based financial stewardship. What does the Bible say about Stewardship?

Proverbs 21:5 says "The plans of the diligent lead to profit as surely as haste leads to poverty."

What does this mean: Let's put the word steward for the word diligent and then this reads the plans of a steward lead to profit. A financial steward makes money the right way that leads to profit.

Matthew 25: 14-30 is known as "The Parable of the Talents." In this parable, 3 servants were given money or talents to invest for their master while he was gone.

• 1 servant was given 5 talents and returned 5 more for a total of 10 - a good and faithful servant
• 1 servant was given 2 talents and returned 2 more for a total of 4 - a good and faithful servant
• 1 servant was given 1 talent and hid it and returned the 1 talent - a wicked and lazy servant.
• The servant with 10 talents was given this 1 talent
• "For everyone who has will be given more and he will have an abundance. Whoever does not have, even what he has will be taken from him."

What does this mean: As a person learns stewardship it will lead to abundance. If you never learn stewardship, ultimately it results in a loss in wealth to those who know it.

If you are a good financial steward, Congratulations.

If you are not a good financial steward, you can either hire someone who is and gain from it or lose money. My advice is to hire someone who is and gain from it. It is your call. Send me a comment if you want to gain stewardship.