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.