My name is Steve Tacinelli. I am a CPA and Vice President of Holland Tax & Accounting Services, Inc., a division of Holland Financial. David Holland asked me to share another common question we get related to retirement planning . . .

 

Is Social Security (SS) Taxable? I’ve found that some people just don’t know! But an individual or couple needs to consider income tax ramifications from the very beginning of their benefit planning. The fact is, from 0-85% of SS benefits can be taxable based on other sources of income. Here is a helpful formula. Take your modified adjusted gross income (MAGI), add 1/2 of your Social Security benefits, and then add your tax-exempt interest. This will equal your “provisional income (PI),” which will be used to determine whether you must pay taxes on your SS. PI is applied to specific thresholds based on your tax filing status. For example, if you are married, filing jointly, and your PI is $32,000 or less for 2016, none of your Social Security benefits will be taxed. PI between $32,000 and $44,000 may result in up to 50% of your benefits being taxed, and a PI over $44,000 can result in taxation of up to 85% of your benefits!

 

Control: What can you do to control your tax bill? If you have a sizeable amount in your IRA(s) and you are younger than the age at which you have to take “Required Minimum Distributions” from those accounts (age 70 1/2), you might want to consider taking distributions early to lessen your tax burden later. If you have the flexibility to do so, you might choose to draw from your IRA(s) and delay taking Social Security for a few years. This can result in lower taxes over your lifetime. Remember after age 62, and up to age 70, you will receive an 8% increase in benefits for each year you delay taking SS. A Social Security benefit of $1,500 per month at age 62 can increase to $2,640 a month (plus cost of living adjustments), if payments are delayed until age 70. This could also mean a much larger “survivorship” benefit to a spouse who didn’t work or whose own SS benefit is much lower.

 

Here to Help: What I’ve discussed here is based on current tax law. Of course, there are certainly viable cases for taking Social Security early, as well. Our firm has specialized tax and Social Security software to assist in determining a prudent course of action for our clients as they enter retirement. If you would like to meet with me, I’d be happy to help you make informed and sound tax decisions based on your individual situation.