How much of your SSI is potentially taxable?

Many new retirees assume that Social
Security income is tax-free. That is not
always the case. The Social Security
Amendments of 1983 opened the door
to taxes on some SSI, depending on the
amount of income someone earns in a
calendar year.
How much of your SSI is potentially
taxable? As much as 85% of it, under
certain conditions. Four factors determine
how much of your SSI will be taxed:
· The total amount of income that
you earn.
· Where it comes from.
· Your taxpayer filing status.
· Your provisional income – a MAGI
calculation which you can figure out by
using Worksheet 34-1 in IRS Publication
915 or the Social Security Benefits
Worksheet in the instruction booklets for
IRS Form 1040 and Form 1040A.
How is provisional income
determined? In simple terms, this is
calculated using your AGI, minus one-half
of your Social Security benefits. (Tax-free
interest from investments such as muni
bonds also becomes provisional income.)
How much income can you earn
before your SSI is taxed? The 2011 limits
are pretty straightforward:
· Single person: up to 50% of your SSI
can be taxed if your provisional income
is greater than $25,000, and up to 85%
of your SSI can be taxed if your
provisional income exceeds $34,000.
· Married/head of household: up to 50%
of your SSI can be taxed if your
provisional income is greater than
$32,000, and up to 85% of your SSI
can be taxed if your provisional income
exceeds $44,000.
Who doesn’t have to worry about
this? If your only source of income is Social
Security or equivalent retirement railroad
benefits, it is unlikely that your SSI will be
taxed and you may not even need to file
a federal return. In 2011, Social Security
benefits are tax-exempt for single taxpayers
with provisional incomes under $25,000
and married/head of household taxpayers
with provisional incomes under $32,000.
What can be done to reduce (or avoid)
the tax? If you are close to hitting either
the 50% or 85% tax levels, you may want
to think twice about moves that could take
your provisional income over the threshold
– for example, receiving a sizable chunk of
profit from selling a stock, or converting
a traditional IRA to a Roth IRA. Here are
some common moves people make with
the input of a qualified tax or financial
professional:
· Delaying some investment income,
rental income or pension income until
the following tax year
· Shifting assets from accounts or
investments producing reportable
income (like CDs) into tax-deferred
alternatives
· Working less
· Ramping up pre-tax contributions to an
IRA, 401(k) or 403(b)
Could Your Social Security Income Be Taxed?
· Lowering interest income (such as
income from CDs)
· Lowering tax-exempt interest income
(from muni bonds, federal tax
refunds, veteran’s benefits, gifts and
other sources).
Before April rolls around, it might be wise
to consider the different ways to manage
taxes on your Social Security benefits.
Some new SSI recipients may be taken
aback by the tax they end up paying;
alternatively, you can plan to reduce it.
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Editor’s Note: by Jason Parker the President of Parker

Financial LLC
This information is not intended as legal or accounting advise and is not meant as a recommendation.