Money from Social Security, Part 4

The past several weeks I have covered some Social Security claiming strategies. I have received quite a few questions and have posted the answers online. You can go to to see the FAQ, past articles and other Social Security resources. Feel free to email me if you have questions. I will continue to update the FAQ page.

Tax Treatment of Social Security Benefits

Some people have to pay federal taxes on their Social Security benefits if they have substantial income from other sources such as wages, investment income, rental income, or any other source of income that is reported on your tax return. Visit the FAQ sheet at to see the income limits.

The tax rate you’ll pay depends entirely on your overall income bracket, since Social Security is treated as ordinary income. However, according to IRS rules, you won’t ever have to pay taxes on more than 85 percent of your Social Security benefits.

Since your tax burden will vary according to your income, residence and filing status, it’s a very good idea to consult a tax adviser who can offer you advice specific to your situation. One of the ways you can help maximize your income while reducing taxes is to take as much income as possible from sources that are excluded from your provisional or combined income.

Combined income is the income that the SSA uses to calculate the taxation of your Social Security. It includes:

* Your Adjusted Gross Income (AGI): total income minus deductions

* Tax-Exempt Income: Income not subject to taxes such as municipal bonds

* 50 percent of your Social Security Income

If these three sources of income combined is under $25,000 for singles ($32,000 for couples filing jointly), then your benefits aren’t taxable. If your combined income is $25,000 to $34,000 ($32,000 to $44,000 for couples), up to 50 percent of your benefits may be taxable. If your combined income is more than $34,000 ($44,000 for couples), up to 85 percent of your benefits may be taxable. If you are married and filing separately, you probably will pay taxes on your benefits.

Tips to Minimize Taxes on Social Security

Reduce your expenses. If married and filing jointly, try to keep your combined income under $32,000. For example, let’s say you are collecting $15,000 from Social Security (combined income counts 50 percent of this) and you withdraw $24,500 from your IRA. Your total income is $39,500, but your combined income is at $32,000 ($24,500 plus half of $15,000). For 2014 your estimated federal taxes will be zero!

But unless you paid off your mortgage completely, you may need more than $39,500 a year. Then it is important to diversify your retirement income sources.

Diversify Retirement Income Sources

There are some potential excluded sources of income (from your combined income and taxes) such as:

* qualified dividends
* Roth IRA distributions
* non-taxable pensions and annuities
* inheritances and gifts
* life insurance proceeds You can take money from these sources to boost your income without raising your taxes.