ElderLaw News — The Estate Planning & Elder Law Firm, P.C. — MD, VA, DC
ElderLaw News

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C., William S. Fralin, Esq., President.

Taxation of Social Security Benefits

As a firm which assists retirees and their families, The Estate Planning & Elder Law Firm is frequently asked by its clients how their Social Security benefits are taxed.

That depends on their other income. In the worst case scenario, 85% of the benefits would be taxed. (This doesn't mean you pay 85% of your benefits back to the government in taxes − merely that you would include 85% of these benefits in the income subject to your regular tax rates.)

To determine how much of your benefits are taxed, you must first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file jointly. To this add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits is not above $32,000 ($25,000 for single taxpayers), then none of your benefits are taxed.

2. For married couples, if your income plus half your benefits exceeds $32,000 but is below $44,000, then you will be taxed on: (1) one half of the excess over $32,000, or (2) one half of the benefits, whichever is lower. For single taxpayers, if your income plus half your benefits exceeds $25,000 but is below $34,000, then you will be taxed on: (1) one half of the excess over $25,000, or (2) one half of the benefits, whichever is lower.

Example (1): Sam and Denise have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. Thus, their income plus half their benefits is $32,900 ($20,000 plus $2,400 plus one half of $21,000). They must include $450 of the benefits in gross income (one half of $32,900 less $32,000). If their combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, then they would include $2,500 of the benefits in income. (In this example, one half of $40,000 less $32,000 equals $4,000, but one half of the $5,000 of benefits or $2,500 is lower, so the lower figure is used.)

Example (2): Sam has $20,000 in taxable dividends, $2,400 of tax-exempt interest, and Social Security benefits of $9,000. Thus, his income plus half his benefits is $26,900 ($20,000 plus $2,400 plus one half of $9,000). Sam must include $950 of the benefits in his gross income (one half of $26,900 less $25,000). (If his Social Security benefits were $3,000, and his income plus half his benefits were $30,000, then he would include $1,500 of the benefits in income: one half of $30,000 less $25,000 equals $2,500, but one half of the $3,000 of benefits or $1,500 is lower, and the lower figure is used.)

3. If your income plus half your benefits exceeds $44,000 ($34,000 for single taxpayers), then the computation in many cases grows far more complex. Generally, however, unless your income plus half your benefits is fairly close to $44,000 ($34,000 for single taxpayers), if you fall into this category, 85% of your Social Security benefits will be taxed.

If you aren't paying tax on your Social Security benefits now because your income is below the above floor, or if you are paying tax on only one half of those benefits, an unplanned increase in your income can have a triple tax cost. You'll have to pay tax (of course) on the additional income, you'll also have to pay tax on (or on more of ) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket. This situation might arise, for example, if you receive a large distribution from a retirement plan, such as an individual retirement account ("IRA") during the year or if you have large capital gains. Careful planning might minimize this stiff tax result. For example, it may be possible to:

1. Spread the additional income over more than one year,

2. Reduce taxable income by changing investment strategies to make use of deferred annuities,

3. Convert traditional IRAs to Roth IRAs to eliminate required minimum distributions,

4. Delay taking Social Security, perhaps as late as age 70, which will also increase benefits, or

5. Liquidate assets other than an IRA, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, then you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated quarterly tax payments.

The attorneys at The Estate Planning & Elder Law Firm assist families with their estate, financial, insurance, long-term care, veterans' benefits, and special needs planning issues.

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The Estate Planning & Elder Law Firm, P.C.

The Estate Planning & Elder Law Firm, P.C. is an elder law firm. We represent older persons, disabled persons, their families, and their advocates. The practice of elder law includes estate planning, estate and trust administration, powers of attorney, advance medical directives, titling of assets and designations of beneficiaries, guardianships, conservatorships, and public entitlements such as Medicaid, Medicare, Social Security, and SSI, disability planning, income tax planning and preparation, care management, and fiduciary services. For more information about The Estate Planning & Elder Law Firm, P.C., please visit our website at http://www.chroniccareadvocacy.com.

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