Tag Archives: Social Security

Are Social Security Benefits Taxable?

Untitled designWhether your Social Security benefits are taxable (and, if so, how much of them are) depends on a number of issues. The following facts will help you understand the tax of your Social Security benefits.

Social Security benefits, in this case, refers to the gross amount of benefits you receive, meaning the amount before reduction due to payments withheld for Medicare premiums. The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not taxable under any circumstances. Therefore they are not included in the calculation.

How Much of Social Security Benefits Are Taxable

How much of your Social Security benefits are taxable depends on your total income and marital status. Of course, that is if any of the social security benefit is taxable.

  • If Social Security is your only source of income, it is generally not taxable.
  • If you have other significant income, as much as 85% of your Social Security benefits can be taxable.
  • If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return. Thus reducing the amount of Social Security income subject to tax.

How do I know if my Social Security Benefit is taxable?

The following quick calculation can be done to determine if some of your benefits are taxable:

Step 1. Add one-half of the total Social Security benefits you received to the total of your other income. Include any tax-exempt interest and other exclusions from income.

Step 2. Compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

What Are the Base Amounts?

  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.

Taxpayers can defer their “other” income from one year to another. They may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to the next. An example of this is taking Individual Retirement Account (IRA) distributions. However, the required minimum distribution rules for IRAs and other retirement plans must be taken into account.

Those may be missing an opportunity for some tax-free withdrawals are:

  • Individuals who have substantial IRAs
  • AND who are not required to make withdrawals OR are making their post age 70.5 required minimum distributions
  • Without withdrawing enough to reach the Social Security taxable threshold.

Everyone’s circumstances are different. However, what works for one may not work for another.

Need More Information on how Social Security Benefits Affect Your Tax Return?

If you have questions about how social security benefits affect your tax returns, or if you wish to do some tax planning, call Alex Franch, BS EA at 781.849.7200 for additional information. He understands the details involved with the Earned Income Credit and the IRS requirements. Worthtax has locations in Quincy, Weymouth and Dedham.

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What Types of Taxes Are You Paying?

by Alex Franch, Tax Specialist

What types of taxes are you paying? Or another way to ask this is, what are the different types of taxes are you paying?

1. Federal income tax (The more you make the more they take)

The-more-you-make-the-more-they-take

FIT is a progressive tax. The rate of taxation increases along with your income.  If you (married, 2 kids, house, mortgage) are making $100k & your tax is $5,316, FIT doesn’t seem so bad.  Your kids, real estate taxes, and mortgage are all subsidized.  Let’s fast forward a couple of years and things are going really well.  You landed a killer job and scores a few raises and you are now making $200k.  Your tax did not double, nor did it triple, in fact, you tax went up by nearly a magnitude of six to $30,422.  Your marginal tax rate may show 25% but it is really 30% because all that stuff being subsidized is being phased out.

2. Old-Age, Survivors, and Disability Insurance (OASDI aka Social Security)

SS tax is a regressive tax and it applies on an individual basis rather than household as the FIT.  You as an individual only pay on the first $117k of your income and then you are done for the year.  If you made $117k and your spouse made another $117k, you paid just as much in SS tax as Warren Buffet and Bill Gates combined.

3. Medicare Tax (was flat, now not so much)

Medicare tax was traditionally a flat 1.45% on your earned income.  This last year it was expanded to include an additional 0.9% above certain incomes and 3.8% on certain types of passive income.

4. Capital Gains (including LT, ST, recapture, etc.)

This tax is like a game of ‘whack-a-mole’  Capital gains often depend on two things, the length of time an asset is held AND the type of asset.  I can think of the following rates: 0%, 5%, 15% 18.8%, 20%, 23.8%, 25%, 28%, and all the FIT rates which may apply.  This is what compromise looks like.

5. Alternative Minimum Tax

Everyone who wanted a ‘flat’ tax and got it now hates it.  There are only two rates, 26%, and 28% so on the face, it seems like a fairly flat tax.  However, your marginal rate can be as high as 35% because all your write-off’s are being phased out.

6. State income taxes (not so united)

By my last count, we have 7 states with no income tax, 36* states (including DC) with a progressive income tax, 6 states with a flat tax (including Massachusetts), and 2 states (Tennessee and New Hampshire) that tax just dividends and some other miscellaneous items.

*4 of these states have the top tax rate that begins under $10k which would make them almost ‘flat.’

7. Sales Tax

Let’s classify every type of transaction and assess a different rate on each depending on where you are and where you live.  Also, let’s make sure businesses have to report on a monthly basis.  Also, you may have to report this on your personal tax return depending on where you bought stuff and where you keep that stuff.

8. Other Use Taxes (Real Estate, excise, etc)

I guess you kind of get what you pay for on this.

I’m sure I am missing another few dozen taxes that we pay on a regular basis.  I also haven’t touched upon corporate, trust, or estate taxes.  Please feel free to write in if you hear of any interesting taxes out there.

 

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