For most retirees living on a fixed income, every penny counts. Unfortunately for them, every penny counts to the Internal Revenue Service too.
There’s no arguing that taxes on social security are incredibly high. As a matter of fact, according to current tax law, up to 85 percent of a person’s Social Security income is taxable when their total ‘threshold income’ exceeds a set limit. What is threshold income?
Threshold income is the government’s formula for determining how much of a person’s Social Security is taxable. It is calculated by adding half of a person’s Social Security income with any other income they may have. The following threshold limits determine how much of a person’s Social Security is taxable:
- A single person with $25,000 to $34,000 in threshold income: 50% of Social Security is taxable.
- A single person with more than $34,000 in threshold income: 85% of Social Security is taxable.
- A married couple with $32,000 to $44,000 in threshold income: 50% of Social Security is taxable.
- A married couple with more than $44,000 in threshold income: 85% of Social Security is taxable.
Although it may seem inevitable that you’ll be forced to pay these steep taxes, there are ways to reduce or even avoid them altogether.
A viable tax reduction solution: Fixed annuities. Why? First of all, fixed annuities offer tax-deferred interest. Additionally, fixed annuities are the only interest-producing assets that the government does not include in their threshold income calculations – which means investing your money in a fixed annuity actually helps to lower your threshold income. As a result, you’ll be able to decrease or even eliminate income tax on your Social Security income. Income from annuities can be spread out over time, which can help smooth out income over a longer period of time. Spreading out income over a longer period of time can help keep adjusted gross income under the threshold, or can help to avoid big spikes in income (and thus big spikes in tax).
Often, retirees have money in certificates of deposit earning interest. They don’t immediately need the income, and they just roll over the CDs when they mature. To reduce income, and the accompanying taxes, retirees can take the money out of CDs and put it into an annuity. Putting the money in a single-premium guaranteed and insured annuity allows you to defer the income until you need it.
Based on current tax law, the IRS includes the following sources of income when calculating your threshold income:
• Pension • Mortgage income • US Treasuries • CDs • Money Market Accounts • Passbook savings • Credit Union savings • Dividends from stocks • Dividends from mutual funds • Capital gains • Municipal bonds • Annuity withdrawals
As you can see, fixed annuities are not included in this list of assets, which is an advantage over these other investment vehicles. Remember that it may not be necessary to sell or re-position all of your taxable investments, just enough to lower your income to where your Social Security benefits will not be taxed. The real factor in this equation often comes from taxable interest that is simply reinvested and is not paid out as income. This “unused” interest will not be counted as income if it grows inside an annuity or IRA. For investors that have several hundred thousand dollars in bonds or CDs, a fixed annuity can offer higher rates, tax relief and other benefits.
Whether you want to ensure you’ll have enough income to last you through the years or you’re looking for a way to reduce taxes on your Social Security income, a fixed annuity may be an investment solution for you.
To learn more from this educator, click here (Keith Collins).
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