A person thinking about a secure retirement might rely on Social Security, but one doesn’t grasp the fact that till the time they retire it can be taxable and might end up in, you owing tax on your own benefits.
Paying taxes on Social Security benefits according to many is unfair, as it is funded by payroll. Many Americans aren’t aware of Social Security benefits being subjected to taxes.
In 1983 Congress voted to begin taxing Social Security benefits. The taxation formula was drafted in a way that it was supposed to be effective for few retirees about 10% in 1984. But it didn’t happen as the provision wasn’t indexed for inflation. So now every year more retirees pay the taxes.
For those who were born before 1938, full retirement age is 65. Those born post 1938 and before 1960 enjoy a full retirement age of 66. Due to a law change in 1983 the retirement age will be 67 for those born in 1960 and post that.
According to Social Security Commissioner Michael J. Astrue, Social Security is the largest source of income for most elderly Americans today.
If you have income from other sources, your benefits are not taxable subject to the condition that the modified adjusted gross income is more than the base amount for your filing status.
Social Security benefits could be taxable if you earn more than $25,000 per year if you are single and $32,000 per year if you are married filing joint.
Taxing Social Security benefits is unjust as these funds were already taxed while making the contributions.
The taxability formula is not an easy nut to crack. One must add up all other taxable income plus tax exempt interest and then consider the half of social security benefits to find if up to 85% of your Social Security benefits are taxable or not.
Some points you should keep in mind to avoid the tax trap is that you realize that it is not the only way to boost your retirement income.
People who convert their Traditional IRAs to Roth IRAs often fall prey of the hidden trap.
Withdrawals from Roth IRAs aren’t taxable so drawing money from Roth accounts could be tax-smart from a Social Security standpoint.
But, drawing money from traditional one will increase the taxable income and will make the Social Security taxable amount more.
Use IRS publication 915 to estimate the amount of taxable Social Security income you will have.