Opportunities for minimizing the taxability of Social Security benefits.
From The Tax Adviser:
Squeezing More From Your Social
F or many years, the methods for minimizing the tax effects of Social Security benefits were limited; given the income thresholds and the available deferral mechanisms, there were little flexibility and few opportunities for significant savings.
This, however, is no longer the case. Recent legislation, as well as certain new investment vehicles, has generated new strategies and opportunities to minimize taxes (and increase added income).
Minimizing the taxes on Social Security benefits centers on two basic principles: avoiding exceeding the annual earned income limits and minimizing the amounts included in provisional income.
Annual earning limits . As of 1997, Social Security recipients who are 65 to 69 can earn up to $13,500 without triggering a reduction in benefits. (This amount is scheduled to increase annually through 2002.) Those individuals lose $1 dollar in benefits for every $3 earned over the annual limit. For Social Security recipients under age 65, the 1997 limit is $8,640; those recipients lose $1 in benefits for every $2 earned over that amount. There is no earnings limit for recipients 70 and older.
Provisional income . Social Security recipients must include a portion of their benefits in income only if their provisional income exceeds certain thresholds. Provisional income is an individuals modified adjusted gross income (MAGI) plus half of his or her Social Security benefits (or Railroad Retirement Tier 1 benefits). For these purposes, MAGI is adjusted gross income, including exempt interest and excluding certain allowances.
As noted, a Social Security recipient must include a portion of his or her benefits in income if he or she exceeds one of three thresholds, based on the individuals status: married taxpayers filing separately who do not live apart for the entire year; single taxpayers, heads of households and married taxpayers filing separately who do live apart from their spouses; and married taxpayers filing jointly.
Several strategies can minimize the includability of Social Security benefits, including some now available to taxpayers whose income levels were previously thought too high to benefit from such planning. As with most strategies, however, a decision to use any (or all) of these techniques requires consideration of a taxpayers overall financial picture as well as his or her attitude toward risk.
For a detailed discussion of Social Security benefits and their inclusion in income, see "Minimizing the Taxability of Social Security Benefits," by Seth Hammer, in the September 1997 issue of the Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser