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Presented by MidAmerica Financial Resources. You can reach them at 618.548.4777 or greg.malan@lpl.com or on the web at www.mid-america.us

 

When Is Social Security Income Taxable?

When Is Social Security Income Taxable?

To find out, look closely at two factors.

 

Provided by MidAmerica Financial Resources

 

Your Social Security income could be taxed. That may seem unfair or unfathomable. Regardless of how you feel about it, it is a possibility.

 

Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above a certain yearly income level in that year. A second, higher yearly income threshold (at which a higher tax rate applies) was added in 1993. These income thresholds have never been adjusted upward for inflation.1

 

As a result, more Social Security recipients have been exposed to the tax over time. About 56% of senior households now have some percentage of their Social Security incomes taxed.1

 

Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.

 

Social Security defines your combined income as the sum of your adjusted gross income (AGI), any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of modified adjusted gross income, or MAGI.)2

 

Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2

 

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2

 

If you are a head of household, or a qualifying widow/widower with a dependent child, the combined income thresholds for single filers apply to you.2

 

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive. (The only exception is if you are married filing separately and do not live with your spouse at any time during the year. In that case, part of your Social Security benefits may be taxed if your combined income exceeds $25,000.)2

 

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools) or the worksheet in I.R.S. Publication 915.2

 

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 22% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2,3

 

Did you know that 13 states tax Social Security payments? In alphabetical order, they are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Sometimes, only higher-income seniors face such taxation. In Kansas, Missouri, and Rhode Island, for example, the respective AGI thresholds for the taxation of a single filer’s Social Security income are $75,000, $80,000, and $85,000.1

 

What can you do if it appears your benefits will be taxed? You could explore a few options to try and lessen or avoid the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

 

If you have a number of income-generating investments, you could opt to try and revise your portfolio so that less income and tax-exempt interest are produced annually.

 

A charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. Individually, you can endow a qualified charity with as much as $100,000 in a single year this way. The amount of the gift counts toward your Required Minimum Distribution (RMD) and will not be counted in your taxable income.4

 

You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax exempt as long as you are age 59½ or older and have held the account for at least five tax years.5

 

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the I.R.S. and the Treasury stand to receive greater tax revenue with the current limits in place.

 

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@lpl.com www.mid-america.us

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and advisory services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to LPL.

Citations.

1 – fool.com/retirement/2018/08/30/everything-you-need-to-know-about-social-security.aspx [8/30/18]

2 – forbes.com/sites/kellyphillipserb/2018/02/15/do-you-need-to-pay-tax-on-your-social-security-benefits-in-2018 [2/15/18]

3 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]

4 – fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds [9/17/18]

5 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [10/25/17]

What if Capital Gains Were Indexed to Inflation?

What if Capital Gains Were Indexed to Inflation?

Investors would be taxed less if this idea gets the green light.

 

Provided by MidAmerica Financial Resources

 

Recently, President Trump and Secretary of the Treasury Steven Mnuchin both voiced their support for an intriguing idea: the indexing of capital gains.1

 

The idea is not new; President George H.W. Bush’s administration briefly considered it in the early 1990s. It is certainly appealing, especially for wealthy investors. (More than 75% of Americans who pay capital gains taxes earn $1 million or more annually.) Secretary Mnuchin has claimed that this change could be made via an executive order or a new Treasury rule. How would it alter the capital gains tax picture?1,2

 

Capital gains tax rates would not change, just the determination of cost basis. That alone could hand investors a tax break.

 

The cost basis is the amount that an investor originally pays to acquire an asset. Capital gains = sale price of the asset – cost basis + expenses. If capital gains were indexed, the cost basis would be adjusted upward with time.2

    

Chances for arbitrage could also emerge. An investor could purchase a capital asset using debt, positioning themselves for a tax deduction. The investor could then hold onto that asset for at least a year, sell it and pay nothing or next to nothing in capital gains tax, and yet claim a tax break from the interest on the loan.1

  

This would be no small change. Adherents of the idea cite its fairness, saying inflation should be factored into the calculation of investment gains. Detractors point to its potential for swelling the federal deficit: the Penn Wharton Budget Model projects that the alteration would cost taxpayers $102 billion across the next ten years, with 63% of the tax benefits going to just the top 0.1% of earners. Brokerages, investment funds, and real estate investment trusts (REITs) might challenge the rule change with lawsuits, as it could affect a portion of their income generation and their favorable status under the Internal Revenue Code.1,2

 

The conversation on this topic will no doubt continue, and investors will want to keep track of it in the near term.

 

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@lpl.com www.mid-america.us

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and advisory services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to LPL.

Citations.

1 – bloomberg.com/news/articles/2018-08-31/trump-touts-benefit-of-capital-gains-break-experts-aren-t-sold [8/31/18]

2 – fool.com/taxes/2018/08/20/capital-gains-taxes-could-change-heres-what-you-ne.aspx [8/20/18]

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