50+ Lifestyles

Social Security Tax – Unnecessary

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Following our “Discovery Alternatives” workshops, questions continue to arise on the strategies we recommend for our clients to minimize or reduce income taxes. Alternatives are available. Annuity strategies may minimize tax on social security retirement income.

Let’s review taxation on Social Security retirement benefits. Historically Social Security Retirement benefits began a long time ago – in 1940. Initially Social Security retirement benefits were not taxable. The monthly retirement benefit was received income tax free. Then in 1982 Congress decided 50 percent of Social Security Retirement benefits would be subject to income tax. Apparently, Congress decided this was a good revenue source, because in 1992 Congress elected to expand amount subject to tax to a much greater amount.

Provisional income is the official term applied to the calculation that determines amount of Social Security retirement income subject to tax. Provision income is defined as ALL sources of income; wages, salary, including 50 percent of amount received from social security, interest income including the interest income from tax-exempt bonds, dividends, capital gains, rents, all pensions and retirement accounts. The total of all those sources of income is the provisional income number to arrive at the amount of tax. Please note though ALL sources of income are utilized to determine amount of social security income tax. Recent guidelines (unless changed) state that provisional income in excess of $32,000 married couple filing joint tax return ($25,000 single tax flier) is subject to social security tax. Not included with Provisional Income is Roth IRAs, life insurance policy loans AND tax deferred annuities. What an opportunity to review our annuity strategies! Not only is safety from stock and mutual fund market volatility available but potential for tax savings is available with annuity strategies.

Current clients and listeners of our Saturday morning “Safe Money” radio show, often hear my analogy of taxes and the former bridge tolls we paid here in the Quad-Cities. Remember those bridge tolls? I remember the Centennial Bridge toll was initially 25 cents. Then it increased to 50 cents. Remember that toll? I absolutely detested paying that toll. Often instead of crossing the Centennial Bridge and paying that toll, I would take an extra couple minutes driving time to use an alternate route, Arsenal Bridge or 1-74 bridge, both toll free. By electing an alternate route, I avoided paying that bridge toll (tax). Paying taxes on Social Security retirement income is similar to the bridge toll. Pay the toll. Pay the tax on social security retirement income or take an alternate route. The use of annuities is an alternate strategy to minimize or even eliminate the income taxation on social security retirement income.

Fixed and fixed index annuities are income tax deferred. Interest and earnings on fixed and fixed index annuities are not subject to income tax reporting. Fixed and fixed index annuities are an option to paying income tax AND an option to help reduce or even eliminate social security tax. In addition to income tax deferral, the non-qualified immediate annuity has the tax exclusion ratio. This ratio is even a greater alternative to paying taxes.

Now keep in mind, our firm does not prepare taxes nor give tax advice. But, our firm knows the strategies that can help reduce or eliminate income taxation including the income taxation of social security. Avoid paying the toll. Look into arranging annuities to make a significant reduction or even elimination of taxes.

Our monthly ‘Discover Alternatives’ workshop provides a focus on proper arrangement of annuities. Discovering Alternatives is scheduled for June and July. Encourage you to prepare for your 2013 tax return now. Take the alternative route to continued taxes. Join our workshop to learn of more details.