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Are Social Security Benefits Subject to Income Tax?

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

A question we periodically receive this time of year is this one: “Are my social security retirement benefits subject to income tax?” The answer is a portion of your benefits may be subject to income tax if your modified adjusted gross income (MAGI), plus ½ of your social security benefits exceeds specific limits. Let talk about MAGI – what is it? On the first page of tax form 1040, an entire middle section is referred to as Adjusted Gross Income. But nowhere on the form does the word ‘Modified Adjusted Gross Income’ appear.

Our tax system says Modified Adjusted Gross Income (MAGI) equals adjusted gross income (or the adjusted gross income of you and your spouse if married and filing jointly), including wages, interest, dividends, taxable pensions and other income sources including tax-exempt income (interest from municipal bonds, and qualified US Savings bonds) and amounts earned in a foreign country, U.S. possession or Puerto

that are exempt from tax.
Up to 50 percent of your social Security benefits may be subject to income tax if your combined income (MAGI plus one-half of your Social Security benefits exceeds $25,000 for an individual filing single, unmarried head of household, or qualified widow(er) with dependent – $32,000 if married filing jointly.
If your combined income exceeds $34,000 ($44,000 if married and filing jointly), up to 85 percent of your benefit is taxable. If you are married and filing separately, up to 85 percent of your benefits will be taxed unless you and your spouse live apart for the entire year.
Remember readers I am not a tax advisor. I do not prepare individual income taxes. Encourage you to consult an accountant or other tax professional for more information. Or contact the internal Revenue Service at 800-829-1040 or www.irs.gov. Obtain publication 554, Tax guide for Seniors and/or publication 915, Social Security and Equivalent Railroad Retirement Benefits.

The bottom line on this question – are my Social Security benefits subject to income tax? The answer for many filers is a resounding YES – assuming we exceed these MAGI limits. Once again readers know that I am not a tax advisor. I am an insurance agent and financial professional recognizing one of the greatest risks we face with our retirement income is the taxation risk. Taxes reduce income.

One of the reasons we often recommend annuities in retirement income planning is the very favorable income tax benefit of the annuity – both qualified and non-qualified annuities but in particular the non-qualified annuity. Taxation of an annuity is relatively simple. Generally all distributions (both payments and withdrawals) from an annuity represent a partial return of your initial investment and a partial distribution of investment earning. The portion of the payment that represents your investment earnings is subject to income tax and the portion that represents you initial investment is not taxed in the non-qualified annuity. This is called the “exclusion ratio.” Further annuities can be arranged in such a manner to really maximize on this wonderful exclusion ratio. That is a tremendous benefit. Take advantage of the exclusion ratio as often as it can be arranged.

Taxation remains a real risk to retirement income. Both qualified and non-qualified annuities are funding vehicles for retirement money. Income tax deferral benefit is a benefit for both. Income exclusion is also a huge benefit for non-qualified immediate annuities. Use this exclusion ration whenever it can be arranged. Regular income tax including Social Security income tax can be minimized by the creative use of these benefits. Call us for an opinion on minimizing your taxation risk.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.