SUBSCRIBE TO OUR FREE NEWSLETTERS FOR EXPERT ADVICE

CUSTOMER CARE SUBSCRIBE TO OUR PUBLICATIONS

Cutting Taxes

7 Things You Didn’t Know Are Taxable

Ignore Them at Your Own Risk Buried treasure…generous gifts from your employer…and that iPad you…

Cutting Taxes

Last-Minute Tax Savers

Steps to Take Before Year-End Now is a great time of year to find tax…

Cutting Taxes

Surprising Medical Deductions

Ranging from Home Renovations to Clarinet Lessons Family medical costs continue to rise, with more…

Cutting Taxes

5 Most Overlooked Tax Deductions

Tax time is probably the least fun time of year, and everyone who owes the…

Cutting Taxes

The 5 Most Overlooked Tax Deductions

Taxes…we all have to pay them, but nobody wants to pay more than their fair…

Cutting Taxes

Last-Minute Frequently Overlooked Tax Deductions

Use this checklist to find savings before filing your tax returns. These deductions have been…

Cutting Taxes

Year-End Checklist for Tax Breaks

It’s not too late to take actions now that can result in income tax breaks…

Cutting Taxes

Get a Bigger Tax Deduction for Donated Clothing

That clothing packed away in your attic could be worth hundreds or even thousands of…

Cutting Taxes

Medical Deductions You Didn’t Know You Could Take

You may think that there’s little or no chance you can deduct medical expenses. After…

Cutting Taxes

Will Uncle Sam Let You Write Off a Church Raffle Ticket?

Q: I bought $1,000 in raffle tickets to help out my church, which was giving…

Cutting Taxes

Midyear Tax-Saving Opportunities for 2009

Changes in both the tax law and the economy create new tax-saving opportunities in 2009…

Cutting Taxes

Big Tax Breaks You Can Still Get for 2008…

Don’t overlook these tax-saving ideas for 2008. You can use them during the rest of…

Cutting Taxes

Refinancing Your Mortgage? Maximize the Tax Breaks

Interest rates may be falling slowly, but they are falling, as the Federal Reserve seeks…

Cutting Taxes

New Deductions and Timely Strategies for a Bigger Tax Refund

In today’s tough economy, you’ll want to give as little as possible to the IRS……

Cutting Taxes

Minimize AGI

Reducing your adjusted gross income (AGI) for 2009 can produce multiple benefits, including… Increasing deductions…

Cutting Taxes

Surefire Strategies for Nailing Down a Home-Office Deduction

Home-office deductions can mount up, providing ample tax savings. If you’re self-employed, those deductions may…

Cutting Taxes

Tax-Free Income 12 Different Ways

The best income to receive tax-wise is tax free. And while it may seem surprising,…

Cutting Taxes

Summertime Home and Travel Tax Breaks

Summertime is the prime time for many people to enjoy vacation homes and travel. And…

Cutting Taxes

Cash in Your Losses to Save on Taxes in This Volatile Stock Market

Stocks are down sharply since reaching record highs in 2007. You may now hold stocks…

Cutting Taxes

How to Pay the Least Tax on Social Security Benefits

Social Security benefits are taxable and can have the surprise effect of nearly doubling…

1 2 Next

How to Pay the Least Tax on Social Security Benefits

Social Security benefits are taxable and can have the surprise effect of nearly doubling your marginal tax rate — the amount of tax you pay on receiving an extra dollar of income. How much of your Social Security benefits will be taxed depends on your “provisional income.”

Provisional income is adjusted gross income plus one-half of your Social Security benefits plus any tax-exempt interest you receive (such as from municipal bonds). When provisional income is…

Up to $32,000 on a joint return or $25,000 on a single return, no Social Security benefits are taxed.

More than $32,000 and up to $44,000 on a joint return, or more than $25,000 and up to $34,000 on a single return, each additional dollar of provisional income causes another 50 cents of Social Security benefits to be taxed until 50% of all benefits are taxed. So, receiving an extra $1 of income can cause you to owe tax on $1.50 of income.

More than $44,000 on a joint return or $34,000 on a single return, each additional dollar of provisional income causes another 85 cents of Social Security benefits to be taxed until 85% of all benefits are taxed. So, receiving an extra $1 of income causes you to owe tax on $1.85 of income.

Example: You file a single tax return, have taxable income of $34,000 from a pension and IRA accounts, and receive Social Security benefits.

Normally, $34,000 of taxable income would place you in the 25% tax bracket. But in this income range, increasing income by $1,000 — perhaps by taking $1,000 from a traditional IRA to meet a financial need — increases the amount of your Social Security benefits that are taxable by $850. So, you owe 25% tax on $1,850, causing $462.50 of tax to be due. This $462.50 of extra tax resulting from $1,000 of additional income is a 46.25% marginal tax rate.

What to do: Check to see if such a “boosted” tax rate will apply to your situation in 2008. Use tax software to run the numbers, or have a tax adviser do it for you.

If it will, be sure to pay enough income tax through estimated or withheld taxes to avoid underpayment penalties. Also…

If you’re about to retire, consider delaying first taking Social Security benefits until age 70 (at which point your benefits won’t be increased) to avoid this “boosted” tax rate during the years you’re not taking the benefit. When you delay taking benefits, you’ll receive correspondingly increased benefits later.

Make investments that don’t increase current provisional income, such as appreciating investments that will eventually receive favorable capital gain rates… life insurance products… tax-efficient growth mutual funds.

Take tax-free distributions from Roth IRAs instead of taxable distributions from traditional IRAs while in the “boosted tax rate” zone.

Source:

Source: Sidney Kess, attorney and CPA, 10 Rockefeller Plaza, New York City 10020, coauthor/consulting editor of Financial and Estate Planning ($1,329/yr.) and coauthor of Financial and Estate Planning Guide 2009 (CCH). Over the years, he has taught tax law to more than 700,000 tax professionals.

Date: February 1, 2008 Publication: Bottom Line Personal