A Nasty Tax Surprise for Baby Boomers…

Last week, I talked about a new way that Congress might hurt lots of Americans who have used IRAs to save lots of money and I said this was just the latest in a long list of transgressions against well-prepared retirees.

If you happen to be a Baby Boomer with even moderate retirement income, you’re probably familiar with one of the biggest examples.

Or, if you started collecting Social Security benefits last year, perhaps you just found out about it when you filed your taxes.

Washington and Social Security Income

I’m talking about the fact that Washington taxes Social Security income received by millions of Americans.

As far as I’m concerned, this tactic is simply a benefit cut by another name.

Just consider: Under current law you could owe federal taxes on as much as 85% of the Social Security benefits you receive – which effectively means the government is taking back some of the money they promised you!

It all depends on how much “provisional income” you earn during retirement.

To figure this number out, you add up your adjusted gross income (not including S.S. payments), additional tax-exempt interest you’ll collect, plus half of your S.S. benefits.

If you file a joint return:

  • Your benefits are tax free if your provisional income is less than $32,000 …
  • No more than half your benefits can be taxed if your provisional income is between $32,000 and $44,000 …
  • And if your provisional income exceeds $44,000, it’s almost certain that 85% of your benefits will be taxed.

A couple of things to note:

First, if you file single or head of household, these thresholds go DOWN significantly — i.e. taxation begins at provisional income of $25,000.

Second, in that middle range the actual methodology and exact amounts get tricky but the end result is that you will likely owe a good amount of money back to Uncle Sam.

Third, these thresholds have NOT been getting re-adjusted for inflation!

And that’s just another reason why more and more retirees are getting snagged every year.

Originally, just 10% of Social Security recipients had any portion of their benefits taxed.

Now, it’s more than half!

And let’s be real – plenty of regular folks like teachers, firefighters, and low-level company employees – are receiving enough retirement income to subject their Social Security benefits to taxation. Heck, even a very modest pension would exceed the ranges I just outlined!

I don’t think this is right at all.

Can You Avoid Having SS Taxed?

I believe it punishes people who have planned adequately for retirement, and only raises more questions about the overall fairness of our current Social Security system.

So is there anything you can do to avoid having Social Security payments taxed?

You may be able to shift around certain retirement distributions and use certain types of investment accounts to control how much provisional income you receive in any given year.

I would recommend working with a tax advisor or financial planner to figure out what’s right for your particular situation, but here are a few starting points:

  1. Consider a Roth IRA over a traditional IRA since the former’s distributions are not taxable income.
  2. Take distributions from your retirement accounts in such a way that they only push you into taxable range every other year.
  3. Be careful how and when you sell stocks, real estate, or other major assets.

Oh, and based on the rapidly deteriorating condition of our nation’s retirement system, realize that this could still be just the beginning of a much larger, much nastier trend.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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