Social Security Tax Strategies

Social security benefits were completely tax free until 1984 at which time 50% of the benefits received were treated as income if the taxpayer's total income exceeded a specified amount. After 1993, up to 85% of the benefits could become taxable for higher income taxpayers.

For the year 2003, the point at which social security benefits became taxable depended on the taxpayer's filing status. For single taxpayers, the first threshold (base amount) is $25,000 and for married couples it is $32,000 of total income -- including half of the social security benefits and any tax exempt interest income. Any income above that amount will result in including 50% of the social security benefits in taxable income.

However, where the base amount exceeds $32,000 for a single taxpayer or $44,000 for married taxpayers filing a joint return, 85% of the social security benefits are subject to income tax.

Because taxes are not withheld on social security benefits, recipients whose total income causes some benefits to be taxable will need to submit quarterly estimated tax payments.  Of course, if a retired person has enough income from other investments to cause the social security benefits to be partly taxable, they will need to file quarterly estimated taxes anyway.

One way that retired taxpayers who are close to the threshold level (the base amount) can reduce their taxable income is with a tax deferred annuity or by paying off any loans such as a home mortgage. (Putting money into tax exempt bonds won't help.) A more aggressive approach would be to move some assets from interest bearing accounts into mutual funds that are likely to increase in value instead of paying taxable interest income.

A more conservative arrangement would be to buy a life income annuity that would replace the interest income. Whereas the interest income is fully taxable, the amounts received from the annuity are only partly taxable because part of the annuity benefit is a return of your investment and isn't taxable.

Some retired taxpayers are paying taxes on their social security benefits because they have earned income from self employment. If the business is the kind that can be incorporated, it might be possible to defer the receipt of income by letting it accumulate in the corporation at a relatively low tax rate. This is a more complicated solution and would require the help of a well informed tax professional to avoid a variety of traps and pitfalls that could make the arrangement backfire.

Copyright, 2003, Vernon K. Jacobs

Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/  Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/  

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