“We can never insure one-hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
—Franklin D. Roosevelt
If you want to start an energetic discussion around any dinner table in America, all you have to do is bring up the topic of taxes. And you will find the opinions are wide-ranging and diverse. Regardless of your view or the sentiments of family and friends, taxes are here to stay. And is it just me, or does it seem as though the government taxes just about everything?
First, a civics lesson. “Nooo!!!!” you say. Don’t worry, I’ll try not to make this too painful. The first income tax was implemented in 1861 to assist with covering the costs of the Civil War. This initial tax was eventually repealed and replaced by the 16th Amendment to the U.S. Constitution which allowed the government to collect income taxes as a source of revenue.
Since then, taxes have become an indispensable part of the economic system of our government. Oliver Wendell Holmes described taxes as the price we pay “for a civilized society.” Even the early leaders of our country underscored the government’s obligation to provide for the defense and general welfare of its citizenry. Taxing our income is but one method the federal government uses to generate the revenue necessary to execute indispensable functions.
A quick note. As of this writing, Congress is busy working through a major overhaul of our tax system. I have not heard or seen that any of what I am about to share with you is changing, but it’s always worth a chat with your tax preparation professional to be sure.
Now that the civics lesson is over, let’s focus on the subject at hand. Once you begin your benefits, managing your taxable income will become an important consideration. Too much taxable income could cause a portion of your Social Security retirement benefits to become taxable. Depending on your “provisional income” and filing status, 0%, 50% or 85% of your Social Security benefits paid to you could be income taxable.
Provisional income can be a fairly complicated calculation. It starts with your adjusted gross income (AGI), which is part of the regular income tax calculation process. Certain amounts are then added back to your AGI. Examples include tax-exempt interest and any excludible foreign income. There are several other items that are included in the calculation, and your tax preparer will be able to assist you with those items. There’s some good news here, though. Qualified distributions from a Roth IRA, which are received income tax-free, are not added back to AGI, which is something to keep in mind for the future.
The sum of this calculation is called your modified adjusted gross income (MAGI). Creative, right? Not so much. This is the IRS, after all. To get to your provisional income, you add your MAGI and one-half of the Social Security benefits you received for the year.
Below is a chart that outlines how taxation of benefits is determined.
| Filing Status | Provisional Income | ||
| Single | < $25,001 | $25,001 to $34,000 | >$34,000 |
| Head of Household | < $25,001 | $25,001 to $34,000 | >$34,000 |
| Married Filing Jointly | < $32,001 | $32,001 to $44,000 | >$44,000 |
| % of S.S. That’s Taxable | 0% | 50% | 85% |
Note: For Married Filing Separately use rules for Single Taxpayer
The additional income tax paid will depend on the total amount of your overall taxable income and your marginal income tax bracket. So, you can see that it is important to carefully manage your taxable income in retirement.
Has the migraine headache started? Were the civics and economics lessons a little too much? If so, don’t despair. You have access to trained specialists to assist you. Those resources include financial planners, CPAs and tax preparation professionals. They will guide you as you navigate these financial waters. Still not sure where to start? Ask family and friends for a recommendation to a solid pro they have used.
Remember, the more money you can keep in your pocket provides an additional resource for fueling the incredible life you are building in retirement.
“This is too difficult for a mathematician. It takes a philosopher.”
—Albert Einstein on filing his tax returns
Enjoy your journey!
Gary A. Weuve, CFP®
Founder and CEO
2NDACTLIVES, LLC
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