Social Security
In 1983 Congress legislated that up to 50% of Social Security could be taxed when combined income exceeded certain threshold limits. This ruling came into effect because politicians felt that since half of Social Security Benefits came from contributions paid by employers it should be taxed. In 1993 the law was amended again to allow up to 85% of Social Security Benefits (SSB) to be taxed.
What makes up threshold income?
All income is included as threshold income except for annuities. Tax deferred annuities are the only interest producing assets that allow interest to grow without being included as income. Below is a list of income included in the threshold:
- Pensions
- Rental Income
- US Treasuries
- Certificates of Deposit
- Money Market Accounts
- Savings Accounts
- Dividends – Stocks
- Dividends – Mutual Funds
- Capital Gains
- Municipal Bonds
- Annuity Withdrawals
Social Security is taxed when income exceeds thresholds
If income (which includes half of Social Security), exceeds the following thresholds, up to 85% of the amount received from Social Security could be taxed:
- Single: Total Income (including half SSB) = $25,000-$34,000. Up to 50% of SSB is taxable
- Single: Total Income (including half SSB) = Over $34,000. Up to 85% of SSB is taxable
- Married: Total Income (including half SSB) = $32,000-$44,000. Up to 50% of SSB is taxable
- Married: Total Income (including half SSB) = Over $44,000. Up to 85% of SSB is taxable
What income is NOT included in this threshold?
Interest accumulated in annuities.
Annuities offer tax advantages
The interest produced inside an annuity does not count when determining the threshold limit. By replacing taxable interest with tax deferred interest, you can reduce or eliminate the tax on SSB.