InsuranceNewsNet Magazine September 2011 : Page 37

THE SOCIAL SECURITY TAX SURPRISE | ANNUITIES But you can ask them, “If you could participate in growing your principal and provide the protection from the risk of stocks, you would be interested, right? You may be able to do this by reposition-ing the assets that have created a tax on your Social Security.” TABLE 1 TAXATION OF SOCIAL SECURITY BENEFITS, TAX YEAR 2011 Social Security exempt Social Security included in taxable income at 50% rate Social Security included in taxable income at 85% rate Social Security subject to full 85% inclusion in taxable income RETIRED MARRIED COUPLE Annual Social Security income: $22,800 Total income less than $43,400 Total income between $43,400 and $55,400 Total income between $55,400 and $71,141 Total income over $71,141 RETIRED SINGLE WORKER Annual Social Security income: $13,896 Total income less than $31,948 Total income between $31,948 and $40,948 Total income between $40,948 and $49,550 Total income over $49,550 Section 72 Section 72 of the Internal Revenue Code allows “income credited on a deferred annuity contract is not currently includ-able as income.” Based on Section 72, income credited inside an annuity may not create a tax on Social Security. Let’s look at two examples (Table 2) of how Section 72 could have an effect on someone’s Social Security income. By repositioning Gary and Lisa’s 1099 assets (that created taxable income) into a deferred annuity, the tax of $1,913 on their Social Security was eliminated. Gary and Lisa did not withdraw the $20,000 taxable interest they earned from their 1099 assets; rather, they had the earnings roll back into the assets. They were forced into taking money from their monthly retirement checks to pay the tax on this 1099 income that they did not access. Interest earned within a deferred annu-ity (and not withdrawn) may eliminate or reduce the income tax on Social Secu-rity and could increase net retirement income. And in many cases retirees can access up to 10 percent of their funds each year without a penalty, depending on policy provisions. Today someone in America is retiring. The lasting impact of retirement planning on this next phase of their lives could be ensuring that things that have become staples in their lives remain staples and not luxuries—visiting grandkids, travel-ing, getting the brands of medication they feel comfortable with, and shopping at their favorite grocery stores for their comfort foods. “The Social Security Surprise” may be that retirement is just as they imagined it would be—safe and secure. Lloyd Lofton, CSA, LUTCF, is the vice president of sales for American Eagle Consultants, a national marketing organization. Lloyd can be reached at 865-776-7632, Lloyd.Lofton@ innfeedback.com. TABLE 2 IRS SECTION 72 EFFECT ON SOCIAL SECURITY INCOME Single – Example: Sam is retired and living comfortably. He receives a pension and Social Security. His savings are in CDs, mortgage certificates, and money market accounts. He doesn’t need the interest, so he reinvests the interest back into his certificates. SAM’S INCOME Pension Social Security CDs, Mortgage Certificates Money Market Total Income Received * Estimated Income Tax $19,200 $11,400 $12,400 $4,400 $47,400 SAM’S TAX ON SOCIAL SECURITY Social Security Social Security (subject to tax) Tax on Social Security * Estimated based on tax table $11,400 $9,690 *$2,665 Total Federal Income Taxes *$6,828 SAM’S SOCIAL SECURITY THRESHOLD Pension $19,200 1/2 Social Security $5,700 CDs, Mortgage Certificates $12,400 Money Market $4,400 Threshold Income $41,700 Threshold Limit $25,000 Over Threshold $16,800 Sam’s Income Total Threshold Income Annuity (Deferred Interest)* Threshold Income Threshold Limit (single) Over or Below Threshold Social Security Taxed Tax on Social Security Federal Tax Due w/Annuity $41,700 ($16,800) $24,900 $25,000 Below $0 $0 $1,598 Without $41,700 $0 $41,700 $25,000 Over $9,690 $2,665 $6,828 *Assumes the interest paid by the annuity is the same as paid by the certificates of deposit and money market accounts. Married – Example: Gary and Lisa are retired and spend time in a winter home. Gary and Lisa receive a pension and a distribution from an IRA. They also receive 1099 income and Social Security. They don’t need the 1099 income, so they reinvest the interest. GARY & LISA’S INCOME Pension/IRA Distribution 1099 Income Social Security TAX ON SOCIAL SECURITY Social Security 85% subject to tax Tax on Social Security TAX ON GARY & LISA’S REMAINING INCOME Pension/IRA Income 1099 Income Tax on Remaining Income $24,450 $20,000 $15,000 Gary & Lisa’s Income Total Threshold Income Annuity (Deferred Interest) Threshold Income Threshold Limit (married) Over or Below Threshold Social Security Taxed Tax on Social Security Federal Tax Due w/Annuity $59,450 ($20,000) $39,450 $44,000 Below $0 $0 $555.00* Without $59,450 $0 $59,450 $44,000 Over $12,750* $1,913 $3,073* $15,000 $12,730 $1,913* * Estimated based on tax table @ 15 percent $24,450 $20,000 $3,073* *Assumes earnings from an annuity are not withdrawn but are left to accumulate. Assumes standard deductions. * Estimated based on tax table @ 15 percent September 2011 InsuranceNewsNet Magazine 37

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