InsuranceNewsNet Magazine September 2011 : Page 36
BY L LO YD LOF TON T oday someone in America is retir-ing. In fact, starting this year some 10,000 individuals a day are retiring. Those in the boomer generation are now making decisions that will have a lasting impact on this next phase of their lives. These individuals will have a higher income than their parents did, and for the most part, they will have a higher educa-tion level. According to the Social Security Admin-istration, they will have an average number of years in retirement of 17.89 (19.2 years for females and 16.3 for males). When they retire, two things will happen: They will apply for Social Security and upon doing so will be enrolled in Medicare. Signing up for Social Security is the last step in a relationship with our fed-eral government that these retiring indi-viduals have been involved in their entire working lives. Each pay period, these individuals had money taken out of their paychecks that they believed would play a large part in their retirement income. When they complete this step, many may experience “The Social Security Surprise” as they see part of their Social Security check being taxed. Provisional Income – Married For married or head of household: • Social Security can become taxable when income plus half of the amount received from Social Security exceeds $32,000—up to 50 percent of Social Security benefits. • If the amount exceeds $44,000, up to 85 percent of Social Security benefits can be taxed. results in a “threshold income” that deter-mines the tax that may have to be paid. What is the Average Monthly Benefit for Retired Workers? As of June 30, 2010, the average monthly benefit for couples in which both are receiving benefits is $1,900. This is $22,800 per year for a retired couple at the average benefit level. For single recipients, the average monthly benefit is $1,158—or $13,896 annually. Table 1 shows income levels at which Social Security would be fully exempt. This is subject to inclusion in taxable income at the 50 percent rate and at the 85 percent rate. An example is listed below for a couple and single retiree with an average level of benefits. Total income refers to the combination of tax-able source income and Social Security. The table shows that a married couple receiving the average Social Security ben-efit of $22,800 and total income from all sources of less than $43,400 is not subject to tax on any Social Security benefits. A cou-ple with average benefits and total income over $71,141 must include 85 percent of the Social Security, or $19,380 in taxable income. Social Security income included in taxable income is taxed at the same rate as other kinds of income—5.35 percent, 7.05 percent, or 7.85 percent, depending on the total amount of taxable income. When income is deferred instead of taxed, it reduces provisional income and may lower amounts below the allowed thresholds. Individuals planning retirement may want to evaluate their current risk tolerance to see where their finances would fit best. They may find that a CD is a conser-vative investment but not be happy with the low interest rate. They might like the potential return on stocks but not the threat to principal. Provisional Income – Single For a single person: • Social Security can become taxable if income plus half of the amount received from Social Security exceeds $25,000—up to 50 percent of Social Security benefits. • If the amount exceeds $34,000, up to 85 percent of Social Security benefits can be taxed. What is Provisional Income? Income from these accounts may be the reason your clients pay more taxes, including the tax on their Social Security: 1. IRA distributions 2. Certificates of deposit 3. Money market accounts 4. U.S. Treasury bills 5. Mortgage certificates 6. Capital gains 7. Dividends 8. Tax-free bonds 9. Corporate bonds 10. Half of Social Security Income from any combination of these accounts added to half of Social Security Social Security History In 1935, President Roosevelt signed into law one of the most significant pieces of legislation of our time—the Social Secu-rity Act. At the time, the U.S. Treasury ruled that benefit payments were gifts and would not be subject to tax. In 1983, Congress changed the law and allowed up to 50 percent of Social Secu-rity benefits to be subject to tax. In 1993, the law was changed again—now up to 85 percent may be taxed. So what causes Social Security to be taxed? The taxa-tion is based on the amount of income received in a calendar year. This is called “provisional income.” 36 InsuranceNewsNet Magazine September 2011
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