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have an annuity question?

Can annuity income cause Social Security benefit to be taxable?

For many retirees, it comes as a surprise that Social Security retirement income could be taxable – and unfortunately, this means that a portion of these benefits will go into Uncle Sam’s pocket and not yours. But there are ways to plan ahead for this, in turn, reducing or even eliminating the amount of tax you owe on the benefits.

When are Social Security Retirement Income Benefits Taxable?

There are some Social Security benefit enrollees who may have to pay tax on this income. This is typically the case if you have other substantial income in addition to benefits from Social Security. The way in which you file your federal income tax return can also play a part.

For instance, if you file your tax return as an individual, and your combined income is:

  • Between $25,000 and $34,000, you may be required to pay income tax on up to 50% of your Social Security benefits
  • Over $34,000, then up to 85% of your Social Security could be taxable

If you and your spouse file a joint income tax return, and you and your spouse have a combined income of:

  • Between $32,000 and $44,000, you may need to pay tax on up to 50% of your Social Security benefits
  • More than $44,000, up to 85% of your Social Security retirement benefits may be taxable.

The amount of your combined income is determined by using the following formula:

Your Adjusted Gross Income
Nontaxable Interest
Half of your Social Security retirement income benefits
Your Combined Income

What counts as income when determining the taxability of Social Security retirement benefits? There are actually several types, including:

  • Wages
  • Self-employment income
  • Dividends
  • Interest
  • Capital gains
  • Rental property income
  • Pension income
  • Other taxable income that is required to be reported on your annual tax return

This includes income from an annuity. In the case of qualified annuities – where none of the contribution or gain has been subject to taxes yet, the full amount of the income received will be taxed as ordinary income.

In the case of a non-qualified annuity, where the contribution was already taxed before it was deposited into the annuity, only a portion of each annuity payment – the gain – is considered to be taxable.

Keeping the Taxes on Your Social Security Low (or Nonexistent)

There are some ways that you can reduce or eliminate the taxes on your Social Security retirement benefits. One is to put off taking taxable income from traditional IRAs and/or retirement accounts until you need it, or until you are required to start taking it at age 72 (due to the required minimum distribution rules).

You could also focus more on taking withdrawals from Roth IRA and/or retirement account(s). The money that is accessed from Roth accounts is not subject to income taxation, provided that you have held the account(s) for at least five years, and you are over the age of 59 ½.

It may also be possible for you to convert part or all of your traditional accounts to Roth(s), in turn, increasing your non-taxable income in retirement (although you will be subject to taxes at the time of conversion).

All situations are different, so it is best that you discuss your specific objectives and potential options with a retirement income specialist. At Annuity Gator, our primary focus is on educating people on how annuities work, and how they could be used in different planning scenarios.

To contact us, you can call (888) 440-2468, or you can send us an email with any questions that you may have by going to our secure online contact form. We look forward to assisting you.

Can annuity income cause Social Security benefit to be taxable?

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