Can you really coordinate Social Security with annuity income to reduce – or even eliminate – tax on your benefits.
But only if you do it properly.
Generating as much income as possible in retirement can allow you to more easily pay your ongoing living expenses, as well as to travel or take part in other activities you enjoy. But if you are also bringing in income by way of Social Security, you may need to coordinate this with your other incoming cash flow sources. Otherwise, you could find that you owe income tax on a large chunk of your Social Security benefits.
Federal Income Tax on Social Security Retirement Benefits
For some people, federal income tax will be incurred on up to 85% of Social Security retirement benefits. Here’s how to narrow down whether or not you will be taxed (for 2020):
For those who are at their full retirement age for Social Security (which is somewhere between age 65 and 67, depending on the year of your birth), you may be taxed on your benefits. For instance, if you are currently at or over your Social Security FRA, you are allowed to receive your retirement benefits from this source tax-free.
Social Security Full Retirement Age
|Year of Birth||Minimum Retirement Age for Full Benefits|
|1937 or Before||65|
|1938||65 + 2 months|
|1939||65 + 4 months|
|1940||65 + 6 months|
|1941||65 + 8 months|
|1942||65 + 10 months|
|1943 to 1954||66|
|1955||66 + 2 months|
|1956||66 + 4 months|
|1957||66 + 6 months|
|1958||66 + 8 months|
|1959||66 + 10 months|
|1960 or After||67|
However, if you are under your full retirement age, and you are also receiving Social Security retirement benefits, then you could owe federal income tax on up to 50%, or even 85%, of this income.
Which category do you fall into?
- If you file your federal income tax return as an individual, and your “combined income” is between $25,000 and $34,000, you could pay tax on up to 50% of your Social Security retirement benefits. If your combined income is higher than $34,000 in 2020, up to 85% of these benefits could be taxable.
- If you and your spouse file a joint tax return, and you together have a combined income of between $32,000 and $44,000, then you may be required to pay federal income tax on up to 50% of your Social Security. If your combined income figure is higher than $44,000, up to 85% of your benefits could be subject to income tax. If you are married and you file a separate tax return, it is also probable that your retirement benefits from Social Security will be taxable.
You can find additional information regarding how much of your Social Security income will be taxed, as well as which forms to use when filing your annual tax return, by visiting the Social Security Administration’s website HERE.
What exactly counts as “combined income” in the eyes of the IRS?
You can determine this figure by doing the following calculation:
Your adjusted gross income (AGI)+Non-taxable interest+½ of your Social Security benefits=Your combined income
Every year in January, the Social Security Administration will issue you a Social Security Benefit Statement. This is referred to as Form SSA-1099. Here you can see the amount of Social Security benefits you received in the previous year – which you can use to determine how much – if any – of your income from Social Security will be taxed.
Income that counts as wages against the Social Security earnings test limits include:
- Hourly pay
- Severance Pay
- Employee’s Contributions to a Pension/Retirement Plan (provided that these funds were included in the employee’s gross wages)
Items that do not count as wages for the Social Security earnings test include the following:
- Investment Income
- Capital Gains
- Pension Income
- Government Benefits
- Annuity Income
With that in mind, generating a significant portion of your retirement income from an annuity can be extremely beneficial – especially if you plan to start taking your Social Security benefits before you reach your full retirement age.
For further clarification on what does and does not count towards the Social Security earnings test, you can go HERE.
How to Find the Right Annuity for Your Retirement Income Plan
While an annuity can provide you with a stable income source in retirement, not all annuities operate the same. So, in order to find the one that may be best for you, it is recommended that you discuss all of your potential options with an annuity specialist.
At Annuity Gator, we can help you to narrow down which annuity is right for you – if any. We can also work with you in comparing different annuity options so that you know what you can anticipate both in the short- and long-term time horizon.