LIB'S LABYRINTH: Social Security Income

HOW TO AVOID PAYING TAXES ON YOUR SOCIAL SECURITY

Every penny counts when you're living on fixed income. But as you know and as I have found out a few years ago every penny counts to the Internal Revenue Service. I have to pay the total interest of $1.89 to them after I skipped a line in my income tax deductions and did some recalculations and corrections . I blame it on my slight dyslexia with all that big hullaballo which is a Federal case. Not every penny counts to the IRS when it comes to wasteful spending such as YouTube videos of Star Trek and line dancing instruction and things that we don't know about.

There are a few simple methods seniors and future retirees can take to reduce on Social Security:

1. First, look at the front side of your tax return from last year. The first part of the form 1040 lists all of the different sources of income that you were taxed on. Look at the line that lists Social Security Income. If there is a number (such as $15,000) that is listed on the right side of the form from that row, then you had taxable Social Security Income.

2. SS income is only taxable if your modified adjusted gross income is $25,000 or more if you are a single filer, or $32,000 or more if you file jointly. Some forms of tax-free income, such as municipal bond interest, can be used to calculate the income threshold.

3. If your tax return shows that you are paying taxes as a result of your SS income, there may be a remedy available. The formula that determines your SS taxability includes all forms of taxable investment income, such as interest, dividends and capital gains. Reallocating some or all of these income items into tax deferred or tax-free accounts can reduce or eliminate the tax on your SS income.

4. There are several ways to remove taxation on your taxable investment income. One is to move your CDs or preferred stocks and corporate bonds into a fixed or variable annuity. Another is to sell your taxable investments and buy them back inside a traditional or Roth IRA, although this method can generate current taxable capital gains. It may not be necessary to sell or reposition all of your taxable investments, just enough to lower your income to where your SS benefits will not be taxed. The real factor in this equation often comes from taxable interest that is simply reinvested and is not paid out as income. The "unused" interest will not be counted as income if it grows inside an annuity or IRA. For investors that have several hundred thousand dollars in bonds or CDs, a fixed annuity can offer higher rates, tax relief and other benefits.

With a single-payment annuity, were the rate of return is guaranteed, a retiree has the comfort of knowing what his/her money is going to earn. Retirees who have a good handle or know how might be able to employ these strategies on their own; others might need to get help from a financial adviser.

5. Many people fail when they figure out how to maximize their income and minimize their tax burden BUT IGNORE WHAT IT MEANS TO THEIR LIFE. If your SS benefits are taxed, it's often easier to find additional income to cover the taxes than it is to tighten your belt and avoid them.

______________________________________________

HOORAY! WHAT MY BRIGHT FINANCIAL PROFESSIONAL PLANNER SAYS SURELY GIVE ME A PEACE OF MIND. I believe him because I just got a photocard of him posing in his modern aircraft with his lovely wife somehow telling me, hey, your money is safe with me.

I do know everything is all pure manipulation, from Wall Street to Main Street. The gloom and doom coming from the White House and economic pundits don't bother me at all really. Why so? Because I'm a proud American Social Security card holder - very important.

Here's a brief description of Social Security:

The benefits are funded primarily by the payroll tax of 12.4% on wages up to $113,700. Employees pay half, and employers pay the other half of this tax. Social Security income from payroll taxes boomed from the early 1970s through the early part of 2000 creating a massive surplus due to us Baby Boomers in the workplace. The surplus is a trust fund, which, by law, is invested in interest-bearing US Treasury Bonds. It is currenly valued at approximately $2.7 trillion.

Social Security will not be bankrupt by the time you start taking it! Boosted by the interest earnings of the Trust Fund bonds, the Social Security system is expected to continue running surpluses until 2023, at which point the Trust Fund is expected to have grown $3.7 billion. One caveat - Baby Boomers reaching retirement during that decade is such that this surplus is expected to be exhausted by 2033. You bet, goodbye Social Security to Generation X. Fortunately for them, simple changes were made and suggested to make Social Security solvent for many more years. In 2013, the payroll tax rate increased by 2%, so more money will be collected this year and in the coming years to pay the benefits. Many have suggested raising or eliminating the wage cap on payroll taxes. There are lots of feasible solutions but it's a matter of political will to implement such solutions.

The US Treasury Bonds are still considered one of the safest investments on the planet. Interest from these bonds is currently generating over $100 billion in revenue for the Social Security system. The government has never defaulted on its bonds, and the bonds issued are special issue, at least as secure as regular US Treasury Bonds. Hello, the Federal Government/Secretary of Treasury Ben can always print money and it did last November 2012 to boost the re-election of the Obama Administration. It's now March 2013 and I'm still getting crispy, brand new $20 from my ATM. Oh, the smell of new money! It's also helpful to keep in mind that this will not be the first time Social Security has faced solvency challenges. Many changes have been made before to help keep it in the black. And I'm glad to know, fact or fiction, that all of our American money are safely deposited in the Vatican Bank vault. Just kidding!!! In God we trust.

Of course, Social Security is designed to be a guaranteed source of retirement income that cannot be outlived. The word "outlived" is a financial scare tactic by most financial advisors (works with me all the time) because for most people, it's the only source of guaranteed life-time income. Thirty years ago, in addition to receiving Social Security, over 60% of employees were covered by company pension plans. Now, less than 17% are covered. In place of pensions, employees were given the keys to their own retirement funds with 401K and other qualified plans. However the assets have been devastated by market crashes and market stagnation. SOCIAL SECURITY ASSETS ARE IMMUNE FROM THESE SHOCKS.

Social Security benefits are indexed for inflation, a precious benefit that's not available in other investment. Since most of the bonds in the Trust Fund were purchased years ago, they're still earning a decent interest rate. On average, these assets currently earn 4.1% - not bad at all if you compare to CD interest of 1.65% or less.

The administrative costs for Social Security are low, less than 1% for every dollar collected, significantly lower than most mutual funds, 401K plans, and broker-managed accounts.

I believe in America. Never doubt.