19 Jun How is triple tax-free income considered by Social Security?

Q. For income tax purposes, would you kindly advise if triple tax-free income is considered as income when collecting Social Security at age 70? I’m trying to avoid paying tax on my Social Security when I begin to collect it in a few years.
— Retired

A. Let’s take a look at what taxation you could face.

First, Social Security benefits are taxable up to a maximum of 85% of your benefits based on a formula that includes otherwise tax-exempt municipal bond interest, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

He said there is a Social Security Benefits Worksheet included in the Form 1040 instructions.

“All taxable income aside from Social Security benefits is added together along with municipal bond interest. Then 50% of Social Security benefits is tacked on,” he said. “If the total exceeds $32,000 for a married joint filer or more than $25,000 for any other filing status, then a portion of the Social Security benefits will be taxable.”

The good news is that most states, including both New Jersey and New York, do not tax Social Security benefits, so your dilemma only impacts your federal income taxes.

Becourtney said even if a portion of your Social Security benefits ends up being subject to federal income tax, the impact may not be too severe.

“For 2019, a single filer pays 10% federal tax on taxable income up to $9,700, with the tax rate increasing to 12% from $9,701 to $39,475, whereas a joint filer pays 10% on taxable income up to $19,400, with the tax rate increasing to 12% from $19,401 to $78,950,” he said. “It is conceivable your itemized deductions could partially or fully offset any increased taxable income resulting from taxable Social Security benefits.”

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This story was originally published on June 19, 2020.

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