There are 4 tax season learnings which may impact Baby Boomer tax planning. Volunteering to Prepare Tax Returns: The Happiness Effect describes the benefits of AARP’s tax return preparation program for seniors. When I prepared tax returns for seniors most taxpayers used the standard deduction, some received the earned income credit and there were many one time events. However, many seniors were puzzled as to why their Social Security is taxable, when interest income from U.S. savings bonds is taxable, and how to adjust their tax withholdings.
Baby Boomer Tax Planning for Social Security
Many taxpayers did not understand why their Social Security was taxable by the federal government. IRS Publication 915 outlines when and how much of your Social Security benefits are taxed. To determine if any of your Social Security is taxable, you compare the “base amount” for your filing status to the total of 1/2 your Social Security benefit, plus all other income including tax exempt interest.
Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er); $25,000 if you are married filing separately and lived apart from your spouse for the entire year; $32,000 if you are married filing jointly; or $-0- if you are married filing separately and lived with your spouse at any time during the year.
How much of your Social Security that is taxable depends on how much you make. The more you make, the more Social Security is taxable, up to a maximum of 85%. Generally up to 50% of your Social Security is taxable. However, up to 85% is taxable if the total of one-half of your benefits and all your other income is more than $34,000 for a single filer, and $44,000 if you are married filing jointly. 85% is also taxable if you are married filing separately and lived with your spouse at anytime during the year.
IRS Publication 915 has many examples to help clarify your specific situation.
The majority of States do not tax Social Security. However, some do and therefore you should review your own State tax rules.
Social Security Planning Before “Full Retirement Age”
Your Social Security benefits can be reduced if you have not reached full retirement age and you work. If your age is less than your full retirement age and you work for the entire year, your benefit will be reduced $1 for every $2 you earn over $16,920. Beginning with the month you reach full retirement age, your benefit will not be reduced no matter how much you earn. In addition, at full retirement age you can expect a recalculation upward of your monthly social security benefit payment.
Earnings included in this calculation include wages, net earnings from self-employment, bonuses, commissions and vacation pay.
Full retirement age is 66 for people born in 1943-1954 and gradually rises to 67 for those born in 1960 or later.
Baby Boomer Tax Planning for U.S. Savings Bonds
You may choose when to report U.S. savings bonds’ interest to the IRS. You can report and pay tax on the increase in the redemption value of the bonds as interest annually, in the year the bonds mature or upon redemption. Most people wait until the bonds are redeemed.
If you have a significant amount invested, it may be nice to defer paying the tax until redemption. However, the accumulated interest from up to 30 years of investing could be significant. It could be significant enough to put you in a higher income tax bracket or cause your Social Security to be taxable. Therefore, you should consider the timing of reporting the interest when making your investment.
Tax Planning for Federal Withholding Taxes
Many taxpayers are surprised at tax time when they owe money. There are a variety of ways to have taxes paid to the IRS throughout the year and reduce the burden at tax time.
Additional tax can be withheld in several ways. These include from W-2 employment income by completing Form W-4, from Social Security payments by completing Form W-4V, or making estimated payments using Form 1040-ES.
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