Photo of social security card with one hundred dollar bills. High quality photo

A Retiree’s Guide to Reducing Taxes on Social Security Benefits

by with No Comment Tax, Advisory

Social Security benefits serve as a crucial financial backbone for millions of retirees, disabled individuals, and families of deceased workers in the United States. However, the taxation of these benefits often presents a complex landscape for beneficiaries. This article delves into the intricacies of how Social Security benefits are taxed, the conditions under which these benefits become taxable, and strategies to minimize tax liabilities.

These benefits are part of a social insurance program that provides retirement income, disability income, and survivor benefits. Funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA), the Social Security Administration administers these benefits. The retirement benefits an individual receives is based on their lifetime earnings in work in which they paid Social Security taxes, modified by other factors, especially the age at which benefits are claimed. Benefits are adjusted annually for inflation.

Taxation Thresholds and Conditions – The taxation of Social Security benefits is contingent upon the beneficiary’s “combined income,” which includes adjusted gross income, nontaxable interest, and half of the Social Security benefits. The Internal Revenue Service (IRS) uses this combined income to determine the portion of benefits subject to taxation.

For individuals, if the combined income falls between $25,000 and $34,000, up to 50% of the benefits may be taxable. Should the combined income exceed $34,000, up to 85% of the benefits could be taxable. For married couples filing jointly, these thresholds are set between $32,000 and $44,000 for up to 50% taxation, and above $44,000 for up to 85% taxation. When the combined income is less than $25,000 ($44,000 for married joint filers), none of the Social Security benefits are taxable, with an exception for some married taxpayers filing separate returns as noted below.

Railroad Retirement – The taxation rules that apply to Social Security benefits also apply to Railroad Retirement benefits. Railroad Retirement benefits are reported on Form RRB-1099 whereas Social Security benefits are reported on Form SSA-1099. 

Married Taxpayers Filing Separate – Some married taxpayers for one reason or another may choose not to file jointly and instead each spouse files a return using the status Married Taxpayer Filing Separately.  Married individuals filing separately generally face taxation on up to 85% of benefits, regardless of combined income, if they lived with their spouse at any point during the tax year.

Survivor Benefits – Social Security survivor benefits are payments made by the Social Security Administration (SSA) to the family members of a deceased person who earned enough Social Security credits during their lifetime. Eligible family members include widows, widowers, divorced spouses, children, and dependent parents.

These benefits are a crucial financial support for families who have lost a wage earner. However, many beneficiaries are unaware that these benefits may be subject to federal income tax, depending on various factors.

Survivor benefits can be taxable and the amount that is taxable is determined in the same manner as for a retiree as discussed previously based on the beneficiary’s total income and filing status. 

Children and Social Security Survivor Benefits – A child’s taxable Social Security benefits are treated as unearned income and subject to the Kiddie Tax rules and thus will generally be taxed at their parent’s top marginal tax rate.The Kiddie Tax is designed to prevent parents from shifting large amounts of investment income to their children to take advantage of the child’s lower tax rate.

  • If the child only receives Social Security benefits and has no other income, the benefits are typically not taxable, and the child may not need to file a tax return.
  • If the child has other income, the taxability of Social Security benefits depends on their “combined income.” Combined income includes the child’s adjusted gross income (AGI), nontaxable interest, and one-half of the Social Security benefits. Basically, the same way a retiree’s benefits are taxed. 

Strategies to Minimize Taxation – Beneficiaries can adopt several strategies to minimize the taxation of their Social Security benefits.

  • Income Planning – Adjusting the timing and sources of income can help keep combined income below the taxable thresholds. For example, delaying withdrawals from retirement accounts or strategically timing the sale of investments can reduce AGI. If required to take distributions from a traditional IRA or 401(k) account, only take the minimum amount required if possible.
  • Tax-Deferred Savings – Contributing to tax-deferred savings accounts, such as traditional IRAs or 401(k)s, can lower AGI, potentially reducing the taxable portion of Social Security benefits. Of course, this suggestion only applies to those who have earned income (wages, self-employment income).
  • Tax-Efficient Investments – Investing in tax-efficient vehicles, such as Roth IRAs or growth stocks that aren’t currently paying dividends, can generate income that doesn’t count toward combined income, thus reducing the taxability of Social Security benefits.  
  • Deductions and Credits – Taking advantage of all eligible tax deductions can lower AGI, which in turn can reduce the taxable portion of Social Security benefits.

Other Issues

  • Tax Withholding on SS Benefits – Taxpayers can elect tohave federal income tax withheld from their Social Security benefits and/or the SSEB portion of Tier 1 Railroad Retirement benefits. Use Form W–4V to choose one of the following withholding rates: 7%, 10%, 12%, or 22% of the total benefit payment (flat dollar amounts aren’t permitted).  Once completed, the W-4V form can either be mailed or faxed to the Social Security Administration.  
  • Same-Sex Married Couples – The Supreme Court determined that same-sex couples have a constitutional right to marry in all states.  As a result, the Social Security Administration says that same-sex couples will be recognized as married for purposes of determining entitlement of Social Security benefits.  Therefore, their Social Security benefits are taxed the same way as for married taxpayers. 
  • Gambling & Social Security Taxation – For tax purposes gambling winnings are added to a taxpayer’s income while gambling losses are deducted as an itemized deduction. Thus, even if the gambling resulted in a net loss, the full amount of the gambling winnings is added to the combined income which can make more of the Social Security benefits be taxable or cause some of the benefits to be taxable at the higher 85% rate. 

Example: Suppose the combined income, without considering gambling income, for a married couple filing a joint return is $30,000. That is below the combined income Social Security taxable income threshold of $32,000. Thus, none of the couple’s Social Security benefits are taxable. However, suppose the couple are recreational gamblers and for the year had winnings of $20,000 and losses of $21,000 for a net gambling loss of $1,000. Because the gains and losses are not netted, the $20,000 of gambling winnings is added to the combined income, bringing it to $50,000, which makes nearly all the Social Security benefits taxable.     

To make matters even worse, if a taxpayer is covered by Medicare, the Medicare premiums are based on the taxpayer’s income two years prior, so the gambling winnings might very well also cause an increase in future Medicare premiums. If married taxpayers are both covered by Medicare, the increase would apply to each spouse.

  • Lump-Sum Payments – Some SS beneficiaries may receive a lump-sum payment that includes benefits for previous years. Special rules apply for reporting and taxing these payments, allowing beneficiaries to potentially reduce their tax liability.
  • State Taxes – While this article focuses on federal taxation, it’s important to note that some states also tax some or all Social Security benefits, which as of 2023 included Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont.
  • International Aspects and Treaties – The taxation of Social Security benefits also has international dimensions. The U.S. has entered tax treaties with several countries, which can affect how benefits are taxed for residents and nationals of those countries. For instance, benefits paid to individuals who are both residents and nationals of treaty countries may be exempt from U.S. tax.   

The taxation of Social Security benefits has evolved since its inception nearly 90 years ago, and future legislative changes could further impact how these benefits are taxed. Beneficiaries and financial planners must stay informed about these changes to effectively manage tax implications. This article includes issues in effect as of April 1, 2024.

If you have questions related to taxation of Social Security benefits, please contact our office.

Protect personal identity concept of privacy theft

Reclaim Your Life: Essential Steps to Overcome Identity Theft and Secure Your Future

by with No Comment Tax, Advisory

In an era where digital transactions and online interactions have become the norm, the specter of identity theft looms large, posing significant challenges and potential financial hazards for individuals. Among the various forms of identity theft, tax-related identity theft is particularly insidious. It occurs when someone uses your stolen personal information, including your Social Security Number (SSN), to file a tax return in your name and claim a fraudulent refund. This not only jeopardizes your financial health but also complicates your tax obligations with the Internal Revenue Service (IRS). Understanding the steps to take in the aftermath of identity theft and recognizing the measures the IRS employs to protect taxpayers can mitigate the impact and help restore your financial integrity.

Signs of Tax-Related ID Theft

According to the IRS, any of the following tax-related issues could indicate that your ID has been compromised:

  • You get a letter from the IRS inquiring about a suspicious tax return that you did not file.
  • You can’t e-file your tax return because of a duplicate Social Security number. In this case you should file a paper tax return along with a Form 14039, Identity Theft Affidavit.
  • You get a tax transcript in the mail that you did not request.
  • You get an IRS notice that an online account has been created in your name.
  • You get an IRS notice that your existing online account has been accessed or disabled when you took no action.
  • You get an IRS notice that you owe additional tax or refund offset, or that you have had collection actions taken against you for a year you did not file a tax return.
  • IRS records indicate you received wages or other income from an employer you didn’t work for.
  • You’ve been assigned an Employer Identification Number, but you did not request an EIN.

Immediate Steps for Taxpayers

Report the Incident – If you suspect or know that your identity has been stolen, report the incident to the IRS immediately. You can do this by filing a Form 14039, Identity Theft Affidavit, which informs the IRS of the potential fraud. This step is crucial, as it alerts the IRS to scrutinize any tax return filed under your SSN more carefully. Form 14039 can be completed and submitted online at  f14039.pdf (irs.gov), faxed or mailed to the IRS.

Contact Other Agencies – Beyond the IRS, you should also report the identity theft to the Federal Trade Commission (FTC) at IdentityTheft.gov, which acts as a central reporting point for identity theft and offers a recovery plan. Additionally, alerting the Social Security Administration and the major credit bureaus (Equifax, Experian, and TransUnion) can help prevent further misuse of your personal information.

Secure Your Personal Information – Change passwords for your online accounts, especially those related to financial institutions and email. Ensure your computer has up-to-date antivirus software and consider a credit freeze or fraud alert on your credit reports to prevent new accounts from being opened in your name.

Stay Vigilant – Monitor your financial accounts and credit reports regularly for any unauthorized transactions or changes. This proactive approach can help you catch any further attempts at identity theft early.

How the IRS Protects Taxpayers

The IRS has ramped up its efforts to combat tax-related identity theft with a multi-faceted approach focusing on prevention, detection, and victim assistance.  The IRS continuously enhances its security measures to prevent identity thieves from filing fraudulent tax returns. This includes employing advanced data analytics to flag suspicious returns and improving authentication procedures for online services.

The IRS has dedicated over 3,000 employees to work on identity theft cases, with more than 35,000 employees trained to recognize and assist victims of identity theft. The agency uses sophisticated return-processing filters to identify returns that may be fraudulent, stopping the issuance of fraudulent refunds.

For individuals affected by tax-related identity theft, the IRS offers specialized assistance through its Identity Protection Specialized Unit (IPSU). It can issue an Identity Protection PIN (IP PIN) – a six-digit number that must be included on tax returns to verify the taxpayer’s identity in addition to their Social Security Number.

Initially, the IP PIN was available only to victims of identity theft or those who were deemed at significant risk of it. However, recognizing the escalating threat of identity theft, the IRS expanded the program, making it available to all taxpayers who wished to participate and could verify their identity.

The process of obtaining an IP PIN begins with the taxpayer verifying their identity with the IRS. This can be done online through the IRS’s Get an Identity Protection PIN (IP PIN) tool, a secure platform designed for this purpose. However, the process is rigorous, reflecting the seriousness with which the IRS treats the security of taxpayer information. For those unable to validate their identity online, alternative methods include submitting IRS Form 15227 for those with an adjusted gross income of $72,000 or less or requesting an in-person appointment at an IRS Taxpayer Assistance Center.

Once a taxpayer is issued an IP PIN, it becomes an essential part of their tax filing process. The IP PIN must be included on their federal tax returns, serving as a unique identifier that helps the IRS verify the taxpayer’s identity. By doing so, it prevents identity thieves from filing fraudulent tax returns using the taxpayer’s Social Security number. It’s important to note that the IP PIN is valid only for one calendar year and must be renewed annually. Each year, the IRS generates a new IP PIN for individuals in the program, which they can retrieve through the same secure IRS online tool or wait for a postal notification.

The significance of the IP PIN cannot be overstated for victims of identity theft. For those who have experienced the misuse of their Social Security number for tax fraud, the IP PIN acts as a safeguard for future tax filings. It ensures that even if their personal information is compromised again, the presence of the IP PIN will prevent fraudulent returns from being processed in their name. This not only protects the taxpayer’s refund but also aids in the broader fight against tax-related identity theft.

The journey to recovery after experiencing identity theft can be daunting, but taking decisive action and leveraging available resources can significantly ease the process. By promptly reporting the theft to the IRS and other relevant agencies, securing personal information, and staying vigilant, taxpayers can mitigate the impact of identity theft.

Please contact this office for assistance in dealing with the IRS in case of identity theft.

Wooden cubes with words HSA Health Savings Account Business and HSA concept.

How Health Savings Accounts Can Supercharge Your Tax Savings

by with No Comment Tax, Advisory

In the labyrinth of financial planning and tax-saving strategies, Health Savings Accounts (HSAs) emerge as a multifaceted tool that remains underutilized and often misunderstood. An HSA is not just a way to save for medical expenses; it’s also a powerful vehicle for retirement savings, offering unique tax advantages. This article delves into who qualifies for an HSA, the tax benefits it offers, and how it can serve as a supplemental retirement plan.

Qualifying for a Health Savings Account – At the heart of HSA eligibility is enrollment in a high-deductible health plan (HDHP). As of the latest guidelines, for tax year 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for an individual or $3,200 for family coverage. The plan must also have a maximum limit on the out-of-pocket medical expenses that you must pay for covered expenses, which for 2024 is $8,050 for self only coverage and $16,100 for family coverage. But having an HDHP is just the starting point. To qualify for an HSA, individuals must meet the following criteria: 

  • Coverage Under an HDHP: You must be covered under an HDHP on the first day of the month.
  • No Other Health Coverage: You cannot be covered by any other health plan that is not an HDHP, with certain exceptions for specific types of insurance like dental, vision, and long-term care.
  • No Medicare Benefits: You cannot be enrolled in Medicare. This rule applies to periods of retroactive Medicare coverage. So, if you delay applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess, are not tax deductible and subject to penalty, if not withdrawn from the account.
  • Not a Dependent: You cannot be claimed as a dependent on someone else’s tax return.
  • Spouse’s Own Plan: Joint HSAs aren’t allowed; each spouse who is eligible and wants an HSA must open a separate HSA.

These criteria ensure that HSAs are accessible to those who are most likely to face high out-of-pocket medical expenses due to the nature of their health insurance plan, providing a tax-advantaged way to save for these costs.

It should also be noted that unlike IRAs, 401(k)s and other retirement plans, it is not necessary to have earned income to be eligible for an HSA. 

Tax Benefits of Health Savings Accounts – HSAs offer an unparalleled triple tax advantage that sets them apart from other savings and investment accounts:

  • Tax-Deductible Contributions: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. This deduction applies whether you itemize deductions or take the standard deduction. Rather than being a tax deduction, HSA contributions made by your employer are just not included in your income.
  • Tax-Free Growth: The funds in an HSA grow tax-free, meaning you don’t pay taxes on interest, dividends, or capital gains within the account.
  • Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA for qualified medical expenses are tax-free. This includes a wide range of costs, from doctor’s visits and prescriptions to dental and vision care, and even some over-the-counter medicine, whether or not prescribed.

The combination of these benefits makes HSAs a powerful tool for managing healthcare costs both now and in the future.

HSAs as a Supplemental Retirement Plan – While HSAs are designed with healthcare savings in mind, their structure makes them an excellent supplement to traditional retirement accounts like IRAs and 401(k)s. Here’s how:

  • No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, HSAs do not require you to start taking distributions at a certain age. This allows your account to continue growing tax-free indefinitely.
  • Flexibility for Non-Medical Expenses After Age 65: Once you reach age 65, you can make withdrawals for non-medical expenses without facing the 20% penalty that would apply to nonqualified distributions at a younger age, though these withdrawals will be taxed as income. This feature provides flexibility in how you use your HSA funds in retirement.
  • Continued Tax-Free Withdrawals for Medical Expenses: Regardless of age, withdrawals for qualified medical expenses remain tax-free. Considering healthcare costs often increase with age, having an HSA in retirement can provide significant financial relief.

To maximize the benefits of an HSA as a retirement tool, consider paying current medical expenses out-of-pocket if possible, allowing your HSA funds to grow over time. This strategy leverages the tax-free growth of the account, potentially resulting in a substantial nest egg for healthcare costs in retirement or additional income for other expenses.

Establishing and Contributing to an HSA – Opening an HSA is straightforward. Many financial institutions offer HSA accounts, and the process is like opening a checking or savings account. An individual can acquire a Health Savings Account (HSA) through various sources, including:

  • Employers: Many employers offer HSAs as part of their benefits package, especially if they provide high-deductible health plans (HDHPs) to their employees. Enrolling through an employer might also come with the benefit of direct contributions from the employer to the HSA.
  • Banks and Financial Institutions: Many banks, credit unions, and other financial institutions offer HSA accounts. Individuals can open an HSA directly with these institutions, like opening a checking or savings account.
  • Insurance Companies: Some insurance companies that offer HDHPs also offer HSAs or have partnered with financial institutions to offer HSAs to their policyholders.
  • HSA Administrators: There are companies that specialize in administering HSAs. These administrators often provide additional services, such as investment options for HSA funds, online account management, and educational resources about using HSAs effectively.

When choosing where to open an HSA, it’s important to consider factors such as fees, investment options, ease of access to funds (e.g., through debit cards or checks), and customer service.

Once established, you can make contributions up to the annual limit, which for 2024 is $4,150 for individual coverage and $8,300 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.

What Happens If I Later Become Ineligible – If you have an HSA and then later become ineligible to contribute to it—perhaps because you’ve enrolled in Medicare, are no longer covered by a high-deductible health plan (HDHP), or for another reason—several key points come into play regarding the status and use of your HSA:

  • Contributions Stop: Once you are no longer eligible, you cannot make new contributions to the HSA. For example, enrollment in Medicare makes you ineligible to contribute further to an HSA. However, the specific timing of when you must stop contributing can vary based on the reason for ineligibility. If you enroll in Medicare, contributions should stop the month you are enrolled.
  • Funds Remain Available: The funds that are already in your HSA remain available for use. You can continue to use these funds tax-free for qualified medical expenses at any time. This includes expenses like copays, deductibles, and other medical expenses not covered by insurance, but not insurance premiums.
  • Investment Growth: The funds in your HSA can continue to grow tax-free. Many HSAs offer investment options, allowing your account balance to potentially increase through investment earnings.
  • Use for Non-Medical Expenses: As noted previously, if you are 65 or older, you can withdraw funds from your HSA for non-medical expenses without facing the 20% penalty, though such withdrawals will be subject to income tax. This makes the HSA function similarly to a traditional IRA for individuals 65 and older, with the added benefit of tax-free withdrawals for medical expenses.
  • No Required Minimum Distributions (RMDs): Unlike traditional IRAs and 401(k)s, HSAs do not have required minimum distributions (RMDs), so you can leave the funds in your account to grow tax-free for as long as you want.

  • After Death: Upon the death of the HSA owner, the account can be transferred to a surviving spouse tax-free and used as their own HSA. If the beneficiary is not the spouse, but is the beneficiary’s estate, the account value is included in the deceased’s final income tax return, subject to taxes. If any other person is the beneficiary, the fair market value of the HSA becomes taxable to the beneficiary in the year of the HSA owner’s death.

In summary, while you can no longer contribute to an HSA after losing eligibility, the account remains a valuable tool for managing healthcare expenses and can even serve as a supplemental retirement account, especially given its tax advantages.

Health Savings Accounts stand out as a versatile financial tool that can significantly impact your tax planning and retirement preparedness. By understanding who qualifies for an HSA, leveraging its tax benefits, and recognizing its potential as a supplemental retirement plan, individuals can make informed decisions that enhance their financial well-being. 

Whether you’re navigating high-deductible health plans or seeking additional avenues for tax-efficient savings, an HSA may be the key to unlocking substantial long-term benefits. 

Contact this office for additional information and how an HSA might benefit your circumstances.  

Gavel On a Legal Text

Tennessee Tax Legislative Update

by with No Comment Tax, Advisory

As previously shared through an earlier update, in January Governor Bill Lee announced plans to amend the Tennessee franchise tax to simplify the calculation. Under existing law, the franchise tax base is the greater of 1) the taxpayer’s net worth or 2) the net book value of the property owned, and the rental value (using a defined multiple) of property used in Tennessee. Once calculated, the franchise tax base is subjected to a tax rate which is $0.25 per $100 of the tax base. Under Governor Lee’s simplification, the franchise tax would be determined based solely on net worth, with the alternative method using net book value of assets being repealed.

Since its announcement, this planned overhaul to the state’s franchise tax law has been subject to significant debate and negotiation among lawmakers; however, in the final hours of Tennessee’s legislative session last week, both chambers approved a compromise plan. The plan is projected to send approximately $1.5 billion back to taxpayers and reduce the state’s franchise tax revenue by approximately $400 million annually. Additionally, the compromise plan provides for three years of tax refunds desired by the Senate while also providing transparency provisions desired by the House. Tax refunds will be available for returns filed after January 1, 2021, covering a tax period that ended on or after March 31, 2020. Generally speaking, for calendar year taxpayers the applicable periods are tax years 2020 through 2023.  The refund claims will be required to be filed between May 15th and November 30th of this year and taxpayers claiming refunds will be required to waive all rights to sue the state over franchise tax obligations during the affected period. Specific to transparency, the compromise plan will require refunds paid to taxpayers to be disclosed in ranges – $750 or less; $751 to $10,000; greater than $10,000; or “pending” if a final payment has not been determined. 

Governor Lee is expected to sign the legislation.

Within the next few weeks, RBG tax advisors will be contacting our impacted Tennessee taxpayers to discuss the details of anticipated refund claims and expected timing of filings. Should you have any immediate questions, feel free to contact your RBG advisor.