Some Social Security recipients have income so low that their benefits won’t be taxed. Others have so much income that 85% of their Social Security benefits will be taxed–that’s the maximum. However, many others are in the middle, where some tax planning can pay off.
Roughly speaking, seniors with total income in the $30,000-$50,000 range can benefit from some planning. For couples, the range is probably around $35,000 to $60,000.
Suppose John and Mary Johnson are both collecting Social Security. Their total income is about $50,000 this year, including $6,000 from taxable bond funds. John and Mary don’t need this interest income so it’s reinvested, yet they still pay tax each year on $6,000 in income.
This couple could cash in their bond funds and buy a deferred fixed annuity, which would have about the same yield. However, income inside an annuity isn’t taxed, so the Johnsons would reduce their taxable income by $6,000 each year.
What’s more, removing $6,000 from their gross income also would reduce the amount of their Social Security benefits subject to tax by around $3,000. Altogether, this move would trim their taxable income by $9,000, saving the Johnsons more than $1,300 in tax each year. Thus, investing in a fixed annuity might be a good move; be sure to read the fine print carefully.
