Q: I am age 71. I started receiving Social Security benefits four months prior to age 66. My wife started at age 65. I have worked up until June 15, 2015. My CPA said I had to pay income tax on my Social Security benefit because my income exceeded a certain figure. I have done so. Should I have to pay taxes on my Social Security retirement income?
– Joe Rademacher
A: Don’t shoot the messenger Joe. But yes, your Social Security benefits may be subject to federal income taxation.
“Depending upon a person's other income, up to 85% of a person's Social Security benefits would be included in income,” says Joe Stenken, an advanced markets product consultant with Ameritas in Cincinnati and author of 2016 Social Security & Medicare Facts. “For a married couple filing jointly, if their other income plus 50% of Social Security Benefits exceeds $32,000, up to 50% of the benefits are included in income.”
Also for a married couple filing jointly, if their other income plus 50% of Social Security benefits exceeds $44,000, up to 85% of the benefits are included in income, says Stenken.
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Just as a reminder: Your gross income would include wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return, as well as tax-exempt interest. And adjusted gross income (AGI) is your total gross income minus specific deductions.
Here’s the formula you need to know when trying to get a handle on whether and how much your benefit will be taxed: Your adjusted gross income + nontaxable interest + ½ of your Social Security benefits = your "combined income."
"Combined income" is what is compared to the $32,000 and $44,000 amounts to determine whether or not Social Security Benefits are taxable, said Stenken.
To learn more, readBenefits Planner: Income Taxes And Your Social Security Benefits.
Q: Social Security benefits for current retirees are increased by some percentage for inflation. Are the "expected benefits" for future retirees increased by the same percentage as for current retirees each year?– Jean Weeks, St. Louis
A: The short answer is sort of. Benefits for future retirees are based on the growth in wages, while benefits for current retirees are based on the increases in inflation, or, more specifically, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
It's hard to explain in plain English, it is Social Security after all, but expected benefits for future retirees are based on their earnings history, adjusted for the increase in theNational Average Wage Index. This adjustment, according to Social Security, ensures that a worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime. ReadSocial Security Benefit Amountsof this Social Security website.
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By contrast, Social Security beneficiaries receive an annual cost-of-living adjustment (COLA) – based on whether they are actually collecting cash benefits or opting to defer in order to earn what are called Delayed Retirement Credits or DRCs, says Kurt Czarnowski of Czarnowski Consulting in Norfolk, Mass.
Now, the difference between the two – the increase in the national wage index and COLAs – has been small in recent years. Wages, for instance, rose on average 2.67% for the nine years ending 2013 while COLAs rose on average 2.6% over the same time period. ReadAutomatic Determinations In Recent Yearson the Social Security's website.
Social Security explains how it all works at this website,Application Of COLA To A Retirement Benefit.
In general, here's what you need to know: Each Social Security benefit is based on what's called a "primary insurance amount," or PIA. "The PIA is directly related to the primary beneficiary's earnings through what's called abenefit formula. And it is the PIA that is increased by the COLA, says Czarnowski.
So, if you choose to retire before yournormal retirement age, Czarnowski says your benefit will be lower than your PIA. On the other hand, if you retire after your normal retirement age, your benefit will be higher than your PIA.
Thus, Czarnowski says the PIA is always increased by the COLA, and then any additional increases in the payment amount because of DRCs come on top of the COLA increase.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.
