TAX TIPS (and other stuff)
By Kelly J. Bullis, CPA
2022-October 4th
Many of you know that I have a pet peeve about how Congress treats Social Security recipients. Congress’ first “sin” is never indexing the computation formulas to inflation. We’re using the same numbers since 1984. Do you think there has been a lot of inflation since then? Their second “sin” is the way the formula adds additional Social Security benefits to taxable income. A certain group can get taxed on almost $2 for every $1 earned by adding almost a dollar-for-dollar match onto earnings. (Be in that group and get paid to be a greeter at Wal-Mart, you get paid $12 an hour but must add another $10 an hour of your Social Security earnings onto your adjusted gross income!)
The formula for computing taxable Social Security is quite complicated. Let’s dive in and see how long before your brain starts hurting.
First, you must come up with an item called Provisional Income (PI). You arrive at that by taking your Adjusted Gross Income (AGI) (before including any Social Security benefits), add all tax-exempt interest earnings (Whoops! There goes the incentive to invest in Muni-bonds!), then add half of your Social Security benefits.
Now we must decide if you are in Tier 1 or Tier 2 for computing your taxable Social Security benefits.
Tier 1: If your PI is between $32,000 and $44,000 ($25,000 and $34,000 for single filers), you must pay tax on the lesser of one-half of your benefits or 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers).
Tier 2: If your PI is above $44,000 ($34,000 for single folks), you must include in taxable income 85% of the amount by which PI exceeds $44,000 ($34,000 for singles) plus the lesser of the amount determined under Tier 1 or $6,000 ($4,500 for singles). In no event can your taxable benefits exceed 85% of your total Social Security benefits.
Still with me? So now we get to the planning side. (The part I love!)
Idea #1: Defer taxable income until the next year. Example: Invest in CDs that don’t mature until the following year, you’ll get a higher interest rate to boot. With the Fed finally getting back to lowering interest rates, locking in a higher rate for a longer period of time is a double bonus.
Idea #2: Cash in stocks that have accumulated losses, the capital losses you realize before the end of the year can offset capital gains, plus up to $3,000 of ordinary income. This may be enough to pull your PI down and get you out of Tier 1 or at least Tier 2. At the same time, hold onto stocks with accumulated gains with long-term growth objectives in mind.
Have you heard? Isaiah 34:11b says, “…He shall stretch the line of confusion over it, and the plumb line of emptiness.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.
