Using Annuities To Reduce Taxation On
Social Security

In 1983 Congress legislated that up to 50 percent of Social Security benefits could be taxed when a senior’s combined income exceeded IRS declared threshold limits. The ruling originated because bureaucrats realized that as much as half of Social Security income flowed from contributions paid by employers and therefore, should be considered taxable.

In 1993, the law was amended to allow the IRS to tax as much as 85 percent of a senior’s Social Security benefits when the declared thresholds are exceeded.

Here’s how the thresholds for determining taxation work. For married couples filing a joint return, up to 50 percent of Social Security benefits are taxed if provisional income is between $32,000 and $44,000. If provisional income exceeds $44,000, up to 85 percent of benefits will be taxed by the IRS. For single filers, the 50 percent level is $25,000 to $34,000 and the 85 percent level kicks in over $34,000. As advisors, it’s important to understand the definition of provisional income because it is more expansive than gross income or adjusted gross income. Provisional income includes wages, pensions, interest, dividends, tax-exempt income, plus half of Social Security benefits!

As a result of this legislation, there’s a strong possibility that your clients’ Social Security benefits are being taxed. By moving money from taxable or tax-exempt investments to tax-deferred annuities, advisors can help reduce or altogether eliminate the taxation of Social Security benefits. That’s because income from tax-exempt or taxable investments is counted when the IRS calculates the taxation Social Security benefits. Earnings growing tax-deferred in a fixed, indexed, or variable annuity, however, are not counted.


Advisor Considerations

• Make sure your clients don’t need the income from the tax-exempt or taxable investment before moving money to a tax-deferred annuity. Remember, annuities have surrender charges.

• Make sure you and your clients understand the tax consequences before transferring assets into a tax-deferred annuity. Advising your clients to consult with their tax advisor may be appropriate.

• Remember that annuities aren’t tax-free. Earnings are subject to ordinary income tax in the year they are withdrawn and will be counted as provisio-nal income when the IRS calculates taxation of Social Security benefits.

• If your client’s income is hovering near the threshold, be cautious about liquidating investments like stocks, or making IRA withdrawals. This could trigger the Social Security tax. For your benefit, we’ve included a worksheet that can be used to help you determine the suitability of using tax-deferred annuities to reduce taxation on Social Security benefits.

Shore Benefits Brokerage. PO Box 1. Allenhurst. NJ 07711
Toll Free: 800-777-1459 / Local: 732-531-8339 / Fax: 732-517-1079 / Cell: 732-233-9585