The taxman cometh

The above numbers are important for retirees to keep in mind when contemplating life decisions during retirement. Is taking a job worth exposing 50 percent or more of Social Security benefits to federal taxes? Keep in mind that 50 percent of Social Security income, non-taxable interest on municipal bonds, wages, interest, dividends, capital gains, alimony and distributions from a 401(k) or traditional IRA all count toward figuring out modified adjusted gross income that could nudge Social Security into the taxable arena. Some forms of income don’t count, but most do.

The good news is unrealized capital gains in taxable accounts, asset growth in tax-deferred retirement accounts, and deferrals in annuities don’t figure into modified adjusted gross income calculations. More good news is that in the 10 to 15 percent tax brackets capital gains and non-qualified dividends are not taxed, so investments delivering that sort of income are preferred above interest on a certificate of deposit or money market that is taxed as ordinary income. Returns on capital gains and non-qualified dividends would still figure into the couple’s modified adjusted gross income to determine whether or not the minimum or maximum threshold for Social Security taxes was reached. But personal exemptions and standard deductions would substantially reduce or eliminate any resulting federal taxes on Social Security benefits if most of the additional income was beyond the taxman’s reach.

The crux, then, is where a senior makes up that 60 percent of cash flow they need above Social Security. Qualifying dividends, like those from dividend-paying stocks, are taxed as long-term capital gains, or at a lower rate than interest from bonds or CDs. Making informed decisions is vital. It pays to be in the know.