Will the Tax Torpedo sink your retirement?
Benjamin Franklin is credited with coining the phrase “nothing is certain but death and taxes”.
Viewing retirement in 2018 through an admittedly imperfect telescope, we can say Ol’ Ben hit the nail on the head. There is a deadly tax lurking just beneath the surface of what seems to be smooth sailing for your retirement.
What is the Tax Torpedo?
The tax torpedo is a name given to the unexpected way that Social Security can get taxed, depending on how much other income you have.
Social Security may be a long-awaited retirement perk, but it’s not without its headaches and complications. (It is, after all, a government program, so that shouldn’t come as a complete surprise).
What is “provisional income”?
Provisional income is a measure used by the IRS to determine whether or not recipients of Social Security are required to pay taxes on their benefits. Provisional income is calculated by adding up a recipient’s gross income, tax-free interest, and 50% of Social Security benefits.
Figures are for demonstration purposes only, consult your financial advisor and/or tax professional for your personal situation
What triggers the Tax Torpedo?
Social Security isn’t taxed when provisional income is less than $25,000 for individuals ($32,000 for married couples filing jointly). When income is between $25,000 to $34,000 ($32,000 and $44,000 for married filing jointly), 50 percent of Social Security income is taxable. When provisional income is above those amounts, 85 percent of Social Security is taxable.
Related: Ease the retirement squeeze
How does it work?
Consider the example of a single taxpayer whose taxable income puts her in the 25 percent tax bracket. She may think that withdrawing an additional $100 of income would increase her taxes by $25. But if she has hit the provisional income threshold, it could increase her income much more. In that case, an extra $100 would actually make $185 of income taxable because now she must include her Social Security, as well.
And if the Tax Torpedo didn’t give you enough to think about, be on the lookout for the Medicare Torpedo.
What is the Medicare Torpedo?
“Your Medicare premiums for Part B are based on modified adjusted gross income,” said William Meyer, founder and CEO of IncomeStrategy.com, a website the helps people maximize their sources of retirement income. “So if you withdraw too much of your IRA, you could increase your MAGI and that will affect the amount that you pay for Medicare.”
For single filers, Medicare Part B (the part that pays for doctor’s visits and services) costs $134 a month if MAGI is below $85,000, but it could run as high as $428.60 if it exceeds $214,000.
How can The New Reverse Mortgage help me sink the Tax Torpedo?
The key to outmaneuvering the tax torpedo is to supplement your income in such a way you can still maintain your quality of life without the onerous tax consequences of the torpedo.
Because the proceeds from your reverse mortgage are not considered income you can create your own personal retirement paycheck or have a Plan B to cover those unexpected expenses that always seem to pop up at the wrong time.
Which is best for you? That’s a conversation to have with your financial advisor and or tax professional.
The New Reverse Mortgage isn’t for everyone…but it could be!
If you’re still wondering if a Reverse Mortgage is the right solution for you but you’re not ready to sit down with one of our Reverse Mortgage Experts, then we’ll be happy to mail (or email) you Use Your Home to Stay at Home which is the official federally approved consumer booklet for those considering a reverse mortgage.
Some of this information first appeared on cnbc.com