A question which often arises among those who are thinking about retirement is, “Will my Social Security income be taxed?” Generally speaking, the answer to this question is yes; however, there are deviations from this. Previously, Social Security income was not taxable. But things have changed. Everyone drawing Social Security gets 15% of their benefits tax-free. After this percentage, things change. If you rely exclusively on Social Security for your income, your entire benefits should be non-taxable. However, if you fall in the bracket of people who receive income from other outlets such as a 401(k), a pension, or a part time job, you are receiving more than the Social Security Administration limit allows for tax free-benefits and therefore up to 85% of your Social Security could be taxed.
IRS Income Limits:
As of 2015, the IRS limits for configuring tax liability of your Social Security income are as follows:
A person filing individually with a combined income (your Adjusted Gross Income + Nontaxable Interest + 1/2 of your Social Security benefits.) within the financial bracket of $25,000-$35,000 must pay income tax on up to 50% of their Social Security benefits. If an individual has a combined income of $34,000 or more, they will be required to pay income tax on 85% of the Social Security benefits.
For married couples who are filing together, if their combined income is between $32,000 and $44,000, they will be required to pay taxes on up to 50% of their benefits. If, however, their combined income is more than $44,000, they must pay taxes on 85% of the Social Security.
As of right now, no one pays taxes on more than 85% of their Social Security benefits no matter their financial bracket.
The monthly Social Security check averages around $1,294. This is an annual income of approximately $15,528. If your benefits are near average and this is your sole income, you will not have to pay any taxes on your Social Security. If you are not sure about your Social Security income you can consult form SSA-1099 for a summary of your benefits.
Federal Taxes on Social Security Income:
For those who have figured out that they will need to pay taxes on their Social Security, the tax rate is the same as regular income. To break it down, for every dollar over $25,000 that an individual makes, $.50 of their Social Security benefits could be subject to federal taxation. This number rises to $.85 when an individual claims an income over $34,000.
If 50% of your benefits are subject to taxation, the amount you include in your taxable income will be the lesser of either (a) half of your annual benefits or (b) half of the difference between your combined income and IRS threshold. However, if you figure out that 85% of your benefits are subject to taxation, things can get even more complicated. In order to help you better understand the tax liability on your Social Security, it is advisable to check into the worksheet and e-file software provided by the IRS. These sheets will help you to better calculate and understand your income tax.
The Impact of Roth IRAs:
Based upon the information above, you may be a little concerned about the taxes you will have to pay once you are in retirement. If this is the case, you might consider saving your money in a Roth IRA. With this type of IRA, you save after taxes. With a traditional IRA you will be required to take Required Minimum Distribution; however, with a Roth you have already paid the taxes on that money.
Because of this, a Roth IRA will not add to your provisional income; therefore, such an account will allow to draw additional income without going over the IRS threshold concerning Social Security.
You Can Make Social Security Taxes a little Simpler:
There are ways to avoid the shock of paying a large amount of taxes in one large lump. First, you can ask the Social Security Administration to withhold taxes from checks. This is simply done by submitting a IRS W-4V form. Second, you can pay your taxes on quarterly basis just like you would taxable investments.
State Taxes on Social Security Benefits:
Another question you may be asking concerning Social Security is how it works with state taxes. Will you have to pay state taxes based upon your Social Security income? This is a rather complicated question due to varying rules throughout the 50 states and the fact that some states offer exemptions and credits based upon age or income.
A majority of States exempt some Social Security income from their taxes, while states such as Alaska do not tax income at all. However, there are a handful of states which tax Social Society benefits to the extent that they are at the federal level. The best way to know the specifics concerning state tax is to check with your local authorities. As with federal taxes, if Social Security is your only source of income, you are exempt from paying taxes on your benefits
Although none of us enjoy paying taxes, there is a bright side: if you are having to pay taxes on your retirement, this means you are doing well. You are receiving income from other outlets
and not relying solely on your Social Security. Even though you may have to pay some taxes, having other financial outlets outside Social Security will provide more security in the long run.
We often hear that car salespeople can be shrewd as they are looking to try and sell you a lemon or trick you into buying something way out of your price range. Although this definition is a little harsh, it is a good idea to keep a level head when walking into a car dealership. After all, they are the only people standing between you and getting your car for the best price. Below are four traps salespeople often use on buyers which can result in you making a huge mistake and paying more than you originally planned.
Trick #1 Negotiating on Monthly Payments:
We’ve all heard the wonders of low-monthly payments. How taking such a route will help us to drive away in a brand new luxury automotive for mere hundreds a month. When a dealer begins discussing this payment method, your red flags should go up.
Although a clever dealer can make you focus on the low payments, they are neglecting to tell you about other financial variables. While monthly payments may sound low, dealers may actually be inflating other factors such as interest and the length of a loan. There are even dealers who use what is commonly known as a four-square chart which is extremely difficult to understand. A former car salesman describes this “game” as putting the buyer on the defense and carefully wearing them down with complex math while the salesperson appears to be lowering payment prices.
In order to avoid this trick, there are three counteractive moves you can make. First, avoid talking about monthly payments. When the dealer begins discussing this, inform them that you will talk financing later, but you first want to know their best price. Second, pay cash for your car or secure your own financing. However, do not inform the salesperson of your plans. They will be less likely to give you a good price if they know they are not going to receive a profit from the financing. Third, if you do have to discuss financing, it is better to wait until you have negotiated the sale price. Once you have an idea of the total price you can then focus on the annual percentage rate versus payments.
Trick #2 Telling You Your Credit is Bad:
If you are unsure of your credit score, a car salesperson is at an advantage. They can easily tell you that due to your credit score you are not eligible for a high rate. For example, a bank may tell you that you qualify for a 5% loan; however, a dealer could easily tell you that 7% is the lowest available to you.
To avoid this, know your credit score before you ever step one foot into a dealership. Pull your credit score for free so you are knowledgeable about whether a dealer is being fully honest. Additionally, as stated before, do research into your own financing as it is better to do this independently versus going through a dealership.
Trick #3 Baiting and Switching:
It is easy for a salesperson to appear to be on your side and lower your guard with humor or statements which ensure you they will help you get a discount or a great trade-in rate. But most of these promises are inevitably pushed to the side. Edmund.com’s “Confessions of a Car Salesman” series revealed that rates and numbers given in the initial negotiation are often “forgotten” by the dealership later on.
The information above really makes salespeople sound bad. Although not all salespeople are out to cheat you, there job is to sell you a car, not be your friend. Be cautious not to fall for their games and make sure to get the numbers they gave you in writing that way you have something fall back on if they try to change things. Also, you are not bound to anything at this point and if they neglect to uphold the deal you agreed upon, walk away.
Dealer Trick #4: Pushing Add-Ons and Fees:
When negotiating for a car, make sure to watch out for additional add-ons dealers will try to throw into the mix. Although their salesmanship is great and an extended warranty of only $40 a month sounds great, it will end up costing you $2,400 more on a 60-month loan. Although add-ons sound great in the moment, they can essentially be just another way for a dealer to jack-up the price of your car.
In order to avoid buying add-ons which are not worth the price you will ultimately pay, make sure you know the add-ons which are necessary and those which are just gimmicks. Additionally, check your financing and sell sheets for fees you should not be charged. Examples of such charges include a hidden loan acquisition fee and other fees, such as “customer service” or document preparation fees.
Your Best Strategy:
To avoid falling for the tricks dealers often use, it is a good idea to do two things to make sure you will come out on top. First, research car prices and second, do comparison shopping. A recent survey showed that knowing the dealer’s invoice prices and visiting at least two dealerships could potentially save buyers an average of $800. Searching websites such as TrueCar, Kelley Blue Book, and Edmunds.com will help you find invoice prices and discover what your trade-in is worth.
Another strategy which is rather ingenious can be found on GetRichSlowly.com. They recommend emailing all the dealers in your area saying, “Hi, my name is so and so. I plan to buy such and such car today at 5pm. I’m going to buy it from the dealer who gives me the best price. What is your best price?” Such an email will help you cut to the chase very quickly and avoid tricks which jack up the price of a car.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Need help managing your financial life? An investment professional is a tremendous resource to tap for financial planning information throughout your lifetime. For instance, your financial advisor can help you with:
Short-term savings: Avoid piling up debt when unexpected expenses come your way by having at least three months of living expenses available at all times. If you don’t have an “emergency” fund, your financial advisor can help you figure out how to build one.
Investing for long-term goals: Your investment professional can help you determine how much you will need to retire and then work with you to build a portfolio to pursue the kind of retirement you have in mind. He or she can also help you come up with creative funding solutions for your children’s education.
Estate planning: Contrary to popular thinking, estate planning is not just for the wealthy. Creating a will and naming a health care proxy (someone who makes medical decisions for you if you are incapacitated) and durable power of attorney (someone designated to decide financial matters if you are unable to do so) can make sure your wishes are honored. Consider using a qualified professional to develop an appropriate plan.
Three Tips for a Smooth Financial Meeting
Prepare for an appointment with a financial advisor by keeping this pre-meeting checklist in mind.
- Organize your thoughts and set priorities. Think about your financial goals and time frames. Your advisor will be able to help you review these issues and match them to your tolerance for investment risk. Also discuss your top areas of financial concerns, such as reducing debt.
- Gather the appropriate paperwork. You’ll likely need to bring financial documents, such as investment account statements and tax returns, to your first meeting. Call in advance and ask what documents would be helpful.
- Prepare questions for your advisor. It’s important that you feel comfortable with your advisor and the services provided. Ask about the type and level of advice you should expect. Talk about how often you should meet for a “checkup” or to rebalance your portfolio.1
1Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.
Investing involves risk including loss of principal. No strategy assures success or protects against loss. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
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