| In 2000, President Clinton signed into law "The Senior Citizens' Freedom to Work Act of 2000," eliminating the Retirement Earnings Test and allowing social security beneficiaries at full retirement age to avoid having their benefits reduced because of their work. A lot of people are surprised when told that their social security benefits are taxable because they confuse the Freedom to Work Act with the taxability of social security benefits. The 2000 Act allows you to receive your full benefits while you are working; but the taxability of your benefits is based on your total income and marital status. If social security benefits are your only income, the benefits are not taxable. But if you receive other types of income, your benefits are partly taxable: if half of your social security benefits plus your other income (including tax-exempt interest income) is more than $25,000 for single or $32,000 for married filing jointly. Up to 50% of your social security benefits are taxable if your modified adjusted gross income (MAGI ? half social security plus all other income, plus tax-exempt interest and other exclusions) is between $25,000 and $34,000 for single, or between $32,000 and $44,000 for married filing jointly. If your MAGI is more than the $34,000 and $44,000 threshold, then up to 85% of your benefits will be taxable. The IRS provides a worksheet for these calculations. If you have to pay tax on more than 50% of your social security benefits on your federal return, there is a break on your Wisconsin return because Wisconsin taxes social security on up to 50%. You may subtract a portion of federal taxable social security from your Wisconsin income. |
| About the author |
| Mei-Feng Moe (May) is a Master Tax Advisor certified by H&R Block. In addition to giving tax advice and preparing income tax returns, she has also been teaching income tax courses for a number of years. She is an Enrolled Agent who may represent clients before the IRS. She also holds series 6 and series 63 security licenses. |
| Q &A: |
| Dear May, I had to withdraw my Roth IRA amounting to more than $17,000 in order to pay off my debts and secure some funds for ongoing home projects. I was told by the bank clerk that I have to pay IRS 10% of it. Is this true? Should I pay about $1,700 penalty? It's my own money! Should I just wait until next year, in April to pay it off? Thanks for your help, May! Grandma Lola |
| Dear Grandma Lola, Too bad you had to use your Roth IRA money; but people sometimes just have to do what they have to do. The 10% penalty is imposed only on the income from your Roth contribution. The amount that you contributed will not be subject to income tax or any penalty -- because when you put money in your Roth account, there was no deduction from your income, therefore it's not taxable when you take it out. For an example, if the amount you put in the account over the years totals $16,000 and that $16,000 generated $1,000 interest in the account over the years, you'll only need to pay income tax and penalty on the $1,000 to both federal and state (Wisconsin penalty is 1/3 of the federal penalty.) There are some exceptions to the penalty, but your reasons for taking the Roth distribution do not qualify for an exception. You should check your records to see how much was the total amount that you put in your Roth IRA in the past, because Roth IRA has different distribution rules. Your contribution comes out tax-free first, then the conversion amount also comes out tax-free if you had transferred from a traditional IRA to a Roth before, then the income would come out last subject to income tax and penalty. These rules translate to this: if over the past years, you had put in more than $17,000 of contribution (that would mean that after you took out your $17,000, you still have money left in your Roth account) you won't have to pay any income tax or penalty on that $17,000. I think that you can probably wait till filing your tax return to pay the tax on the Roth distribution if you really have to pay the tax and penalty. Please let me know first how much you put in your Roth IRA so I can figure for you whether you'll have tax liability or penalty on the distribution. May |
| Your Master Tax Advisor Social Security: When are the benefits available? |
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