Question: I am retired, and let's assume that for 1984, my wife and I expect adjusted gross income of $32,100. We would then have to add one-half of our Social Security benefits (around $12,000) and pay tax on an income of $38,100. But if I give away income-producing assets to drop my AGI to $31,900, we don't have to add Social Security because we're below the $32,000 limit. It can't be that simple, but I can find nothing about dropping income below the $32,000 figure. Why not do an article on this?
Answer: You're right--it isn't that simple. The $32,000 floor that triggers income tax on half of Social Security benefits is matched against total income including Social Security.
You start with adjusted gross income--any wages or income from self-employment you may have, plus income from investments, plus payouts from IRA or Keogh plans and taxable income from other pension or retirement plans.
To that figure you must add any tax-exempt income received during the year, and then half of your total Social Security benefits. If that total--which already includes Social Security--exceeds $32,000 ($25,000 on a single return) then you have triggered some income tax liability.
If you're just over the threshhold figure, then not all of the Social Security benefits included will be taxed. Let's go back to adjusted gross income, which does include neither Social Security nor other non-taxable income.
To the AGI figure you must add for tax purposes either one-half your total Social Security benefits or one-half the amount by which the computed total income exceeds the $32,000 (or $25,000) threshhold, whichever is less.
As you can see, reducing your adjusted gross income to just under $32,000 wouldn't accomplish very much. The principle will work, but you would have to give away enough assets to reduce your income to around $26,000, so that the $6,000 representing half your Social Security will not bring the total over the $32,000 trigger.
Q: Prior to becoming a resident alien of the United States, I made regular contributions to the pension plan of my then-Canadian employer. In Canada, such contributions are exempt from income tax until withdrawals begin at retirement. I will soon be eligible to receive pension payments, and may elect to receive the self-contributed portion as a lump sum or in the form of annuity payments. What portion of such payments will be taxable in the United States? (There will be a 15 percent Canadian tax withheld from each payment.)
A:I'm not an expert on foreign taxes, so I decided to check with the experts at the IRS--which turned out to be a good thing. They told me that your pension is to be treated just like a U.S. pension to which the employe had made contibutions.
Thus there is no U.S. income tax liability for that part of your pension payments that represents a return of your own contributions. If you can recover the total of your contributions within three years, none of your pension payments is taxable until you have received that total amount. Thereafter, the full amount of each payment is subject to tax.
If the entire amount of your self-contributions will not be recovered in that time period, then a portion of each payment is non-taxable and the remainder taxable. The fractional division is based on your age and life expectancy at the time the payments start, derived from an IRS table.
You may claim credit on your U.S. tax return for the 15 percent Canadian tax withheld from each payment either as an itemized deduction on Schedule A or as a tax credit using Form 1116.
But neither the deduction nor the credit will do you any good if you don't have other U.S.-taxable income for the year. The foreign tax credit may not exceed your income tax liability; and it can only be claimed in the year the foreign tax is paid, with no carryover to succeeding years.