Q. Your recent article on the taxation of social security benefits and "other income" was of special interest. I noted that house equity from the sale or refinancing of one's house is not considered other income.  Is the income generated from a reverse mortgage included in the "not other income" category?

---P. C., by e-mail from San Antonio, TX

 

A. No, it isn't. Cash from a reverse mortgage would not be considered as income when measuring the possible taxation of Social Security benefits. You are borrowing equity from your home. It is not income. Investment real estate owners do much the same thing--- they borrow new money from appreciated properties and it is not what the IRS calls a "taxable event."

 

Q. Enjoyed your article on avoiding a Social Security tax trap.  There is a lot of confusion on this subject.

Social Security told me that only "earned income" counted as income.  I specifically asked them if my military pension or my TRS (Teacher Retirement System) income would count as earned income toward my taxable portion of SS benefits and they said no.  The person I talked to said retirement income is not considered earned income. 

Did I get bad information from the office of Social Security?

---B.K., by e-mail from Houston, TX

 

A. I think you and the Social Security representative were talking about two different things. There are two ways your Social Security benefits can be reduced. The first applies to workers who retire early but earn too much from continued work. Those workers have their benefits reduced, not taxed. The second applies to all Social Security benefits: If your income (not just wages) exceeds certain amounts, your benefits will be taxed.

People who retire at age 62, for instance, have not reached full retirement age. Until they reach that age they have to be concerned with having their Social Security benefits reduced if they earn over certain amounts. For 2005 you can earn up to $12,000 without having your benefits reduced. If you earn more than that, your benefits are reduced $1 for every $2 you earn. It's not a tax but it takes 50 percent of your benefit per dollar earned. You can calculate the impact of different earnings on your benefits by using a calculator available on the Social Security website at this URL: http://www.ssa.gov/OACT/COLA/RTeffect.html

Once you reach full retirement age (which depends on your year of birth) there is no limit on your earnings from work--- whatever you earn you'll continue to receive your full benefits. Your benefits, however, will still be subject to taxation if your income from other sources exceeds certain amounts.

Those who prepare tax returns for a living face a bright future.

 

Q. I just read your article concerning "Other" income for social security purposes.  It left me with a couple of questions.

I plan to start collecting Social Security when I turn 62 in a couple of years.  I am retired from the Air Force and receive deferred compensation (read that as retirement check) each month.  I also own a commercial rental property that produces passive income each month.  Finally, my wife is still working and has taxable income of around $62,000/year.  How will this income affect whether my social security will be taxed or not?

---M. S., by e-mail from San Antonio

 

A. Your Social Security income could suffer two "hits."  First, between the time you turn 62 and the time you reach full retirement age, your Social Security benefits could be reduced by $1 for every $2 of earnings over $12,000 if you choose to work for wages. If you just collect your pension and rental income, your Social Security benefits will not be reduced.

Your benefits, however, will be subject to tax once half of the benefits plus your pension, rental income, and your wife's earnings exceed $32,000. No more than 85 percent of your Social Security income can be taxed. Given the income you've outlined, you can expect to have 85 percent of your Social Security benefits included in your income tax return.

On the web:

Tuesday, May 24, 2005: "No Simple Answer on Social Security Taxes"

Taxes and Your Social Security Benefits (includes URL to IRS publication 915, "Social Security and Equivalent Railroad Retirement Benefits"