Q. When I retire from Exxon Mobil, I plan to take the lifetime annuity offered by the company.   I also have money in my savings plan, which I plan to invest.     Will the money from the annuity, or the interest, dividend and earnings from my investments be subject to Social Security or Medicare taxes?

--R.B., Houston, TX


A.   Income from investments is not subject to the payroll tax for Social Security and Medicare. However, it will be subject to the taxation of Social Security retirement benefits. Whether you have to pay any tax at all will depend on the level of your SS benefits, the level of your pension, and what other taxable income you take from your savings.

Most people don't pay taxes on their Social Security benefits. The reason they aren't taxed isn't that we have a kind and beneficent government. The reason most people aren't taxed is that they don't have the pension income or investment income that makes Social Security benefits subject to taxation.

This is not your situation.

Your pension income, alone, may make your Social Security benefits taxable. It really depends on how much you have in Social Security income and how much income you have from other sources. Unfortunately, the formula for calculating the taxation of Social Security benefits is so complicated that it is unsafe to make broad generalizations--- but you can test by using income tax software, such as TurboTax. (That's what I did when I wrote columns on the subject earlier this year.) If you haven't got the software--- or have no knowledge of income taxes--- I suggest a visit to a CPA. It will be worth the expense to get an idea of whether your Social Security benefits will be taxable and what, if anything, you can do about it.

Very roughly, it appears that income beyond SS benefits of around $30,000 will initiate the tax and that virtually everyone will be through the "tax barrier" before their other income reaches $80,000. The only way to avoid (or reduce) the tax is to withdraw money from a conventional (taxable) investment or savings account. The problem with qualified accounts--- such as your 401(k) account or the IRA rollover that it goes into--- is that every dime withdrawn is taxable income.


Q. My husband and I are in our early 50's. We are renting, waiting on the side for the home prices to drop. This is our situation: before 2002 our annual income varied from $60,000 to $100,000 a year. In 2002 we earned $220,000 pre-tax. And in 2003 our income will be $600,000 pre-tax. This increase is probably a one-time happening. We expect our income will return to pre-2002 levels.

We are renting and pay $1,000 a month. We are making very little on our money in a money market account as we choose to stay fluid, feeling certain that we will find a home to purchase. I believe that the homes in the areas that I wish to live are significantly overpriced. They have increased 15-20 percent annually for the past 6 years. I have used your mortgage and tax benefit calculator and think we would benefit from the tax break for expensive homes.

Given the tax benefits (of home ownership), is it better to purchase the expensive home financed over 30 years, reserving most of our capital to cover future payments? Or is it wiser to continue to wait and simply rent a nicer home?

---E.D., Dallas, TX


A. The answer here depends a lot more on your age, source of income, and circumstances than it does on the tax code or home values. I also think most readers will agree that all the areas where they wish to live are also overpriced. Personally, I've experienced that all my life, regardless of income--- we're always looking for a place that's a little better and it always costs a lot more.

Since you are in your 50's and have an uncertain future income, the real exercise here is figuring out what you can sustainably spend for shelter. Not an easy task. I'd guess it at about 3 times your long-term income. While you may be able to pay more and may qualify for more mortgage debt, the important thing isn't how much you borrow but how long it will take to pay it off. Since a 30-year mortgage would have you paying off the note when you were in your 80's you'd probably be better off considering a 15-year note and a relatively large down payment.

Finally, you could increase your security immensely if you could buy a house with retirement in mind and pay cash for it--- with $820,000 of pre-tax income in two years that should be possible.