Q: My wife and I are both retired and we recently heard that Congress might eliminate taxes on Social Security, just like Trump promised during his campaign. We currently receive about $50,000 a year in Social Security and have another $65,000 in income. Could this new bill really mean we won’t have to pay taxes on our Social Security anymore?
A: The short answer is no and it’s not even close. To start, under today’s rules, a person can only get taxed on up to 85% of their Social Security benefit. With your $50,000 in Social Security and $65,000 in other income, your benefits are going to get taxed up to the maximum amount allowed. In dollar terms, this means about $43,000 of your benefits count as taxable income.
The proposed House bill won’t help you much. Under their chosen legislative process, they weren’t allowed to just declare Social Security benefits tax-free. Given the need for tax revenue, I doubt they really wanted to do that anyway. Instead, they are proposing a special added deduction for those 65 and older to the tune of $4,000 per person, or $8,000 for couples.
That will only reduce the taxable portion of your Social Security by about 20%. In other words, that $8,000 added deduction only offsets your $43,000 of taxable Social Security. Granted, for some lower income retirees, the added deduction would offset a larger proportion.
But, remember, currently about half of all Social Security recipients get tax-free benefits already.
Interestingly, this proposed change won’t make the tax treatment of your Social Security benefit look that different on your tax return. The same 85% of your Social Security will still be shown front-and-center as taxable income.
Q: I want to give my niece’s daughter $25,000 to help her buy her first home. I’ve never given away such a large amount before. Will either of us have to pay any taxes on this gift? I really don’t want this to be too complicated for either of us.
A: Don’t worry, it’s simple enough. This year, you are allowed to give up to $19,000 to any person without any tax implications.
However, since you want to give her $25,000, it does exceed the annual exclusion by $6,000. But, honestly, it’s really no big deal.
Exceeding the annual limit means you’ll just need to file IRS Form 709 to report this extra $6,000 gift amount on your tax return.
Amazingly, you have a whopping lifetime allowance of $14 million in gifts before you’ll ever need to worry about owing any gift taxes! So, you’ve still got a lot of room for more generosity before Uncle Sam gets his slice.
For your niece’s daughter, this gift is very easy. She won’t owe any taxes on it and she won’t need to report your gift on her tax return.