According to the Social Security website, some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).

The information provided below applies to 2020 and changes every year.

You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service (IRS) rules. If you:

  • file a federal tax return as an “individual” and your combined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return, and you and your spouse have a combined income* that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.

What is a combined income? Combined income = adjusted gross income + nontaxable interest + half of your Social Security benefits.

We are not going to go into details as to how to calculate the taxable portion of your Social Security income. It suffices to say that if you earn income from a job or supplement your Social Security income from your qualified plans such as your 401k or IRA, you can expect that a portion of your Social Security may be taxable depending on how much you earned.

The reason we are telling you this is because if you are planning ahead, as you should, for when the time comes to start collecting Social Security, you might want to keep this in mind.

On the other hand, if you plan on supplementing your retirement with money that you have in your IBC policy, you would be pleasantly surprised to know that the amount you withdraw or borrow from your life insurance policy at retirement, does not affect your Social Security income, because this money does not get reported on your tax returns as long as it is correctly taken from your policy. What do we mean by that? That means that once you start taking money out of your policy to supplement your retirement, you first withdraw the money down to the last penny of your cost basis. This is language used by accountants and IRS to say every penny that you put into the policy. Once you have withdrawn all of your cost basis, then you begin to borrow out the rest of the money in your policy. Neither of these two events are considered taxable income and therefore do not show up on your tax return.

Caution, if you do not withdraw to the cost basis and then borrow your capital gains out, or if you put too much money into your policy and it becomes a modified endowment contract (MEC) all your gains in the policy will become taxable and that will have a negative impact on your Social Security income.

Plan ahead, discuss this article with your accountant or tax preparer to make sure you do the right thing by your family.

Remember, we are always available to advise you on the best way to utilize your IBC policy.

If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at http://InfiniteBankingSimplified.com/  or feel free to email us your questions at ContactUs@InfiniteBankingSimplified.com or call us toll-free at 1-844-443-8422.

Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners

We are experts in designing high cash value dividend-paying whole life policies.

Blog 69 – Is Social Security Income Taxable?