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Ask the Advisor: Notch Reform-Which Would Be Better For Me? An Improved Monthly Benefit or $5,000 Lump-Sum? If passed, `The Notch Fairness Act` would provide those born 1917 through 1926, with their choice of either a higher monthly benefit or a $5,000 Lump-Sum payable in installments of $1,250 over four years. How will you be able to determine which would be best for you? In order to select the method that will pay you the highest benefit, you must consider the effect boosted benefits would have on your tax situation, or how additional benefits might impact other government benefits you may receive such as Supplemental Security Income (SSI) or Medicaid. This month we will take a look at some of the tax implications. Next month, we will examine the effect on other government benefits. Part 1: How Notch Reform Benefits Could Affect Your Taxes Notch Reform benefits would be treated like other Social Security benefits. If your income is already close to certain limits, added benefits may be enough to subject a portion of your benefits to tax. The additional taxable income can also bump you into a higher tax bracket. Currently Social Security benefits may be subject to tax if your `provisional` income exceeds certain levels. Your `provisional income` is (roughly), your Adjusted Gross Income (AGI), plus your tax-exempt interest (not normally included with your AGI), plus one-half your Social Security benefits. If your provisional income is less than $25,000 for single filers, or $32,000 for couples filing jointly, then none of your Social Security benefits are taxable. If you are single and your provisional income is over $25,000, but no more than $34,000, or a couple and your income is over $32,000, but no more than $44,000, then up to 50% of your benefits may be subject to tax. If your provisional income is more than $34,000 (single), or $44,000 (couples), then up to 85% of your benefits may be taxable. If your income is close to or already over these proposed limits, and you are at the edge of your income tax bracket, the proposed $1,250 Lump-Sum installment could put you over the limit. Higher monthly benefits may give you slightly less annual income than the Lump-Sum, but allow you to remain under the limits. You need to calculate whether you would KEEP more by taking an improved monthly benefit instead of the Lump-Sum installment. Work sheets to help you calculate your provisional income are available in the IRS instructions with 1040 and 1040A forms or in tax guides such as J.K. Lasser`s Your Income Tax 2001, $15.95 retail. This article first appeared in Volume 6, Issue 6 of "The Social Security and Medicare Advisor" newsletter (May/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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