From 24/7 Wall St. · Gerelyn Terzo · · 1m
Muni Interest Pushes Social Security Taxable
Municipal bond interest can make more of your Social Security taxable even when tax-free.
In brief
Municipal bond interest can make more of your Social Security taxable even when tax-free. Municipal bond interest adds to Social Security taxable income despite being federally tax-exempt. Originally reported by 24/7 Wall St..
Municipal Bonds Avoid Federal Tax
Municipal bond interest escapes federal income tax but gets added to Social Security calculations.
“Municipal bond interest escapes federal income tax, but the IRS has a separate formula that pulls it back into Social Security calculations in a way most retirees never see coming.”
Current Bond Yields Rise
The 10-year Treasury yield has risen to about 5.2% and the 20-year pays close to 5.6%.
“The 10-year Treasury yield has risen to about 5.2%, and the 20-year pays close to 5.6%”
Retirees' Taxable Thresholds
A single filer starts owing tax on benefits once combined income goes above $25,000.
“A single filer starts owing tax on benefits once combined income goes above $25,000”
Linda's Taxable Situation
Linda gets $30,000 from Social Security and $10,000 of other taxable income without munis.
“Linda gets $30,000 a year from Social Security, so half of it is $15,000. She also has $10,000 of other taxable income.”
Muni Interest Adds Taxable Portion
Adding $20,000 of municipal interest makes $13,850 of Social Security taxable.
“Now $13,850 of her Social Security, about 46% of it, counts as taxable income”
Yield Impact on Thresholds
Higher bond yields help retirees reach taxable thresholds with less portfolio money.
“At 5%, a $400,000 bond portfolio pays $20,000 a year. At 2%, you would need $1 million to get the same income”
Taxable Impact After 2027
The 2027 cost-of-living increase will push Social Security taxable thresholds higher.
“The 2027 increase is on track for 3.5%-3.6%. That raises the half-of-benefits piece of the formula”
The essence
Municipal bond interest adds to Social Security taxable income despite being federally tax-exempt.
