From 24/7 Wall St. · Gerelyn Terzo · · 1m 10s
Treasury Yields Climb, Social Security Taxable Before Collection
Retirees face unexpected Social Security taxes from inflation-linked bond growth.
In brief
Retirees face unexpected Social Security taxes from inflation-linked bond growth. Retirees with inflation-protected bonds may see more Social Security taxed before receiving payments due to annual inflation adjustments. Originally reported by 24/7 Wall St..
Social Security Tax Trap for Retirees
Retirees with inflation-protected bonds face unexpected Social Security taxes from annual inflation adjustments.
“She chose inflation-protected Treasury bonds to keep her savings safe, but a quirk in the tax code means the IRS collects on income she cannot spend”
TIPS Create Paper Income
TIPS bonds generate income that grows with inflation but remains uncollected until tax time.
“TIPS protect against inflation by raising their principal as consumer prices rise. Her interest, paid twice a year at a fixed rate, is figured on that larger amount.”
IRS Taxes Inflation Growth Immediately
The IRS taxes inflation adjustments as interest before cash is received, creating taxable income.
“IRS Publication 550 says anyone holding inflation-indexed debt such as tips must report any increase in the inflation-adjusted principal as original issue discount.”
Taxable Threshold Impact
An extra $7,200 in paper income can push retirees over Social Security tax thresholds.
“On $200,000 of tips, that adds about $7,200 of reportable income. None of it lands in her checking account.”
Social Security Taxable Calculation
The IRS adds half of Social Security benefits to other income to determine taxable portions.
“To decide whether social security is taxable, the irs adds one-half of the social security benefits to her other income.”
Thresholds Trigger Taxable Portion
Retirees above $25,000 in other income see up to 85% of Social Security taxed.
“IRS Publication 915 sets the starting threshold for a single filer at $25,000. Once her combined total passes the thresholds, a growing piece of her benefits becomes taxable.”
TIPS in Taxable Accounts
TIPS in taxable accounts create immediate taxable income that affects Social Security calculations.
“Her bonds create income she never uses. That income can also raise the share of her social security check that gets taxed.”
Tax Planning for Retirees
Retirees should check Form 1099-OID and separate bond yields, inflation adjustments, and tax impacts.
“Each year, she should check box 8 of her form 1099-oid before calculating her taxes.”
What matters most
Retirees with inflation-protected bonds may see more Social Security taxed before receiving payments due to annual inflation adjustments.
