« BackArticles

The MAGI Trap

Franklin Delano Roosevelt said, “You will never pay taxes on your Social Security benefits.”

What happened?

Someone said, “He died!”

Every year thousands and thousands of Americans needlessly pay taxes on up to 85% of their Social Security income. They’ve fallen into the MAGI Trap.

You are probably familiar with AGI - Adjusted Gross Income. MAGI stands for Modified Adjusted Gross Income. This is a second calculation done on your tax return that determines if you will have the joy of paying taxes on your Social Security income.

If that MAGI calculation goes above $25,000 for a single, or $32,000 for a couple, then taxes are due on 50% of the social security income received during the year. If MAGI is above $34,000 for a single and $44,000 for a couple, then taxes will be due on 85% of Social Security income received during the year.

The trap springs into action because ALL income received throughout the year is counted towards the MAGI figure. That includes income or interest from all sources, including:

• CDs (even if the interest is not used)
• Money Market accounts
• Brokerage accounts
• Mutual Funds
• Savings accounts
• Limited Partnerships
• MUNI BONDS!

“Wait a minute? I thought muni-bonds were tax free?”

It is true that muni-bonds are federal INCOME tax free - but this tax-free amount is added back into the MAGI calculation. Many people are happy they are receiving tax-free income, but are also shooting themselves in the foot when it comes to the MAGI calculation - and must go back and pay taxes on their Social Security.

It is possible to avoid the MAGI Trap - WHILE STILL RECEIVING THE INCOME YOU NEED. Even if you need income from your bonds or CDs each year, chances are you can get the same income or more, yet very little of it is counted toward the MAGI calculation.

Have you ever heard the statement, “What you don’t know COULD hurt you?” Well, it is true! Most brokers or bankers will not (or don’t know how to) sit with a person and creatively PLAN a person’s income stream to be tax-efficient.

The Granite Financial team of professionals is prepared to analyze your needs and provide tax-advantaged solutions.