Near Intersection of I-35 & I-90 Southern Mn. | Through the years I have purchased some tax-free bonds. These are typically for school or street improvements. They usually pay less than other types of investments but are tax-free;
I have through some stroke of luck managed to live to retirement age. I paid into Social Security for many years sometimes from two jobs, I have no shame in drawing Social Security.
I have become aware (just again yesterday after having my taxes done) that these tax-free investments are of themselves tax-free and don't directly affect my taxes. HOWEVER, they can still have a rather painful indirect effect.
The amount of Social Security benefits that must be claimed on ones individual income tax is determined by many other sources of income. It can range from zero (I guess) to a maximum of 85%. When I had my pre-tax planning session, the Social Security rate that was predicted that I would need to claim was some 58% due to substantial farm losses in 2018. When my taxes were actually computed, it rose to 85%. In checking, I found the reason was that at the time of the tax planning session we hadn't included the amount of tax-free income. This income was not itself taxable but changed the value on which the rate of Social Security which needed to be claimed was based. This explained why the amount which needed to be claimed changed from 58% to 85%. This increased my taxes a fair amount as it affected both Federal and State.
Another area where tax-free income can affect your financial situation relates to Medicare. Many folks are charged a standard flat rate for Medicare. This is deducted from the Social Security payment each month. If ones income for the year before last exceeds certain thresholds, then an adjustment is applied. I call it a surcharge. This value is based on pretty much all sources of income for the year before last. This means that ordinary income, investment income, retirement income, IRA's etc. AND tax-free income are used to determine whether a person falls into the surcharge categories. There are different values based on income and filing status.
This year's surcharge is based on the year before last taxes since when determining this for 2019, the 2018 taxes had not yet been filed so the previous year of 2017 is used.
My point of all of this is to warn others that might be in the same situation. Maybe those tax-free investments weren't such a good idea after all.
Edited by tedbear 3/8/2019 12:58
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Tax ramifications with "tax-free" income
