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On Big Brother Expands Reach(Cont’d):
Q
Mr. Klotz answered one question about the “Big Brother Expands Reach” article in the Bond Investors’ Forum, but his response has raised another question for me. Here is the last paragraph from Mr. Klotz’s answer: “Incidentally, there is a method to this madness. Although the interest is not taxable, certain levels of tax-free income can reduce other benefits you receive, such as Social Security.” My question is: How can I determine if the amount of tax-free interest I earn is at a level that will reduce other benefits?
A
James A. Klotz responds:
Your tax-free income is not the only factor involved in determining taxation of your Social Security. Higher-income taxpayers will lose some of their benefit regardless of the makeup of their income. Your tax preparer must plug your income information into an IRS formula to determine the taxable portion of your Social Security benefit. It is your total income that matters. Tax-free and taxable income are treated the same in this calculation.
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