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The Simple Dollar

Social Security benefits: How to prepare for the tax hit

Social Security income triggers big tax for newlyweds. How do you cope? See question No. 2 on Social Security and taxes in the reader mailbag. 

By Guest blogger / February 22, 2012

This 2002 file photo shows mailboxes in New London, N.H. A question in this reader mailbag involves how to prepare for the financial hit when Social Security kicks your income tax up.

John Nordell / The Christian Science Monitor / File


What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Long term life insurance
2. Social Security and taxes
3. Dental challenges
4. Fear of switching careers
5. Money from selling household items
6. Haircuts and appearance value
7. Considering purchases again
8. Emergency fund and future
9. My business partner is lazy
10. Children and television

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The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

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I’m often blown away by other people’s definitions of fun. For some, you have to have alcohol to have fun. Others seem to require spending lots of money.

I’m usually pretty happy doing almost anything as long as it’s with people I like. I’m always taken aback by people who loudly announce that the current event is boring and that booze or spending need to happen in order for them to be placated.

Q1: Long term life insurance
I have had life insurance through SBLI and through my employer for a long time. My questions aren’t about how much or what kind to have. My children are now young adults, so I don’t need to worry about providing for them, but I would like to leave them and any future grandchildren a good sum when I die. The only way for me to do that would be through life insurance, as I have no money saved or invested and no time left to accumulate even a small fortune. So my questions are, is it possible to continue a life insurance policy into old age? Would it be very expensive? How is a life insurance benefit taxed when it is paid to the beneficiary? Is there any way to reduce the amount of taxes the beneficiary will have to pay? Would it be better to leave money to minors than to adults?
- Chris

There are lots of different varieties of life insurance policies out there. Generally, ones that last a person for their entire life tend to have rather high premiums – after all, the insurance company isn’t in the business of paying out more than they’re bringing in. Benefits of most life insurance policies are free from income tax.

If I were you, I would probably hang onto a very small policy – enough to cover your burial expenses – and instead start putting money directly into college savings funds for your grandchildren. After all, you don’t seem to have any direct dependents besides yourself.

In terms of bang for the buck, this is probably going to give them the greatest benefit unless you were to die exceptionally young.

Q2: Social Security and taxes
My hubby and I were married last September. He’s been receiving retirement income for the last two years and started receiving Social Security benefits in August of last year. We were hit hard when figuring our taxes for last year. Because we’re filing as married, his SS benefits were taxable since his other income was over a certain amount. Should we have known about this? I’m wanting a way that we can prepare for the hit next year, as he will have received a full year of SS by next time. Should we just put a portion of that back each month for the tax bill?

Additionally, hubby cashed in some savings bonds last year and those were on our taxable interest statement. It seems that it kind of defeated the purpose of having them if we’re going to get hit with a huge bill because of cashing them in. Is there a way that we can make use of them without taking that huge hit? 
- Olivia

For starters, you’re not going to get hit with a huge bill for cashing in the savings bonds. Let’s say you bought bonds for $500 and are now cashing them in for $1,000. If you’re in the 20% tax bracket, your tax bill for that $1,000 you just stuck in your pocket is only $100. You’re only taxed on the gains, and even then, the highest federal tax bracket is 35% (and most people are far, far below that).

Whenever you earn income that doesn’t already have taxes taken out of it, you should put half of it in a savings account designated for taxes and forget about that money. When you do your taxes, pay your bill using the money in that account, leave behind a little bit for the following year, and withdraw the rest to do with whatever you want.

That’s how I do my own taxes. All of my income requires me to pay my own taxes in this way.

Q3: Dental challenges
I usually go to this great dentist, Dr. C., but this time around she was not available on the day that I needed to do the appointment so I went to a new dentist, Dr. L. Last time I saw Dr. C, in summer 2010, she told me specifically that I do *not* need to get my wisdom teeth out (I’m 26 and still have all of them. They’ve never hurt). Dr. L told me I absolutely *need* to get them out sometime this year. She referred me to a local oral surgeon.

I looked this surgeon up and he has horrible reviews…literally not even one review says anything positive about him. He does not work with my insurance so the estimated $3000 bill would fall on me. I called my insurance company and found out that they’ll only cover up to $1000 of any dental surgery…and the closest oral surgeons they work with are 60 miles away, in another state. So I’ll still have to pay estimated $2000, plus find somebody willing to take the day off to drive me because I won’t be able to drive myself back.

Dr. L had mostly good reviews but people did mention that she tried to do a lot of referrals for wisdom teeth, veneers, teeth whitening etc, and tried to push extra services on medicaid people. And looking back on it, she didn’t mention anything about wisdom teeth until after I had said I was a federal employee (USPS). What I did not mention, because this never comes up in conversation, is that I’m classified part time, and therefore don’t get all those sweet federal benefits. I just bought myself some cheapo dental and health insurance on my own because I’m paranoid. I’d think that if my wisdom teeth were so bad, she’d mention it right off, not wait until 10 minutes into the consult.

If Dr. L was my only dentist, I would’ve booked that oral surgery appointment today, but since the other dentist said I didn’t need it, I’m confused. Maybe my teeth have changed, and I do need it, or maybe I’m being ripped off! Or maybe it’s just a difference in opinion. I’m suspicious of Dr. L because she referred me to such a bad surgeon. My current plan is to make my next appointment with Dr. C and see what she says…if she thinks I need it now then I’ll do it. Plus she is very low-cost so maybe she knows a surgeon that is cheaper.

My question is, am I reacting rationally to this, or am I cheaping out on my health? Have you ever heard of a dentist trying to upsell? This is more money than I make in a month. I have the cash in the bank to cover it, but it would make a huge dent in my downpayment-on-a-house fund, plus surgery always has risks, complications, etc.

When I was a kid (7 or 8), my parents took me to a dentist that said I needed *all* of my teeth removed. The idea being that if all my baby teeth were removed, my adult teeth would come in straighter b/c nothing would be in the way. My parents could not afford this, plus they thought it was weird, so they took me to another dentist. He said that was totally crazy and I didn’t need that at all. Maybe this is the same situation?
- Chloe

Every time a medical professional suggests a significant procedure, you need to get a second opinion on it. In this case, your original dentist seems to be against it.

If I were you, unless there was an ongoing problem, I’d leave your wisdom teeth alone. I’d talk it over with my primary dentist, but it seems like there are other issues going on here outside of your teeth.

I’m not sure what’s going on in this story, but there are certainly some strange signs coming from the second dentist. I would not make major decisions based just on the words of this person.

Q4: Fear of switching careers
My husband would like to quit his unfulfilling job to spend some time working on a new business venture. Our only debt is $65,000 remaining on our mortgage (monthly payment about $1000), but it’s a little scary to think of cutting off our reliable source of income. Do you have recommendations or advice for us? We have three children and another on the way, and I feel a little overwhelmed about where to start looking for new insurance etc. We do have about $20,000 saved and will have a little more by the time he would quit his job. 
- Melinda

Unless he has a direct and very clear path to a steady income, he should not make this leap.

The only way I would ever recommend someone making such a leap is if there is going to be enough income coming in from the other person in the relationship to cover all of the bills or if the business is already earning enough income to pay the bills due to building it in one’s spare time.

If I were him, I would try to get the ball rolling on the business in his spare time before quitting the primary breadwinning job for the family.

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