The effect of income from your 403(b) or other teachers' retirement fund on your taxes depends on your deductions and exemptions, your filing status and the amount withdrawn from the retirement fund. If your combined taxable income, as calculated by a formula that discounts Social Security income by 50 percent, exceeds a threshold, you must pay taxes on between 50 percent and 85 percent of your Social Security benefits.
The Social Security Tax Formula
If half your Social Security income plus all other taxable income equals more than $25,000 annually for singles or $32,000 for couples, it is taxable. Using this formula, if your taxable income is between $25,000 and $34,000 for singles or $32,000 to $44,000 for couples, you must pay taxes on 50 percent of your Social Security benefit. If your combined taxable income calculated according to this formula is more than $34,000 for singles or $44,000 for couples, you'll pay taxes on 85 percent of your Social Security benefits.
Theoretical Tax Calculation
If your Social Security benefits are $16,000 and your benefits from your teachers' retirement fund are $20,000, half your Social Security benefits plus your retirement benefits equal $28,000. If you're filing jointly your Social Security benefits remain untaxed. If you're filing singly, you must pay taxes on half your Social Security benefits. With total taxable income equaling $28,000, assuming for the moment that you have no other taxable income or tax credits, your taxes due for 2013 are 10 percent of the first $17,851, which is $1,785, plus 15 percent on the difference between $25,000 and $17,851, which is $1,072. Your total taxes according to this theoretical calculation are $2,857.
Real World Tax Calculations
The taxes you really pay depend on the details of your tax return. If you're married and filing jointly, for example, for 2013 your standard tax deduction is $11,900. After subtracting the standard deduction in the previous example, no taxes on Social Security income are due even if you file singly. If filing singly, to reach the threshold where taxes are due on 50 percent of your social security income, the income from your teacher's retirement would have to reach $43,900. Itemized deductions, charitable contributions and a variety of available exemptions and credits may allow you to withdraw substantially more from your retirement account before reaching the threshold where taxes become due on Social Security benefits.
One simple way to avoid paying taxes on your Social Security income is to keep your withdrawals from your teachers' retirement fund a few dollars under the threshold where taxes become due on Social Security benefits. If you need to withdraw more than that from your teachers' retirement fund, withdraw enough above the threshold every other year to fund your living expenses for two years. The other year, when you withdraw just under the threshold amount, you pay no Social Security taxes.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.