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Will IRA payout spark Social Security tax?

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in Small Business Tax

Q: I've heard that I might pay tax on Social Security benefits because of the tax-free income earned by my IRAs and Roth IRAs. How can this be true? R.S., Eagle, Colo.

A: Technically, it's not true. Here's the deal: You may pay tax on your Social Security benefits if your "provisional income" for the year exceeds a specific amount. Your provisional income is your modified adjusted gross income (AGI) plus one-half of your Social Security benefits. For that purpose, "modified AGI" does not include qualified withdrawals from Roth IRAs, which are effectively tax-free. But the buildup of interest inside a regular IRA is tax-deferred (not tax-free), so when you take an IRA distribution that includes taxable earnings, it does count toward your provisional income.

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