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Working In Retirement? Reduce The Tax Bite

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Q  I’m single, age 64 and receiving Social Security benefits while I work part time. Can I avoid tax on the benefits by putting it into an IRA? J.A., Billings, MT

A  Not exactly. You’re taxed on up to 50% of Social Security benefits if your provisional income (PI), including earnings from a job, exceeds the first tier of $25,000 of AGI ($32,000 for joint filers). Up to 85% of the benefits are taxable if your PI exceeds a second AGI tier of $34,000 ($44,000 for joint filers). You can’t treat the benefits as compensation for IRA contribution purposes. But, because you’re working part time, you can contribute to an IRA, which may reduce your tax bill if you qualify for a deductible contribution.

Tip: For 2007, a person age 50 or older can contribute the lesser of compensation or $5,000. Deduct the full amount if you don’t participate in an employer retirement plan. Otherwise, the deduction phases out for 2007 between $52,000 and $62,000 of AGI ($83,000 and $103,000 for joint filers).

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