A reader sent in a question about how annuity income could affect his tax on Social Security benefits: “George, I’m considering purchasing an immediate annuity. I’m 81 years old and in excellent health. The funds would come from my IRA, so I would not receive the tax break from the exclusion ratio. “I am considering this purchase because I’m currently drawing out about $1,400 a month from my IRA, or about $16,800 a year. This is affecting the tax on my Social Security income. What I don't know is if the payout from the immediate annuity would be included in the calculation of income in terms of calculating my Social Security tax? “I am aware that I’d have to pay ordinary income on the funds received. The payout on the annuity is $517 per month for life, so it reduces my income by about $10,000 a year. The question is: Will I have to include the annuity income in my Social Security calculations. “Thanks so much for any thoughts you have on this matter.” My answer: “You are correct in saying that the annuity would not qualify for the exclusion ratio since the money is coming from your IRA. And since all of the annuity’s income is taxable, it must be included in the calculation to determine how much of your Social Security benefits are taxable.” Many boomers entering retirement are not aware that their Social Security benefits could be taxable. This can apply if you are single and earning at least $25,000 a year or married and earning $32,000 or more. Earnings include one-half of your benefits and all other income, including tax-exempt interest. So before you make the decision to start taking Social Security, make sure you understand how much of those benefits will be taxable. For information, go to IRS Publication 915. Best wishes, George P.S. I’m now on Twitter. Follow me at http://twitter.com/efinancialwrite for frequent updates, personal insights and observations on how to have a healthy retirement.