i'm going to show you today some really
cool examples of how social security is
taxed going to clear up some
misconceptions but then i'm also going
to show you how to do this calculation
yourself
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hi i'm troy sharp ceo of oak harvest
financial group certified financial
planner professional host to the
retirement income show and also a
certified tax specialist so i feel like
for more than 10 years now we've been
way ahead of the curve as a retirement
planning firm we've been telling people
to do roth conversions to consider taxes
when you look at your income in
retirement to do all of these various
things that is specific that are
specific to retirement planning that
most accumulation phase advisors or
maybe just now or not even coming around
to today i'm going to share another one
of those concepts that we've talked to
our clients about and i've shared even
on the youtube channel before but it's
not just about how your social security
is taxed it's how your social security
election strategy the taxation of those
benefits how that works into an overall
retirement income and tax strategy too
often people say you should defer social
security
to maximize your benefit but what they
overlook is the power of how social
security is taxed and how that can
improve everything inside your
retirement for some of you it may make
sense to take social security sooner or
later everyone is different but i just
want to convey in this video the power
of how social security is taxed clear up
some of those misconceptions and help
you whether you reach out to us you work
with your advisor or you're just a diyer
so you can understand how social
security and the taxation of it can be a
very very powerful planning tool in your
retirement toolbox hey just a brief
interruption here if you like the
content if you're learning about social
security and taxes make sure to
subscribe to the channel comment down
below and hit that like button if you
enjoy it one of the main points i'm
going to get across today is that you
can have a whole lot of social security
income and pay very little if any tax
but once you start to introduce other
forms of income in retirement all of a
sudden the taxation of not only that
income but the social security income
can jump
significantly so one of the
misconceptions is when we look at let's
say you've read an article
about how social security is taxed or
you've done some research and you've
really kind of read
and
i used to get in these conversations all
the time with with clients with people
who come in and see me
because you read something and this is
right from the social security
administration and it's talking about
the
income thresholds that determine how
much of your social security is subject
to tax so if you're a single filer or an
individual and your combined income is
between twenty five and thirty four
thousand you may have to pay tax on up
to fifty percent of your benefits more
than thirty four thousand dollars of
combined income up to eighty five
percent of your benefits may be taxable
okay so 25 to 34 and then more than 34
you get into the 85 percent of your
benefits are taxable that doesn't mean
85 tax rate it says up to 85 percent of
the benefits received could be taxable
the key wording here is it says you may
have to pay
income tax on up to 50 percent of your
benefits if you file a joint return
these income thresholds are between 32
and 44 000 for 50
up to 50 percent and then more than 44
000 of combined income it's up to 85
percent so first off what is combined
income
it is what we call your provisional
income essentially it is half of your
social security benefits so if you have
50 000 of social security only half of
that goes towards that calculation and
then you add back any non-taxable
interest from muni bonds for example
plus any other income that you have
okay
most people when they read an article
they'll get that understanding but it's
the actual calculation itself where most
people go wrong
so
key takeaways here or hear your income
thresholds but the wording is you may
have to pay income tax on up to 50 or 85
percent depending if you're single or
married so
i'm actually going to show you the
worksheet and we're going to have this
link down below in the description so
this is directly from the irs but i'm
going to give you another link where you
can actually go and calculate this
yourself it's the exact same worksheet
it's just in a link where you can input
all the numbers right there and then
spit out an answer pretty cool
but this is actually the worksheet this
is publication 915 it is uh page 16 of
the pdf we'll have again this pdf in the
description a link to it as well as that
calculator so you can do this
calculation yourself but
i want you to just kind of work through
this
worksheet yourself just enter either
fictitious numbers or the numbers from
your actual tax return from last year if
you're taking social security add it in
if you've not yet begun social security
put your projected amount in but work
through it and this will really help you
understand how that calculation
unfolds and help you understand better
about the taxation of your social
security
so
let me give you an example here
if we switch over to this
link
first and foremost you're going to put
in if you're married filing jointly
your marginal tax bracket so this is the
next dollar of your what the next dollar
that you would earn what rate would it
be taxed at
here we would put in
any of these income sources that we have
so if we have ira distributions for
example they'd go here if we have
municipal bond interest if we have
dividends or capital gains
bond interest a pension benefit pretty
self-explanatory for the purpose of this
illustration i'm going to put nothing in
here
and then for social security benefits
i'm gonna put eighty thousand dollars
now if we think back to the previous
slide and what i told you you would say
okay if i have eighty thousand of social
security no other income provisional
income would be forty thousand one half
of the social security benefits if i'm
married filing jointly that falls
between the thirty two and forty four
thousand dollar threshold so i would
think that fifty percent of my social
security benefits are taxable
so
that would mean twenty thousand dollars
of that forty would be subject to income
tax and i'd be paying tax on that
the truth is
so we see
we have the eighty thousand this is the
forty thousand the one half number this
is the entire worksheet that i showed
you over here
the irs publication 915 page 16 of the
pdf this calculator just does all the
inputs for you this is that worksheet
it's just it's it's done for you
so
we see that and then we start to go
through all of the other points of the
worksheet this is why i want you to work
through it because
it just will be beneficial if you do
then we get down here and it says the
taxable social security benefit is four
thousand it's not twenty thousand
because if we just read an article and
it says if you fall in between this 32
to 44 because our provisional income was
40 that up to 50 percent of the benefit
is taxable keywords are up to
fifty percent of the benefit is taxable
doesn't mean it's fifty percent taxable
it's actually because of the
calculations in the worksheet only four
thousand dollars of our eighty thousand
dollar social security income is subject
to tax but it gets better
this worksheet it has one flaw here
it's not taking into account your
standard deduction or your itemized
deductions if that's what you do
so
this four thousand dollar number is
actually our it goes towards our
adjusted gross gross income
here is the actual full tax calculation
so once we go through that eighty
thousand of social security we get the
same four thousand dollar number but
that's not what's subject to tax that is
it's part of our gross income
modified adjusted gross income four
thousand we then have our deduction so
this is a standard deduction
taxable social security 4 000 total tax
zero so 80 000 of social security income
zero income taxes i've received this
comment sometimes when i do the roth
conversion videos or financial planning
videos and i'll show on the ledger for
those of you who follow the channel and
you'll see eighty thousand ninety
thousand seventy thousand of social
security income but zero taxes and i get
comments all the time troy i don't
understand what am i missing why can you
have that income and not pay any taxes
this is why this is why i'm showing you
this
so and i'm going to show you some
examples for single people as well but
let's say we have a hundred thousand
dollars of social security income
hundred thousand
our number comes to eleven thousand one
hundred that's what's taxable for social
security but we get our deductions the
standard deduction which again brings
our total tax down to zero
so
when we're looking at income planning
tax planning for retirement and also
social security planning this is what we
do for clients when we look at a full
comprehensive retirement plan and this
is what so much of the industry
overlooks one of the reasons to consider
deferring your social security is one it
gives you more time and space within
your income brackets to do roth
conversions because if we're doing roth
conversions while deferring we can take
roth distributions if we need additional
income later in life and that doesn't
increase our modified adjusted gross
income which means our medicare premiums
won't potentially go up net investment
income tax won't come into the picture
and it won't increase the taxation of
any of your social security benefits
if you remember earlier i said the
calculation for provisional income you
add back
it's one half of your social security
benefits plus any other income plus one
half of your non-taxable interest like
municipal bonds well roth ira
distributions don't count towards that
non-taxable interest it is a tax
redistribution but it doesn't go towards
that calculation
so
when we're considering do we defer
social security it's not just how long
you will live it's not just how much
income will you receive it's not just am
i better off keeping more money in my
portfolio and in
taking social security versus allowing
social security to defer and taking
income out of my accounts okay
it's also how does it impact my tax plan
because if we defer social security
and you think there's a pretty good
chance you're going to make it to 84 85
86 then
deferring till 70 mathematically is
probably the right decision the reason i
say probably is because you also should
take into account the time value of the
money but that's another video that's
another discussion
but when we take into account if we're
going to take into account the time
value or the opportunity cost of taking
money out of the portfolio versus social
security deferral we also have to take
into account the taxation of our future
income and also the taxation today
so
that's a little bit deep down a rabbit
hole
main point here is understand there are
powerful amazing tax benefits when it
comes to social security and how it's
taxed in this country
and most people don't understand this
calculation okay now i have an example
where i'm going to show you the same
eighty thousand dollars of social
security income but combined with 80 000
of ira distributions now this may be a
required distribution because you've not
done any roth conversions leading up to
age 72 but i just want to show you how
you lose the powerful benefit of social
security taxation the planning aspect to
it if you
don't do any planning leading up to it
and we're stuck with these big required
minimum distributions later in life
so we have the same 80 000 as social
security 80 000 of ira distributions
adjuster gross incomes 148 we get our
deduction but now look
68 000
of our social security is subject to
income tax i'm pretty sure this is the
85 percent of that benefit
18 000 in taxes so
the question never is
will we pay taxes in retirement you
absolutely are going to pay taxes in
retirement the only question is when do
you pay those taxes and how much tax do
you pay so if we
proactively were looking at roth
conversions targeting a customized
income and tax plan for you
it may make more sense to pay
the taxes earlier in life defer social
security because then based on inflation
based on your needs maybe your concerns
about the market crashing later in life
your concerns about taxes being higher
there is nothing more secure than having
a significant amount of tax-free income
being deposited into your bank account
every single month when you're 70 75 80
years old whatever that number you live
to
it's very very secure now the next
example i want to look at is 60 000 of
social security and a forty thousand
dollar ira withdrawal
so
we see that here ira 40 social security
60
this causes 28 000 of our social
security benefits to be taxable but an
ordinary income tax of only forty seven
hundred dollars so this isn't horrible
and this is one reason when we're
looking at planning into the future we
have to extrapolate out your estimated
account values require minimum
distributions income taxes and then also
the situation today and kind of have
this discussion over what makes the most
amount of sense
but this is not a bad situation to be in
this is one argument towards not
converting all of the ira over to roth
and oftentimes that doesn't make sense
at all the point is is even if we have
an rmd
of 40 000
later in life with 60 000 of social
security it's not that bad of a tax
situation now if taxes are higher in the
future this is a consideration something
maybe we want to get more of the roth
converted to reduce the r ds therefore
our ira distributions are less
but just something for you to think
about now i also wanted to show you
what's called the tax torpedo the social
security tax torpedo now i'm not going
to go too in depth about this because
it's not tremendously consequential but
it is something you should be aware of
so
all i've done here is we still have 60
000 of social security but i've
increased the ira distributions to 65
000
so this increases the tax up to 11 132
but here is the torpedo
so this is what we call a tax map
essentially because of how social
security is taxed when we take one
additional dollar from the ira if we're
at a certain level it causes either 50
cents more of your next social security
dollar to be taxed or 85 cents of that
one dollar to be subject to income tax
so it's a bit complicated you can google
the social security tax torpedo to learn
more about it
if we just pulled 60 000 out instead of
65 000 of this ira distribution
our tax liability would be right here
but because the tax torpedo when we look
at the tax map we're actually getting
taxed 40 percent on these dollars right
here even though we're nowhere near the
tops top tax bracket
so
to sum that up because i know it is
confusing
essentially it's certain income levels
of ira distributions so if we take an
ira distribution it brings us to a
certain income level it brings in to
taxation another either 50 cents or 85
cents of every one dollar received from
social security once we kind of get
through that threshold it evens out
but it's something to be aware of all
right so now i want to look at just a
single example so if you're a single
filer and you have social security the
numbers are very similar okay
here we have a single filer with 48 000
of social security paying zero in income
tax so some of you may be saying troy
how do i get 48 000 of social security
well if we look at the maximum amounts
for social security
so if you file at 62 your maximum
benefit is 23.64 per month someone who
files at full retirement age is
33.45 per month and someone who defers
all the way to age 70 right now the
maximum social security income check you
could receive is four thousand one
hundred and ninety four dollars per
month you do not have to make two
hundred thousand dollars a year for
thirty five years in order to receive
the maximum benefit if you have a middle
class job for thirty thirty five years
in this country you're probably going to
qualify for something very very close to
the maximum social security benefit at
full retirement age if you decide to
defer it until 70 you could have almost
4 200
per month
so
that is why
i wanted to show you this example
of social security of 48 000 because if
you have if you're a single filer and
you have social security of anything
less than that and no other income
sources you're paying zero in total tax
now if we look at a single filer that
has 48 000 in social security and 40 000
of other income in this example it's an
ira distribution uh but this could maybe
be a pension this could be bond interest
the tax amount due would be a little
different for sure if it's dividends or
capital gains because we have special
tax rates for dividends and capital
gains as well but i just wanted to point
this out
that extra forty thousand dollars of ira
distribution essentially is being taxed
at about twenty percent because we know
the social security is being taxed at
zero if we didn't have those
so we're paying about twenty percent as
far as the total tax liability now in
actuality 30 000 of your social security
becomes taxable so it brings that in
we have
provisional income of 64 which is one
half of social security 24 plus any
other income 40 000
brings our total tax to eight thousand
dollars so as we can see here there are
a lot of different decisions that need
to be made when it comes to your income
planning and tax planning and retirement
when you take social security how does
that impact your taxes where do you take
your other income from how does that
impact not just your taxes today but
your taxes in the future should you do
roth conversion should you not do roth
conversions all of these things
determine how much security you have in
retirement and again i want to remind
you it's not
if you'll pay taxes in retirement for
most of you it's when and how much will
you pay our goal is to help you pay the
least amount over time that you're
federally obligated to but by having a
proactive plan of action to help you be
more secure in retirement if you learn
something today if you benefited from
this video please share this with a
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you more connected to your money make
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seeing you on the next video
[Music]
you