How are your Social Security benefits taxed, and is it possible to pay zero taxes on your
social security? Just maybe: I'm going to show you how to do it in this video.
Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner professional
and host of the Retirement Income Show. When it comes to social security,
we have to understand a couple definitions. One of them is provisional income. So,
provisional income is all of your gross income, plus any tax-free interest (from municipal bonds,
for example) added back in, and then one half of your Social Security income.
So provisional income is one half of your Social Security, the rest of your income,
and any tax-free income added back in. When we look at the chart for how Social Security
is taxed, if you're a single filer and you have less than $25,000 of income, your Social Security
is 100% tax-free. If your income falls between $25,000 to $34,000, provisional income that is,
50% of your Social Security is tax free, 50% of it is subject to income taxes. And
then if you're a single filer and you have more than $34,000 of provisional income,
then 85% of your Social Security is subject to income taxes. Never more than 85% of your Social
Security will be subject to income taxes. Now, if you're married and filing jointly,
your provisional income, if it's less than $32,000, Social Security is tax-free. Between
$32,000 and $44,000, 50% of it is taxable, 50% of it is tax free. And then $44,000 -- more
than [and] up to 85% of your Social Security income will be subject to income taxes.
Now, these are the thresholds. They may not sound large at first. But when you understand
concepts about retirement income planning: in retirement, that's the only time typically we
ever get to control what goes on to our tax return. So overall, we need to plan. Do we want
to save taxes today? Or do we want to save taxes over the course of our retirement? And we need to
embark upon that strategy or that path, which is best suited for our overall retirement goals.
But if we want to save more taxes today -- because we might think we're going to be in
a lower tax bracket in the future, or we don't have a large IRA balance -- and therefore we
don't have to worry about increasing required minimum distributions, [then] we may want to
save taxes today. So, when we take income in retirement [then] we could, for example,
harvest capital gains and losses to offset them, take no IRA distributions,
and then only take from savings or possibly capital gains up to these certain limits.
So, where we take our income from, we can control what goes on the [Form] 1040
(which is your tax return). And we can manage what our provisional income is to
determine what our social security taxes are. A lot of times when clients come in to see me and
we're doing this tax planning, we'll identify these opportunities and say, Look, if we stop
taking the income from here, if we change these investments around, if we add this investment in,
now we have a retirement income plan. This is where you're going to take your income from and
how much. [Then] we can manipulate the tax return to reduce the provisional income to fall into some
of these brackets. And it might be two years, four years, five years, seven years, where we
can get the Social Security Income 100% tax free, or maybe only 50% of it subject to income taxes.
And then for some people, there's nothing we can do: Iit's just always going to be subject
to income taxes at the 85% threshold. The point is, to get you more connected
to your money, we have to understand what provisional income is, [and] how social
security is taxed. But, more importantly I'd say, [is] how this decision (from a
planning standpoint) ties into everything else that you're doing in your retirement plan.
This is how social security is taxed. Understand that in retirement you can control what goes
on your tax return by the types of investments that you have, the accounts you place them in,
and where you take your income from. One thing I will add here is mutual funds.
A lot of times with mutual funds, if we're big mutual fund investors, they will distribute
capital gains, and we don't necessarily know how much that's going to be, so sometimes that can
mess up the calculation a little bit. But for the purposes of this video,
I'm glad now you understand how Social Security is taxed; how you can have control over what income
tax rate you pay on your social security. And, of course, if you enjoyed this video,
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