Proper Planning May Help You Reduce Taxes on Your Social Security Income

Video Transcript

When my mom turned 60, we had a surprise for her. My brother and sister and I surprised my mother with a trip. The three of us pitched in and along with my father, we took a family vacation something that we haven’t done a long time. And the five of us went off and spent an entire week together. It was a truly fantastic experience.

And I’ll never forget when we gave my mom that gift. She had tears running down her eyes. She was so happy and excited. And it’s something that I’ll remember as a really cool experience that we were able to provide for her. Now, there’s good surprises and bad surprises. That one from my mom was a good surprise.

What I want to talk about today, which is taxes on social security, for a lot of people can become a bad surprise. Social security is an interesting thing. You’ve been putting money in to social security most of your life, most likely. That FICA that you see on your paychecks, all of those years.

That’s your social security. It’s you making deposits into social security. And that social security earnings that you guys get when you turn 62, 66, 70, whatever the age might be, those are them paying you out things that you’ve put in or your employers put in on your behalf. Now, that FICA is not like money you put in your 401k, that FICA has already been taxed. Your 401k is money that has got to be taxed. Your FICA paychecks, your social security, that’s money that’s already been taxed. Now social security was signed into law in 1935 as part of the new deal. And one of the promises that was made to us back then was that we as Americans would never pay taxes on our social security income.

Well, guess what? Surprise. Here we are in 2020 and taxes on social security are a very real thing. What does that mean? Well, if your social security is taxed because the rule is it may be taxed. And if your social security is taxed, what that means is you have to spend down more of your other assets to live the same life.

So for example, if you’re getting $40,000 a year in social security and you have to spend 12,000 in taxes in order to make up that difference, you’ve got to take that 12 from somewhere else. And you know what happens if you take that 12 from somewhere else? What happens is your money is going to run out faster.

Your kids aren’t going to inherit as much. You’re not gonna be able to live the same lifestyle that you were used to living. So, how did they determine if your social security is taxed? Well, they have a fun little calculation they do, they refer to it as the provisional income calculation. And this is done in your tax return and it’s actually a separate side calculation is kind of done behind the scenes. How do they come up with this provisional income calculation? Well, it’s a fun little thing.

And what they do is they first, they take your social security income. And if you’re married, it’s for you and your spouse, and they divide it by two. So if my wife and I were married, we were getting $40,000 a year in social security, they’d take 20,000 and put us in the equation. And then they take anyone, what I refer to as taxable income, taxable income is wages, if you’re still working and then the interest dividends and capital gains. Interest, dividends and capital gains, they add that to the equation. Then they take any tax deferred income. So tax deferred income is IRA and annuity withdrawals, 401k withdrawals, things like that, that goes into the equation.

And finally they take any tax-free interest. So if you have any muni bonds or any other tax-free interest, they add that to the equation. And they add it all up. And if you’re married and that number comes to more than $44,000, congratulations, 85% of your social security is now taxable. But, if you’re married, and you can keep that number below $32,000, guess what?

None of your social security is taxable. Is that a big deal? Yeah, that’s a huge deal. That could mean the difference between your money lasting the rest of your life and it running out 10 years before you do. That could mean the difference between you leaving a couple of hundred thousand dollars extra to your kids or your favorite charity, or uncle Sam taking the majority of it.

This is a really big, big deal. Now, is there something you can do about it? Yes. In almost every situation. Now, there are some people that have large pensions or some other scenarios that they can’t do anything about it. But for most Americans. You can do something about your taxation on social security.

It’s usually not something you could snap your finger and have it happen overnight. But, within a few years time, we can usually work to make your social security tax decreased as much as humanly possible. Again, is it worth it? Yes. When should you start? As soon as humanly possible. If you have questions on this or how the taxation on social security works, or if it even can benefit you, please feel free to reach out to us.

We’d love to talk to you further about this. Thanks.

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