Ep. 231 – Social Security Taxation – How it Works in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss how social security taxation works for both single and married filing jointly. Other sources of income you have coming in determine the amount of your social security that will be taxed.

Listen in to learn the importance of understanding your sources of income, social security benefits, and how they’ll be taxed, and have a long-term perspective. You will also learn why some people with low income in other areas can have their social security untaxed.

In this episode, find out:

●     How a single person needs to think about social security and their other sources of income.

●     Understanding the other sources of income that determine your social security taxability.

●     A scenario on how married filing jointly social security is taxed as determined by income.

●     Why some people with low income in other areas can have their social security untaxed.

●     How your social security tax ranges differs when filing as a single person.

●     How states differ from the federal government when it comes to social security taxation.

●     The importance of understanding your sources of income and social security benefits taxation.

●     The benefits of working with a financial advisor to help you take a long-term perspective.

●     Taylor explains where to find your social security item on your tax returns.

Tweetable Quotes:

●     “The amount of your social security that is reported on your tax return as taxable depends on what your other sources of income are; the more income you have from other sources, the more of your social security is going to be taxable.”– Taylor Wolverton

●     “Every state tax social security a little bit differently; some may follow same rules as federal taxation while some states don’t tax social security at all.”– Taylor Wolverton

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	So thank you very much, Taylor, for hanging out with us today.
Taylor Wolverton:	Yeah, thanks for having me.
Radon Stancil:	So what we wanted to do is we get a lot of questions from our clients, and basically, it’s around this idea of as they’re getting … Sometimes they’re getting ready for social security and they go, “How does that work? How does it get taxed?,” and then sometimes they might’ve already started social security, and they still don’t understand how they get taxed on social security. The government has done a really nice job of not making this super simple, and they give us all kinds of different percentages. So what we thought we would do is just kind of take through the scenario here of saying, “Okay, first of all, there’s some different things that we’ve got to think about in the setup of taxes.”
	We’ve got single, we’ve got married filing jointly, and then we even have some folks that are married filing separately. I don’t think we’ll spend a ton of time on that one this year, I mean, on this episode. Let’s just really kind of focus between the single filing single, and then married filing jointly, because I think it’s kind of rare that you’re married and filing separate, but it does occur. So can you kind of set this up for us and help us to understand, first of all, let’s just take the single person, and help us to understand how they need to think about what’s coming in from social security and how they would think about it with other money that they’ve got coming in as well.
Taylor Wolverton:	Yeah. So the amount of your social security that is reported on your tax return as taxable depends on what your other sources of income are. So the more income you have from other sources, the more of your social security that’s going to be taxable. So the other sources of income that are going to affect your social security taxability comes from your adjusted gross income, plus any non-taxable interest that you have, and then half of what your total social security benefits are for the year. Your adjusted gross income comes from all of your other sources of income.
	It includes any interest that you have from like savings accounts, any dividends that you have from brokerage accounts, or stocks that you’re holding, any distributions that you’re taking from your IRA or other investment and savings accounts. So any type of income, really, that you have on your tax return that’s reported as taxable is going to be taken into consideration when we’re adding up your AGI or your adjusted gross income. Then, if you have non-taxable interest, usually that comes from holding like municipal bonds. If you have those as part of your portfolio, those have interest. The interest is usually not taxable, but for determining your social security, that gets added into the equation, and then, again, half of your social security benefits. So that’s really where the determination comes from, is what that number is, and we’ll refer to that as your combined income amount, so …
Radon Stancil:	That was a mouthful.
Murs Tariq:	Yeah.
Radon Stancil:	Let’s bring it down maybe kind of give an example of a scenario, like an easy one.
Taylor Wolverton:	Yeah. That’s a lot.
Murs Tariq:	Yeah. So you can already see that trying to figure out what social security is and how it’s going to be taxed, and it’s already, it can make your mind spin a little bit. We’ll get the comment all the time from clients that say, “Wait a second. So I’ve paid into social security all my life, and everyone’s got their opinions about social security, but now you’re telling me that I’m also going to have to pay taxes on it if I make a certain amount of income, and so security is not going to cover all my retirement income, so yeah, I need other income to live a nice, comfortable retirement, so but you’re going to tax me on it for how much I make.” I don’t know a great way to set up a good example, but-
Radon Stancil:	So I was going to say we actually have planned how we’re going to do this. I think we could go right over here, and then we can come back, and let’s just kind of go through that example, because, I mean, what she just said, I think we need in order to do that. Let’s just kind of take us through this example here.
Murs Tariq:	So let’s do this, Taylor. Let’s say someone’s got other income, so that could be their AGI of around 75,000, and let’s talk about Bob and Jane. So Bob is going to get $3,000 a month of social security, and Jane is also going to get, just to make it easy, $3,000 a month of social security. So you got 75 coming in from outside sources, you got six coming in from social security, and so walk us through, first of all, how do you get to what the combined income is, and then how that starts to get taxed?
Taylor Wolverton:	Yeah. So if we’re saying their other sources of income is $75,000, then that would be probably the AGI part of the equation, so the first part, and then we’re adding in any tax-exempt interest that they have, which in this example, they don’t have any, and then we’re adding back in half of their social security benefits. So in this example … Wait, are we saying $3,000 a month, or are we saying a year?
Radon Stancil:	A month, yes.
Taylor Wolverton:	Okay. And we were looking at it annually … So one second, I have to get my calculator to make this a legitimate example.
Radon Stancil:	Yeah. So to kind of set this up, as she’s kind of looking at the calculator here, because we’re doing a live scenario here. So what we’re seeing is, just to repeat, that they’ve got $3,000 a month coming in each, total of six. Half of that now is going to get counted as a part of the number. So now, we’re going to get like a true adjusted gross income.
Taylor Woolverton:	Yes. Okay. So if there’s two people, they’re both getting $3,000 a month in social security, annually, that’s $72,000. So half of that amount is $36,000, so that’s what we’re adding back to their other sources of income, which is a 75. So $36,000 of social security benefits, plus $75,000 of other sources of income, we’re looking at a total of $110,000 for determining how much of their social security is going to be taxable.
	So then, it gets a little more complicated from there. There’s some thresholds. Do you want me to go into that?
Radon Stancil:	Yeah, just jump right in there.
Taylor Wolverton:	Okay, cool. This part does depend on your tax filing status. So this example, these people are married. This is a couple, so we’re assuming they’re married filing jointly. That’s their tax filing status, and so if your income …
	And there’s some numbers, so I’ll try to talk slow. Stay with us, but if their income is between $32,000 and $44,000, half of their total social security benefits will be taxable. If their income is more than the upper range of $44,000, then up to 85% of their social security benefits will be taxable. So in our example, where their combined income is $111,000, they’re far above the upper range of $44,000, so 85% of their social security benefits will be taxable. So for them, where they have $72,000 a year in social security, 85% of that is $61,200, so that’s what will be reported on their tax return as being taxable for social security.
Radon Stancil:	So I’ve got a question on that real quick. I’m sorry.
Murs Tariq:	Go ahead.
Radon Stancil:	My brain. So you know how back there in the very beginning, you took half of the social security and added that to the math?
Taylor Wolverton:	Right.
Radon Stancil:	So are you saying that now that we do that, 85% goes up there, and we just adjust that number now?
Taylor Wolverton:	So when you add back half of the social security to the combined income amount, that’s what determines which range you’re falling into, whether it’s 50% of your social security being taxable or 85% of your social security being taxable. Yes.
Radon Stancil:	I got you.
Murs Tariq:	So to say it back, 75,000 is, let’s just assume their AGI. They don’t have non-taxable interest. We’ve just determined that 85% of their social security is going to be taxable. What was that number that you said, 85 of the 76,000?
Taylor Wolverton:	It’s $61,000 or so.
Murs Tariq:	Yeah. So their total annual social security benefit is 76,000 a year, but they hit this threshold above 44,000, so 61,000 is going to be added to their overall income. So you take 75 plus roughly the 61, and that is their taxable income. Is that right?
Taylor Wolverton:	Yeah.
Murs Tariq:	So like 137 or whatever that number comes out to?
Radon Stancil:	Yeah, and by the way, if your brain right now is blowing up, I have to always remind people when we do episodes like this, that we do have a blog on our blog page that’ll have all of these numbers. It’ll have all of these scenarios here so that you can kind of go read through it and make sure that you understand it as well. All right, so that’s our thresholds. That’s an example there of married. So if a person is single, we don’t have to go through the whole scenario, but could you just say, “Okay, we just told about the thresholds 32 to 44.” Oh, I’m sorry, I’m going to-
Taylor Wolverton:	Yeah.
Radon Stancil:	Before we go to single, what if it’s below 32,000, because we just said 32,000 to 44,000? What if we did this math and the persons just happens that they’re below 32,000?
Taylor Wolverton:	Yeah. So it’s actually possible for some people that have low income in other areas, that none of their social security will be taxable at all. It’s a little more complex. We’re simplifying it a little bit, which I think is good for purposes of an episode that you’re listening to or this video that you’re watching, but it’s kind of more of like a sliding scale and it kind of depends on how much of your income is below or above these thresholds of 32,000 or the 44,000. So it’s kind of on a sliding scale, so it’s possible that none of your social security could be taxable.
	It’s also possible that 10% of your social security could be taxable. I’m just throwing out random numbers, but the most it will ever be taxed at is 85%, or the most that will be taxable, let me say it in a better way. The most that will be taxable is 85%. So it could be anywhere between zero to 85% based on your income. These are just kind of starting points to say if you’re in this range, it’s likely to be around 50%. If you’re in this range, it’s likely to be up to 85%, but yeah, if you’re below the $32,000, you’re married filing jointly, it is possible that none of your social security is taxable at all.
Radon Stancil:	Okay.
Murs Tariq:	So then, let’s just hit on real quickly the difference of what that ranges from married filing jointly, and then if someone is filing single, because there is a difference there in the tax code in general, but also, how the ranges for social security being taxed.
Taylor Wolverton:	Yes. Okay. So if you are single, and that’s your tax filing status, or head of household or whatever, similar statuses like that, then the ranges do change slightly. So now, instead of where we were with married filing jointly, the range being 32,000 to 44,000, if you’re single, it’s actually 25,000 to 34,000. So if your income is between that range, 25,000 to 34,000, then up to 50% of your benefits will be taxable. If your income is above the $34,000 range, that’s when up to 85% of your social security benefits will be taxable.
Radon Stancil:	Okay. I think all these things, I know that what we’ve been talking about thus far is dealing on the federal side of our taxable scenario.
Taylor Wolverton:	Yes.
Radon Stancil:	How does it vary depending upon on the state side, and I know that states may do it differently, so let’s don’t talk about every state, but just kind of give us an idea about like how a state looks at it versus how federal looks at it.
Taylor Wolverton:	Yeah, that’s good, because I don’t know how every state looks at it, but it’s true. Every state taxes social security a little bit differently. Some may follow the same rules as federal taxation. Some states don’t tax social security at all. So the state that most of our clients reside in that we’re looking at, North Carolina, does not tax social security benefits at all.
	So for people that live in North Carolina, they only have to worry about federal taxes on their social security. They’re not paying any state taxes at all on those benefits.
Murs Tariq:	So you’ve been running a lot of our tax strategy meetings with clients to help them get projections on what this year is looking like, help them think through and make sure they’re not surprised, and also coming up with strategy. So in your own words, I guess, tell us how important it is to understand how social security is taxed when we’re looking at it from a strategy perspective or an advisory type of perspective.
Taylor Wolverton:	Yeah. Well, it’s definitely going to affect how much you pay this year and every year going forward in taxes. I mean, I think it’s important for everyone to understand what their sources of income are, how much they’re paying in taxes. For a lot of people, it’s one of the biggest expenses that they have, is taxes. So I would say you want to be able to understand what your social security benefits are, how those are being taxed, how that’s going to affect your tax liability for this year, making sure that if you need to withhold taxes on your social security, that you have that set up properly, or that you’re withholding from other places so that you’re not surprised by the time you do file your tax return, and maybe you have a large tax liability that you are not expecting or are not prepared for. That’s what we want to prevent from happening, so …
Murs Tariq:	Yeah. And on top of that, I’ve got a pretty specific example of a client that I was working with, and she turned on social security, not fully realizing what that would do to their overall taxation scenario, and one of her goals is to leave a legacy behind, and a tax-free type of legacy behind, which is really doing Roth conversions over time, and so she decided, and I’m not saying this is for everyone, but she decided, “Let me, in all essence, stop my social security. Let me pay it back as if it never happened, because now I know it is going to affect my taxes, which therein, it affects my ability to maximize Roth conversions.” She said, “I’m going to turn off social security for now. We’re going to focus, for the next few years, on Roth conversions, and then I’ll turn it back on.”
	In her mind, it’s all about how you shape some things and why we make the decisions we make. You got to go back to the goal. The goal of hers is to leave a tax-free legacy behind. So to optimize that, reducing income, so that we can, in all essence, add income back in a Roth conversion type of strategy was very important to her. Again, that’s not going to be for everyone, but it’s just a look into how we are thinking about certain goals that people have and, “How can we make this happen without overpaying in certain scenarios and stuff like that?”
	Also, the benefit here is that her social security is going to continue to grow, and then she’ll have her Roth conversion strategy, and then have a higher social security down the road as well. So some of this is just all about knowing how certain things work when it comes to retirement.
Radon Stancil:	One thing-
Taylor Wolverton:	Yeah, and I would say-
Radon Stancil:	Go ahead. I’m sorry.
Taylor Wolverton:	Okay. I was going to say I think that’s a benefit to working with an advisor is taking the long-term perspective, because I think someone listening to this podcast could start to wonder, I think it’s a logical question to ask, “Well, how do I keep my social security income from being 85% of it from being taxable, and what do I need to do? How do I control my other sources of income?” But what I would say is to take the long-term perspective and to think about, “What are your goals? Do you want to leave a legacy?”
	Ultimately, what we want for our clients is for them to pay the lowest amount of taxes over their lifetime, not only the lowest amount of taxes that they can pay this year. So it might make sense in scenarios like the one that Murs and Rado were just talking about, to actually intentionally pay more taxes, whether social security is part of that equation or not. In that example, it wasn’t, but it might make sense to pay more taxes this year so that you can limit the amount of taxes you’re paying in the future and to have that long-term perspective to look at, “What taxes am I paying over my entire lifetime, not just in 2023?”
Radon Stancil:	Yeah, great. So one of the things too, that as we were prepping for this, and I think it’s just a really good thing so people can visualize it, if a person’s trying to figure out where do they even locate this on their tax return, where would you find your social security item on there, because sometimes you see that page with all those lines on there? It’s like, “What am I looking at?”
Taylor Wolverton:	Yeah, tax returns are not always the easiest thing to navigate. So yeah, I think everyone listening, if you have social security benefits, pull out your most recent tax return, find the 1040. Usually it’s the first page, and look at line 6a on your form 1040. That will tell you how much social security benefits you had on that for that year, for whatever tax return you’re looking at, is 2022, then how much social security benefits you had in 2022. Then, if you look to the right of that line, labeled as 6b, that will tell you how much of your social security benefits were actually taxable. So the amount in 6b should be lower than the amount in 6a, because not all of your social security benefits are going to be taxable, but yeah, definitely look at your tax return and see what your situation is.
Radon Stancil:	Well, if there’s any doubt in anybody’s mind that Taylor knows and understands taxes, you probably now know, yes, absolutely she does, and that’s why we love having Taylor on our team, but thank you very much, Taylor. I’ll just say this again, whoever’s listening, don’t forget to go to the website. You’ll be able to get a whole blog written on this. All these numbers will be laid out for you, so you don’t have to sit there and take a bunch of notes and get those numbers mixed up, but thank you again very much, Taylor. We appreciated it.
Taylor Wolverton:	Yeah, thank you.