October 9, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for October 9, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Social Security Taxation – How it Works in Retirement

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.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Social Security Taxation – How it Works

Social Security taxation is complex. You may need to pay taxes on your benefits, or you may not have to pay taxes. Ultimately, your combined income will determine if you pay taxes and will include the sum of….https://pomwealth.net/social-security-taxation-how-it-works/

CLICK HERE TO READ THE BLOG

Social Security Taxation – How it Works

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Social Security taxation is complex. You may need to pay taxes on your benefits, or you may not have to pay taxes. Ultimately, your combined income will determine if you pay taxes and will include the sum of:

  • Adjusted gross income
  • Non-taxable interest
  • Half of your Social Security benefits

Often, clients of ours are taken aback because they paid into Social Security their entire lives, and then they find out that they may be taxed on their benefits. For many of our clients, the benefits that they receive are not enough to live the lifestyle they want in retirement, so they’ll need other sources of income, such as distributions from their IRA.

We brought Taylor Wolverton, a member of our team, to our podcast to discuss how your Social Security is taxed because there are a lot of moving parts to consider. Taylor is our lead tax strategist and an Enrolled Agent, so she’s hyper-focused on individual taxation.

P.S. We are going to go through a lot of numbers, so take your time and reread this post a few times. However, if you do have questions about your specific situation, feel free to schedule a free 15-minute call with us.

Breaking Down the Figures

We have three main factors in determining how much of your benefits are taxable, but what do these really encompass?

What is Adjusted Gross Income?

Adjusted gross income (AGI) includes:

  • Interest from savings accounts
  • Dividends
  • IRA or other distributions

Your AGI includes any type of income that you’ll be taxed on in a given year.

What is Non-taxable Interest?

Your non-taxable interest comes from things like municipal bonds. Now, you must combine all this income plus half of your Social Security benefits. It’s a lot to consider.

Example of Taxation on Social Security

Someone has other sources of income of $75,000. Bob and Jane each receive $3,000 per month from Social Security ($6,000 total). Based on this example, there is:

  • $75,000 AGI
  • $0 tax-exempt interest
  • 50% of Social Security benefits, or $36,000 annually

Other sources of income are now $75,000 + $36,000 or $111,000. Now, it gets a little more complicated because of your tax filing status and the various thresholds that this may include.

Married Filing Jointly

If your income is between $32,000 and $40,000, up to 50% of your benefits may be taxable. However, if the couple’s income is more than $44,000, up to 85% of benefits will be taxable.

In the example above, the couple has $72,000 in Social Security benefits, so $61,200 will be reported on the couple’s tax return and will be taxable.

Going over these figures again, based on these calculations, the couple would have:

  • $75,000 AGI
  • $61,200 (85% of $72,000) from Social Security

Total taxable income is $136,200.

Note: For people who have income less than $32,000, you might not pay any taxes at all on your Social Security. However, taxation is on a sliding scale. At the most, 85% of your benefits are taxable.

Thresholds for Single, Head of Household, Qualifying Widow(er), or Married Filing Separately (and you did not live with your spouse during the year) 

A single person will have a different threshold for Social Security. You’ll be taxed up to 50% if you have income of $25,000 – $34,000. You may be taxed up to 85% if you have income of more than $34,000.

You’ll want to keep in mind that taxes are a bit more complicated than the examples above. We used approximations for these figures, but you’ll also need to consider credits, deductions, and special financial situations, which can lower your tax bill, too.

Variations Based on States

All the taxation above this point is based on the federal level. Every state has different rules that you must consider when retirement planning because some may follow federal rules, while others may not tax Social Security.

In North Carolina, where our office is located, there is no tax on Social Security, and this can be advantageous when trying to secure your retirement. 

How Social Security Taxation Impacts Retirement Planning

When looking at Social Security taxation, it’s important to know:

  • Sources of income
  • Taxes

Often, one of the largest expenses people have is the taxes that they need to pay in retirement. You’re not saving money for retirement any longer – you’re living off what you saved.

You need to understand how Social Security benefits will impact your taxes this coming year.

It’s possible to withhold taxes in some areas to lower the pending tax burden, but this is something that you need to consider well ahead of time. You never want to have a surprise when filing a tax return because you didn’t realize that Social Security is taxed.

Example of the Impact Social Security Had On One Client

One client of ours has the goal of leaving a tax-free legacy behind when she retires. She turned on Social Security, but she didn’t realize that she would be taxed on her benefits. 

What did she do?

  • Turned off Social Security
  • Paid it back
  • Leveraged Roth conversions for a few years
  • Turned benefits back on

She wants to leave a tax-free legacy behind, so it was crucial to make the most out of tax-free Roth conversions.

While she did have to pay back the benefits she received, she does benefit from higher Social Security benefits when she does decide to take them in the future.

Working with an advisor allows you to take the long-term approach to your Social Security and maybe avoid 85% of your benefits being taxable. A long-term perspective, based on your goals, needs to be considered.

Our goal is to limit the amount of taxation over a lifetime rather than a short period of time.

You may find that paying more taxes this year allows you to lower your burden over your lifetime. If you pay a bit more in taxes today but save 10% every year, it’s often in your favor to take the tax hit immediately.

Where to Learn How Much of Your Benefits Were Taxable

Pull out your most recent tax return and find your 1040 form. Often, this is the first page of your return. You’ll want to go to line 6a. This will show you how much of your benefits were for that year. If you look to the right to 6b, you’ll see how much of your benefits were taxable.

IRS officials do like to update income tax brackets and change percentages around for inflation. You’ll need to consult with us or a tax professional to learn the current year’s guidelines for income ranges and maximum taxation percentages.

The IRS does have an online calculator (here) where you can plug in data and learn how much of your benefits are taxable.

Do you want to talk to us about your tax situation?Schedule a free 15-minute call today.

Social Security Questions Answered

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Social Security is such a key part of retirement planning, but people have a lot of questions that they never ask about. If you’re relying on Social Security to secure your retirement, you must know the answers to some key questions.

Don’t know what questions to ask?

We have you covered. We’ll be discussing the most important questions you should be asking about Social Security.

Top Social Security Questions and Answers

How Do I Find Out How Much My Social Security Benefits Will Be?

Determining your Social Security benefits was, at one time, much easier. Many people probably remember the time when paper statements were sent to you in the mail explaining just how much your benefits would be if you retired now or in the future.

However, the Social Security Administration wants to save money and encourage people to use its website. As a result, you won’t receive these paper statements in the mail anymore.

Instead, you’ll want to go to:

We can run estimates to determine your benefits, but the only 100% accurate solution to find out about your Social Security benefits is to go straight to the Social Security Administration.

You can view how much you’ll have in benefits if you retire now or in the future. Additionally, you can apply for benefits right on the platform if you like. You should sign up about three months before you plan to take your benefits just to be on the safe side.

Bonus Question: What about spousal benefits and Social Security?

Individuals have two options for Social Security:

  1. Their own benefit
  2. Their spouse’s benefit

Why would you want to take your spousal benefits? Typically, one spouse works more than the other spouse or earns more than their spouse and can take higher benefits. Ultimately, most people want to maximize their benefits, so they’ll only take their benefit if it’s the higher of the two amounts.

Let’s see a few examples of this:

  • One spouse goes to work, and the other raises the kids. If you’re married for 10 or more years, your spouse can take your spousal benefits.
  • Both spouses are the same age (just to make this easy), and they’re 67 years old.
  • The working spouse has $3,000 a month in Social Security benefits.
  • The non-working spouse, who didn’t get to work and earn credits, may have a $1,000 benefit.
  • You can take your $1,000 benefits, or you can take half of your spouse’s benefit.
  • So, based on this, the non-working spouse will want to take spousal benefits because they’re $1,500 a month versus their own $1,000 a month.
  • In total, the couple would have $4,500 a month in Social Security benefits.

However, if the working spouse is 67 and the non-working spouse is 65, the math is a little different. If the spouse who didn’t go to work applies at 65, they’re applying early and will have the benefit cut down to $1,350 or a figure around this amount.

What is the Youngest That You Can Take Social Security?

Barring any disability or any other issues, you can retire at 62. However, the earlier that you take your benefit, the lower your benefits will be. Benefit increases will end at 70, so there’s no reason to wait longer to take your benefits.

If you take in around $20,000 or more a year, you are penalized for taking your benefits before full retirement.

If you don’t understand your benefits or want advice on the best way to maximize your benefits, schedule a call with us today.

How is Social Security Taxed?

Many people get upset that they have to pay taxes on their Social Security. For many of our clients, it’s a sore spot and a major topic of discussion. However, under current law, you may have to pay taxes on your benefits.

Married and Filing Jointly

Unless you have less than $32,000 in income, you’ll have to pay taxes on your benefits. 

$32,000 and $44,000 in Income

If your adjusted gross income falls into this range, you’ll pay taxes on up to 50% of your Social Security. For example, if your benefits are $3,000 a month, you’ll pay taxes on $1,500.

$44,001 and Higher

If you earn over $44,000 in adjusted gross income, you’ll pay taxes on 85% of your benefits. 

Single Filers

If you’re single, you’ll pay taxes on 50% of your benefits if you earn $25,000 or more. And if you earn over $34,000, 85% of your benefits are taxable.

Unfortunately, you’ll be taxed on Social Security in most cases. We recommend working with a financial planner to help you determine when to take your benefits and how to minimize your tax burden through strategic tax planning.

When Should I Take Social Security?

If you go to Google, you’ll find most people saying to take Social Security at 70. You’ll maximize your benefits by waiting, yet every family and situation is different. When we work through a person’s retirement plan, we evaluate:

  • Income
  • Assets
  • Health
  • Expected lifespan

When income is not coming from Social Security, it often comes from assets or retirement accounts. The impact on your retirement may not be much, but if you want to leave as many assets as possible to the next generation, your choice may be different than someone who doesn’t mind leaving a little less to your estate.

There are so many factors to consider aside from maximizing your Social Security by waiting until 70 to start taking it.

For example, if you have more than enough assets or you may only live to 75, taking Social Security earlier may be in your best interest. You need to consider your choice carefully to make the right financial decision for you and your family.

Do you want to skip the reading and listen to us talk about great topics, such as Social Security, financial planning, ways to secure your retirement and more?

Sign up for our podcast today, where we have great weekly discussions on the topics above and more.