Since Social Security is a primary benefit for most, it’s essential to develop a well-thought out claiming strategy. Consider all potential income, expenses, and tactics to improve your chances of achieving your financial goals. Pure’s Financial Advisor, Joey Bailey, CFP®, CPA, explains the impact of Social Security taxes and how they might affect you.
He discusses:
- Social Security tax amounts
- State and federal taxation
- Action steps
FREE GUIDE | Social Security Handbook
Transcript
Social Security is perhaps the most common form of income that people receive in retirement. But you may be taxed on those benefits! Sometimes 50% of your Social Security income may be taxed. Sometimes 85% of your Social Security income is taxed. Sometimes none of your Social Security income is taxed. Knowing if you qualify to receive Social Security, when to take it, how much will be taxed, and whether that is enough money to live off is not always easy to understand.
Typically, you claim Social Security anywhere from age 62 through 70. The longer you delay, the greater your future benefit will be. A general rule of thumb is that for each year you delay, you can increase your benefit around 8%. So, how do you make that choice? How do you know when the optimal time is? Well, you do that by having a cash flow plan that looks at all your income and all your expenses. Having a cash flow plan helps you more easily determine when the right time is to turn Social Security on, and importantly, understand what the tax ramifications of that decision is going to be.
Because here is how Social Security is taxed:
When you file your tax return, as a single filer, and your income is $25,000 to $34,000, you’ll pay income tax on 50% of your social security benefits. When you make over $34,000, you’ll pay income tax on 85% of your social security benefits.
Now, if you are married and file a joint tax return the numbers change a bit. For married filing joint people, when your income is $32,000 to $44,000, you’ll pay income tax on up to 50% of your benefits. When you make more than $44,000, you’ll pay income tax on 85% of your Social Security benefits.
Assume you are single and receive $24,000 of Social Security and no other taxable income. In that case none of the Social Security is taxed. However, as soon as you add additional taxable income such as a pension, or interest from your savings, dividends from investments, or maybe you process a Roth IRA conversion or surrender an annuity, or maybe Required Minimum Distributions (RMDs) begin. All of that is additional income that pushes your taxable income higher, which in turn subjects of your Social Security benefits to more federal tax.
Now, most states do not tax social security benefits, but some states do, so you’ll want to know how your state taxes your Social Security.
Beyond state and federal taxation there are a number of factors that may be unique to your situation that you’ll want to understand from the Windfall Elimination Provision (WEP) to Social Security tax withholding, to even withdrawing your Social Security claim.
Here’s a few action steps to take: First Visit SSA.gov to see if you qualify and get your Social Security benefits estimate. Determine when you want to retire and how long do you expect to live. Understand if you may be executing financial strategies while receiving Social Security for example Roth conversions, receiving IRA distributions, or surrendering annuities. Finally, understand if you have tax-deferred accounts and how require minimum distributions (RMDs) may impact the tax of your Social Security benefit.
With Social Security being a primary retirement benefit that most of you will receive, it’s important that you get your Social Security claiming strategy right.
If you want to know your optimal Social Security strategy you need to establish a detailed cash flow plan that takes into consideration all the potential income and expenses, and the various strategies that you might implement that will increase your odds of achieving your financial goals. If you’d like to see how Social Security taxation may affect your overall retirement plan, contact Pure for a free financial assessment.
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IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
• Pure Financial Advisors, LLC, is not affiliated with any government agency, including, but not limited to the Social Security Administration.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
