Social Security Taxation

Okay ladies no limit as turnover Mr. Stillman's opus with the one and only John Stillman, Rosewood wealth management John all a lot of people are confused about Social Security and how it stacks a lot of people say they already paid this money in it should be taxed and a lot of people basically are confused about the taxation of Social Security. Can you explain that whole concept well. So let's address what you just said the idea that I was tax on this money went. That's true.

You still paid income taxes on the Medicare and Social Security withholdings that come out of your paycheck. So yes, you have paid taxes on that money for most people, when you get your Social Security benefit 85% of it is going to be taxable. So the idea there section with the federal government is saying is that 85% of what's coming to you when you receive your Social Security is that that represents your growth on what you paid into the system and then the 15% that's not taxed.

That's what you paid in and were already taxed on analysis you getting your principal back whether or not that math checks out I think is dubious, but that's the story is that you not being taxed on what you paid in when you get back your only being taxed on the quote unquote growth okay take that for what it's worth. Now let's talk about that 85% because that's the important conversation to have your not every body is going to have their Social Security be 85% taxable, and again let's clarify what were talking about their it's not that 85% of it will be taken away in taxes. It's just that 85% of your income would make the math really easy if you're Social Security was $1000 a month only $850 will go on your taxes as taxable income right okay so that's if you're in the 85% bracket, but it's important understand there are three different brackets for Social Security. Most people like I said there Social Security is going to be 85% taxable. There is a group. However, where your Social Security will only be 50% taxable. And then there are still a much smaller group, but very happy group where your Social Security is not taxable at all okay and it's all depending on how much other income you have, how much other income your reporting and so you tell me to a class the Friday center.

We do this little game where we create the same amount of income, but we do it in different ways and we do it in a way where your Social Security is 50% or 85% or 0% taxable and how does that change your actual net income so the thing to understand is something called provisional income so provisional income is essentially half of your Social Security so let's let's write it all down again make the make the math easier. Let's say you're Social Security's of thousand dollars a month for $12,000 a year. Okay tracking with me. I'm with you so far.

So for the provisional income calculation. It's going be half of your Social Security so $6000 is going to be going into that equation that makes sense. Added to that $6000 is going to be all of your other income. So this is going to be earned income any withdrawals from IRAs and 401(k)s.

That's all going to be income if you get interest from the bank for the $0.75 that you made on your $50,000 savings account that had that will get that 1099 that interest counts any capital gains is going to go into this so all those and those you don't divide in half. That's just whatever the number is add that to half of your Social Security.

That's going to tell us what your provisional income is okay and whatever your provisional income is that dictates how taxable your Social Security. I know it's all very confusing. The point that I want you to take away from this discussion is that there are things you can do if you have the right amount of money in the right places to get yourself into a position where your Social Security isn't taxable.

Like for instance let's suppose that the only retirement savings you had were all in Roth IRAs. Okay well those withdrawals from Roth IRAs.

As you know art what taxable they also don't count toward your provisional income.

So if all of let's say you took $100,000 out your Roth IRA and then the only other income you had was Social Security what you would actually be in the 0% tax bracket like the sound for Social Security because you would have no other taxable income and so there are a lot of games we can play in some cases, if folks have enough money in Roth IRAs or just other nontaxable accounts where we can take certain amounts of money out up to the threshold we come up just up to the ceiling where if we spend a dollar more not spent but if we take a dollar more out of our account. Suddenly our Social Security would be taxed. We will figure out where that line is willing to write up to that line and it any additional income. We take doesn't come from IRAs. It comes from raw or other places where we can get the money tax-free. So you say well lit all my monies in a 401(k).

So what can I do about this. Well you if you're retiring tomorrow.

There are limited things you can do about it will be but if you're younger you still have a ways to go. You could start doing all of your future savings and Roth.

You could look at doing Roth conversions and we have a whole other podcast about Roth conversions of your check that out you could just save money in other ways.

That's not going to be quite so consequential from a tax standpoint down the road.

That's one thing you can do the other thing you can do in this we been doing with a lot of clients recently is we basically play this every other year game where we say all right. Let's look at our tax bracket so we got the 10 the 12, the 22% bracket and let's suppose that to live the life we want to live were going to be right in the middle of the 12% tax bracket and if we wanted to withdraw another $20,000. We could do it and still be the 12% bracket so let's say that's 2018, we could take another $20,000 out of IRAs that we don't actually need to live on.

Still with me as Nellie's area not not yet. I'm with you every step of the way. So let's take out that additional $20,000 this year, pay the taxes on it this year 2018. Check. We didn't need it to spend this year. Sorting a pocket in the bank one now. Next year we have a $20,000 head start in terms of money that we need for our expenses but we already paid taxes on it and 2018.

It's coming ~2018 provisional income somewhat when I get to get to the 0% tax bracket 2018. So we can take out more spine, but by having that $20,000 head start money that's already I don't say laundered because that sounds criminal, but we've Artie claimed that we've already paid the taxes on it. That's not going to count between 19 so that might be our first several months worth of spending that $20,000. Now that reduces how much we have to take out of our IRAs in 2019 will now we can do the 0% gain for 2019 and actually make it work okay. Fast forward to the next year. Okay well now we have to take more out of the area. So you see we can do this every other year there if we can take out enough in December of each year to tide us over for part of the next year and we can make our Social Security nontaxable the following year, and that's how you start to see good tax planning really affect your retirement plan we could be talking up the difference of three, four, $5000 a year saved in taxes just by thinking through this at a time. That's a complicated issue but you make it simple. Make it easy to understand, and you can certainly help people figure out how to do that for themselves. What a lot of people say why is my CPA helping with this for the most part, this is not what CPAs do CPAs are looking back at what happened last year and making sure you fill in the right boxes to make sure that you're paying the taxes that you over the previous year and they may have some suggestions moving forward of all right what you think about this for next year, but more often than not, your CPA isn't doing this kind of proactive planning when it comes to where you're taking your income from any given year.

Most financial advisors are doing it either and I'm convinced that if more financial advisors and CPAs talk to each other about their current clients you actually see some progress on your that's why in so many cases I I'm pretty dogmatic about the fact that yet. I want to talk your CPA. I want to do some planning on this to be sure that were not missing any opportunities and it really is a missed opportunity for a lot of people like us that we have several folks as I do work for everybody.

If you want to spend $150,000 year okay but there's nothing we can do to get you in the 0% tax bracket, but if you're kind of in that in between realm and we can do it every other year. He really does make a difference. All right.

Well if you want to find out more about this if you like to do this and I get in touch with John Stillman at Rosewood wealth management and John you managed in all the right notes and that's why we call this Mr. Stillman's opus