 Personal Finance PowerPoint Presentation Social Security and Taxes Prepare to get financially fit by practicing personal finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable So once again click the link below for a free month membership to our website and all the content on it In prior sections we've been talking about investment goals, strategies tools, we're honing them down in current sections in prior presentations to the specific goal of retirement planning Quick recap on the types of income people might have in their retirement years to be living on We have the employer pension plans we've talked about in prior presentations We're including here the 401k plans for example public pension plans which we're going to include in that category things like a 403b the public pension plans being similar you can think of them as to the employer pension plans but for those working in the public sector for the government for example We also are going to include in this category the benefit programs government benefit programs such as the big one being social security which we're talking about now We've got the personal retirement plans which could include IRAS and other accounts we have saving for retirement and annuities in a specific tool that we might talk about more for retirement planting Most of this information comes from Investopedia It's social security taxable We're focusing in on that taxability component of the benefit programs Social Security This by Melissa Horton updated August 15th, 2022 Remember that as we think about social security planning we usually have two sides to it One, us putting money into social security usually in the form of payroll taxes and two, getting the benefits at the point of retirement and we're often thinking how much will the benefits be how can we maximize the benefits and taxes are always a complicating factor in our decision making process so we want to have an understanding of the general tax implications so we can work that into our planning So is social security taxable? Most Americans it is that is a majority of those who receive social security benefits pay income tax on up to half or even 85% of that money because their combined income from social security and other sources pushes them above the very low thresholds for taxes to kick in So when we're talking about taxes it could be a little confusing because you got taxed with payroll taxes when you paid into social security that's not what we're talking about here because we're talking about income taxes so when you paid the taxes that was a social security or payroll tax now you're thinking about getting the money back from the social security benefits whether that be income to you in the form of an income tax so when you fill out the income tax to the IRS everything is income in general unless they say otherwise this is kind of like a benefit program so you think maybe they would say exception not taxable and they basically have a phase out threshold that is put in place so the general question or the easiest way to think about it is to say that well up to 85% will be taxable if you have a significant amount of income remembering that income taxes are a progressive tax meaning your tax brackets go up as you get more income so as you have a higher income threshold you also have this phase out that happens with whether or not you have to include social security as income income being bad for taxes right because if you have to claim income on the taxes then you might have to pay taxes on the income so we might have to claim up to 85% as income if we have total income that's fairly high or above a certain fairly low threshold would be the general bottom line and then you can get into the details in terms of when the phase out actually happens okay but there are three strategies you can use place some retirement income in Roth IRAs withdraw taxable income before retiring or purchase an annuity to limit the amount of tax you pay on social security benefits so this kind of goes into total tax planning as well as the social security so remember your goal in retirement is to be paying less taxes you would like to use our goal from a tax perspective but the question would be well in retirement if you just had all your money and like a savings account or something like that you would think that when you pull the money out it wouldn't be taxable because it got taxed when you earned it when you put money into the savings account into the bank but most people have most of their money actually in something like a 401k plan which got a tax deferral for it up until the point they take it out so when you take the money out of a 401k plan then it's usually subject to taxes if you're living on say like a hundred thousand dollars just for an even number and you pull all of it out of a 401k plan it might all be subject to tax and because you'll have a high taxable income that would also mean that like 85% of your social security benefits would most likely be taxed as well that you would be receiving but if you can live on whatever you're going to live on like a hundred thousand or whatever and you can get some of that money out of non-taxable accounts because you didn't get the tax benefit when you put it in such as Roth IRAs like if you put money into a Roth IRA then you still get a tax benefit from it but it's not taxable when you take the money out so if you can take 50,000 out of a normal IRA that's taxable and 50,000 out of a Roth IRA you would expect that you would have less taxable income and that could also have an impact on whether or not your social security is going to be taxed when you think about those limits as well so that's a general tax planning strategy we would like to be living on whatever we need to live on in retirement and we would like to be spreading out the income from the sources that we're getting to lower the income on a year by year basis so we can be in those lower tax brackets at retirement age okay how much of social security income is taxable social security payments have been subject to taxation above certain income limits since 1983 no inflation adjustments have been made to those limits since then so most people who receive social security benefits have other sources of income pay some taxes on the benefits so notice they didn't increase these limits these thresholds for inflation and therefore the limits are fairly low at this point in time because the time value of money has gone up and they haven't adjusted them however, regardless of income no taxpayer has all their social security benefits taxed the top level is 85% of total benefits so the easy answer to the question is you might be paying income taxes up to 85% that's not the tax rate that's the amount that you would have to include in income which would then be subject to taxes dependent upon whatever tax bracket you are in so the easy answer would be up to 85% of your social security could be subject to tax if you have any significant income because the thresholds are fairly low because they haven't been increased for inflation and then when you get into the weeds in terms of where that threshold is and what happens if your income is below the threshold and how much you would pay and so on so here's how the Internal Revenue Service IRS calculates how much is taxable so the calculation begins with your adjusted gross income that's basically your AGI adjusted above the line deductions which are the more kind of rare deductions or the Schedule 1 deductions you might call them on page 1 of the 1040 typically from Social Security and all other sources then may include wages self-employed earnings interest dividends required minimum distributions so the amount from the IRAs and stuff that are subject to taxes qualified retirement accounts and other taxable income tax exempt interest is then added it isn't taxed but it goes into the calculation so you're trying to figure this calculation to determine if you have to pay taxes on it you've got to include the tax exempt interest there for that calculation if that total exceeds the minimum taxable levels then at least half of your Social Security benefits will be considered taxable so you would think that often times many people will clear that which would mean that half of your Social Security tax that you receive would be subject to tax that's not the tax that's how much you would have to include an income which would then be taxed at your normal tax rates so you must then take the standard or itemized deduction to arrive at your net income the amount you owe depends on previously where that number lands in the federal income tax tables individual tax rate of benefits will be subject to tax if you file a federal tax return as an individual or your combined gross income from all sources is as follows $25,000 to $34,000 if you may have to pay income tax up to 50% of your benefits so again that's a fairly low threshold because they haven't increased it with inflation more than $34,000 up to 85% of your benefit may be taxable so the IRS has a worksheet that can be used to calculate your total income tax due if your Social Security benefits when you complete this exercise in arithmetic you will find that your taxable income has increased by up to 50% of the amount you receive from Social Security if your gross income exceeds $25,000 for an individual or $32,000 for a couple the tax percentage rises to 85% of your Social Security payment if your combined income exceeds $34,000 for an individual or $44,000 for a couple many basically married then married filing joint job for example say you were an individual taxpayer who received the average amount of Social Security about $18,000 you also had $20,000 in other income add the two together and you have a gross income of about $38,000 however your combined income is computed as only $29,000 other income plus half your Social Security benefits that's within the $25,000 to $34,000 range for a tax of 50% of your benefits so half of the difference between that income and the $25,000 threshold is your taxable amount $28,000 minus $25,000 equals $3,000, $3,000 divided by $2 is $1,500 the calculation can become more complicated for taxpayers with different forms of income so we got the Medicare taxes for couples who file a joint return your benefits will be taxable if you and your spouse have combined income as follows from $32,000 or to $44,000 you may have to pay income tax on up to 50% of your benefits more than $44,000 up to 85% of your benefits may be taxable for example say you are a semi-retired couple following filing jointly and have a combined Social Security benefit of $26,000 you also have $30,000 in combined other income add two together and you have a gross income of $56,000 your combined income for Social Security is $43,000 other income plus half of your Social Security benefits this combined income falls into the $32,000 to $44,000 range meaning that half the difference between the income and the threshold is computed at 50% to get your amount taxable $43,000 minus $32,000 equals $11,000 $11,000 divided by two is $5,500 so Social Security benefits tax tool the IRS being the IRS the straightforward example above may not apply to you the IRS's interactive tax assistance that's the ITA will lead you through the possible complications and calculate what part of your income is taxable IRS notice 703 describes tax rules for benefits so again the easy answer would be well up to 85% of your income could be subject to tax if your income is above a certain threshold once you start getting below the threshold it gets a little bit confusing to calculate the tax of course and I would highly recommend software as well tax software can be useful to kind of run scenarios if you don't have access to the tax software you can visit the IRS website and look at the resources there as well so your spousal survivor disability and SSI benefits taxable or spousal survivor disability and SSI benefits taxable follow the same general rules as the social security program for retirees except for supplemental security income that's the SSI spousal benefits if you don't have social security benefits but collect spousal social security benefits based on your marital partner's benefits the rules are the same as for other social security recipients if your income is above 25,000 then you will owe taxes on up to 50% of the benefit amount the percentage rises to 85% if your income is above 34,000 survivor benefits survivor benefits paid to children are rarely taxed because few children have other income that reaches the taxable ranges the parents or guardians who receive the benefits on behalf of the children do not have to report them as part of their income disability benefits social security disability benefits follow the same rules on taxation as the social security retiree program benefits are taxable if the recipients gross income is above a certain level the current threshold is 25,000 dollars for an individual and 32,000 dollars for a couple filing jointly SSI benefits SSI is not social security it's a needs based program meaning it's social security is kind of like a benefit program for everyone and not just a welfare program so there's kind of a question with these programs again it used to be that you would think of them all as safety net programs for people that need the safety net kind of a welfare program but now social security is being more of like a program that everybody is going to have access to and so you got to kind of keep in your mind these days what kind of program is a welfare or safety net program and these other programs that are kind of shifting to be applicable for everybody so a needs based program for people who are blind disabled or age 65 and older SSI benefits are not taxable therefore and you would think okay that seems reasonable paying taxes on social security you should get a social security benefit statement so how do you know to pay taxes well clearly if you're then filing for social security you're going to get a form SSA a 1099 type of form about your taxes if you're trying to plan for when you should be claiming social security how much you're going to be receiving and so on then of course you're projecting into the future so you'd have to determine how much you think you're going to get and then you can say well how much is going to be taxable what's going to be the tax implications and you can think well if I have significant income over a fairly low threshold then 85% of the social security benefits will be subject to tax if you're below that then you can try to get more into the weeds in terms of how much of it will be taxable to project to determine what the best strategy would be with regards to social security planning so each January detailing your benefits as you get that in January in a tax season and you can use it to determine whether you owe federal income tax on your benefits so the information is available online if you enroll on the social security website if you owe taxes on your social security benefits you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them so if you're going to owe taxes on them and you want it to be as easy as possible you might try to have withholdings withheld from your social security or if that's a big source of your income and you need to pay your taxes then you have to actually pay the IRS quarterly payments it's a little bit difficult often times when people are saving for retirement for income taxes because if you've worked your entire life and the money was just taken out of your wages before you even received it in the form of withholdings to pay your taxes it can be a little bit of a shock for a lot of people that are now receiving money from things like 401k plans or IRS which are subject to tax when you take the money out of your social security which might be subject to tax to then plan a little bit more to figure out that you have to actually make estimated tax payments to avoid penalties and interest or possibly have withholdings on the distributions that are being given to you in that way so it's a little bit different than the employee or situation for many people so state taxes on social security 12 states taxed social security benefits in some cases check with me if you live in one of these states so you've got Colorado, Connecticut, Kansas Minnesota, Missouri, Montana Nebraska, New Mexico, Rhode Island Utah, Vermont and West Virginia taxed social security as with the federal tax how these agencies taxed social security varies by income and other criteria three ways to avoid taxes on benefits so how can I not pay taxes is the question legally, legally the simplest way to keep your social security benefits free from income tax is to keep your total combined income below the threshold to pay tax so this gets into normal tax strategies for retirement we want to keep our taxable income low as possible it's not the same thing to talk about how much money we're going to be living on how much we're going to consume and how much is subject to taxes because we might have some of our retirement earnings in accounts that aren't subject to taxes if I just had money in the bank account it's not subject to taxes but I can still take it out of the bank account and use it but if it's under an umbrella of an IRA or a 401 K traditional at least then if I take the money out it will be subject to taxes because I got a tax benefit so we would like to be able to take some of our money that we're going to consume out of tax free areas that aren't subject to tax like Roth IRAs or something like that and some of the money out of tax accounts so that our income is fairly low and if we can get a low enough under the threshold to be subject to tax for social security we might be able to pay less taxes on social security due to not having to include as much in income from the social security distributions however this may not be a realistic goal for everyone so there are three ways to limit the taxes that you owe so clearly this is a fairly low limit so if you make a significant amount of money you're not going to be able to get your income below these fairly low thresholds place retirement income in the Roth IRAs so again it be if you had some money in a Roth IRA that could be beneficial for pulling it out the taxes withdrawal tax income before retiring purchase and annuity so an annuity is going to mean that you buy an investment that's going to that's going to pay out periodically like yearly let's say and therefore now you've spread out the money that you're going to get over a long period of time and therefore you're going to have less taxable income on a year to year basis would be kind of a general idea so place some retirement income in Roth accounts contributions to a Roth IRA or Roth 401k are made with after tax dollars so you're not getting the tax upfront the tax break up front but rather you're getting a tax benefit as it grows and it's not subject to tax when you take it out it's kind of the reverse of a standard IRA or 401k so this means they're not subject to taxation when the funds are withdrawn thus the distribution from your Roth IRA are tax free provided that they're taken after you turn 59 and a half and have had the account for five or more years as a result the Roth payout won't affect your taxable income calculation and won't increase the tax you owe on your social security benefits distributions taken from a traditional IRA or traditional 401k plan on the other hand are taxable the Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age so you'd like to start thinking about this in terms of well how am I going to pull my money out so I can live on a good amount while still having only part of it taxable possibly because you're pulling some of the money out of a Roth instead of the traditional so the blend will give you greater flexibility to manage withdrawals from each account and minimize the taxes you owe on your social security benefits a similar effect can be achieved by managing your withdrawals from conventional savings, money market or other tax sheltered accounts so if you have a lot of money in your traditional IRA then you might just have a lot of other money that is in other accounts just a normal savings account or any kind of retirement tax shelter kind of area savings plan like a 401k Roth, 401k IRA Roth IRA or anything when you take that money out it might be subject to capital gains because you might have gains when you earn money on stocks and stuff but it's not going to be subject to taxes just because you took it out which is another nice balancing factor that you can have against the distributions made from your taxable accounts like a 401k taxable income before retirement another way to minimize your taxable income when drawing social security is to maximize or at least increase your taxable income in the years before you begin to receive benefits this means you could withdraw funds a little early or take distributions in tax jargon from your tax sheltered retirement accounts such as IRAs or 401ks you can make penalty free distributions after age 59 and a half this means you avoid being dinged for making these withdrawals too early but you must still pay income tax on the amount you withdraw so since the withdrawals are taxable unless they're from a Roth account they must be planned carefully with an eye on the other taxes you will pay that year the goal is to pay less tax by making more withdrawals during the pre-social security period than you would after you begin to draw benefits that's going to get a little bit more complex right you're trying to say I'm going to try to pull money out so that I have the money before the social security benefits kind of kick in and if I can plan it out properly maybe I can get my income below the threshold so my social security benefits are less of them are taxed would be the example there but those thresholds you got to be careful with that because those thresholds are fairly low and you still have tax consequences of the 401k plan and if you're trying to take the money out early that complicates things as well because you want to avoid penalties and interest for taking the money out early so that requires considering the total tax bite from withdrawals social security benefits and other sources be mindful too that at age 72 you're required to take RMDs that's the required distributions from these accounts so you need to plan for those mandatory withdrawals meaning the IRS to force you to take money out of a 401k or an IRA even if you don't need it at that point in time because they want to force you to pay taxes on the income so you want to plan for that beforehand so that you can try to limit the amount of money you're going to take out on a per year basis hopefully putting you into a lower tax bracket so this strategy has another benefit by using these distributions to boost your income when you're retired or nearing retirement you might be able to delay applying the social security benefits which will increase the size of the payment so purchase and annuity a qualified longevity annuity contract QLAC is a deferred annuity funded with an investment from a qualified retirement plan or an IRA so now we can buy like an annuity so it's going to be a series of payments that we're going to receive periodically into the future QL these are the longevity annuity contract provide monthly payments for life and are sheltered from stock market downturns so one of the benefits of an annuity is you've made a deal to get set payments no matter what so it's not subject to the whims of the market so much so as long as the annuity complies with the IRS requirements it is exempt from the RMD so that's the required mandatory distribution until payouts begin after the specified annuity starting date so by limiting distributions and thus taxable income during retirement QLACs the annuity can help minimize the tax bite taken from your social security benefits under the current rules an individual can spend 25% or $135,000 whichever is less of a retirement savings account or an IRA to buy a QLAC with a single premium the longer an individual lives the longer the QLAC pays out so clearly if you buy an annuity so if you're able to basically get the money into the annuity now that's going to have an impact on your required minimum distributions and the annuity generally is going to be for life so when they give you the annuity take into consideration your life expectancy so then you have this idea that obviously if you have an annuity the longer you live the better that deal will be because you're going to keep getting payments so if you have someone dependent on you that you think well anyways you want to have a longer life so the QLAC income can be deferred until age 85 a spouse or someone else can be a joint annuitant meaning that both named individuals can be deferred regardless of how long they live remember that a QLAC shouldn't be bought only to minimize taxes on social security benefits retirement annuities have advantages and disadvantages that should be weighed carefully preferably with help from a retirement advisor so you want to take into consideration your full picture not just looking at one factor which is going to include your longevity finances, your current income what other required minimum distributions and so on and so forth how do I determine if my social security is taxable add up your gross income for the year include social security if you have little or no income besides your social security you won't owe taxes on it however if you're an individual filer with at least $25,000 in gross income including social security for the year then up to 50% of your social security benefits may be taxable for a couple filing jointly the minimum is $32,000 if your gross income is $34,000 or more or a couple's income is $44,000 or more did I say that right it was income is $34,000 or more or a couple's income is $44,000 or more then up to 85% may be taxable what percentage of social security is taxable as an individual your social security is not taxable if your total income for the year is below $25,000 half of it is taxable if your income is in the $25,000 to $34,000 range if your income is higher up to 85% of your benefits may be taxable if you and your spouse filed jointly your old taxes on half of your benefits if your joint income is in $32,000 to $44,000 range if your income exceeds that then up to 85% is taxable do I have to pay state taxes on social security 38 states did not impose taxes on social security benefits the other 12 tax some recipients under some circumstances does social security income count as income yes but you can minimize the amount you owe each year by making wise moves before and after you retire consider investing some of your retirement savings in a Roth account to shield your withdrawals from income tax take out some retirement money after your 59 and a half but before you retire to pay for expected taxes on your social security before you begin receiving benefit payments you might also talk to a financial planner about a retirement annuity at what age is social security no longer taxed social security is taxable based on your total income not age however the taxable income varies from 0 to 85% depending on your total income what's the bottom line most advice on social security benefits focuses on when you should start taking the benefits that of course is another factor we talked about earlier the short answer is to wait until your age 70 to maximize the amount that you get still another consideration is how to prevent your social security benefits from taking a big tax bite out of your overall retirement income the answer is to plan well in advance to minimize your overall tax burden during your retirement years