Tom Mosley:

Hey, today we’re going to talk about taxes. Oh, I know it’s your favorite subject, but it’s how taxes impact social security.

Welcome to the E.A.S.E. Into Retirement Show. I’m Tom Mosley, your host. Every week I do my best in five to 10 minutes to increase your financial knowledge. Today we are going to talk about particularly how social security income gets taxed. Now, I listened to a vinyl record one time and I heard Franklin Roosevelt, who was the president when social security started in the thirties, and he said, this is a good impression here. You better listen to this. He said, “If you pass social security, it will never ever be taxed.” Well, that was one of his promises, that social security for older people in retirement would not be taxed, but he kept his promise. I always ask this in any kind of meeting that I have when I talk about taxes. He kept his promise, he just died.

Then in 1984, Reagan and Tip O’Neill got together both sides and they started taxing social security. In 1994, Clinton and Newt Gingrich got together both sides again, and they raised taxes on social security. What we’re going to talk about today is how will your social security be taxed so that you know when you’re getting social security whether or not it’s going to be taxed, and if it is going to be taxed, how much. I’ve asked this question before on these episodes and on this show. Have you ever heard people who are in retirement say, “I can’t make too much money because I’m on social security”? This is one of the reasons, they want to avoid taxes.

Let’s talk about social security and how it’s taxed. Provisional income. Nobody ever goes, “Hey, let’s go to In and Out Burger and sit there and figure out our provisional income.” This is a crazy calculation that Congress came up to, but when this amounts to a certain level as a single person, I’ll tell you about that, and as a married couple I’ll tell you about that and those numbers, then that provisional income gets to that level, you start getting taxed on your social security. You could be taxed on every penny you earn from social security.

Now, wait a minute. I want to have a pity party for you. If you’re making over $44,000 as a married couple, you’re going to start getting taxed. When you get around $75,000, usually all of your social security is taxed. But, the great news is you’re making around $75,000 as a married couple, $50,000 or so as a single person in retirement. There are many people that we see at our events where we talk about social security, where they wish they were making $50,000 a year or $75,000. If you’re going to get taxed, the good news is you’re making enough money to get taxed.

But, here’s how they calculate it. It’s real crazy, I think you’ll agree. Provisional income, they take half of your social security. Not all of it, half of it. Then they take all of your ordinary income. Again, people say, “I can’t make too much money because I’m on social security.” Then they take your dividends and capital gains, and then they add in your non-taxable interest. You say, what’s a non-taxable interest? Non-taxable interest, things like your muni bonds. Oh, Tom, I never get taxed on my muni bonds. Wait a minute. You don’t get directly taxed on muni bonds, but when they add up provisional income, they take half of your social, they take all of your ordinary income, they take all of your dividends and capital gains, and they take all of your non-taxable interest and they add that total up.

When that total reaches, are you ready? When it reaches, may be a little hard to see, but just listen to me here. If you’re single, when you reach $25,000, for every new dollar they tax you on 50 cents of that dollar at your regular rate. Then when you reach $34,000, then they start taxing you at 85 cents of every new dollar until every dollar of your social security is taxed. Again, it’s 85% of your social security, but it’s taxed at your regular rate. You’re not taxed 85% rate. It’s at your regular rate. What about married couples? It starts at $32,000. You go over $32,000, every new dollar, half of it is taxed at your regular rate. You hit $44,000, every new dollar is taxed, 85% of it is taxed at your regular rate. Make sure you understand this.

You can look on your income tax, and they’ve moved it all around this year, but I believe it’s still on the first page. It’ll show you how much social security income you had and how much of it was taxed. You can do the calculation to see if, hey, this is a happy time because all of our social security is getting taxed. 85% of our social security is getting taxed at our regular rate. Again, it’s a happy time because you’re making lots of money.

Now, there’s some things you can do. Some things create income in that social security, half your social, your ordinary income, your dividends and capital gains, and your non-taxable interest, all of those things, they can be adjusted sometimes by just taking an investment and putting it into a different investment and it’ll do away with some or all, potentially, of your social security taxation. That’s why you need to be working with a good financial advisor who understands tax laws and understands how social security is taxed so that maybe they can save you money in those kind of situations.

Let me show you, for instance, let me show you the gotcha. Let me show you how it just bubbles up there and why you want to try to avoid it if you can. If you’re making money and you make $1 more than your maximum limit, $34,000 as a single person, $44,000 as a married, we’ll go with married in this. You make another dollar over that limit, here’s what they do. You make $1 more, they reach back and take 85 cents of a previously untouched dollar of social security. For making $1 more, you’re going to get taxed on $1.85. I said that correctly. For making $1 over that $44,000 limit as a married couple, $34,000 as a single, $1 more gets you taxed on $1.85 for a while until all of your social security is taxed.

Now, watch. If you’re in a 22% tax rate, you actually go to an effective 41% tax rate until all of your social security is taxed. That’s how social security is taxed. How will my social security be taxed? You’re in the know. Rewatch this video if I went too fast or if you didn’t catch everything. Slow it down, stop it, but understand how your social security is going to be taxed when you enter those levels, and hopefully this helped. I appreciate you watching. I really do.

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