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Are Social Security Benefits Taxed?

Are Social Security Benefits Taxed?
in today's video we are going to continue the discussion on

Social

Security

benefits

and specifically how and when

Social

Security

benefits

are

taxed

so when I say

social

security

taxation I'm referring to your actual

Social

Security

benefits

being

taxed

I'm not referring to FICA payroll tax right so during your working career you're paying into the system through your FICA tax 6.2 percent goes to

Social

Security

your employer pays another 6.2 percent and if you're
are social security benefits taxed
self-employed you end up paying both right 12.4 that is not what I'm talking about we are talking specifically about the taxes on your actual

benefits

in retirement whether your

Social

Security

benefits

will be

taxed

or not has to do with your provisional income you know provisional income is an IRS term and the provisional income formula is what is used to determine if your

Social

Security

benefits

will be

taxed

or not to know how much of your

Social

Security

benefit may or may not be

taxed

has to do with provisional income you know provisional income is an IRS term and it is a formula you take a look at my screen here this is the provisional income formula that is used to determine how much of your

Social

Security

benefit will be

taxed

now this taxable bakit what that represents is any any investments that you may have that are taxable so that could represent any gains from stocks bonds mutual funds it would include any earned income if you had earned income it could include
rental income it could include interest earned off of municipal bonds even though municipal bonds are exempt from federal tax they are not exempt from the provisional income calculation and so so you have all of your taxable money right found in this taxable bucket and then we add that to the tax deferred bucket so you tax deferred bucket would represent any assets that you have such as 401k IRA a pension and then they take 50% of your annual

Social

Security

Bennet it may add that all together
and that is your provisional income number so if you have no retirement accounts you have no pension of any kind you have no earned income then your

Social

Security

benefit it's not going to be

taxed

but if you do and if you've done a good job of saving and preparing for retirement it is highly likely that your sole

security

benefits

will be

taxed

so if you're single and your provisional income exceeds 25,000 then 50% of your

social

security

benefit will be

taxed

as ordinary income
if your provisional income exceeds 34,000 then 85% will be

taxed

as ordinary income and then for married couples the numbers are 30 2014 4 thousand respectively so let me ask you a question what do you think is the greatest single contributing factor to whether your

Social

Security

is

taxed

or not and the answer is this having too much money in your tax deferred bucket meaning you throughout your working career you did the 401 K tax deferred tax deferred tax deferred all your contributions or
are social security benefits taxed
into an IRA where it's all tax deferred money because when that money comes out when you take distributions in retirement it is 100%

taxed

as ordinary income as of 2019 these are our tax brackets so as you look at this think of this kind of like a measuring cup and if you were to pour some liquid in you know comes down at the bottom and it fills up and so as you pour in your income right into this measuring cup some of your income will be

taxed

at 10% 7:12 some at 22 and so forth depending
on how much income you have now when it comes to provisional income and

Social

Security

tax what they do is they take whatever your income is so if you're going to say you're in the 22 percent tax bracket they're going to dump in your provisional income number and it's going to land right on top of your other income in other words if you're in the 22 percent tax bracket then and 85 percent of your

social

benefits

gonna be

taxed

it's going to be

taxed

at your highest
marginal bracket so in that case you'd be

taxed

at 22 percent so let me just show you a hypothetical example let's say we have Jack and Jane and they have a provisional income that exceeds 40 $4,000 and let's assume that they have a

social

security

benefit of $30,000 per year that means 85 percent of the 30 thousand which would be twenty five thousand five hundred dollars it's going to be treated as ordinary income and Jack and Jane happened to be in the twenty two percent tax
bracket which means that their federal tax on their

Social

Security

benefit would be five thousand six hundred ten dollars the problem with this is most people don't see this tax coming I refer to this as a stealth tax because it's very commonly overlooked and so if you have planned down retirement and anticipated what your

Social

Security

benefit would be only to find out that it's effectively being reduced through taxation you now have less retirement income than you had thought
that you had right but what happens in the real world is if you now have planned on this income and now you realize you have a shortage let's say five thousand six hundred ten dollars in this case let's assume that they have there's a 20% total taxes including this federal and state how much would Jack and Jane have to pull out of their tax deferred account to pull out of an IRA for example to compensate for the shortage and the answer is seven thousand seven hundred ninety-two
are social security benefits taxed
dollars so they have to thought enough to pay the tax and to compensate for the shortage so now here we have them pulling out seven thousand seven hundred ninety-two dollars every year throughout retirement that was not really anticipated that can cause your portfolios to deplete ahead of schedule what is the lost opportunity cost on seven thousand seven $92 if you were table to avoid it if we take $7,700 per year at 8% over 20 years we're approaching $400,000 so there's a lot of money
at stake the important thing that I want you to know is that avoiding

Social

Security

tax is possible for most people not everyone's going to be able to completely avoid it but most people can and but you have to plan for it and you have to use some strategies to make that happen now as I work with my clients in creating a holistic financial plans what I can tell you is just that one strategy alone of avoiding

Social

Security

tax can add 5 to 7 years of life on your portfolio because when
you have if you're so secured

benefits

being

taxed

it kind of has this snowballing effect and it can really deplete your assets more quickly so in conclusion if you have a formula K or an IRA or a pension your

Social

Security

benefits

are most likely going to be

taxed

and it has a very negative impact on the sustainability of your retirement portfolio and what I can tell you is that there are strategies and there are ways to avoid having your associates

taxed

now again not everyone can avoid
it completely but most people can with proper planning the strategies are often going to include Roth conversions once you once you get money inside of a Roth account that money it from that point forward is tax-free it is not subject to required minimum distributions it isn't it does not contribute to the provisional income which causes

social

security

benefits

to be

taxed

and that income is is essentially tax-free for forever and so you can't do Roth conversions too fast or too large
because then it shoots you up the tax bracket and you end up paying too much in tax and so the strategies are multi-year takes it takes a little bit of time to get your tax deferred accounts properly shifted into a tax-free bucket so that you can ultimately avoid

Social

Security

tax and if you can't completely avoid the tax you can at least reduce it significantly so the strategies of actually how to do that I will have little cover in a different video but for now I just wanted to point out
the importance of not overlooking taxes on

Social

Security

benefits

thank you please subscribe to the channel and I look forward to seeing you in the next video you