Taxing Social Security

Taxing Social Security

Today we talk about taxing Social Security. We will discuss:

  • the factors that go into determining whether your Social Security income is taxable or not
  • give you some examples, and
  • tell you about a few potential surprises that you may encounter.

Watch Now: Taxing Social Security

Blog Post Alt Tag

Listen Now:
Taxing Social Security

Subscribe Where You Find Your Podcasts

Blog Post Alt Tag

Taxing Other Types Of Retirement Income

Last week we discussed how other types of common retirement income are taxed. Click Here to watch that episode.

Today, we focus on taxing Social Security benefits. For some people, your Social Security may be taxable. Here is how we can determine if your benefits will be taxed.

Provisional Income

It starts with your provisional income. To determine if your Social Security is taxable, you’ll need to compute this. It includes:

  • half of your Social Security
  • dividends
  • interest, both taxable and non taxable
  • earnings
  • pension income
  • IRA distributions, and
  • other income

If your provisional income is less than

  • $32,000, for a couple
  • $25,000 for a single person,

your Social Security benefits are not taxed.

But if your provisional income is between

  • $32,000- $44,000 for a couple
  • $25,000- $34,000, for a single filer,

50% of your Social Security income is taxed.

And if your provisional income is over

  • $44,000 for a couple
  • $32,000 for a single person

85% of your Social Security benefits is taxed.

Examples

John and Carol

John receives about $27,600 in Social Security benefits and Carol receives $21,600. That totals $49,200. Half of their benefit is $24,600. They receive $2,000 a month from John’s IRA, for a total of $24,000. Total, they earn $5,000 per year in dividends and another $1,500 in interest.

Their provisional income is $55,100. This means 85% of their Social Security benefits are taxable.

taxing Social Security

Mary

Mary was recently widowed. She receives $21,600 in Social Security, half of which is $10,800. She takes a required minimum distribution from her IRA which was $8,300. Her provisional income in this case is $19,100. This is below the $25,000 threshold, so her Social Security benefits are not taxed.

taxing Social Security

Carl

Carl is single. He receives $2,000 per month from Social Security, $24,000 total. Half of that is $12,000. He also gets about $2,000 in dividends and $1,000 in interest. The rest of Karl’s income comes from a Roth IRA. He takes $50,000 from his Roth account. His provisional income is $15,000.  His Social Security benefits will not be taxed.

The Roth IRA distributions do not add to his provisional income.This is an additional benefit of using a Roth IRA in your retirement planning. Distributions from the Roth are not taxed. They also won’t make your Social Security benefits taxable.

taxing Social Security

Potential Surprises

Change in Marital Status

The first surprise is a sudden change in your marital status. If you find yourself suddenly single, you may owe more in taxes. The income limits for single people are lower than those for married couples. A sudden change in marital status may lead to more of your social security benefits being taxed.

Change in Income

A sudden increase in your income can also have a hidden surprise. This normally happens when you reach the age for required minimum distributions. At age 72, you have to start taking money from your IRA account. This will add to your provisional income. The distribution may cause your Social Security income to be taxed

Talk to a Certified Financial Planner™ Professional

There are a lot of factors that affect your taxes in your retirement, and you can manage some of them. Talk to a financial planner to learn more.

 


insert here

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

What is Tax-Loss Harvesting?

What Is Tax-Loss Harvesting?

A listener asks a question about year end tax planning.  Can tax-loss harvesting help your tax situation?  Today we look at this strategy and how it works.

Watch Now: What is Tax-Loss Harvesting?

What is Tax Loss harvesting

Listen Now:
3 What is Tax-Loss Harvesting?

Subscribe Where You Find Your Podcasts

What is tax-Loss harvesting

Today we answer a question from Joanne. She writes, “Last week I heard about something called tax-loss harvesting. What is it, and how can we benefit from it?” This is a strategy you can use to reduce your tax liability.

Understanding Capital Losses

From time to time, investments will decrease in value. And they may decrease to a level that is below your cost basis. Your cost basis is what you paid for the investment, plus any dividends reinvested into that position.

If the market value drops below your cost basis, you have an unrealized capital loss. You realize that loss when you sell it, and that can help reduce your income tax liability.

How Capital Losses Affect Your Taxes

First, losses offset any capital gains. Capital gains happen in two ways. They happen when you sell something for a profit. If you own a mutual fund, the fund may pay a capital gain distribution. The fund creates gains when the fund buys and sells securities.

An investor sells shares of Amazon for a $10,000 profit. They also sell shares of Ford for an $8,000 loss. They would only pay capital gains taxes on $2,000.

Loss-Harvesting

If your losses exceed your gains, you can use those losses to reduce other income, up to certain limits. You can use $3,000 of capital losses to reduce your other income each year. Any excess gets carried forward to future years.

Our investor sold shares of Amazon for a $10,000 gain. They also sold shares of General Electric for a $15,000 loss. You would not incur any capital gains taxes this year. They can use $3,000 of the remaining loss against their other income. The investor would have to carry $2,000 forward to use against their taxes next year.

What is Tax-Loss harvesting

Planning Tip

This does not apply to any investments in an IRA, 401k, or other types of qualified plans. You are not paying capital gains taxes on anything you buy and sell in those accounts.

Wash Sales

If you are harvesting a capital loss, you can’t buy the same investment you sold for a loss within 30 days. Doing so creates a wash sale. The IRA will not allow the loss on your taxes. If the stock you sold has a sudden increase in price, you can miss out on the gains.

Keep Good Records

If you have a large capital loss, it could take a long time to carry it forward. You will need to keep very good records.

There is Still Time for 2020

You still have time to harvest capital losses for this year. Any sales made between now and December 31 count on this year’s taxes. But you should speak to your tax professional to see what kind of impact those will have on your situation.

Talk to a Certified Financial Planner™ Professional

 


insert here

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts