There’s a lot of confusion surrounding the taxation of Social Security. Join us as we seek to clear up the confusion on the podcast.
Listen to the episode...
The Bass Lines:
Framing The Conversation.
- [00:14] – A lot of people think because they’ve already paid into the system, their benefit shouldn’t be taxed. It’s true; you have already paid income tax on the Medicare and Social Security withholdings the government has taken out of your paycheck. However, most folks are going to be taxed on about 85 percent of their benefit. Basically, that 85 percent represents your growth, and the remaining 15 percent is your principal. You’ve already been taxed on your principal “investment” into the system, but you have yet to be taxed on your “gains.” To clarify, that money isn’t getting taken away. It’s just that you’re going to have to pay taxes on it.
Social Security Tax Brackets.
- [1:40] – Not everyone’s Social Security will be taxed at 85 percent. There are three different tax brackets for Social Security taxation. Most of you will be in that 85 percent bracket. However, there is another group where only 50 percent of their benefit will be taxed. Finally, a much smaller group will not have taxable income at all. It all depends on how much income you’re reporting. That’s why income planning and tax planning is crucial.
What Is Provisional Income?
- [3:02] – Provisional income is half of your Social Security plus all of your other income. If your benefit is $1,000 per month, you’re making $12,000 a year. That means your provisional income is $6,000 plus any other income you have from IRA withdrawals, capital gains, pensions, interest gains, etc… Your level of provisional income dictates how the government will tax your Social Security.
What’s The Point?
- [4:25] – The point is that there are ways to get your Social Security taxation to zero. If you put your money in the right places, you can lower your tax burden. As an example, if you put all of your money into a Roth IRA and then withdrew $100,000 from that account and took your Social Security benefit, you would be in a zero percent tax bracket for Social Security. Because Roth IRAs are after-tax accounts, you don’t have to pay taxes on your withdrawals. Therefore, you could report zero income outside of Social Security.
- [5:55] – Roth Conversions: What To Do If All Of Your Money Is In An IRA?
- [6:29] – The Every Other Year Game.
Uncle Sam will collect his cut of your Social Security benefit, but there are strategies you can employ to minimize your tax burden. - Mr. Stillman's OpusTweet This