This is the Truth Network. Yeah. Welcome to Finishing Well, brought to you by CardinalGuide.com with certified financial planner Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.
Now, let's get started with Finishing Well. Oh, welcome to Finishing Well with certified financial planner Hans Scheil. And today's show, I think you might find. More than interesting, it's how are you taxed on your social security? And you know, what's the formula with all that?
And so. You know, when I watched the video that they did on the same idea, you know, I couldn't help but note that, oh my goodness, you know, things are just not as they appear. Which, if you read the Bible, you'll see so many things in the Bible are not as they appear.
So when you first hear that your Social Security can be taxed, Up to 85 percent, right? It's as if the government's taking 85 percent of the benefit, but the truth is only 85 percent of the benefit can be included in the income. That's what they're talking, it's completely different, and the tax is again on a marginal rate, so at first. Glance in the Bible, you know, when God commanded Abraham to offer Isaac, it looks Unthinkable, even cruel, right? But when Abraham steps forward in faith, All of a sudden, he gets to see what God had really provided.
The veil was lifted, and he heard from God, right?
Now that I know you feared God. He would then come to see that the land would be called the Lord provides, that there was a provision hidden. A big, huge provision, believe me, in this one, that was hidden behind what was a step of faith for him. And so it seems like the worst tax imaginable may turn out to be the place where Jehovah Jireh is really revealed. And so many people that are on Social Security, believe me, can testify to this fact.
So, you know. Rather than judge God's dealings or even your taxes on surface appearances. you know, what feels like a penalty might actually As this case contained provision. And understanding the whole story is what you're going to hear today, I think. Reveals the grace that's really hidden beneath that.
And so the taxes on Social Security may look. look like they're worse than they than they actually are, Hans, right? Yeah. They're not as bad as they look. Even we we went through an example that I just put out in my head, I said, So we got Mr.
Mr. Big Box that comes in. to me as a client his income. He and his wife over 300 grand a year. He's in retirement.
And 60 grand of that is Social Security. Yeah. You know, and he sees this 85%. uh tax, he's thinking they're you know, taking 85% of his Social Security in attacks. I said, now wait a minute.
So if we got sixty grand in Social Security income, only eighty five percent of it is taxable.
So we're going to now only 50 grand of the 60 grand is taxable. And then because of your high income, you're in the 24% bracket. It means that about $12,000 is the federal tax that you're going to owe on your Social Security. And North Carolina doesn't tax Social Security.
So, and a lot of most states don't.
So You know, it's a $12,000 tax on a very rich and wealthy guy. Um out of a sixty thousand dollar Social Security check annually. Yeah. That's about the worst it's going to be. Let's look at somebody more realistic here.
So if I'm going to go through the formula, like if you Google. And you go in and you say, How am I taxed on Social Security? or you put it into AI or something, what it's going to spit out is this very complicated formula that Very few people understand. Tom and I understand it. But to sit down and explain it to any one person is almost pointless.
But let me just point out. If you watch the video, they explain it. And I thought I had some idea about all this. I was like, man. There's no way in the world.
I know that the computer figures it all out. I'm so glad there's spreadsheets because There are so many aspects of that. But again, it really is quite simple, the idea of it. But that formula is a piece of work.
Well, and look, people that are going on Social Security and they're retiring and they're stopping their job income and We're lot in their IRA and You know, doing all this kind of stuff, they want to know. I mean, like, what kind of tax am I going to pay on my Social Security? It, you know, the answer to that for most people is not a lot, okay? But I'm going to just go in. The very first thing you got to do is you got to.
come up with what is your provisional income. And that's a word. invented by Social Security. You know, you're not going to find it anywhere else in our stuff. But we you know, your provisional income As Social Security and the tax man looks at it.
And what that is. is you got to take your adjusted gross income or AGI. and turn it into Maggie. M-A-G-I. modified adjusted gross income, but it's pretty much your adjusted gross income.
How much do you bring home before deductions? And so we're going to take your MAGI. And we're going to add to it. half your Social Security benefits.
Now why they cut it in half? I don't know, but it just So like if this guy that we were talking to had a $360,000 total income, but three hundred thousand of it was Magi And then Social Security was 60,000. We take half of that.
So now we're at 330,000. If we take a more common person, let's say Uh for a couple. fifty thousand dollars of Social Security combined. And then we're going to Um take take maybe maybe their MAGI is 40,000.
Well, their MAGI is another 40,000.
So we're going to take 40,000 plus half their Social Security, which was. be twenty five thousand, their provisional income would be sixty five thousand dollars. Of their $90,000. You're proving my point also well. I like the name Maggie because that's how you spell Magi in the Bible, and it takes three wise men in order to be able to figure that out.
That's pretty good, Robbie. You came up with that real time.
So. Have I ever calculated a provisional income for somebody that comes into me? The answer is no. I mean, I can just look at your numbers and I can tell you about what your tax is going to be. And a lot of people say, I like what you're doing, Hans.
I don't want to go through this, but you know. I can't tell you the number of people. that have spent hours on this before they come to me. or come to us and and then they're You know, they want me to kind of walk them through it. And you make one mistake somewhere along the line, and it's, you know, it's fatal.
So Anyhow, you got to come up with this provisional income.
So it's your income. Other than Social Security, plus half your Social Security benefits.
So that's what we're going to plug into the formula. And then the formula is just for a married couple The base amount is thirty two thousand dollars.
So if your provisional income is under 32,000, You don't pay any tax on your Social Security. And if your provisional income is between 32,000 and 44,000, It reads as though it says up to 50% of your Social Security is taxable. but heavy emphasis on the up to. Because it's a small percentage. And then if your provisional income is over 44,000, like our guy with 360,000.
You know, maybe you're going to get to the 80. Five percent. of your Social Security is included in Your income. I mean, how's that for a mouthful? Oh I've said it before.
It's it takes takes three wise men. But at the end of the day, it's really not all that complicated from a standpoint of: yes, how you calculate it is complicated. But what you what you start out with is the absolute worst case scenario if you continue to work after you're on your Social Security. Right. The the absolute worst case scenario is 85% of what you're getting in Social Security benefit could be taxed at the rate that you're currently being taxed at.
In other words, fifteen percent of your Social Security is absolutely not being taxed. That's right. And you got to get way up there for 85% of it to count. Right. And Tom proves that in the video.
if you you go through the math problem on the taxes. and you watch the video rather than lay it out on the board In the video, we just went through the example. And we showed You know, a couple making 150 grand. Um or actually we showed this couple with a provisional income of 70 grand and we showed what their total tax was. And it was It was nominal.
I mean, the taxes that those people paid, and then the single. that had a provisional income. of 35,000. And remember, their real income was larger than 35,000 because they cut the Social Security in half. Tax was nominal.
So Um for people of a moderate income that are on Social Security. Your overall taxes are going to be lower than you're used to. Yeah, a lot lower. Because You know If you're used to working. You've got all sorts of stuff come out of your paycheck that won't be coming out of your paycheck anymore.
And and So that's just your regular monthly income. And again, when it comes down to To do in your taxes, it's different as we've talked about in previous videos with the tax brackets and all that. You know, it's a new game, essentially, that that that or it's a new inning in your life, new season, however, when it comes to financial planning. And that's more reason that to me it it helps to at least understand the basic formula of this, because I I really think it's a trap for folks. To keep them thinking, I don't need to work.
I'll send myself into tax mania if I need that extra income or something like that. And or if whatever it is you feel like God puts on your heart to do. Um this is not A stopper in it, do you think? No, I I I don't. And I think it was put there I remember my dad talking to me about this, and my dad retired in 1985 because it was the year I got married.
My dad was of the day a high income person. And, you know, he he probably made 60 grand a year, 80 grand a year. I don't know, in some good years he may have approached 100, which was a lot of money back then.
So, when we got to take a break here, it's a good time to remind you that this show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuy.com, you're going to see that you've got seven worries tabs. And today's. Um is actually going to be on Social Security, right? It'll be in this, it's going to be in that worry, the Social Security tab, because that's what we're talking about: attacks on Social Security.
So it kind of meets both of tax. But it's under the Social Security tab. You're going to see a wonderful video along these same lines with the board and again the spreadsheets and all.
So you can see the calculations, you know, right in front of you. It's all there at cardinalguide.com, as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook that goes along with that. And of course, make life easy on yourself. Rather than need three wise men, just go to the contact Hans page. It's there at cardinalguy.com.
We'll be right back with a whole lot more on. Right? How are your taxed on your social security. Investment advisory services offered through Brookstrone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil. And today's show, how are you taxed on your Social Security? What's the formula?
And uh You know Let's speak English in this segment. Yeah. I think that's a great idea. I mean, I I'll normally sit with the two fists in the air when somebody's looking across and turn backwards and I would say over here you got your social security. How much is that?
And most people, I can calculate that in the head. How much is hers? How much is yours? Add the two together, annualize it, and you know, we got the 50 grand or 60 grand or of Social Security, so that's the left fist. And then we have your other income.
And your other income is going to be what you pull out of your IRA, or if you got a pension, or You got some interest coming in on something, you know, you know, whatever else you're living off, withdrawals out of the IRA. Um Say that's $30,000.
Well then you got Social Security of 50,000. other income of 30,000. I could tell you right now, if you're a couple, you're not going to pay a lot in federal income tax.
Okay, or or state tax. I mean, just let's get started there. Ian. the the taxes on Social Security. are pretty much calculated by your other income.
So if you you know, if you've got substantial other income, and by substantial I mean $100,000, $200,000 of other income. that you're pulling out.
Well then your Social Security is going to get taxed at a Pretty significant rate. You know, never more than 85% of it is going to count in your income tax.
So another way to put that is that 15% of your Social Security is always going to be tax-free. and the other 85% is going to get taxed. But if you're back to these people where they got 50 grand of Social Security and 30 grand of other income. You know, you're not going to pay a lot of taxes on the 30 grand of other income, and you're not going to pay probably any tax.
Social Security portion. I mean, your taxes are going to be low. They haven't Um you put in the standard deduction. couple that's less than 150 grand a year. between the s standard deduction and the senior deduction and Next year in 2026, you're going to have like 48,000.
dollars worth of standard deduction and you apply that to this couple that just there's no tax due.
So that's good news. And so people that are listening to this, I'm speaking English today, is that people. with a moderate other income and a You know, a pretty good but moderate social security, those two things together. Yeah. Very little tax, if any at all.
That makes sense? No, absolutely. And I like that. Especially the no-tax. you know, idea which leaves room to make other plans, right?
Well, it does. It means that you get to spend What you have, let's go over the single for a sec and just you know, in the example that we had in the video. We had this person that has $30,000 a year worth of Social Security, that's $2,500 a month. and they got twenty thousand dollars of other income So left fist thirty grand, right fist twenty grand. But now they're at single taxpayer rates.
But they're not paying much. tax on 20 grand. Of other income because the standard deduction is 18,200. And plus they're going to get that senior deduction. Of 6,000, so it's up to 24,000 of deductions.
off of their twenty thousand again. Almost no tax. I mean, there's somewhere in there something's gonna get you, but. Tom? That's why Tom runs the examples on the video.
is th they're really intending for Seniors to pay very little tax.
Okay, and so when we take this into If we're going to compare your pre you know, when you're working income and how you lived. And then you're after and Social Security, it's like night and day. Because, you know, if you made a hundred grand Under social security, I mean, under 65, working somewhere, and 100 grand is a pretty good. chunk of money to be knocking down. Um you make a hundred grand.
Um you Are you going to have Social Security taken out of that? You're going to have 401k contributions. You're going to have unemployment taken out of that, federal income tax. state income tax. I mean, you're going to be lucky if you take home 60, 65 grand.
Yeah. you know, that's a little over five grand a month. And you can take that same person. Boo. Takes home five grand a month in retirement for half of its Social Security and half of its deductions from their IRA or just some other income.
They're going to pay almost no tax at all.
So they're going to all their money is take-home pay. Or pretty close to all of it. That makes sense? Oh, absolutely. Absolutely.
And so we always build income plans in our financial planning. from the ground up. In a lot of cases. With people, if they've got money in an IRA or a 401k, substantial money. They And they haven't taken Social Security yet.
This isn't for everybody, but a lot of people, we're going to have the lower earner start their Social Security at full retirement. And we're going to have the higher earner. start their Social Security at seventy, And we're going to make up the difference. out of their IRA.
So they still got the same money to live on. They're not paying a lot of taxes on this withdrawal. out of their IRA because it's all compressed to a Reasonably lower level, they're getting the benefit of waiting on their social security. And then the taxes on their Social Security. are going to be even though they got the higher Social Security now, 'Cause they waited till 70.
Yeah, and then the spousal social security. their other income to make up the difference for them to meet their lifestyle. is small enough that their taxes on into the future are going to be pretty low. Yeah. Yeah.
So Again, the it gives them r margin to do Roth conversions and Or life insurance, there's a lot of things they can do based on those. Advantages, right?
Well, yeah, I mean, so then once we've created, we've helped with the tax problem. On the amount of income that you need to live, we still have the problem of the big. IRA or the big what was a 401k, maybe they've rolled it into an IRA, but this big glob of money. that now we really don't need a lot of it every year because we've figured out the taxes on On their living, a lot of people go, oh, well, I'll just live off of this and I'll just kind of save that.
Well, no, we we don't want to do that because We're wasting tax brackets. You know, that's another video another day, but.
So There's more to it than just calculating the tax on Social Security, which this video is about. I just like to. Um Help people be less afraid of it, in other words, or understanding that it's a Small bite. unless you're a really high income person. Yeah.
Right. And and to me, b again, as I said earlier, Um You know, God Enabled us to work and to be, you know, fruitful and all that stuff. And when people start to see things like this, it discourages them from my standpoint of man, I don't want to do that and have to pay 85% of my Social Security in taxes. And so, you know. You know, let some of your friends know to listen to this video if they're thinking about it.
You hear them say something like that because. Right. As as you talked about, even your dad, um was freaked out by this, you know, back However many it went thirty years ago, right? Oh, it was more than that. It was 40-some years ago.
And he used to say, you know, I'll take all the 50-cent pieces I can get. Um, because he just what he was saying is every time he makes a buck, The federal government takes half of it. And that was probably true with tax rates back then. the kind of income that he was making, but he was applying that same theory to his Social Security and it just wasn't true post-retirement. I mean, he was able to keep a large amount of it.
Um And so people overthink this and over worry this and it's just not as bad as As you're thinking, unless you're a high-income person. And if you're a high-income person, then we got another set of rules that we're going to, and another set of strategies that we're going to work. Yeah. to try to make this better. One of them is Roth conversions and living off of principle and not interest.
Um where is if a person has A bunch of money in a rough once they're 70, and then they got a big social security check. And then they make their withdrawals out of raw Annuities to live then they're really not going to pay any much any tax on either. Um I mean, at whatever level of income you want.
So Yeah, and that g gets back to why I do those Roth conversions, especially, you know, for people that are maybe listening to this or are still. In their early 60s, and those kinds of things to take advantage of those rates, because when you get there, and you're on Social Security And like you say, your other income's coming out of that Roth, you don't have any taxes on that. But I like that, especially for my wife, because I think she's going to live a lot longer than me. And I've got. All of my money, or not all, but most all.
of my Um IRA money is in Roth annuities. That are set to just start kicking out a tax-free check for life for both of us. And I can just see her. being a widow being in her eighties and nineties, And she's collecting a big Social Security check because she'll get mine when she lives on and then she's going to have a big a Roth annuity check that won't stop until she dies, and she's not going to have to be worrying much about taxes. Which is a good feeling.
Not at all.
So Again, we want to remind you this show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuide.com, again, there's the seven worries tabs. And as we talked about today's show, it is under the Social Security tab.
So you're going to find show notes there as well as a wonderful video from their YouTube channel, Cardinal Advisors YouTube channel. And so if you see that video, you're going to see the show notes there. That's going to have all sorts of spreadsheets and those kind of things. If you're interested in seeing it on paper, as well as if you want to read about it, you can get Hans's book there at the website, CardinalGuide.com. You've got the complete Cardinal Guide to Planning for and Living in Retirement.
And of course, the famous contact Hans and Tom Page, so you won't need Three's Wise Men to figure out your Magi. That's funny. That's a great show, Hans. Thank you. Thank you and God bless you.
The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results.
Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation. Finishing Well is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor.
BCM and Cardinal Advisors are independent. Of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Well, brought to you by CardinalGuide.com.
Visit CardinalGuide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Han's best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and the Workbook. Once again, for dozens of free resources, past shows, or to get Han's book, go to CardinalGuide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com.
