Social Security Federal Income Tax

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This is the Truth Network. Welcome to Finishing Wealth, 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 Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. So Finishing Wealth is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Scheil CFP sell insurance. This show does not offer investment products or investment advice. Welcome to Finishing Wealth, certified financial planner, Hans Scheil. And boy, do we have a whopper of a show for you today. We really do. It may not sound like I want to give you the title, but I'm going to tell you it is.

It's Social Security Federal Income Tax is the name of it. But this is so cool. I think you're going to get a blessing. And you look at our lives, it's like we're refiners, right? Our idea is to take something that is complex or whatever and refine it into usable stuff. And so when it comes to all this information on taxes, I was thinking as I watched the video that Hans and Tom did on this whole idea, I saw how they were refining all this information. And then you find these nuggets of gold, right? And inside those nuggets of gold is where we really see God.

And when we can find those kinds of nuggets in a bad situation like taxes, then you can have peace where you would have anxiety, because we always talk about these seven worries. Well, the reason why you're worried is you don't see God. God's got you.

He's not going to let you down. Well, I have a little story I wanted to relate. I'll never forget.

It makes me laugh just to think about it. I worked for Royce Reynolds, who was a wonderful godly man in Greensboro, North Carolina. And he ran a bunch of dealerships. And he'd gotten us in, well, I'd gone in to help save this dealership in Raleigh that was losing about $100,000 a month.

And Royce was really pretty upset about it. And then I was talking to him on the phone one day, and he exclaims, oh, I longed for the day when I had to pay taxes. I used to hate paying those taxes. I wish I could pay them again, because I'm sick of these losses.

I've never forgot about that. Whenever I looked at a tax bill, I went, man, I'm really lucky I get to pay these taxes, because the alternative ain't so pretty, is it, Hans? No, no, I mean, it's just people when they have an income, and then they pay high income taxes. And this is me for a few years, when I opened my business as I, I made nothing for several years. And I actually had the same thought where I, I'm now back to paying taxes and actually enjoying it. Because that means I'm earning money. But this idea, you know, I love the question that you ask people, you know, is, and a question we need to ask ourselves, you know, how much tax do you pay on your Social Security?

Yeah, well, I mean, the thing that I've found with retired people, and I really, I really learned this after I've been in practice for several years. And I'm really helping people with their taxes, and I'm looking at their income. And people that are retired, relatively speaking, don't pay a lot in taxes.

I mean, and they pay, many of them pay very little tax on their Social Security income. And so we really in this video, and this show today, we just want to break that down. And then we want to show people how to manage their money in such a way and manage when they start Social Security in such a way that they can have a very low income tax retirement. Yeah, and there, there are some nuggets coming, believe me, folks, and some wonderful examples, too. Yeah, now, now, we kind of go to the examples at the end, because, you know, we got three examples, the example of Barbara, that's in the video, and we have the example with Beth and John. And then we have the example of Linda and Alex. And Barbara is a widow.

And she, we've talked about her before. And, you know, now we're talking about the taxes she pays on her Social Security. And she's actually collecting her deceased husband's 100% of his benefit. She's just now just turned 66.

And she's been collecting this for about a year. And then her benefit is actually frozen. And it's, you know, it's increasing because she's going to switch benefits at 70. So she's actually going to get more benefit, Social Security benefit at 70, because she's delaying her benefit while she's collecting the benefit of her deceased husband.

But that's not necessarily what the video is about. It's just showing how she's paying no income tax. And her, her Social Security check is about just short of two grand a month. She needs like a little over 3000 a month to live and pay her bills. And she's pulling that extra 1300 a month out of her 401k, which is not real flush with money. So we can't do that the rest of her life. But we can for now, and she's not even paying any income tax or anything to speak of on the 1300 a month that she's pulling out of her 401k.

So she's got like 30,000, 3100 a month coming in, and she's paying no income taxes. Yeah, which is pretty cool. Yeah. And she needs it, right? I mean, you know, God has provided for her in a neat way, I think.

Yes. And the plan here is she had to have a little surgery after she retired about a year ago. And the plan here is for her to get a part time job where she can bring in a little over 1000 a month. And then we'll be able to stop those deductions from her 401k and be able to parlay that forward as long as she can work at a part time job and earn that kind of money. And she still won't be paying much in taxes at all. And the second example is a couple who they got to social security checks, and which are pretty substantial.

I believe and again, I just haven't watched this in the last minute, they're around four grand a month, between the two of them, maybe a little short of that. And to make their budget, they deduct from their 401k another 1000 a month, which is pretty cool. And then they pay almost nothing in taxes.

And you know, you say, Well, how is that? And it's just social security is taxed to the extent of your other income. And their other income is only 1000 a month. And that's by choice, it's a deduction from their 401k.

So it's $12,000 a year. And by the time you put in the standard deduction, and the social security formula, and all that is very little income taxes that they're paying on an annual basis. And the state income taxes for both of these people, they're both in North Carolina, and North Carolina doesn't set tax social security at all. Some states do. But that's why the thing is social security federal income tax, is we don't want to say that's the only tax you need to worry about, because some states tax it.

But North Carolina is not one of them. And the third example is, which was the most enlightening for me is, which Tom really put all this stuff together, where Tom can do a mock up tax return, he's doing that on just about every person that comes into us and does a financial plan. And he after we do our recommendations, he plugs it all in a in a mocked up tax return out 2345 years, and shows them the tax effect of what we're doing here. And with this couple, we really encourage them to delay their social security to 70. And by the time they do get on social security, these people have 8000 a month that they're able to spend. And they're only paying 1000 a month on top of that in taxes. And it was really, I mean, 1000 a month in taxes is not just when you talk about that I was $12,000 a year, that sounds like a lot, but relative to their income and the money they're spending and their social security, it's it's really not. And so we've got people covered from $100,000 a year, two couples down to a single individual taken home about $40,000 a year, we've got all three of these paying very low or no income taxes. Yeah, and it was kind of cool, because I had not realized that there are three different levels of income tax on social security. So that that question, I immediately knew there.

Wow, there's some here. I don't know. So, right. And those those three kind of fit into all three brackets, right? Yeah.

Well, it's just, it is all three of those. And, you know, what I can add to that, we've got another guy at a very high income. And right now, and he's retiring the end of the year that we're working with right now. And we targeted all his income and receipts and social security and all that around an income of $180,000 a year. And he doesn't pay that much in income taxes on 180 grand a year, because about a fourth of its social security. Another, probably half of it is coming from qualified or IRA money. And then the other rest of it is coming out of just savings that he doesn't have to pay taxes on. So, I mean, it just the general theme of this is if you plan things properly, your tax bill can be very low in retirement. And it also, what that means is that you get to keep more of your money. If we've made this a sustainable plan, you not only get to keep more of your money, you can actually spend the money that you get. Because if this is a repeatable thing, which for all three of these examples, and people, your social security checks going to keep going on for the rest of your life. And if you come into us, as all three of these people did, we're going to have you spend your other income and pay it out to yourself over the years.

I mean, that's sustainable all the way up into your 90s. And so you can see that there's some helpful information that's all available at cardinalguide.com, cardinalguide.com, where they have, of course, the Seven Worries tab where today we're talking about income tax. And so that's there as well as show notes.

And actually, you got all these different tax forms that Tom has there in the show notes, as well as the video that you can watch on the same subject. And of course, it's all in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, one of the more important things you want to know from my standpoint is how to get up with Hans so that they can figure out this plan for you. Let's go to cardinalguide.com right there and all those contact information available.

So we'll be right back with a whole lot more on Social Security Federal Income Tax. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Well, welcome back to Finishing Well with certified financial planner, Hans Scheil. And today's show is Social Security Federal Income Tax. And one of the really helpful things in Hans' videos is they have a board to show you all these numbers. And so that, again, is at the show notes and there under the income tax worry there at the cardinalguide.com.

But Hans, some of the information on that board is really important. It is. And it'd be great if some of the folks could watch the video and we, you know, it's concise, but the general theme of the show is that your Social Security income or your Social Security check every month, and if you're a couple and you got two of them, in and of itself is not taxed. Okay. I mean, part of it is going to count as income if you make enough. But let's just go with a simple rule of thumb is if the only income that a person has is Social Security, they're not going to pay any income tax.

Okay. And that's encouraging because there's some people that they live off of only their Social Security, some unfortunate things have happened to them, whatever, they're retired, they can't work anymore. And they've got a check coming in, and at the very least, all of that's theirs. They don't really have to pay any taxes to the feds and the state. Now, if you have your Social Security and some other income, you're probably still not going to pay income tax.

And our examples that we talked about earlier prove that out. You know, as an example, the lady that has about $20,000 a year in Social Security income, $23,000, something like that, $24,000. And then she takes out of her 401k, like $1,200 a month, or $1,100 a month, she doesn't pay any income taxes. I mean, by the time you plug all that into the system of $1,100 a month of other income, that's $12,000, $13,000 a year. And then the percentage of her Social Security, she just pays nothing in federal tax and North Carolina, she lives in North Carolina, doesn't tax Social Security. So she's got no income taxes due.

In other words, she can keep all her money and she needs it. Yeah. Yeah.

It's a beautiful formula. You know, and the neat thing is, and again, in the video, you know, Tom puts all the numbers right in a tax return and you can see what we're talking about here. And, you know, it's really helpful to know, you know, in every situation there's really ideas that would help, like in her case, as you talked about going on her husband's Social Security so that hers could begin to, you know, bake as you say, and grow so that when she reaches 70, you know, she'll be able to get more benefit, right? Yeah. And more non-taxable benefit because her income is never going to be high enough that they're going to be taxed in either the income, the other income or the Social Security.

I mean, it's just, it's a beautiful thing. And, you know, I'm doing the video for people that aren't yet retired and they are now, you know, in a situation where they, they, they're going to be, where they're going to be collecting Social Security and then whatever that produces for them, they're going to get to keep most of it. And then if they need other income, in addition to their Social Security, which many people do, and they're going to make reductions from their 401k or IRA or money they haven't paid taxes on yet, they're going to be pulling income out of there. And if that's a smallish income, you know, like a thousand a month or 2000 a month, they're still not going to pay much taxes at all because it's the other income that gets taxed. And it's the amount of the other income combined with a portion of the Social Security that creates their overall taxable income. And by the time you plug everything in there with a smallish income, separate from Social Security, the tax is going to from Social Security, the tax effect is almost nothing.

Pretty cool, actually. And just right on the top of my board I'm showing is that if you're at the low end of other income, you're going to pay 0% income tax, or 0% of your Social Security is going to count toward income tax. And if you're kind of middle of the road, you're going to have half of your Social Security check is going to count as income in your tax calculation. And if you're at the top of the thing, and you have a lot of other income, well then 85% of your Social Security is going to count as income.

But we figured a guy that a client that doesn't need a lot of monthly income to live, he has a lot of money, but he doesn't need to access a lot of it to live. You know, we based it on $180,000 a year, and with about $50,000 of that being Social Security, he isn't paying much taxes either. Yeah, because you know, it sounds when you say that 85% of your Social Security, if you have other income that's over what, 40 some odd thousand?

Right. That 85% of its taxable income, but for somebody that's in that taxable income bracket, they're only paying like 12% tax anyway, right? So 12% of the 85% ain't a whole lot of tax, right?

Well, yeah, they're paying 10% on some of it, and 12% on the rest of it, and they're getting the standard deduction for a couple, over 65, over $28,000. So by the time you plug all that stuff in, and you live in a state without state income tax, your tax bill is just going to be low-ish in retirement, which means you can keep more of your money. And it's very important that we plan things for you so that you don't have some years where you pay a lot of taxes. And let me tell you how that happens, is if somebody's going along, they don't really get any planning, most of their money is in an IRA or an old 401k, and they don't want to touch it because, oh, I got to pay taxes. So that is their savings account. And then lo and behold, something happens where they have to go get some money to help one of their kids, or they've had some, they need to buy a new car, or they need to fund their new roof, or air conditioning, or just something happens where they need money, and they go to their savings, which is their IRA, and they pull out a bunch of money, then they got to pull out a bunch of other money to pay the taxes on what they just pulled out. And then what that does is make more of their Social Security taxable, which they've been living off of. So that's what you really want to avoid, is one of these big bulge years where you've had to make a reduction.

So how do you think you prepare for that? Yeah, you reduce the IRA while the getting's good, apparently. Yeah, well, what we want to do for just about everybody is we want to start winding down their IRA in little bits, bits by bit by bit by year, because all three of these examples, we could pull another $10,000, $20,000 a year out of their IRA, maybe as much as $30,000 or $40,000, and have still paid very little income taxes. So it just makes sense to do a little bit every year, and actually voluntarily pay some tax, and then save the money, don't go blow the money, and then save the money so that if you do have a problem that a savings account is there for, you don't blow your whole retirement income tax plan, because you can just take it out of a savings account where there aren't taxes due. Right, and I loved what you said on the last group, which they had a high income and a large IRA balance, and yet you're able to do a whole lot with them, not just with what you were switching over from the IRA to a Roth IRA, but then also with a change of income without increasing their tax that much, but then you also talked about they had another investment account that you switched over to an annuity, and so there was all these things that happened, and like wow, I mean I couldn't believe how much money was going around, and yet they still had a really limited, you know, amount of taxes that were due.

Oh yeah, I mean we just got Tom in there and we sat down with the tax return, and then we sat down with all their money, and they were fortunate enough that they have pretty sizable money they've already paid taxes on, so this guy's been a really smart saver. This couple has their whole career, and they've made a big income, and now they're facing retirement. They don't need that big income anymore. I mean they need what's going to look like a big income to a lot of people, but we literally have the choice of how much taxes do you want to pay year by year, and so we just structured things that we made their income just under 180 grand, so we're going to stay away from Medicare, Irma. He actually started his social security, or is starting it early, because he can, so he started at 66, because relative to his whole situation, that extra money just doesn't mean much to him, so they have between the two of them about $50,000 a year in social security coming in, and we were able to put that in there, put in some other sources of income that are not taxable, and just put together put together the income they need, and still keep their tax bill relatively low, which is really cool.

Right, and that, but also I loved what you talked about with the investment account that was taxable income that was really high, but you were switching it to an annuity for tax reasons as well, right? Well yeah, because I mean there's the annuities that can be set up that, you know, where like for him, we did a five-year payout annuity that just stops making payments at the end of five years, and we just took a small portion of his money, stuck it in there. He gets a big check every month, which only about 10% of it is interest. The other 90% is just giving back his own money to him, which is non-taxable. It's a little complicated, but we threw the money in there, and then he gets a check every month, and by the time we ended up adding it up at the end of the year, the taxable income that shows up on his tax return is very small, and then we've got a bunch of other money just in annuities that we're not taking income from, and it's just accumulating tax deferred. I mean there's no point in paying taxes on interest that you're not spending. You just stuff that money in an annuity, and then it accrues tax deferred. So it's a little complicated to explain on the radio, but we can sit down and put the numbers in front of you. He's just amazed by this. This is how little taxes he's going to pay for several years. Right, and so you know at the end of this, I hope everybody's hearing that this is, you know, a lot of times I don't want to think about taxes because it's bad news, but actually when it comes to your retirement planning, this is really good news, and something it's worth doing some planning around thinking about, you know, in my opinion, you know, calling Hans and getting him involved with your plan because every one of these is so different, and there's so many different cool options.

Every time I hear one of these stories, they did something else that was like, man, I hadn't thought of that, and so they can do that for you. You go to cardinalguide.com, right, and get in contact with Hans, and again, wonderful show. Hans, people can go there.

Get all those resources, including your book. Thank you for a great show. Thank you, and God bless you. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Shile, CFP, sell insurance.

This show does not offer investment products or investment advice. 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 Hans' 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 Hans' 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. This is the Truth Network.