Tax On Your Social Security

This is Rodney from the Masculine Journey Podcast, where we explored manhood within Jesus Christ. Your chosen Truth Network Podcast is starting in just a few seconds. Sit back, enjoy it, share it, but most of all, thank you for listening and choosing the Truth Podcast Network. Care, IRAs, long-term care, life insurance, investments, and taxes.

Now let's get started with Finishing Well. Well, welcome to Finishing Well with Certified Financial Planner, Han Shyle. And I know that most people in retirement are going to be very interested about today's topic, which is tax on your social security. And of course, it doesn't sound all that illuminating, but I like what Tom said is the reason for this video, in the video that's actually on Cardinal Advisor's YouTube channel, is he said, the purpose of the video is what everybody wants to know is how much money do I get to keep of my social security? And I think you'll find through listening to this show today, and of course, if you go watch the video at Cardinal Advisors, not the YouTube channel, is that it isn't the formula that you may think about what you get to keep.

And you might be actually surprised at how good it is on how much money you get to keep, you know, based on understanding truly how it all works. But the thing is, biblically, Jesus taught something in Matthew 6 that's kind of surprising about the idea of the tithe, because most people, I think, when they think of the tithe, they go, okay, well, a tithe, as most people would agree, is 10% of your income, meaning I get to keep 90, right? But unfortunately, or fortunately, depending on how you want to look at this, what Jesus clearly taught was don't store up for yourselves treasures on earth, because thieves and moths and all that can happen.

But instead, what? Store up yourself treasures in heaven, because, you know, where your treasure is, that's where your heart's going to be. When you think about it, the money that you actually tithe, or the money that you give to charity, all those things that Jews teach, and I love this, that you're assaulting your money, you're preserving that money, that money is an internal investment, you get to keep that. That's what you get forever, right?

The 90%, you know, I don't know what's going to happen to all that. You maybe use that to invest and hopefully create more tithe out of it later, if you're a good steward of what that all becomes. But the great news is the money that you actually give to God, oh, you've stored that up in the exact right place, that one will continue to pay off for eternity. And with that in mind, Hans, give us the good news on our tax on our social security.

There's a lot of good news there, really. Well, there is. And when you apply all these formulas, which are confusing, they look simple when you're just looking at them. But they really, when I do these in my head, I don't end up anywhere near the right place of telling somebody what their taxes are going to be on social security. And that's why I have Tom use the computer to do that. Tom can do it very fast.

And in the video for this show that's on YouTube, we actually do that, where we take an example. I'll talk about that in a minute. And so, one piece of good news is if somebody has only social security income, you know, they don't have any retirement savings, maybe some things have happened that are very fortunate, it doesn't matter how they got there, and they're living just off social security, and maybe a little bit of other money coming from somewhere. For all practical purposes, they're not going to pay any taxes.

Okay. And that's a good thing. I mean, if somebody has a social security check of 1500 bucks a month, and maybe a little bit other money from a pension or a little bit of savings that they have, you plug it all into this formula, and you're going to end up with little or no tax.

And so that's a good thing. They can keep all their money. And if they live in North Carolina, it's, you know, they're not one of the 11 states that tax social security.

Let's go through those real quick. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. Those are the states that tax social security.

The rest of them don't. And some of the rest of them, like Florida, they have no income tax period, no state income tax. So it would be hard for them to tax social security. But those 11 states, they tax social security. And but they all too have thresholds in all those laws.

I don't have time to go over all the states. But again, somebody that just has a social security check, and no other income, most of these states, they'd be all right, where they wouldn't pay any state tax either. So that's one piece of good news. Another piece of good news, depending on how you look at it, is that the tax that you pay on your social security goes right back in to the trust fund. And I've had people that say, oh, I don't believe that. And they're all those people that are experts on how the federal government handles the social security money. But we have a show every year, which you're part of, Robbie, where we go over the financials of the social security system. And I can show you right on that sheet, or you go back to that show, every dollar that individuals pay on their social security check of federal tax goes right back into the social security trust fund. Did you know that, Robbie, before?

Well, yeah, because I've done all those shows. But I think that's beautiful. And again, being one of those people probably pay a little bit of tax this year in the social security. It's kind of neat to think that you're showing up other people's social security, but with money that's coming from social security goes back into social security.

I think it's beautiful, actually. Yeah. Now, before 1983, no taxes on social security anywhere. So you would take your social security before 1983, pay no taxes. And then they put in 50% of your social security as taxable. That's pretty simple for about 10 years, is that half your check fell under taxable income. Well, then in 1993, they changed it all around. They came out with these formulas that we're looking at.

The individual $25,000 to $34,000 gets taxed at 50%, people $34,000 and above, 50% to 85%, larger amounts for the married filing jointly. But they made it more confusing. And they also made it where the lower income people didn't pay any tax, so that's good. But the higher income people paid more tax, and nobody could figure it out without coming to somebody like me. And so people just, and these numbers, by the way, have not been adjusted ever for inflation.

From 1993 to 2024, no changes in them. So what that's done is more and more people are paying taxes on some of their social security. And then, again, that money gets diverted back into the trust fund. So it's not a lot of real exciting stuff, but it's all leading to how much of your social security check do you get to keep. And then what we'll talk about in the backside of the show is we're going to talk about what we do with this information, what we can do for your income to try to reduce your taxes on social security.

And there are some ways to do that. Darrell Bock But also, it's just critical to, like, isn't it the first, in fact, it's the first of the seven worries, because it's kind of like the building block of the whole plan. And obviously, it becomes a critical number, since it's your, you know, at least if not your main source of income, it's one of the bigger sources of income that ends up being a foundation block, so to speak.

David Morgan Well, it is. I mean, it's just, I don't care whether you're very well-to-do, your middle income, your lower middle income, your poor or your whatever you want to call it. Social security matters to all those people, especially when you talk to them when they're 80 years old.

I mean, a lot of 80-year-old people, I talk to them all the time, they can't tell you a lot about their finances, but boy, they can name down to the dollar with their social security check that goes into the bank every month. And that's important. If it's not important to you now, it's going to be important to you at some point, or to your spouse, even if you have a lot of other money. And so, and we use it as the base source income. And if it's all you got, you're not going to pay any taxes.

But then as you start to recognize income, in addition to social security, you're going to have to pay taxes on other income, but it's also going to drive up your taxes on your social security. Right. And especially if you're working like I am, right. So that actually is a big part of the factor of creating these brackets that you're going to talk about.

Well, yeah. And so, I have been very fortunate and earned a lot of money over my career. And so I'm going to have a very high social security check when I take it at 70. And my wife is going to have a pretty significant one at 50% of my full retirement rate. And so we're going to have a pretty significant social security income coming in, but it's not going to be enough to support us. It's still pretty significant, but I have converted most of my IRA, which is where we're going to get our other income from, to a Roth. And I've done it with annuities, so they're just going to send me a tax-free check every month from several of them. And that counts toward the taxation on social security as other income, the grand total is zero. And then I have another source of money, which is the savings inside of my life insurance policies that I've been paying on for years. And I can get it that tax-free too. So my plan in retirement is to live off of what I need to live on and pay for what I need to pay for, but basically to pay very little in income tax. Yeah.

And it's a beautiful thing, right? Because those Roth IRAs that we talk about in so many shows really pay off to be able to supplement your income and reduce your tax, especially on social security, since it is, like you said, one of the foundation, foundational income sources that all of us are going to have as we get into retirement. And really, you know, this planning is like anybody, like you got a budget, you got to start out with how much am I making? And then that's after tax. It is. Now, on the backside of the show, we're going to really talk about, we're going to give an example of a man with a $3,400 a month Social Security check, 67 years old. And then we're going to talk about how much taxes he pays on his Social Security check, because we calculated them on the video. Right.

Right. So we want to remind you right now that the show is brought to you by cardinalguide.com. So if you go to cardinalguide.com, there you're going to find the Seven Worries tab. And so today isn't the taxes, you know, particular worry tab, but it's also clearly about Social Security as well. But if you look at the taxes, worry tab there, you'll see the video of taxes on your Social Security where the you know, that you can click on see the show notes for today's show and all the information specific details, as far as these amounts, and as well as of course, other resources like how to get up with Hans and Tom, and Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And so when we come back, a whole lot more of Tax on Your Social Security.

We'll be right back. with or endorsed by the Social Security Administration or any other government agency. Welcome back to finishing well with today's show's Tax on Your Social Security.

And so Hans, can you kind of review of what we've gone through so far? Yeah, so they have this kind of odd formula that's been the same since 1993. And it hasn't been adjusted for inflation. But you know, it takes your adjusted gross income, and it adds your non taxable interest. So if you think you're going to use tax free bonds to get out of this, they're going to add that back in. And then they're going to add half your Social Security for the year.

And so you plug all that into a formula. And if you're an individual, filing as a single, if the number for that equals 25 to 34,000, you're going to pay tax on 50% of your Social Security. And if that number is over 34,000, you're going to pay from 50 to 85% tax on your Social Security. That means that 50 to 85% of your Social Security is going to count in your taxable income. So it gets a little confusing.

We're going to give an example in just a sec here. Married filing jointly, it's the same formula. But if you have 32,000 to 44,000, half your Social Security will count taxable income. And from 44,000 and up, the result of that formula is from 50 to 85% of your Social Security count.

And you're taxable income. And hand calculations of this don't get us very far. So that's just a summary thing. And we also mentioned that there's 11 states that own the tax Social Security. You can go to the YouTube video for a list of those.

Now what I want to do is talk about an example that we were working on the week that we shot this video. And so this example, this guy has a Social Security check coming in of $3,400 a month. He's just signing up for it, which equals about $41,000 a year. So he's going to have that much money coming in. And he needs about $5,000 a month to live. And he actually needs a little more than that to live well and to have some fun money in there. And so he's got an IRA, which he's in control of the taxable income that comes out of that, or the distributions, in other words. So if he took no distributions and he only lived up to $3,400 a month, he would have no taxes.

But that's not an option. And so what we did is we calculated for him based upon distributions of about $2,500 a month, $2,600 a month, out of all of his retirement savings. And we showed him away through the use of some annuities that he can guarantee that for life. So you put all that stuff together, he's got an income up in the 70-some thousand. He's got $41,000 of that from Social Security, about $32,000 or $3,000 from withdrawals from the IRA.

And so we plugged all of that in, all this formula. We came up with $5,000 of federal tax. And this dude lives in Florida, so there's no state income tax. So you put all that together and you say, how much tax did he pay on his Social Security? Well, he's paying about 6% to 7% tax total.

But if you break that down, it's almost no tax on the Social Security, and the whole $5,000 is pretty much there because of the other income. That's, I guess, a simpler way to put it. Right, which is just, it makes sense, but it's also the good news.

I talked about it at the beginning of the show. Surprisingly, for those people who really are going to have to watch their Ps and Qs, like he obviously is. I mean, he's getting close to just, what is it going to take for me to live, and obviously concerned about making sure that money's there for life. And I love the idea of the annuity being there. But the point is that it's very, once you actually put it down on paper, I guess who came up with the formula, and they're like, you know, I guess who came up with the formula, it kind of works for those people with lower income.

Well, yeah, it does. And the only way you're going to know that is to have Tom go in and plug it into a mock-up tax return, which he did real-time during the video, or I guess I asked him to do it right before we made it, and, you know, just punched it all in and showed us how it all works. But yeah, it creates a very low taxable income for somebody, a single person that's in the $70,000 to $80,000 tax income area, of which more than half of it, just more than half of it is from Social Security. He ends up paying $5,000 in taxes. And so this guy also has $100,000 in savings, because he's known that he's pretty close, and so he's been saving his money from work. And I think that the incomes that we set up for him, I think he still can save some money, and he's not going to have to spend all of his net, and so he can build up that $100,000. He can also go to the $100,000 if he has some sort of emergency expenditure of $10,000 or $5,000 or $20,000 or something that, you know, he can build up the savings through spending a little bit less than this is affording him, and then he can dip the savings instead of going to the IRA, which will throw that whole thing out of whack.

Well, throw what thing out of whack? It'll throw the whole tax picture of the Social Security. I mean, you know, if you got $41,000 worth of Social Security, and then you're taking out so much to live, maybe like $20,000 or $25,000 or $30,000, and then, but you're not in an annuity, you're just making withdrawals and paying the taxes, and then you don't have any savings, and then you all of a sudden have to spend $20,000 and you have to go to the IRA, then you got to pay tax on that $20,000 that you pull out, so you won't have $20,000, and it'll drive up the taxes on the Social Security. Oh, again, pointing out how cool it is that through doing this planning, you know, he has got that savings account where if he was in that point, he could get that money from that, and that's already paid taxes on that, and again, the way he's got his distributions going and all that, through this plan, you know, he really, you know, has sort of gotten rid of that worry, right?

Well, he has, and his big concern is going to be inflation, okay? If he lives a long time, and that's why I'm recommending that he save some of the net coming out of the IRAs and the Social Security, that he save some of that and build that $100,000 so that, you know, eventually if that builds and builds, maybe even builds slowly, we can take a piece of that and set up a further income stream to deal with inflation down the road, or we can just simply make withdrawals, tax-free withdrawals from his savings account to, you know, just to better his situation. And I think I included some interest on that $100,000 of savings in the numbers. I'm just throwing the numbers from memory at you on the radio here, but I think we actually included the fact that he's able to get about 4% on that $100,000, and that 4% is taxable.

Darrell Bock Right. So, you know, just out of curiosity, why wouldn't he go ahead and just create himself a little Roth IRA and put the money in that rather than put the money in a regular savings account? David Morgan Well, because all the IRA money that he has, we've had to commit to two different annuities to guarantee the income for life, and we're not paying that much taxes on the distributions of the IRAs because you just see it.

It's $5,000 on Darrell Bock Right, right. Oh, I understand that, but I mean, he's got the savings account over there, and if he's making 4% on it, if he put that in a Roth IRA, he wouldn't have to pay taxes on the 4%, right? David Morgan Well, he could, but you just can't stick $100,000. I mean, you'd have to convert some of the money he's already got in a 401k and an IRA. Darrell Bock Oh, I see, because he's not still working, so he can't make contributions to a Roth.

David Morgan No, no. And furthermore, I mean, we could help him mess around with the taxes on that money too, but I don't really want to tie it up at this point. I like the liquidity of it, and he likes that because he's somewhat uncomfortable putting all his IRA money in annuities, and we're just spreading out the payments for him and guaranteeing the lifetime income. So he likes those, but he likes the fact that he's got $100,000 that if he has a problem or things don't work out like he thinks he is, he can go tap that for some type of expense. So unfortunately, we need to leave that in a taxable account, and the $4,000 worth of income, it's actually maybe a little bit more than that, is just not that big of a deal in the scheme of his tax plan. Okay? Darrell Bock I understand.

That was helpful, actually. David Morgan Yeah, but I like your thinking about sheltering all income from taxes. I don't want to be bragging about my personal plan, but I just kind of off to the side, that's been my plan all along with accumulated savings is to never pay tax on it.

Not just defer it, but get rid of it. And, you know, we can look at your whole picture, and you've got some money in an IRA, and we can do the same for you. Darrell Bock Right, right. Which is the whole idea of being a good steward, right, is to put your investments in things that multiply, not depreciate, and thus you're creating more income, and obviously more opportunities really to tithe, as we just described at the beginning, right? Because you got all sorts of opportunities to bring the kingdom with those resources as you continue to build them. Again, with the fundamental block of Social Security that we're talking about, which I just think is a huge blessing. I mean, it's like, unbelievably, you know, I complained about it probably 63 years, however long it was before I started doing this show. But oh my goodness, what a blessing it turns out to be when you realize what's coming your way. We want to remind you, as always, that the show is brought to you by cardinalguide.com. If you go to cardinalguide.com, there you're going to find the seven worries tab we always talk about. Today's worry is taxes. And of course, if you go to that, you can watch the video we've talked so much about that's at the Cardinal Advisors YouTube channel, but there's a link right there on the seven worries tab under taxes there.

And under the same topic, taxes on your Social Security, and as well as, of course, the contact information for Hans and Tom and Hans's book, The Complete Cardinal Guide to Planning for and Living a Retirement. Great show, Hans. Thanks.

Yeah, thank 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 Whale 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.

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