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Social Security Income Tax

Finishing Well / Hans Scheil
The Truth Network Radio
December 28, 2024 8:30 am

Social Security Income Tax

Finishing Well / Hans Scheil

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December 28, 2024 8:30 am

Hans and Robby are back again this week with a brand new episode! This week they discuss social security income tax. 

Don’t forget to get your copy of “The Complete Cardinal Guide to Planning for and Living in Retirement” on Amazon or on CardinalGuide.com for free!

You can contact Hans and Cardinal by emailing hans@cardinalguide.com or calling 919-535-8261. Learn more at CardinalGuide.com. Find us on YouTube: Cardinal Advisors.

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This is the Truth Network. 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. Welcome to Finishing Well, with certified financial planner Hans Scheil, and today's show, really cool, Social Security Income Tax.

How does that work? You know, that's kind of a great question. And let me just point out that when you watch the video on this, you're going to think, man, this is somewhat complicated, but it really gets down to, as you finish the show today, I think you'll see how simple it really is.

And it's not unlike the plan of salvation, which is really pretty simple. I do a devotion at a retirement home, and I came across a couple that had been displaced due to the hurricane, and they started coming to our nursing home there where I do that, and they were Catholic. And they at first were a little worried that I would be doing something they didn't want me to do, but they decided they liked my jokes, and they liked to hang out, and so I was really grateful I got to minister with them, you know, for a few months. While they were with us, and the last time they were there, I was talking about it on how in heaven we would recognize the people that, you know, we knew on earth, and even be able to, you know, see what all's going on and all that stuff based on the story of, you know, the rich man in Lazarus, who was the poor man that the dogs licked his wound, you might remember, but he remembered all those people. So I was talking about that, and Roy, the man that had been at Lake Lure, got really disturbed. Because he went on to tell me a story about how his son had passed, and he was so upset that actually he heard his older brother, who had also passed, tell him, don't worry, Roy, you know, Charlie's with us, and we're good. He said, but I don't know where they were for sure, and when I looked in his eyes, I said, Roy, do you know for sure that you're going to heaven?

And he kind of looked back at me, like, yeah, that's the problem. I don't know for sure, because, you know, I'm a good Catholic, and I'm supposed to go to confession so often, and I'm supposed to do other things for penance that I just haven't been that, you know, regular as I'd hoped I'd been. And I said, well, you know, the good news is in your Bible, my Bible, they both have Romans 10, 9, and this is how simple it just is. If you confess with your mouth that Jesus is Lord, and you believe in your heart that God raised him from the dead, you will be saved. And I said, do you believe Jesus is God, right, Roy? You believe that God raised him from the dead, right? You believe that in your heart? Oh, yeah, I believe that. And I said, well, let's pray and make sure.

And it was like 10,000 pounds were lifted off his shoulders, and as he came out of that, interestingly, the bus came to take him back. But I remember the joy in his eyes, and I think, wow, sometimes we just think we make a lot of things about faith way too complicated. And Romans 10, 9 gives us a simple approach. Hans is we want to give people a simple way to look at this Social Security income tax. I'm going to try to make this a Social Security income tax, as simple as I can. And I do this with clients sitting across the table is, if Social Security is all you got, you're not going to pay any income tax. Okay. So, and most people don't know that. So that should be somewhat reassuring is if all you got to live on is Social Security, and you have no other income, you're not going to pay any income tax. Okay. That's a relief right there, obviously. It is.

And now it gets even better. If you got mostly Social Security, and you just have a small amount of other income, you're still not going to pay any income tax. And a lot of people say, well, define a small amount. Well, let's just say if you're Social Security check is $2,000 a month, and then you got $1,000 a month of other income, like interest, dividends, withdrawals from your IRA or something, and you plug all that in a computer, you're not going to pay income tax if you're a single person. If you're married filing jointly, and let's just raise that your Social Security check is $2,000, and your spouse is $1,000 a month. And so you got $3,000 from Social Security, and then you got another $1,000 a month of income, you're not going to pay income tax.

So I'm just going to make this real simple. I mean, it's going to be no income tax because of the standard deduction. And really, the way they calculate Social Security income tax is your Social Security starts out with no income tax.

Social Security. And if that starts exceeding certain thresholds, not only are you going to have to pay that tax on the other income, but they're going to come back and get some percentage of your Social Security. So people with high incomes in retirement, that also get Social Security, they pay a lot of taxes. And they pay a lot of taxes on their high income, and then 85% of their Social Security is taxed at regular income.

So that's the other end of the extremes. People with high incomes, they're still getting 15% of their Social Security tax free. And the other 85% is taxable.

Now, a lot of people read these charts like we did in the YouTube video, and that's on the website. And you can Google this and you can come up with the thing I'm looking at, which is the government trying to explain to you how your Social Security is taxed. And if you read this chart and you just take it as it is, you're going to think you're going to pay a lot more taxes on your Social Security than you actually are. So there's the simple explanation.

Could you respond to that a little bit? My Social Security is going to be on top of that, but I get to keep 15% without any tax. And so that's simple. You're going to actually get to keep more than that, okay? I mean, even when I look at this chart and you do all that kind of stuff, your tax Social Security, because I know your numbers about, you're not going to pay tax on 85% of your Social Security. When you finally get done doing all the tax return, it's not going to be as much as you think it is. Right, because you have a big standard deduction and those things. But even in the worst case scenario, you're still keeping 15% of your Social Security tax free, right?

Exactly. And then when you retire or you had a forced retirement because you get sick, and now you're on your Social Security, your wife's Social Security, and then whatever other income that you have, earnings on retirement things, withdrawals from retirement things, it's a whole different picture. And your other income is not going to be that high. And you're going to probably go from paying tax on 85% of your Social Security to paying tax on almost none of it, okay? And that's the way the whole system is built. So they're only going to tax Social Security if you have a significant other income. That's a much simpler way to look at it.

And then when we get through with this, then I'm going to explain the more complicated way of how it really works. And then I want to add to that before the show's over with is because Trump ran on the fact that he's going to eliminate the taxes on Social Security. And a lot of people heard that. I had people calling me ready to cash in on that now. Yeah, me too.

Or inaugurate. And I had people calling me that did a financial plan with me a couple of years ago and we decided to delay Social Security till 70. And they're saying, I think I'm going to take it now that I don't have to pay taxes on it.

And I'm just kind of like, whoa, whoa, wait a minute. So we'll get into that before the end of the show of what it's going to take to make that happen and then what the ramifications are. So have I got time to go over these numbers of the single filers and the married filing jointly? Yeah, you got about two more minutes before the break.

Okay. So we've got for a single person – well, actually for a married person, they're going to take half your Social Security and then combine it with your other income and it creates this thing called provisional income. So you got to do a calculation before you even get started into the calculation.

So this is where people – it just gets complicated. But half your Social Security plus your other income. And if you're single and that number is less than $25,000 a year, no tax on your Social Security. But I'm going to tell you, if you're at $25,000 a year between your Social Security and your other income, you're not paying any tax anyhow because of the standard deduction.

Okay. And then if your provisional income is between $25,000 and $34,000, up to 50% of your Social Security is taxable. And if your provisional income is $34,000 and up, up to 85% of your benefits are taxable. So that's where you looked at this thing.

Actually, you're in the married one. So your provisional income is $44,000 and up and it's clearly more than that. So you're just thinking 85% of it is taxable.

And it could be, but it's not. There you go. And this is a great time to remind you that the show is brought to you by CardinalGuide.com. You're going to see the Seven Worries tab and this particular show, right, is going to be under Social Security. Am I right?

That's correct. So it's going to be under Social Security. And if you click on that, you're going to see a wonderful show that Tom and Hans did, a YouTube video as well as show notes on that show, all very applicable, what we're talking about today, a board, all kinds of details to see these rates, exactly what we're talking about. And that's all again at CardinalGuide.com under the Social Security tab, as well as if you go to that website, you're going to find out all about Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, the ever important, you know, contact page for Hans and Tom, just make this whole situation a lot simpler because Tom will just put these numbers into his software and away you go for your situation. That's all the contact information, again, at CardinalGuide.com. So we're going to be back with a whole lot more on Social Security income tax and how that works.

We'll be right back. 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. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil, and today's show is Social Security income tax and how does that work?

And so we got a lot more to cover, Hans. Well, we do, and I hadn't finished the married filing jointly. So if your provisional income on your joint tax return is 32,000 or less, no taxes on your Social Security. And if your provisional income is 32,000 to 44,000, up to 50% of your Social Security is taxable. I'm just telling you if your combined income is 44 grand, even when you're only counting half of your Social Security, you're not paying any tax really much on anything, Social Security or other income.

So these numbers have a tendency to overstate or leave people with the impression they're going to pay a lot more than they are. And if your provisional income is over 44,000, up to 85% of your benefits are taxable. It just leaves people with the impression they're going to pay a lot more tax on Social Security than they actually do. And when you go to a tax return, and that's what Tom did is he walked the people through the example on the YouTube video, and I encourage you to go watch this, and for a single person, we put in 36,000 of Social Security, and we put in 64,000 of other taxable income and put them right at $100,000. And we came up with a tax of 12,230, that's plugging in the standard deduction and all that, 12.2% tax rate, and very little of that $12,000 actually came from the taxable portion of the Social Security. And when we go to the married couple, we put in 48,000 of Social Security, we put in 102,000 of other taxable income to come up with $150,000 of income, and their tax was $14,416 or 9.6% of their income. So, you know, when you actually put it in the calculator of both of these examples, and we purposely ran them up to a pretty high number, 100 grand for a single and 150 grand for a couple, just to show how low taxes are in retirement when you blend all this stuff together. So don't let these charts fool you. Don't let them give you the impression that you're going to pay a lot more taxes once you're getting Social Security than you actually do. Okay?

Absolutely. That would be really, yeah, because it's kind of outstanding when I saw that huge number to think that, wow, out of all that, they're only paying $14,000. So it kind of makes the point that, you know, it's nothing like what you think it is on paper until you actually do the calculations and you know what you're talking about.

But all that makes other opportunities come available, which I'm sure we're going to get to in the end of the show, right? Well, yeah, and this is another reason, the taxes on it, that for people that have substantial retirement accounts, that we delay Social Security many times till 70. So it's not subject to taxes until 70, because you're not getting any of it, or certainly of the larger spouses one. And then we do a bunch of Roth conversions, because you start doing Roth conversions, you're not only going to have to pay the tax on the Roth conversion, but you're going to your increase in income is going to drive taxes on your Social Security. So when we have that advantage, we see somebody at 64, 65, we're going to want to get doing all the Roth conversions before the Social Security is coming in to try to lessen the impact of taxes on the Social Security for 70 and after. And increase the Social Security check. So the other point I wanted to make is there's nine states in our 50 that tax Social Security, Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. They don't tax all your Social Security in all those states, they have a similar thing to the government that the feds have is that they have some sort of sliding scale. But the point, all the other states, all the other 41 tax Social Security is tax free. Okay? Yeah. Now, I wanted to make the point that what, you know, a lot of seniors, they're collecting Social Security, listen to the election, and they said, you know, they listen to Trump and they said, okay, so taxes, Social Security is going to be tax free in retirement, and he's going to get that done and he may well, but it's not done yet.

And I think that he's going to learn some of the ramifications of that. I'm not saying I'm against it or for it, I'm just telling you the ramifications is the money that the government collected from Social Security recipients in federal tax in 2023 was 50 billion. So there was 50 billion collected from. So there's plenty of people with a high other income that are getting their test of security tax at 85%.

Okay? Because it adds up to $50 billion. And so those people are, you know, rooting for this. They're saying, Yeah, man, get rid of that tax. But what I want to tell you is that 50 billion goes right back into the Social Security trust fund. I mean, it's a revenue item to pay Social Security checks. And so when you get into our Social Security show where we look at the trust fund and people saying it's going to be deleted by 2034 2035. And I'm of the belief that the government is going to address this. This is one move that is going to work against that objective. You know, so now I'm not saying don't do it, but they're going to have to find the money somewhere else to properly fund the Social Security system. So this is going to be taken away from that. That makes sense.

Oh, yeah, yeah. Because, you know, in the it's not like it's the overall federal budget we're talking about. This is just purely Social Security. So those of us like me who are paying into, you know, paying taxes on our Social Security, that money goes right straight back into, you know, the overall fund to help create the security of Social Security, you know, for generations to come. So it's kind of a scary proposition, really.

Well, it is. And so when they get that, because that's on the agenda, too, as I think everything's on the agenda that they're going to be looking, how can we shore up the trust fund for Social Security? And it was promised to seniors because he was accused by the other side of wanting to cut Social Security, cut Medicare.

And they say, no, we're not going to do that. We want to take care of our seniors. And so there's lots of promises that are made during campaigns.

And this was one of them. We're going to get rid of the taxes on Social Security. It's going to make it better for the people who are collecting checks now that are paying taxes. I'm just not so certain that this couple in our example that's making 150 grand, 48,000 or about a third of it from Social Security, and they're paying $14,416 in tax. Tom calculated it right before their eyes on the video. If they get rid of the tax on Social Security, that's not going to save them but $1,000, $1,200, $1,400. I mean, I don't have the exact number, but it's not a lot. Their $14 is going to go down to like $13.

And I'm not so sure that they would want to save that $1,400 in tax if they knew that it was going to withdraw the trust fund down by $50 billion, the effect of that. But we'll see. I mean, I'm not the one. It doesn't matter whether I'm for or against whatever I am.

I mean, I'm just sitting here. I want to help people make good decisions now to affect the whole of their retirement. And I want the government to do good decisions to make sure we can start enjoying what we have for the rest of our lives and the rest of our kids' lives.

And so they got a pretty big job ahead of them. What I wanted to do on this show is just make it clear to everyone that you can go with my simple explanation of this and have a little better understanding of what taxes are on Social Security and just I really wanted you to know that for financial planning and for planning out the future. Okay? Oh, yeah. Believe me. And overall, a beautiful understanding because those people are in retirement, Social Security is like one of the whole basis of their income period, right?

Well, it is. And even very well-to-do people, when you just talk to them when they're 85 years old and you start asking them about their money or they're 90, they can't tell you much. I mean, I do it all the time. Yeah, I mean, they can't give you numbers and percentages and a lot of them can't. But I'll tell you, one number they know for sure that they can bring up out of a sleep is how much their Social Security check is and how much goes in the bank every month because they look at it every month and they know it and they get a letter with an increase. And so this is important to all retirees, even well-to-do ones because it's the income that they know they have and that it doesn't really change that much over time. So it gives people security and it gives me security to know that I got a check and I know it gives you security that you have a check for the rest of your life and for the rest of your wife's life beyond your life. Exactly. So we're constantly just given little bits of information and I'm always cautious when I sit here talking and rambling, I get too deep, too technical and then I lose people. So I just want to leave you that if you have Social Security and some other income, not much of your tax is going to be driven by your Social Security.

Some will, but if you have Social Security and little income, you're probably going to pay not any taxes at all. And again, we've got all sorts of information on this subject. If you go to cardinalguide.com, at cardinalguide.com you're going to see the Seven Worries tab, one of which is Social Security.

In fact, it's number one on the list. And if you click on that, you're going to see a wonderful YouTube video with this exact same title as well as the show notes, charts, and you can actually watch Tom do these calculations right before your eyes and see how all this works. It's a wonderful, wonderful asset there at cardinalguide.com as well as, of course, Hans' complete cardinal guide, his book, complete cardinal guide to planning for and living in retirement. Really helpful to give you a real good basis on understanding all this stuff in retirement. And of course, my personal favorite, the contact Hans button as well as Tom so that you can just get your own personalized situation figured out so that you'll have it there. It's all there again at cardinalguide.com. Great show, Hans.

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 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.

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 Whale 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 Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.
Whisper: medium.en / 2024-12-28 10:14:39 / 2024-12-28 10:24:38 / 10

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