Transcript
00:00:00:09 – 00:00:24:28
Mike
This week we’re answering the question, how do you reduce taxes on your Social Security? Now, by the way, if you have a question for us, there is a link below the video you can just click on it, submit your question. And who knows, maybe we’ll be answering your question on one of these videos. All right. How do you reduce taxes on your Social Security Well, the first thing you need to understand is how is your Social Security taxed?
00:00:25:06 – 00:00:57:07
Mike
And you’ll see on the screen here, I’ve got some numbers, five single 25,030 4000 and married 32 and 44,000. So what is the significance of those numbers? Well, in the tax code, those numbers represent a and I’ll make this in red because we’re talking about taxes. We don’t like that. These two numbers represent a 50% level. And these two numbers represent an 85% level.
00:00:57:13 – 00:01:26:29
Mike
Now, that does not mean that your Social Security, that half of it that’s taxed at a rate of 50%. It simply means that if your modified adjusted gross income, that’s the phrase modified adjusted gross income, if it exceeds 50% or exceeds 25,000, if you’re single or 32,000 if you’re married, then up to 50% of your Social Security is included in your overall tax calculation.
00:01:27:14 – 00:02:01:14
Mike
If you’re modified adjusted gross income if you’re single exceeds 34,000. If you’re married, if it exceeds 40 for now up to 85% of your Social Security is included when calculating your taxable income. That’s what those mean. But the question is what in the world is modified adjusted gross income? And if I’m not mistaken, I think that the IRS actually uses that phrase in about 14 different places, and it’s a different calculation every time.
00:02:01:23 – 00:02:35:11
Mike
But here’s how it works for Social Security. So Maggi which rep it’s stands for modified adjusted gross income insofar as Social Security is concerned. It works like this. It is equal to 50% of your Social Security income. So whatever you get gross for Social Security, you take half of that number Plus, here’s the fun part of everything else.
00:02:36:03 – 00:03:05:01
Mike
Oh, I don’t like that one. Everything else That’s where we get into trouble. It’s right here, this section right here, everything else. Because here’s the deal. What do they mean? By everything else? Well, here’s a little bit of a list for you. What they count. Everything else includes any pension you get it includes any earnings. So maybe, you know, who knows?
00:03:05:15 – 00:03:13:20
Mike
Maybe you’re working part time, right? Guess what? It’s included a rental income, business income.
00:03:15:29 – 00:03:51:27
Mike
I are a 401 K for three B distributions. Right. Any any pretax retirement distributions count. That’s a big E, especially when you have required distributions O, things like what if you get interest in dividends, that counts How about this one? Tax free municipal muni bond interest counts that counts in this calculation. Hey, what if you’re getting a deferred comp, a deferred comp payout that counts?
00:03:52:06 – 00:04:15:21
Mike
Basically, everything counts. There’s all counts against you. And so what happens is, you know, when you’re into retirement, like, well, heck, I know that you add all that stuff up plus happy your Social Security. Next thing you know you’re over the 34 44,000 single or married limit. You’re like, oh, my gosh. 85%. My Social Security is counted there’s nothing I could do about it.
00:04:16:08 – 00:04:45:09
Mike
Oh, not so fast. Let’s slow down a minute. So I’m going to put in green. Here are some places that you can get income that do not count in the calculation. So Roth, anything, anything that says Roth income you get from a Roth IRA a Roth IRA when a Roth four 57 Roth four or three B if it says Roth doesn’t count life insurance.
00:04:45:09 – 00:05:22:18
Mike
If you get income from life insurance contracts assuming it’s structured the right way doesn’t count. Reverse mortgage income. If you have a reverse mortgage and you’re getting income from that doesn’t count return of principal income like some annuities out there that are non qualified when you’re taking income you may have a chunk of that income be considered nontaxable or non qualified return or principal income doesn’t count disability income doesn’t count.
00:05:22:27 – 00:05:49:11
Mike
Now, I’m not going to keep going because they get more and more esoteric. But general rule of thumb is Roth Return a principle reverse mortgage, disability income. Those are the kinds of things that don’t count. Now, whenever you’re trying to reduce your taxes on your Social Security, the game is to try to get some of this stuff in this category above.
00:05:50:04 – 00:06:12:15
Mike
We want to move them down. What excuse me to the category below. We want to try to get that move down. But here’s the thing. Some of this stuff on the top section, you really is not a lot you can do. But I’m going to highlight and the ones that there’s nothing you can do about it for example, pension.
00:06:12:26 – 00:06:37:21
Mike
We’re going to put a big X there if you’re getting a pension. Nothing you can do about it. You’re stuck if you’re working. I guess, you know, I could say working as long as you’re working, nothing you can do. But you can always quit your job. I guess. So you could do something about it, I guess. Deferred comp, that’s one that you’re normally kind of set up and it just kind of pays out.
00:06:38:01 – 00:07:07:06
Mike
As long as it pays out, you’re stuck. These are kind of dotted axes, and that means as long as you have that income or need that income, not a lot you could do about it. But guess what? Pretty much everything else on the list, you control these three. These are the big three right here. Those three IRA, 41 K, you can always do Roth conversions, interest in dividends.
00:07:07:06 – 00:07:28:23
Mike
You can always reinvest that money in a more tax efficient way. Tax free muni bonds, guess what? Unless you’re in the highest tax bracket, you shouldn’t have them anyway. Those are the big three that cause a lot of the problems with taxes on social security. If you can work with a financial adviser who can help you with these three, your IRA income or for one can come interest and dividends.
00:07:28:23 – 00:07:53:24
Mike
Muni bonds if you could work with a financial advisor that truly understands tax planning, guess what? They can help you restructure those so that you could truly get your taxes and your Social Security to a minimum. Bottom line. Bottom line, remember this. Do not let the tax tail wagging the investment dog. Don’t do that. And everybody’s different when it comes to taxes.
00:07:53:24 – 00:08:19:24
Mike
I should add that to begin with. But for a lot of people and maybe you there are things you can do to help reduce taxes on your Social Security. Here’s the one really I really want to highlight this pension. That’s the one if you have a really big pension where you just might be stuck. Pretty much everything else, something in you can do about it.
00:08:20:04 – 00:08:43:04
Mike
But that pension, that’s the one long term that that really can handcuff you. Anyway, I hope you found this at least somewhat helpful. Tax planning. It’s so unique to every person. You really want to sit down with an adviser who is knowledgeable in this space, who can help you kind of plan that out. And, you know, if you’re really good, you try it yourself.
00:08:43:04 – 00:08:49:12
Mike
But I always encourage when dealing with taxes, talk to a professional. All right. Hope you enjoyed it. We’ll see you again soon.
