Many retired Americans find Social Security benefits confusing, especially when trying to understand possible tax consequences.
In fact, retirees could face paying taxes on up to 85% of their Social Security benefits because combined income from Social Security and other income streams can quickly push them above the thresholds for taxes to apply. Additionally, the number of beneficiaries who are required to pay Social Security income tax is rising, and it will continue to grow. 

With more people impacted, advisors must make sure they clearly explain — or show — how these benefits are taxed.

Calculating Taxable Social Security Benefits: Optimizing for Your Clients

Calculating taxable Social Security benefits can be complex, and when clients try it on their own, common mistakes happen. Clients also often have either outdated or incorrect assumptions about taxable Social Security. It’s why retirees need financial advisors and why financial advisors need to ensure they present information in an easy-to-understand way. 

For instance, retirees often do not realize that Social Security carries a significant tax advantage over other types of income and that delaying benefits to accumulate higher payouts may have a much more significant positive tax impact. Financial advisors know this, but clarifying it for clients may be challenging. It is critical for financial advisors to have the right tools in their toolkit to make retirement income planning more manageable. 
You need software, such as our tax calculator that simplifies and demonstrates the impact of taxes on Social Security benefits, to make it crystal clear. Not all tax calculators are created equal, so make sure you’re using one that makes it easy for your clients to understand.

How the Right Tax Calculator Helps You Support Your Clients

It can be easy for clients to misunderstand the nuances of taxable Social Security. Starting with a simple tool that makes it easier for you to explain more complex concepts to your clients is an excellent idea. That’s where the right tax calculator comes in. Let’s take a look at an example of when to use one. 

Let’s say that a couple earns an annual income of $24,000 from Social Security and $24,000 from other income sources. Financial advisors can use a tax calculator to clearly demonstrate that only $2,000 of the couple’s Social Security is taxable. That’s relatively easy for retirees to understand. 

However, if the couple delays claiming for eight years, their Social Security benefit would be around $42,000, assuming there’s no inflation and both recipients delay until 70. This delay lets Social Security benefits grow by $18,000. Only $6,850 of the total $42,000 of Social Security benefits is taxable. Only $4,850 is taxable of the $18,000 increase, and the balance is free from federal income tax penalties.
Explaining that to a client without clear and concise visuals is a challenge, and that’s why you need to be choosy about your tax calculator. Our tax calculator can help you walk your clients through their taxable Social Security options, literally showing them how it works, step by step. 

The Right Tools Can Grow Your Business

Suppose you have the right software in your financial planning toolbox. Now, you can provide smart retirement tax planning strategies to help your clients avoid paying taxes on Social Security when it’s time to take required minimum distributions (RMDs). 

The right software can help advisors show retirees how to optimally plan retirement account withdrawals alongside their Social Security benefits to reduce the overall tax burden. Additionally, adding a Roth IRA withdrawal to Social Security benefits can lower the tax burden more than stacking Social Security and traditional IRA withdrawals. 

Arm Your Practice with the Best Retirement Tax Planning Toolkit

While a tax calculator is a must, you can also incorporate more robust tools into your practice that help clients with the Social Security planning process. 

Covisum’s Tax Clarity® software was created by financial advisors for financial advisors to help clients make the most tax-efficient retirement income decisions. Plus, by using Income InSight®, you can give your clients a personalized and comprehensive retirement income strategy, including: 

  • A multi-year Tax Map that identifies opportunities
  • Client-specific information
  • Cash flow analysis that can include Social Security benefits
  • Show the value  of incorporating insurance products for retirees
  • Stress tests, including a Social Security benefits-cut scenario, down market, healthcare event, or early death

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