Financial advisors want to make the right suggestions surrounding taxable Social Security benefits for their retired clients. In many cases, properly planning retirement account withdrawals alongside Social Security benefits can lower the total tax burden. However, with the rules and information surrounding the timing of Social Security benefits and taxes, painting a clear picture of what to expect can be challenging.
Creating well-planned tax planning strategies can help clients maximize their retirement timeline and avoid paying unexpected taxes on Social Security when it’s time to start taking required minimum distributions (RMDs).
Let’s look at how to help clients with taxable Social Security.
Explaining a Client’s Taxable Social Security
Helping clients determine taxable Social Security is crucial because Social Security benefits carry significant tax advantages over other types of income. Properly understanding taxable Social Security can make a sizable positive impact on a retiree’s income.
For example, because Social Security benefits can be tax-efficient compared to other income, retirees who delay receiving benefits can amass larger Social Security payouts, lowering the total amount of taxes owed. Using a Social Security benefits tax calculator can help advisors demonstrate how Social Security benefits will be taxed.
Taxable Social Security for Single and Joint Taxpayers
If income exceeds $25,000 for an individual or $32,000 for a married couple filing jointly, federal income taxes are added to Social Security benefits. The timing of tapping into Social Security benefits can make a big difference in a client’s retirement income.
Many taxpayers don’t meet those thresholds and therefore do not have taxable Social Security benefits. However, for those who will be looking at taxable Social Security, let’s review taxable thresholds.
- Half of individual Social Security benefits may become taxable when provisional income exceeds $25,000.
- Up to 85% of their Social Security benefits may be taxable if provisional income exceeds $34,000.
- For married couples with a combined income between $32,000-$44,000, income tax could apply to 50% of their benefits.
- Up to 85% of a married couple’s Social Security benefits may be taxable if provisional income exceeds $34,000.
Advisors can make it easier on themselves and their clients by using this Taxable Social Security Calculator. Clients can clearly see their taxable Social Security and exactly how it’s calculated.
Helping Clients Understand Provisional Income
Clarifying taxable Social Security to retirees can be a challenge, often due to the role of provisional income. Correctly calculating provisional income can be difficult for clients, because many are misinformed or misunderstand it. That’s usually because determining provisional income takes some math acumen.
Nonetheless, understanding provisional income is an imperative part of retirement income planning because it impacts taxes.
Provisional income includes:
- Half of an individual or couple’s Social Security benefits.
- Any other taxable income, including dividends, realized interest, and realized capital gains.
- Non-taxable interest earnings, including municipal bonds, financial gifts, and insurance payouts.
When communicating provisional income information to your clients, make sure they understand the difference between taxable income and non-taxable earnings — and everything in between. For example, clients may think that because the profits from the sale of a home are considered capital gains, they’ll be taxed. However, home sale profits are only taxed if they reach a certain threshold.
Offer Clients a Quick, Accurate, and Easy Social Security Strategy
Covisum’s® Taxable Social Security Calculator is an excellent tool for getting started. Using the right retirement income planning software, like Social Security Timing®, can make all the difference between your clients feeling in the dark or seeing the light when it comes to their financial future,
Plus, the Social Security Timing benefit cut feature showcases the impact of Social Security benefits cuts, which could impact your clients’ decision about when to claim. Clients get quick, accurate, and easy Social Security strategy identification and comparison graphs to see different claiming strategies and make the best decisions.
Next-Level Advice: Digging Deeper into Social Security Strategies
If your clients are worried about Social Security running out of funds and they want to claim benefits early, you’re not alone. Social Security is a significant income source for many retired Americans, and the program’s health is a genuine worry.
That’s why we created this white paper “Is Time Running Out on Social Security?” We take a realistic look at how the possibility of a benefits cut is not reason enough to claim Social Security early, talk about what financial advisors can do to alleviate concerns, offer advice on optimizing client claiming strategies, and more.
Check out the white paper now.