What Do You Mean I Have To Pay Tax On My Social Security?
When Social Security first came on the scene it came with a promise. FDR is quoted as saying, “Social Security will not be taxed…It is not intended as a tax resource.” But what are politicians good at making but bad at keeping? That’s right, Promises! And as far as political promises go this one lasted a really long time as Social Security was not taxed for many many years. But all of that changed around 1983 when new laws were enacted in order to help maintain the solvency of the system. Now before we go any further with this, how do you feel about your Social Security benefits being taxed? Sure, I know you don’t like it but why is this tax so unfavorable, why does it leave a particularly bad taste in your mouth? Ahh, now you got it, because it’s a tax on a tax, isn’t it? The money to fund this benefit was already sucked out of our paycheck before we could spend it and when that happens what do we call that? A Tax. Then when we go to collect it we have to pay tax on that same money. If that’s not enough to have steam coming out of your earns then you are a lot nicer than I am. And unfortunately, it gets a little worse. Let’s look at how they figure out this tax.
Married Single Percent Taxed
Over $32,000 $25,000 50%
Over $44,000 $34,000 85%
So, if you are married and your provisional income is over $32,000 then about 50% of your Social Security benefits will be taxable. If you are married and make over $44,000 then about 85% of your benefits will be taxable. And it’s even worse if you are single. Now as if that is not bad enough let’s think about this for a minute. Is $44,000 a lot of income in today’s economy? I mean are we living high on the hog because we make $44,000 or more per year or are we just about getting by with $44,000? Well remember I said the tax laws changed back in 1983, that is when these limits were set. Now back in 1983 $44,000 was a decent wage. So why do you think no one complained when they started taxing our benefits? That’s right most people were not making that kind of income. But how about now? And the kicker is these limits were never designed to be adjusted for inflation. Now how do you feel about taxes on your Social Security? Fair or unfair? Was the government being sneaky or what?
The good news here is that due to provisions in the tax code not everyone needs to pay these taxes. In fact, there are multiple ways that these taxes can be avoided and sometimes very painlessly. Obviously, we would not want to lower our standard of living just to save a few dollars on taxes but sometimes the adjustments we make have little or nothing to do with our spending or enjoying our money. And a lot of times these things are missed by our accountants and I bet you can imagine why. Have you ever gone to an accountant’s office during tax time? I’m sure he is very polite and he pulls out a chair for you and offers to shoot the breeze while he makes you a cup of tea, right? No of course not, and why not? It’s because he only gets paid so much per return and he or she has to get as many done as possible so they can earn a living. So, do you think your accountant combs through every tax return and looks to see how close you are to the thresholds we just talked about, taking a break from filling out other returns just to make sure you have things invested in just the right way to take full advantage of the tax code, or do they just rush through to get to the next one to help us all meet our deadline? It’s no wonder that these little know tax breaks often get missed, and another reason is some of the strategies have not as much to do with the tax code as they do with what kind of investments you are using. For just one example of many, did you know that most mutual funds buy and sell stocks very frequently causing you to pay ordinary income tax instead of the much lower capital gains rate? And did you know sometimes saving money on taxes can be as simple as switching from mutual funds to ETF’s which work very much like mutual funds as far as the stocks that you own but are generally held more long term like an individual stock? So, owning an ETF instead of a mutual fund likely won’t hurt your returns one bit but it can make a huge difference to how much tax you pay on your gains and how much tax you pay on Social Security. Again, this is only one example there are literally hundreds of strategies to look at, how many are you missing? One way to find out is to have an analysis done by someone who looks at these kinds of things every day.
Want to learn more about how having a long-term tax advisor in addition to your short-term tax consultant can help you maximize Social Security, Medicare and other retirement benefits so that you make certain you get everything right the first time and avoid making any mistakes?
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Investment advisory services offered through Horter Investment Management, LLC, a SEC-Registered Investment Advisor. Horter Investment Management does not provide legal or tax advice. Investment Advisor Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and annuity products are sold separately through Rockford Retirement Resource Center. Securities transactions for Horter Investment Management clients are placed through Trust Company of America, TD Ameritrade and Jefferson National Life Insurance Company