3 Things Advisors Should Know About Social Security and Taxes

Be sure to have your clients check with their tax professional to determine an appropriate federal and state tax withholding percentage to apply toward their benefits when they begin collecting.  

Of course, with many Social Security rules, taxation of benefits is not as simple as it may first appear.

2. The way Social Security income is taxed is confusing and can ‘creep up’ on you.

The IRS worksheet that determines if and how much of one’s Social Security is taxed is complicated and confusing, even to many tax and financial professionals. 

After establishing if one’s combined income exceeds the thresholds, there is then a three-way test to determine how much will be taxed.

Even though one’s combined income indicates that up to 85% of their Social Security may be taxed, the actual determination of how much will actually be taxed is based on another series of calculations.

Today, more retirees understand the value of maximizing their Social Security benefits by delaying collection up to as late as age 70. This sudden increase in income, and even greater amounts at 72 when required minimum distributions begin, can trigger higher taxes that they may not have anticipated.

Because of the sly way it can cause taxes to increase, it is often referred to as a stealth tax. Many people are unaware of the tax and therefore do not plan for it or see it coming. You can ensure this tax does not just “creep up” on your clients by ensuring they plan for it ahead of time.

3. Taxation is just one of many factors to consider when making the Social Security claiming decision. You can help.

Understanding how Social Security income taxation works and being able to explain it to clients so you can help them manage it is a valuable service. But the Social Security claiming age decision requires consideration of many specific factors, and taxation of benefits is only one piece of the puzzle.

The decision of when to start collecting Social Security benefits is dependent on personal details including, but not limited to, one’s full retirement age and the amount of their benefit at that age, how long they will continue to work, their life expectancy and, if married, their relative ages and benefit amounts.

By taking a smart, thorough approach to retirement planning, starting with the decision of when to claim Social Security benefits, retirees have the opportunity to increase their standard of living, extend the longevity of their portfolios and leave a larger legacy. 

Beginning with an analysis of the optimal Social Security claiming decision and building from there, retirees who consider their potential tax liabilities and sequence of withdrawal from taxable and non-taxable accounts can increase their net after-tax income more effectively.

This all-inclusive type of retirement planning lends itself perfectly to financial advisors who are also certified as registered Social Security analysts (RSSAs). Having the Social Security knowledge and training provides financial advisors with an enormous advantage and a huge opportunity to help their clients plan ahead.

Martha Shedden, RSSA, CRPC, is president and co-founder of the National Association of Registered Social Security Analysts (NARSSA.org) in which she leads the development of the education and training program for all Registered Social Security Analysts (RSSAs). Follow Martha and NARSSA on LinkedIn.