Tax-Smart 2nd Opinions

When do individuals in a 15% tax bracket pay tax a 27.25% rate? When they must account for taxes on Social Security Benefits. However, there is a difference between preparing your taxes and planning around your taxes. Planning from a Tax-Smart Perspective can be defined as making decisions that are investment-based whether through life insurance, annuities, or securities-based accounts, potential tax repercussions must be observed.

Social Security recipients are taxed on provisional income. It`s the total of 50% of Social Security benefits, plus all other gross income including tax-free interest.  Once combined income is determined, taxpayers fall into one of three categories.

  • Too Low. If a client`s combined income is less than $ 25,000 (or 32,000 on a joint return), Social Security benefits won`t be taxed. Such clients may not need tax planning.
  • Too High. While up to 50% of benefits may be taxable for clients whose income exceeds the thresholds, up to 85% of Social Security benefits can be taxed for clients with combined incomes of more than $34,000 (or $44,000 on a joint return). Clients with much higher combined incomes may owe income taxes on 85% of their benefits regardless of tax planning strategies. “For quite a few clients, tax planning won`t affect the tax on their Social Security benefits”, says Stephen Way the owner of Paragon Tax Advisory Services in Brunswick, Ohio. “Some have so little income they don`t need any planning, while others have so much income that they`ll definitely owe the maximum tax on their benefits.”
  • Just Right. Some seniors have combined incomes that are neither too high nor too low, and would likely benefit from tax planning. A married couple with $37,000 of outside income, along with $10,000 of tax-exempt interest income and $20,000 of Social Security benefits, would have a combined income of $57,000. The couple would be taxed on the maximum 85% of the benefits. While clients whose combined income is far greater would have a difficult time avoiding the maximum tax on Social Security benefits, those who fall within or just above the range may reap substantial tax savings from savvy financial planning. If our hypothetical couple can drop other taxable income to $34,000 from $37,000, the amount of their Social Security benefits subject to income tax will drop to $14,500 (72.5% of their benefit) from $17,000 (85% of their benefits). A $3,000 drop in other income effectively cuts a couple`s taxable income by $5,500, counting untaxed Social Security benefits. This couple would save $825 in taxation.

Look at these numbers in reverse. If the couple has $34,000 in other taxable income, adding $3,000 in taxable investment or earned income would increase their tax bill by $825. This couple falls within a 15% tax bracket but would actually pay 27.25% in taxes on that $3,000 in additional income.

How can tax advisors help clients keep their taxes down? It is becoming increasingly important for high-income individuals to manage taxable income with a target tax rate in mind. “You may have the opportunity to reduce your taxes on the capital gains received from your taxable accounts.” says George Elias, CPA, an advanced tax planner for Paragon Tax Advisory Services. For 2016, the taxpayer in the 10% and 15% income brackets can realize ling-term capital gains or receive qualified dividends without being taxed. In 2016, the 15% tax brackets top out at taxable income of $75,300 for married couples filing jointly.

“Seniors should be careful about recognizing capital gains”. George says. “The actual tax can be much greater than 15% if the capital gain causes Social Security to be taxed”. Harvesting capital losses can help hold down taxable capital gains.

Seniors who earn small amounts from self-employment may shelter their income by adopting and contributing to a Simple IRA. If a client converts a traditional IRA to a Roth IRA, Social Security benefits will probably be taxed that current year because the conversion increases taxable income. Delaying Social Security while converting to a Roth IRA will let qualified money grow tax-free. Required Minimum Distributions (RMDs) are not applied to Roth IRA balances.

Withdrawals from a traditional IRA or a 401(K) are counted as taxable income. “If your taxable income falls into one of the two lowest tax brackets, selling stocks held longer than a year could be a highly tax-efficient way to generate cash flow.” Planning from a Tax-Smart Perspective is most feasible if you have a relatively high proportion of retirement assets in taxable accounts and a lower amount of recurring annual income, such as Social Security, a pension, or annuity income.

A Tax-Smart 2nd Opinion is a report that illustrates critical decision-making ages to be aware of when figuring out what your target tax bracket is. Utilizing a Tax-Smart 2nd Opinion analysis in your retirement planning will play a major role in the long-term results of the financial planning process. This analysis will show the impact of when clients should withdrawal money from IRAs, when to file for Social Security, when to take dividends, when to buy and sell investments, and so much more. Understand your target tax bracket, minimize taxation, maximize your pension like income and always Plan From a Tax-Smart PerspectiveTM.