7 Things to Know About Social Security and Taxes

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Optimal Social Security claiming is an increasingly important topic for financial advisors as an aging client base seeks more holistic support in the effort to prepare for and enter retirement.

Savvy advisors know that delayed claiming of benefits is often associated with greater lifetime wealth, especially for a married couple with good longevity expectations. But they also know that each situation demands its own individual analysis — that nobody should rely on simple rules of thumb or other people’s experiences to make their claiming decision.

Joe Elsasser, the founder and president of Covisum, believes that more advisors would do well to study up on how Social Security income is taxed. As Elsasser explained on a recent webcast, the dynamics that come into play regarding the tax treatment of Social Security income are complex, as is the way the level of Social Security income relative to other income sources can affect a client’s overall tax burden in a given year.

As Elsasser emphasized, Social Security benefits can become taxable when the beneficiary’s “provisional income” exceeds specific thresholds established by the Internal Revenue Service. After the application of the formula, clients can end up paying taxes on up to 85% of their benefits at ordinary income tax rates.

This fact often worries clients during the planning process, according to Elsasser, but the reality is that many people can insulate their Social Security income from such taxation levels by implementing a few tried-and-true strategies. Advisors who understand these matters, Elsasser said, can add value to their clients, delivering potentially thousands of dollars in annual “tax savings” to some clients.