A lot of people are surprised to learn their Social Security benefits will be taxable. Potentially up to 85% of your benefit is taxable!

There are hidden taxes that can potentially derail your retirement. Today we discuss what to watch out for so you can be prepared.

Hidden Taxes in Retirement

Show Notes:

• Social Security Medicare Premiums
• How much of your Social Security benefit is taxable

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Full Transcript:

Anthony Saffer 0:00
Hidden taxes can derail your retirement. Today we’re going to discuss what to watch out for so you can be prepared.

Hey, there, it’s Anthony and Alex from One Degree Advisors. Today we’re discussing hidden taxes in retirement. So, Alex, we love to help our retiree clients with ways to save from their lifetime tax bill. A lot of times though, there are these hidden taxes that are in retirement that people just don’t realize they’re there.

Alex Okugawa 0:27
Well, that’s the thing is our tax code can be incredibly complex. I mean, over the years, there have been so many revisions, updates, and folks getting grandfathered in under different provisions of the tax code. So over time, this gets really messy and really complex. And the problem is, is it really doesn’t matter if you don’t know the tax code, like the IRS isn’t going oh, well, you didn’t know. So I guess that’s okay. We can make an exception like, there is no excuse for not knowing. So understanding how this works and how it might impact you in retirement is really important.

Anthony Saffer 0:58
Yeah, so hidden tax number one that we see is with Social Security, a lot of retirees are surprised to hear how Social Security is taxed.

Alex Okugawa 1:05
Usually when I meet with folks, and I tell them, you know, hey, up to 85% of your Social Security benefits will be taxable. A lot of people are like, Are you kidding me, like I’ve been paying into the system this whole time, I thought this was a tax. So knowing this is important. And we’ll put this up on the screen so people can follow along. There are differences if you’re single if you file your tax return as a single, or if you file a joint tax return. And I won’t go through all the numbers, but you’ll see the thresholds are very, very low, to have up to 85% of your benefits taxable. I mean, if you’re a single person, I mean, if your combined income is greater than $34k — 85% of its taxable, you can file a joint return greater than 44%, up to 85% of your benefits, taxable. You’ll notice here it says combined income This isn’t like your AGI adjusted gross income or total income, there’s a special calculation to figure out combined income, we’ll just post a link to that on the Social Security website that breaks down how it’s calculated, but again, a pretty low threshold, right to have up to 85%.

Anthony Saffer 2:10
Right. So really, those people that have income in addition to their social security, which most people do, it’s hard to live just off. So security, they’re usually going to start ramping up in terms of their tax rate.

Alex Okugawa 2:20
Yeah. And the good news is for folks that live in California, California does not tax Social Security benefits. So that is like the one benefit is it big wise, it’s the high tax rate in California.

Anthony Saffer 2:31
Alright, so hidden tax number two Medicare premium surcharges.

Alex Okugawa 2:35
Depending on how much money you make, you may have to pay additional Medicare premium amounts. Right. So a lot of people might see their Social Security statement as they approach retirement, they see the amount that they might get paid at full retirement, Little do they know a, that amount can be taxable, and then be Medicare premiums might also be applicable to you as well, again, we’ll pull this up on the screen so people can follow along. This is just a hypothetical example. This is not a real client showing based upon their modified adjusted gross income for the year where they’re going to fall in terms of the Medicare premium brackets, right, because a lot of retirees are very fixated on like, what’s my federal tax bracket, maybe what’s my tax, my state tax bracket, a lot of people don’t realize these are these other hidden taxes that people don’t talk about. So for example, in this case, if your modified adjusted gross income was about 250,000 bucks, you’re gonna fit right there in the middle, I mean, you’re gonna pay over $200 a month in additional Medicare premiums that you might not have been planning for because he just didn’t know about this.

Anthony Saffer 3:47
A lot of times where the premium can get increased, and people don’t realize it as they have a big windfall. You know, maybe they do a Roth conversion to try and be strategic, we talk about that. But these extra income-type things that really go above and beyond their normal income stream can also increase their Medicare surcharges. So you really need to pay attention.

Alex Okugawa 4:07
That’s why, you know, paying careful attention to taxes, or if you don’t want to do that hiring a good tax pro and a good advisor that is integrated with taxes like we are to understand it is so important. I will say the one good thing about these Medicare premium surcharges is that if you do have one high, you’re like you said like a windfall. Or if you do a Roth conversion, and you mistakenly push yourself up into another bracket, it typically only lasts a year. So it’s not like it’s the rest of your life.

Anthony Saffer 4:36
And that’s where you can do some planning around that and try and get extra deductions potentially in that year to keep the Medicare surcharges down. So taxes are a big deal in retirement. Another thing to watch out for is the potential for Required Minimum Distributions to go up. We just did a video on that with Secure Act 2.0. It’s going through Congress being talked about we’ll see what happens. Exactly. And let us know what you think. If you’re retired, drop a comment below about the hidden taxes that you’ve experienced that you want others to know about. And if you like today’s content, please like and subscribe for more. Thanks for watching.

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures