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Tax-Smart 2nd Opinions


When do clients in a 15% tax bracket pay 27.25% tax? When they  must account for taxes on Social Security benefits. However, there is a  difference between preparing your taxes and planning around your taxes.  There are many ways planners can crack the tax code and maximize Social Security benefits, potentially increasing retirement savings for seniors  and disabled clients from Tax-Smart Perspective. Social Security  recipients are taxed on a combined income. It’s the total of 50% of  Social Security benefits, plus all of a taxpayer’s other income,  including tax–exempt 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. “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, not 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 the 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, and saves $825 in a 15% bracket.

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 27,5% in taxes on that $3,000 in  additional income.

How can tax planners 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.” Say George Elias. “Seniors should be careful about  recognizing capital gains”. “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.
For 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(same) year because the conversion increases  taxable income. Delaying Social Security while converting to a Roth IRA  will let their quailed money grow tax-free in Roth IRA, and they may not  have to take required minimum distributions at age 70 ½.

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 highly  tax-efficient way to generate cash flow.” This Tax-Smart strategy 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. 

Planning from a Tax-Smart Perspective is making decisions that will  help you weather the taxes, or lack thereof, of life insurance,  annuities, or securities-based accounts. Tax-Smart 2nd Opinions are strategic plans which play a major role in  the long-term results of the financial planning process. Second  Opinions show the alteration of things such as how or when clients  withdraw money from IRAs, start drawing social security, take their  dividends, buy and sell investments, buy or sell a house and so much  more.  

Tax-Smart 2nd Opinion is an integration of income and tax based planning within your overall financial plan.


The information on this site is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Planning from a Tax-Smart Perspective.