Jan-Feb2020

any type of 401(k) plan or retirement account. If someone is self-employed, they pay both what an employer and an employee pays for a total of 12.4 percent. Ultimately, these earnings will help determine the benefit at full retirement age. While many people are aware they pay into Social Security each year via a payroll tax, most people aren’t aware that claimed Social Security benefits are subject to income taxes. Social Security benefits are taxable if some- one earns over certain “provisional income” thresholds. Provisional income, also referred to as combined income, is his or her modified adjusted gross income (MAGI) plus tax exempt interest (like from municipal bonds) plus half of the Social Security benefits. Once the provisional income is determined, the Social Security benefits could be subject to taxation based on certain income levels. Up to 50 percent of the Social Security benefits can be taxed at the current tax rate if the provisional income is between $25,000 and $34,000 for an individual and between $32,000 and $44,000 for a married-filing- jointly couple. If your clients can keep their provisional income below $25,000 as an individual or $34,000 as a couple, they can prevent all of their Social Security benefits from being taxed at the federal income tax level. However, for individuals who have more than $34,000 provisional income or married-filing-jointly couples who have more than $44,000 provisional income, up to 85 percent of their Social Security benefits can be subject to their current income tax rate. Worksheets are available on the IRS website to help calculate how much of Social Security benefits might be subject to federal income taxation. It’s important to note that while most states don’t tax Social Security benefits, a handful of states do. How can you help your clients manage their provisional income in retirement? Come up with ways they can generate cash flow and retirement income that’s not taxable or included in MAGI. For example, Roth IRA distributions can come out income-tax free, as can Health Savings Account distributions, reverse mortgage loan proceeds and cash value in certain life insurance policies. These non- taxable distributions can also help improve cash flow and keep provisional income down—the latter of which will allow them to keep more of their Social Security benefits as they might be subject to lower tax rates or might not be subject to taxes at all. Social Security provides a floor of income and the likelihood of creating a financially stable retirement. Make sure you and your clients understand the ins and outs of Social Security, especially how benefits are taxed. Creating a secure retirement income plan for your clients starts with planning and an understanding of how challenging it is to create a sustainable source of income that they won’t outlive. REVERSE MORTGAGE / JANUARY-FEBRUARY 2020 7