Social Security Demystified: Calculating Taxation, Provisional Income, and the Tax Torpedo

Ready For Retirement

Listener Michael asks about how Social Security is taxed, the rationale behind the 50% and 85% tax thresholds, and the implications of these taxes on Social Security and IRA withdrawals.
James responds by explaining how Social Security is taxed at the federal level, highlighting the concept of provisional income and the thresholds that determine the taxability of benefits. He notes state taxation of Social Security, explaining that most states do not tax these benefits and naming the ones that do.
He also explains practical strategies for managing Social Security taxes, including the Social Security tax torpedo, and how to incorporate these considerations into broader retirement and tax planning.
Questions answered:
How is Social Security income taxed at the federal level, and what are the provisional income thresholds?
What is the Social Security tax torpedo, and how does it impact the effective tax rate on retirement income?
Timestamps:
0:00 - Michael’s question
1:06 - How SS is taxed
3:15 - Provisional income thresholds
5:21 - Another example
7:13 - Thresholds for married filing jointly
8:41 - SS state taxes
9:59 - How to pay taxes on SS
12:26 - SS tax torpedo
14:27 - Effect on Roth conversions

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Chapters

1. Understanding Social Security Taxation for Retirement (00:00:00)

2. Navigating Social Security Taxation Strategies (00:10:11)