Page 18 - Investment Advisor July/August 2022

RETIREMENT PLANNING

By Ginger Szala

How to Help Retirees Avoid Tax Traps in

Social Security, Capital Gains

Joe Elsasser, founder of software maker Covisum, walked through how the

interaction of tax rules can create planning opportunities.

n Orion study recently found
80% of investors believe their
A advisors should focus on mini-
mizing their tax obligations, especial-
ly for clients in retirement, said Joe
Elsasser, Covisum founder and presi-
dent, during a recent webinar that
focused on retirement tax strategies
for RIAs.
With that in mind, he began by review-
ing Social Security taxation, which he
said should be a first step for advisors.
He also discussed capital gains taxes and
Roth conversions, among other areas
where taxes can get tricky.

PROVISIONAL INCOME
Provisional income is a measure used
by the IRS to determine when Social
Security benefits are subject to income
tax. It is calculated using:
• Half of Social Security benefits.
• Ordinary income, including any IRA
withdrawals or wages
• Dividends and capital gains For example: $9,000 is taxed. Meanwhile, $6,000 of
• Nontaxable Interest 1. In a year, a couple receives $40,000 their income will be above the $44,000
For a married couple, Social Security in Social Security benefits and takes threshold. An additional 35% of that
benefits are not taxed until provisional a $20,000 IRA withdrawal. That is income, or $2,100, will be taxed. This
income reaches $32,000. On provisional $40,000 of provisional income ($20,000 means the total taxable benefit is $11,100
income between $32,000 and $44,000, in Social Security and $20,000 from the ($9,000 plus $2,100), or on 22% of
half of Social Security benefits are IRA). The $40,000 minus that $32,000 their income.
taxed. Above $44,000, 85% of benefits threshold equals $8,000, of which 50% Further, when the standard deduc-
are taxed. is taxed. The couple will pay income tax tion is taken into account, the second
For individuals, half of Social Security on $4,000, or on 10% of their income. couple reaches a net taxable income of
benefits are taxed when provisional 2. In a year, another couple receives $22,400. Couple number one comes up
income is between $25,000 and $34,000. $20,000 from Social Security and with- with taxable income of zero. Because
Above that threshold, 85% of benefits draws $40,000 from their IRA. This is their taxable income is below the stan-
are taxed. $50,000 of provisional income ($10,000 dard deduction, the first couple could
The sources from which provisional from Social Security and $40,000 from even take out a little more from their
income is drawn can make a huge differ- the IRA), which when subtracted from IRA and still pay no income tax, Elsasser Adobe Stock
ence on taxation, Elsasser pointed out. $32,000 comes to $18,000, of which pointed out.

16 INVESTMENT ADVISOR JULY/AUGUST 2022 | ThinkAdvisor.com