Nikki Foley: All right, Jack, welcome back to another episode of Paladin Financial Talk. You are getting ready to get on a plane this week and you’re going to Vegas. Fantastic. To the Elite Advisor Forum. So, industry training for you. I think you said you’ve been to Vegas once before. Is that right?

Jack Ekholm: Yep. Just as a kid, so it’s been a while.

Nikki Foley: Okay. So, not only do you get to go to Vegas, but you get some industry training. What are you looking forward to or what’s some of the highlights of what’s coming up for you?

Jack Ekholm: I’m really looking forward to the speakers. They bring in a lot of people from the industry, give us updates on different segments of different financial markets, tips and tricks for advisers. So, you know, we see a lot of webinars and content and conferences throughout the course of the year. This one is my favorite. So, I feel like I always walk away with something useful and I’m hoping to get that again this year.

Nikki Foley: Fantastic. Well, we’ll look for it. I’ll quiz you guys when you get back to see what are some of the highlights and if there’s anything we can share with our listeners. Well, what we’re doing right now is conducting a six-part series on Social Security and we’ve been breaking it down piece by piece and I think I’ve given you one of the harder segments to cover, but as we all know, you are very well equipped to do this and I feel like you really thrive on some of these more detailed topics and so handpicking you actually to be in this segment was part of it because I do love your attention to detail and the detail that you go into. So we have been talking about overall you know kind of the overview of it. We’ve gone through workers retirement benefits. We’ve talked about survivor and dependent benefits. We’ve also talked about disability. But again today we are going to talk about taxes and how that impacts Social Security.

So with that, I think a lot of people know that Social Security can be taxable, but then you get into the details of how much can be taxable, what causes it to be taxable, and you know, what you may do about that, and eventually we’ll get into the claiming strategies that might go along with this. And so, all right, we’re going to dig in on some tough stuff. And I am like, my simple mind needs to be able to understand this. So, I know it gets complicated, but I’m going to give you just a quick fire question to get us started to get us kind of warmed up.

Jack Ekholm: Okay, let’s do it.

Nikki Foley: You’ve already done one version of Social Security. You and Ellie had handled the first episode when we were talking about just kind of a broad overview of Social Security and so I can’t ask you the same question that I’d ask everybody else because you’ve already answered it. So what I want to ask you today though is what’s one Social Security rule that you think can be misunderstood or confusing and then how have you broken that down so it’s easy for you to remember and maybe our listeners could learn something from that.

Jack Ekholm: Yeah. So I think one thing that people don’t think about is there’s something called the Social Security earnings test. Okay. So basically, if you’re before your full retirement age, which for most people their Social Security full retirement age is 67 or somewhere between 66 and 67. So basically what that earnings test means is if you have certain amount of earned income, so basically work income, commissions, wages, tips, self-employment income, whatever, if you’re earning that prior to your full retirement age, be careful because it could cause some of your Social Security benefits to be withheld. So it’s broken into different periods. And this is the piece I think people misunderstand is once you get to your full retirement age, you can make as much earned income as you want and they’re not going to withhold any of your Social Security benefits. So past that point, you’re clear. You can go back to doing a part-time job or look for work.

I’ve met with clients before that they are holding themselves back from doing that because they think their benefits are going to be reduced even though that’s not the case. So where you really have to be careful about it is what’s called the lower threshold period. So between age 62 and January 1st of the year that you turn your full retirement age, there’s a threshold of about 24,000 and change. And if you have earned income in excess of that, they’re holding back $1 of your Social Security for every $2 of work income past that point. There is some earnings test in the year you turn your full retirement age just up until you know the date that you turn your full retirement age but that threshold goes up to 65,000 and that’s prorated by month in that year to determine what’s withheld and also the penalty goes down to $1 withheld for every $3 of earned income in excess of that $65,000 in change.

So, it’s complicated, but I think, like I said, the piece people misunderstand is once you’re at your full retirement age, past that point, you’re good. Before that, if you’re collecting Social Security and you have earned income, that’s what you need to watch out for.

Nikki Foley: Yeah. And it’s really a benefit for you to be able to potentially have your Social Security. I mean, you’ve worked hard for this or potentially a spouse has worked hard for it and they’ve passed away. And I have a client that’s in that scenario right now. She has a survivor benefit that she is still wanting to work, but she has a survivor benefit that it generally made sense for her to claim that. And so that’s where you get into a lot of different variables of how do I handle this? And it takes some individual planning to potentially be able to make sure that you’re working within those thresholds, but also getting a benefit that can really make an impact.

Jack Ekholm: Right. Agreed.

Nikki Foley: Okay. Well, then let’s dive in. You made that fairly simple. So, I appreciate you giving us just a quick warm up there, but we’re going to dive in now to this question and answer format that we have been doing. And the first place I want to start with is just it sounds like a simple question. Is Social Security taxable? But it is not that simple. So, when somebody hears that they can be taxed up to 85% of their Social Security, like what does that actually mean? Just take us through this scenario.

Jack Ekholm: Yep. Yeah. So to answer your first question on the federal level, yes, Social Security benefits can be taxable. So you know like we’ve explained a lot in this series, the answer depends for your specific situation. So there is a common misconception that it’s not the case and it’s not taxable. July 3rd of last year before they came out with the One Big Beautiful Bill Act, the Social Security Administration sent out an announcement. I got it via email. I assume a lot of other people did as well that used vague language and made it seem like Social Security was no longer going to be taxable. What they were really talking about was the addition of the enhanced senior deduction. So per the One Big Beautiful Bill Act through 2028 seniors 65 and older get an additional $6,000 deduction in the calculation of their taxable income. So the way that they phrased it was nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits and that was just the result that was going to happen that they calculated as a result of people now getting this additional deduction.

But the deduction itself is subject to a phase out. So if you have too much income, you lose some or all of the deduction. And some people have more than $6,000 of taxable Social Security. So even if they got the deduction, it wouldn’t completely eliminate the taxability of their Social Security. So the deduction provides some relief, but the taxability of your Social Security is determined the same way that it was before the One Big Beautiful Bill Act. And how it’s determined, it’s all based on what’s called your provisional income. So we’ll get into later how specifically the provisional income piece is calculated. But then they’re comparing your provisional income to two hurdles. So if your provisional income is below the first hurdle, 0% of your Social Security benefits are taxable. If it’s between the first and the second hurdle, it scales up to at most 50% of your benefits being taxable.

And if you’re beyond the second hurdle, it scales up to the maximum that you mentioned, the 85% of your benefits being taxable. So to give you a point of reference for a married couple filing jointly those two hurdles are $32,000 and $44,000. So if your provisional income is below $32,000 none of your Social Security is taxable. Between $32,000 and $44,000 up to 50% can be. And if it’s beyond $44,000 up to 85% can be. And then even within those ranges so between the first and second hurdle beyond the second hurdle there’s specific formulas for how you calculate what percentage is taxable. I won’t get into those formulas for the sake of time because especially the one beyond the second hurdle gets pretty complicated but that’s the general methodology there and then for all other filing statuses so single head of household etc those two hurdles are 25,000 and 34,000. One thing I do want to note is married filing separately if you don’t live apart from your you know the spouse that you’re married to for the entire year those hurdles are both $0.

So 85% of your benefits are automatically going to be taxable again if you’re married filing separately and you don’t live apart from your spouse for the entire year. So just something unique to note there. And then clarification on once you determine that percentage of your benefits that’s taxable, that taxable amount is included in your gross income. It’s taxed as ordinary income. So not like long-term capital gains or qualified dividends or anything. Not taxed at any advantaged rate. It’s just subject to your income tax brackets. And then common misconception when people say up to 85% can be taxable. That means only as much as 85% would be included in your gross income and subject to those brackets. It doesn’t mean they’re charging you 85% of your Social Security benefits. So just something quick to clarify there. And then by benefit type, it depends as well. So, SSI or supplemental security income, which we talked about briefly in the first episode, is a form of Social Security benefit.

Those are nontaxable. But this tax determination method I just talked about, that applies to all other types. So, your retirement benefits, survivor, and disability, regardless of who they’re paid to. And then I also wanted to touch on briefly, this is the taxation on the federal level. And then there’s the state level. And that depends on the state. Obviously, most states, so 42 of them don’t tax Social Security benefits. There are eight out there that still do. So if you’re listening in any of these states, beware. Colorado, Connecticut, Montana, New Mexico, Rhode Island, Utah, Vermont, and our lovely state, Minnesota. So, all of these states have a different methodology, but they’re similar in format to how it’s done on the federal level. Basically, they use a similar income-based methodology to determine how much of your benefits are taxable. Some states do incorporate age as well. So, in Colorado, for example, up to age 64, your benefits may be taxable, but are no longer taxable starting in the year you turn 65.

So, age might be a factor as well. And it’s important to note even though their methodologies differ, no state taxes more than that maximum of 85% of your benefits. That also applies on the federal level. So all of them draw the line at that same cap.

Nikki Foley: There’s a lot of moving parts in this that people don’t even recognize when they start the simple conversation of Social Security. I had forgotten about the communication and the marketing spin that went along with that and how that did throw people off and there was a lot more understanding that needed to be had from that. Okay, that was good. I feel like we can get our hands around the zero, 50%, and 85% as being those thresholds. And you did a great job of giving us numbers, you know, that go along with that. So, okay, that seems pretty doable. You used a term in here, provisional income. Take us through that and try to keep it as simple as you can, Jack, because you are one smart cookie and the rest of us are smart as well, but maybe don’t have as much information. So, do the best you can to take us through provisional income.

Jack Ekholm: I’ll do my best. So it’s confusing because provisional income is only used in this specific application of determining how much of your Social Security income is taxable. So it’s not a common calculation that you know like AGI for example that applies to a bunch of other things. So okay provisional income it’s your modified adjusted gross income plus half of your Social Security benefits. And when I say modified adjusted gross income because there’s a lot of versions of that. You’re basically taking your adjusted gross income. So, it’s your gross income, all of your income, excluding any Social Security benefits, and then you’re also taking off above the line deductions. So, things like HSA contributions, deductible traditional IRA contributions for self-employed people, half of the self-employment tax that they paid, and so on. But you’re not yet subtracting out your standard or itemized deduction. You’re not subtracting out the enhanced senior deduction that I talked about yet.

That gets you your tentative adjusted gross income. And then to get this version of modified adjusted gross income used in the calculation, there’s a number of addbacks. So these are things you would have excluded from your gross income or you deducted above the line to get to your AGI that now you add back into that definition of income. And there’s kind of a long list of items here. I would say the one that applies to most people is nontaxable interest. So if you have for example money in a money market fund or a money market mutual fund for example, you might not know a portion of those holdings might be municipal bonds and the interest from those is nontaxable on the federal level. Well, in the calculation of this version of modified adjusted gross income, that gets added back. And then some of the other ones to note too, foreign earned income, you might have excluded, US savings bond interest, you might have excluded adoption assistance benefits from your employer, you might have excluded, student loan interest that you pay that you might have deducted, and then income from other nontaxable fixed income instruments.

So, that all gets added back. So, now we have our modified adjusted gross income. And to that we add half of your Social Security benefits that gets you to your provisional income.

Nikki Foley: So many moving parts, but you did a good job of breaking it down and giving us some real life what would apply, what might not apply. I’ll be honest, there’s sometimes when Jeff and I are talking about taxes. We’re like, why think too hard about it? We have to pay taxes, so we’re just going to pay taxes. But the reality is a lot of this does come back and there are real life scenarios. You can control some of this and other parts you pay taxes and you pay taxes.

Jack Ekholm: Exactly.

Nikki Foley: Tell us, just bring this back: How might this apply in real life? When does it matter that I care about paying taxes, not paying taxes on some of this? And I know that sounds like kind of a basic question, but sometimes you can’t control it. So, do I even have to think very hard about it? Well, tell me in this case, do I have to think very hard about this, Jack?

Jack Ekholm: Well, it is interesting because the way that this is determined, how much of your Social Security income is taxable, it creates a phenomenon called the tax torpedo as we call it in our industry. So, usually when you add a dollar of income, you add a dollar of income and it’s taxed at your marginal tax bracket, whether you’re in the 12%, 22%, 24%, whatever it might be. But what’s interesting here is once you start receiving Social Security benefits, that additional dollar that you add because it also increases your provisional income that we talked about, it might also bring in up to 85 cents of your Social Security income that wasn’t taxable before to being taxable at your marginal tax bracket. So you have to be careful because the effective tax cost of adding a dollar isn’t just your marginal tax rate anymore. So if you’re in the 12% bracket, for example, you add a dollar of income, that might cause as much as $1.85 of taxable income.

So tax at 12%, that’s 22 cents of taxes, which as a percentage of the dollar of income you added is actually 22%. So you’re paying 22% to add the dollar even though you’re in the 12% bracket. So it’s just something to be aware of as you’re tax planning for the year and income planning throughout retirement. It adds an additional consideration.

Nikki Foley: It brings up a good point back to, you know, me keeping it somewhat simple and sometimes you just have to pay taxes and you keep moving. But the reality is and what I heard you say there is as you get into retirement, things get more complicated as you’re taking money out of your own accounts. And that’s really where these conversations, yes, of course, Social Security for many people is about retirement and retirement benefits that you’re receiving. And so as you move into retirement and you’re taking distributions from your own accounts or from Social Security and receiving income really these taxes can make a big difference. Every dollar as you just described it there. Not every dollar but a dollar can make a big impact. Okay, that was great. So how can our listeners manage some of that risk that you were just talking about that you could easily bounce between you know into a new threshold?

Jack Ekholm: So there’s a number of different strategies and obviously the applicability of each is going to depend on your specific situation, but on a high level, you want to take advantage of the fact that as little as 0% of your Social Security benefits might potentially be taxable. As you plan for what income sources to use at different points in retirement, generally try to minimize income from sources other than Social Security in the years you choose to receive your benefits. That way you can maximize the amount of benefits you get at 0% or a rate you know below 85% of your benefits being taxable. So for example, a common strategy might be delay your benefits to age 70. Draw from your portfolio in the meantime where the income you’re adding from taking withdrawals from your IRA for example isn’t causing more and more of your Social Security income to be taxable because you haven’t started your benefits yet.

And so that way in those years prior to taking benefits, like I said, doesn’t impact the taxation of your Social Security. And then when you eventually start receiving Social Security, it’s at age 70. So you’ve maximized the benefit that you’re going to get. And beyond that point, you’re less likely to have to rely on sources other than Social Security for your income, which like we talked about is going to complicate the taxation of it. But again, there’s caveats to that general strategy. For example, some people have so much guaranteed income going into retirement. So things like pensions, annuities, other sources that they’re getting paid that amount each month or each year and or have Social Security benefits large enough to the point that regardless of where they’re pulling, you know, additional supplemental income they need, they already have enough from those sources and from Social Security that 85% of their benefits is already going to be taxable.

So, it kind of removes the ability to do any of that planning. And then there’s also people with a lot of money in pre-tax accounts that are going to have huge RMDs down the road. That’s where we get a lot of benefit from doing Roth conversions, especially prior to those RMDs starting. So, it still might make sense to do Roth conversions and add income in doing that. That pushes you up to 85% of your Social Security benefits being taxable just for the purpose of getting that money converted to Roth, lowering future RMDs, acts as sort of tax insurance if tax rates go up in the future and so on. So, it still might make sense to push beyond that point. So that’s where income and tax planning software like what we use when we’re planning for our clients becomes really valuable because as we’re making decisions, we at least have the awareness and can make a consideration of where your income is going in the future and how adding in from work or account withdrawals, making changes to your portfolio and realizing capital gains or the Roth conversions that I talked about, how they’re going to be taxed, but also how they impact the taxation of your Social Security like we talked about and it’s even beyond that too, the taxation of your capital gains, how it might cause you to get partially or completely phased out of certain deductions or credits like the enhanced senior deduction that I touched on.

If it pushes you past certain income thresholds that cause you to be subject to IRMAA, the additional income related Medicare surcharges and so on. So, in summary, I would say it gets complicated and it pays to work with a professional that has those tools to have that awareness and make a better informed decision for you.

Nikki Foley: Absolutely. It is not do I have enough money but so much about where is that next dollar of retirement income coming from because it really can make an impact on the Social Security taxation like we’ve talked about but just overall it can be really in retirement when we’re talking about retirement income that’s where all these pieces start fitting together.

Nikki Foley: So, I want to stop for a moment and highlight that because as you were talking about retirement income so often you guys say this on the show and it’s just part of the conversation, but you really can’t look at these decisions in isolation. You have to have a conscious effort to say these decisions can impact a lot of other things. And you did a great job of listing off some of those that you know IRMAA, the Medicare premium surcharges or other things that might go into that. And so it’s excellent perspective. I know that’s a recurring thing that comes up in the show. And if you aren’t listening closely, sometimes you miss that piece of it and how critical that is in retirement planning. The next episode, we’re actually going to cover a lot more of these claiming strategies. And I think it’s so good when you start to get into the nitty-gritty. Even though it gets complicated, it’s great to think about, do these things apply back to me?

How might this actually impact me? So thanks for giving us kind of a little foreshadow of what’s to come on future episodes here. So based on our discussion today, do you have any recommended resources for someone who is listening or anything else that you want to share related to this episode?

Jack Ekholm: Like I mentioned I think when I was on for the introduction to Social Security episode for tax related information I always suggest go directly to the primary source. Obviously if you look up how is my Social Security taxed you’re going to have tons of resources out there but you might find it confusing. You might get potentially incorrect information. So, I would suggest just go straight to the IRS and their website. So, IRS.gov FAQs on Social Security income and that’s kind of the jumping off point for all of their information regarding for your specific benefits, your specific situation, the federal taxation piece, and then for your state. Obviously, consult your state’s government website for that information.

Nikki Foley: Well, Jack, you do such a good job of giving us really difficult information, sometimes complex information, maybe not difficult, but complex information and trying to make it as simple as possible for our listeners. So, thanks for taking the show and this topic today. You did make it bite-size and understandable. So I really encourage people to if this is a topic or something that you want to know in more detail, you know, of course listening to the show, but also reaching out to us because there is so much detail and there are so many moving parts, especially as you start taking your own income from your accounts. And so if you are interested in additional information related to this topic, we offer 15-minute no obligation consultations and you can do that by going to our website at paladinfinancialtalk.com to book that top right corner 15-minute booking session. And if you do that, one of the things we’re also offering right now is our Social Security Maximization report.

So you can if you go out to the website there’s a template version of that but we’d love to be able to personalize that for anybody that is interested in having a deeper conversation. We would go in and do a personalized Social Security Maximization report that does take that 15-minute phone conversation so we can find out a little bit about what their scenario is and how to best get all the right information in there for that personalized report. So for any of this go to paladinfinancialtalk.com click on the booking tool or you can always call us at 651-842-8406 and follow along. We’re trying to do a really good job of making these podcasts educational in giving a level of detail where it’s enough to make you understand or say I really should take that next step and have a conversation that you know may be applicable as you move in toward those retirement years. So again, find us and follow us on YouTube, Facebook, Instagram, LinkedIn, and all the social media platforms so we can continue sharing our story and our information and hopefully making this one step easier as you look towards retirement.

Well, Jack, thanks for being with us today. Anything else that you want to add before we wrap up?

Jack Ekholm: Nothing else. Thanks for having me. This is a pleasure.

Nikki Foley: All right. And thanks to our listeners for joining in for another episode of Paladin Financial Talk. We look forward to seeing you on the next episode.