Taxed Once, Taxed Twice… Social Security Ain’t So Nice!

By now you are used to all of the various deductions on your paycheck. Guaranteed you will have withholdings for Federal Income Tax, Social Security (FICA), Medicare (FICA), health insurance, possibly life and disability insurance and your 401k contributions.

The Social Security deduction under the FICA umbrella is a tax that you pay every week with the promise that when you retire (sometime after age 62) you will get a Social Security check until the day that you die.

Social Security is a pretty hot topic right now. There are literally hundreds of seminars being put on by financial advisers in neighborhoods near you any day of the week. These seminars promise to give you the knowledge you will need to apply for and get the highest social security income during retirement.

I am here to tell you that it is a total waste of time!

It is a waste of time because if your income during retirement is more than $34,000 single / $44,000 married filing jointly, then 85% of your social security will be taxed at your highest marginal rate. (It should be noted that 1/2 of your social security income is calculated into the $44,000 total.) Think of it, you and your spouse sat through a 4 hour seminar to get that extra $100 or $200 per month only to have 85% of your Social Security hit with taxes. I liken that to stepping over a $1 bill to pick up a ¢5.

Essentially you are taxed once while you are working when you pay the FICA tax. And you will be taxed again during retirement, as $44,000 can easily be surpassed in retirement income. If it seems like the U.S. Government is double dipping, you would be correct.

It is possible to structure your financial life so that none of your Social Security is taxed. In fact you can structure it so that you are in the 0% tax bracket. You wouldn’t pay taxes on your Social Security, IRA’s or non-qualified accounts.

Once you have that done, then it may be worthwhile to check out your local Social Security seminar.