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Can Your Client Reduce Taxes on Social Security?

Paying taxes on Social Security income is unavoidable for most high income retirees. However it is possible for those who have modest retirement income to avoid these taxes. Here is an overview:

  • Married, Joint Return
    1. Tier 1: $32,000
    2. Tier 2: $44,000
  • Single
    1. Tier 1: $25,000
    2. Tier 2: $34,000

If your client has defined benefit pension or other fixed income above Tier 2, they cannot avoid paying taxes on Social Security. If they have no non-qualified money, they usually cannot avoid paying taxes on Social Security without reducing their income. However, here is an example of a married couple who filed a joint tax return and used annuities to reduce their Social Security and ordinary income taxes (2007 tax rates):

  Before After
Taxable Interest $15,500 $500
Taxable Interest
from SPIA		 $0 $1,000
Non-taxable Income from SPIA $0 $13,000
401(k) Income $40,000 $25,000
Social Security Income ($25,500 Taxable) $30,000 ($4,750 Taxable) $30,000
Adjusted Gross Income $81,000 $31,250
Standard Deduction - $12,800 - $12,800
2 Exemptions - $6,800 - $6,800
Taxable Income $61,400 $11,650
Income Tax $8,431 $1,168
After-tax Income $77,069 $78,332

Helping someone save over $7,000 on their taxes may look “too good to be true” but it is actually well within the ability of most annuity producers:

  1. $500,000 safe assets generates $15,000 in taxable interest
    1. Use $65,000 to buy a 5-Year Single Premium Immediate Annuity to generate $14,000 income per year
    2. Put $385,000 in several deferred annuities to provide future income
    3. Leave $50,000 in a money market fund for emergencies
  2. The $40,000 this couple is taking from their 401(k) is higher than the Required Minimum Distribution (RMD) — reduce it to $25,000

Smart agents will work with the client’s accountant to work the above numbers and to create the ideal product mix. The key is to get the taxable income as close to the Tier 1 income as possible. This has at least four advantages:

  1. The accountant’s OK adds credibility to your sale
  2. The accountant will earn extra fee income
  3. If product suitability is ever an issue, you have the accountant as a friendly witness
  4. The accountant has other clients that need your help — excellent referrals

In summary, this idea created a $65,000 SPIA sale, $385,000 in SPDA sales, and opened the door for an IRA rollover from the client’s 401(k).

 

 

 

This entry was posted on Wednesday, March 18th, 2009 at 4:00 pm and is filed under Annuity Sales Tools, Sales Ideas, Sales Practices, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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