July 21, 2025 • 12 mins
“Hey, Mike. I heard that Social Security is now tax free. Is that true?” Discover changes to the tax code and how you can potentially use it to your advantage.
Text your questions to 913-363-1234.
Request Your Wealth Analysis by going to www.retireontime.com
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mike (00:05):
Welcome to How to Retire on Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial adviser andfiduciary. And joining me here,
Mr. David Franson.
David, thanks for being here.
David (00:15):
Yep. Happy to be here.
Mike (00:15):
As always, we're gonna answer your questions. Text them
to (913) 363-1234. And remember,this is just a show, not
financial advice, so make sureto do your research and
follow-up with whatever we talkabout. David, let's begin.
David (00:29):
Hey, Mike. I heard that Social Security is now tax free.
Is that true? That is not true.I know
Mike (00:36):
that many politicians are saying that, including president
Trump has said we got SocialSecurity to be tax free. It's
not an accurate statement. Sojust for context, as of the time
of this recording, around 64% ofpeople receiving Social Security
were receiving it tax free, andthat's under the Social Security
tax brackets that if you makeless amount of money or a
(00:58):
certain amount of money, that 0%of your Social Security be
subject to tax. Okay? And thenthere's 50% of your Social
Security would be subject totax, and then 85% of it.
So it's important to understandthat 64% or so of people
receiving benefits just wereliving off of very little. So
basically 0% of their socialsecurity is being taxed. Okay.
You with me so far?
David (01:18):
Yeah. So federal we're talking federal income taxes,
well over half, currently justdon't even pay taxes on those
benefits.
Mike (01:25):
Yep. K. The changes that have been implemented by the one
big beautiful bill are expectedto increase that amount to about
88% of those who receive theirbenefit do not have to pay
taxes. Now the question that'sthe most important question is,
how does that happen? And what Ifound is many people, they know
(01:46):
that they file their taxes.
They know roughly that there arethings like the standard
deduction, and there's taxdeductions there that you might
itemize. There's tax credits,and it credits a dollar for
dollar off deductions, notdollar for dollar. There's all
these things that go into a taxreturn. But if you had to ask
someone, well, what's the orderof the tax return, and how is it
(02:06):
calculated? I found most peopledon't actually know that
process, which is fine.
Yeah. I don't know the processfor a surgery. I couldn't go to
court until you do process ofwhat a court proceeding is. I
mean, I don't know these things.So it's normal for someone to
say, I don't know the sequenceof the tax return filing
preparation because that's notmy specialty, and TurboTax is a
(02:27):
great way to file your taxes.
Right. But the calculations arehappening in the background.
They made it really easy forpeople so you don't have to
think about it. Well, right now,you do need to think about it.
Here's why.
I've gotten so many calls frompeople saying, how does my file
strategy change because of thenew one big beautiful bill
changes for Social Security? Ihear that it's now tax free, and
should I it's the wrongquestion. And the reason is they
(02:50):
didn't change Social Securitytaxation. What they did was they
have adjusted the standarddeduction so that if you are 55
years or older and your modifiedadjusted gross income is less
than a certain threshold, so formarried couples, if it's less
than 150,000, then you get anadditional 6 to 12,000, so
(03:12):
12,000 for, you know, a couple.Mhmm.
You get an additional amount ofyour adjusted gross income to be
deducted from your return. SoOkay. Whether you're taking
Social Security or not, it'sirrelevant. It's does your
modified adjusted gross income,is that low enough that you
qualify for an additionaldeduction on your taxes overall?
David (03:33):
Okay.
Mike (03:34):
So let me walk you through really quickly the order, the
correct order in doing taxpreparation. K? First off, you
have to figure out how much ofyour Social Security is taxed.
How does that happen? It'scalled the provisional income,
and the calculation for the mostpart is as follows.
Take your total Social Securitybenefit if you're taking it,
divide that in half. Now add inall of your taxable income. So
(03:57):
pensions, if you've got anannuity that's from a pretax
account like an IRA annuity,that could be taxed. You've got
your w two ten ninety nineincome. Any taxable income
stream.
Right? You're gonna add all ofthat in there, and then any of
your tax deferred or exemptincome. So specifically, think
of your municipal bond interest.K? All of that gets calculated
(04:21):
dollar for dollar plus half yourSocial Security, and that helps
you figure out, okay.
Am I paying 0% of my SocialSecurity benefits taxes, 50% in
taxes, or 85% subject to incometax? Are you with me so far?
Yeah.
David (04:35):
So if I made $5,000 a month in Social Security
benefits, it's potentially, I'mpaying 85% of that 5,000 a month
is getting taxed potentially.
Mike (04:45):
Maybe. Not necessarily. Depends.
David (04:46):
Okay.
Mike (04:47):
So for a couple, zero to 32,000 is the threshold. So
5,000 a month in Social Securitybenefits. Let's say as a
household, that's what? 60,000 ayear. 60,000 divided by two
would be 30,000.
You would be in the 0% of SocialSecurity being taxed if you had
no other income.
David (05:05):
Oh, right.
Mike (05:05):
Right. Right. Or maybe it all came from your Roth as an
example. But if you took $2,000or more, your Social Security
taxation is immediately bumpedfrom zero to 50 or 85% subject
to tax. This isn't a progressivesituation like the income taxes.
This is all or none, you andgotta figure out where you
(05:26):
stand. So things like dividends,whether you're using them or
not, if they're being reinvestedin your brokerage account, can
disrupt this calculation.Leaning into municipal bonds can
disrupt the provisional incometax calculation. These are
important things to understandbecause, oh, well, that's tax
free, kind of, but it couldaffect other parts of your plan.
(05:46):
K?
So that's the first part. So yougotta figure out, okay, is your
Social Security subject to 050,or 85% subject to taxes? That's
the first part. Then you'vegotta go over and figure out,
okay, what is your adjustedgross income? So that
calculation now is the taxablepart of your Social Security.
David (06:03):
Okay.
Mike (06:04):
K? So whether it's like, if you have 60,000 in Social
Security, but you've got alittle income elsewhere, so
maybe it's 50% of your SocialSecurity is gonna be taxed as
income, or 85% of it's taxed asincome. All of your taxable
income is a part of youradjusted gross income, but your
municipal bond interest, forexample, is not a part of this
taxation because it's youradjusted gross income. So we're
(06:25):
trying to figure out then whatis your adjusted gross income
provision because you need to dothat then to figure out what
your capital gains bracket is.So if you're taking income for
your long term you see how thisgets complicated?
David (06:35):
Lots of moving parts I'm seeing here.
Mike (06:36):
K. So I'll gloss over the next little bit here, but you
figure out that is your longterm capital gain subject to a
0%, 15%, or 20 in capital gainsif it's long term. Okay? And so
if that happens, then you figureout that calculation, and then
you move on to the next part ofthe calculation, and I'm
simplifying. So the CPAs areprobably rolling over going, oh
my gosh.
(06:57):
Look. This is a podcast. This isa radio show. We're keeping it
simple. There's a lot of nuancewhen filing your taxes.
I'm keeping it simple. But yougotta figure out your modified
adjusted gross income next. Andthe reason is, the question is,
in this situation, is yourstandard deduction gonna apply
and that's it, or are you gonnahave the standard deduction plus
this new one big beautiful billdeduction as well, which will
(07:20):
sunset in 2031? And so if thathappens, then you get your
taxes, and then it's like basedon your modified adjusted gross
income. Here's your calculation.
Now you get the standarddeduction, and maybe you qualify
for this new additionaldeduction for seniors. So maybe
you have an additional 12,000that's getting deducted from
your total taxable amount, andall of that then calculates to
(07:40):
then the income tax brackets andso on. So the question is, oh,
well, Social Security is now taxfree. No. It's not.
They've changed the standarddeduction to try and help more
people not pay taxes or offsetthe taxes they would have paid
in their Social Security, butit's not an apples to apples
situation because you couldutilize this to just do more IRA
(08:00):
to Roth conversions if you'rewithin the modified adjusted
gross income threshold for yoursituation. You could use it to
manipulate other parts of yourplan. It's just it's not
actually tied to SocialSecurity. The truth is that they
increase the standard deductionto offset some people's Social
Security taxes to try andalleviate them, while other
(08:23):
people who are making more moneyare receiving no relief, and
it's just kind of the same as italways was. So for those
enjoying $203,100,000 inretirement according to your
modified adjusted gross income,this is irrelevant.
It doesn't make a change.
David (08:40):
Because they'll still be paying the same old that they've
always paid.
Mike (08:42):
Right? They just they don't qualify for this
deduction. It really was thewealthy are not receiving these
benefits. Those who are enjoyingless in retirement are enjoying
these benefits, and they shouldbe utilized. I fear that those
who have 700,000 or less don'tunderstand the magnitude of the
next few years, the next fiveyears, and how if it's done
(09:06):
right, the standard deductionplus these additional
deductions, how it canpotentially significantly help
their overall tax and incomeplanning in retirement.
David (09:14):
So it sounds like good news then for a large chunk of
people.
Mike (09:17):
Yeah. For people that have less than a million dollars in
their IRA accounts, this is ahuge opportunity, and it depends
on, you know, how much do youhave in your pension, what your
Social Security there's lot offactors in here, but it's a huge
opportunity to just move moremoney where it needs to go in
preparation for things likerequired minimum distributions
and legacy planning and so on,the list goes on and on and on.
David (09:37):
And so how would the average people out there, how
would they even know about allthese nuances and all this?
Mike (09:43):
It's so complicated. It it allows us to become nostalgic
for the good old days of thepension. Oh, yeah. When you
worked for thirty years, you gota pension, and you lived off it,
and all was well. There's areason why I think we as a
people really enjoyed thepension.
Now I know there are some peoplethat enjoy the four zero one k,
and they like the additionalflexibility, But when you get
(10:04):
down to the core of anindividual, I would say most
Americans would have ratherenjoyed a pension than the
additional responsibility ofhaving to figure out how do you
take this four zero one k andnavigate the tax nuance, the
income nuance, the marketnuance, even the health care
nuances, now it affects allthese different factors and the
longevity risk, and I mean, itjust there are 60 risks that you
(10:25):
may not know exist. But this ishow it is, and we move forward.
Yeah. So I wanna point outsomething that's really
important though in thisconversation. As humans, we like
simplicity, especially when itcomes to retirement planning.
But if you'll notice, there'sbeen a significant change, not
just in the tax planning side ofit, but a number of other parts
of now how our financial systemworks. If you're living off a
(10:49):
pension or if you bought anannuity and turned on that
lifetime income stream, there'sreally nothing you can do to
adjust your retirement to takeadvantage of these
opportunities. You are in areactive position. Now for all
those who built a plan thatoffered them growth and
flexibility with sufficientprotection, because when I say
sufficient protection, I meanthat they have enough protected
(11:11):
for the down markets. When themarkets crash, they can sail
through it.
For those that have thatflexibility, they're the ones
that are rewarded for thesechanges, because the tax code is
written in pencil. It changesfrom time to time, and unless
you can dynamically change yourplan, your income plan, your tax
plan, your health care plan, allof the above. You just might
(11:33):
miss these huge opportunities,and that's one of the biggest
takeaways I think from thisquestion. That's all the time
we've got for the show today. Ifyou enjoyed the show, consider
subscribing to it wherever youget your podcasts.
Just search for how to retire ontime. Discover if your portfolio
is built to weather flat marketcycles or if you're missing tax
minimization opportunities thatyou may not even know exist.
(11:55):
Explore strategies that may beable to help you lower your
overall risk while potentiallyincreasing your overall growth
and lifestyle flexibility. Thisis not your ordinary financial
analysis. Learn more about YourWealth Analysis and what it
could do for you regardless ofyour age, asset, or target
retirement date, go towww.yourwealthanalysis.com today
(12:17):
to learn more and get started.
Welcome to How to Retire on Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial adviser andfiduciary. And joining me here,
Mr. David Franson.
David, thanks for being here.
David (00:15):
Yep. Happy to be here.
Mike (00:15):
As always, we're gonna answer your questions. Text them
to (913) 363-1234. And remember,this is just a show, not
financial advice, so make sureto do your research and
follow-up with whatever we talkabout. David, let's begin.
David (00:29):
Hey, Mike. I heard that Social Security is now tax free.
Is that true? That is not true.I know
Mike (00:36):
that many politicians are saying that, including president
Trump has said we got SocialSecurity to be tax free. It's
not an accurate statement. Sojust for context, as of the time
of this recording, around 64% ofpeople receiving Social Security
were receiving it tax free, andthat's under the Social Security
tax brackets that if you makeless amount of money or a
(00:58):
certain amount of money, that 0%of your Social Security be
subject to tax. Okay? And thenthere's 50% of your Social
Security would be subject totax, and then 85% of it.
So it's important to understandthat 64% or so of people
receiving benefits just wereliving off of very little. So
basically 0% of their socialsecurity is being taxed. Okay.
You with me so far?
David (01:18):
Yeah. So federal we're talking federal income taxes,
well over half, currently justdon't even pay taxes on those
benefits.
Mike (01:25):
Yep. K. The changes that have been implemented by the one
big beautiful bill are expectedto increase that amount to about
88% of those who receive theirbenefit do not have to pay
taxes. Now the question that'sthe most important question is,
how does that happen? And what Ifound is many people, they know
(01:46):
that they file their taxes.
They know roughly that there arethings like the standard
deduction, and there's taxdeductions there that you might
itemize. There's tax credits,and it credits a dollar for
dollar off deductions, notdollar for dollar. There's all
these things that go into a taxreturn. But if you had to ask
someone, well, what's the orderof the tax return, and how is it
(02:06):
calculated? I found most peopledon't actually know that
process, which is fine.
Yeah. I don't know the processfor a surgery. I couldn't go to
court until you do process ofwhat a court proceeding is. I
mean, I don't know these things.So it's normal for someone to
say, I don't know the sequenceof the tax return filing
preparation because that's notmy specialty, and TurboTax is a
(02:27):
great way to file your taxes.
Right. But the calculations arehappening in the background.
They made it really easy forpeople so you don't have to
think about it. Well, right now,you do need to think about it.
Here's why.
I've gotten so many calls frompeople saying, how does my file
strategy change because of thenew one big beautiful bill
changes for Social Security? Ihear that it's now tax free, and
should I it's the wrongquestion. And the reason is they
(02:50):
didn't change Social Securitytaxation. What they did was they
have adjusted the standarddeduction so that if you are 55
years or older and your modifiedadjusted gross income is less
than a certain threshold, so formarried couples, if it's less
than 150,000, then you get anadditional 6 to 12,000, so
(03:12):
12,000 for, you know, a couple.Mhmm.
You get an additional amount ofyour adjusted gross income to be
deducted from your return. SoOkay. Whether you're taking
Social Security or not, it'sirrelevant. It's does your
modified adjusted gross income,is that low enough that you
qualify for an additionaldeduction on your taxes overall?
David (03:33):
Okay.
Mike (03:34):
So let me walk you through really quickly the order, the
correct order in doing taxpreparation. K? First off, you
have to figure out how much ofyour Social Security is taxed.
How does that happen? It'scalled the provisional income,
and the calculation for the mostpart is as follows.
Take your total Social Securitybenefit if you're taking it,
divide that in half. Now add inall of your taxable income. So
(03:57):
pensions, if you've got anannuity that's from a pretax
account like an IRA annuity,that could be taxed. You've got
your w two ten ninety nineincome. Any taxable income
stream.
Right? You're gonna add all ofthat in there, and then any of
your tax deferred or exemptincome. So specifically, think
of your municipal bond interest.K? All of that gets calculated
(04:21):
dollar for dollar plus half yourSocial Security, and that helps
you figure out, okay.
Am I paying 0% of my SocialSecurity benefits taxes, 50% in
taxes, or 85% subject to incometax? Are you with me so far?
Yeah.
David (04:35):
So if I made $5,000 a month in Social Security
benefits, it's potentially, I'mpaying 85% of that 5,000 a month
is getting taxed potentially.
Mike (04:45):
Maybe. Not necessarily. Depends.
David (04:46):
Okay.
Mike (04:47):
So for a couple, zero to 32,000 is the threshold. So
5,000 a month in Social Securitybenefits. Let's say as a
household, that's what? 60,000 ayear. 60,000 divided by two
would be 30,000.
You would be in the 0% of SocialSecurity being taxed if you had
no other income.
David (05:05):
Oh, right.
Mike (05:05):
Right. Right. Or maybe it all came from your Roth as an
example. But if you took $2,000or more, your Social Security
taxation is immediately bumpedfrom zero to 50 or 85% subject
to tax. This isn't a progressivesituation like the income taxes.
This is all or none, you andgotta figure out where you
(05:26):
stand. So things like dividends,whether you're using them or
not, if they're being reinvestedin your brokerage account, can
disrupt this calculation.Leaning into municipal bonds can
disrupt the provisional incometax calculation. These are
important things to understandbecause, oh, well, that's tax
free, kind of, but it couldaffect other parts of your plan.
(05:46):
K?
So that's the first part. So yougotta figure out, okay, is your
Social Security subject to 050,or 85% subject to taxes? That's
the first part. Then you'vegotta go over and figure out,
okay, what is your adjustedgross income? So that
calculation now is the taxablepart of your Social Security.
David (06:03):
Okay.
Mike (06:04):
K? So whether it's like, if you have 60,000 in Social
Security, but you've got alittle income elsewhere, so
maybe it's 50% of your SocialSecurity is gonna be taxed as
income, or 85% of it's taxed asincome. All of your taxable
income is a part of youradjusted gross income, but your
municipal bond interest, forexample, is not a part of this
taxation because it's youradjusted gross income. So we're
(06:25):
trying to figure out then whatis your adjusted gross income
provision because you need to dothat then to figure out what
your capital gains bracket is.So if you're taking income for
your long term you see how thisgets complicated?
David (06:35):
Lots of moving parts I'm seeing here.
Mike (06:36):
K. So I'll gloss over the next little bit here, but you
figure out that is your longterm capital gain subject to a
0%, 15%, or 20 in capital gainsif it's long term. Okay? And so
if that happens, then you figureout that calculation, and then
you move on to the next part ofthe calculation, and I'm
simplifying. So the CPAs areprobably rolling over going, oh
my gosh.
(06:57):
Look. This is a podcast. This isa radio show. We're keeping it
simple. There's a lot of nuancewhen filing your taxes.
I'm keeping it simple. But yougotta figure out your modified
adjusted gross income next. Andthe reason is, the question is,
in this situation, is yourstandard deduction gonna apply
and that's it, or are you gonnahave the standard deduction plus
this new one big beautiful billdeduction as well, which will
(07:20):
sunset in 2031? And so if thathappens, then you get your
taxes, and then it's like basedon your modified adjusted gross
income. Here's your calculation.
Now you get the standarddeduction, and maybe you qualify
for this new additionaldeduction for seniors. So maybe
you have an additional 12,000that's getting deducted from
your total taxable amount, andall of that then calculates to
(07:40):
then the income tax brackets andso on. So the question is, oh,
well, Social Security is now taxfree. No. It's not.
They've changed the standarddeduction to try and help more
people not pay taxes or offsetthe taxes they would have paid
in their Social Security, butit's not an apples to apples
situation because you couldutilize this to just do more IRA
(08:00):
to Roth conversions if you'rewithin the modified adjusted
gross income threshold for yoursituation. You could use it to
manipulate other parts of yourplan. It's just it's not
actually tied to SocialSecurity. The truth is that they
increase the standard deductionto offset some people's Social
Security taxes to try andalleviate them, while other
(08:23):
people who are making more moneyare receiving no relief, and
it's just kind of the same as italways was. So for those
enjoying $203,100,000 inretirement according to your
modified adjusted gross income,this is irrelevant.
It doesn't make a change.
David (08:40):
Because they'll still be paying the same old that they've
always paid.
Mike (08:42):
Right? They just they don't qualify for this
deduction. It really was thewealthy are not receiving these
benefits. Those who are enjoyingless in retirement are enjoying
these benefits, and they shouldbe utilized. I fear that those
who have 700,000 or less don'tunderstand the magnitude of the
next few years, the next fiveyears, and how if it's done
(09:06):
right, the standard deductionplus these additional
deductions, how it canpotentially significantly help
their overall tax and incomeplanning in retirement.
David (09:14):
So it sounds like good news then for a large chunk of
people.
Mike (09:17):
Yeah. For people that have less than a million dollars in
their IRA accounts, this is ahuge opportunity, and it depends
on, you know, how much do youhave in your pension, what your
Social Security there's lot offactors in here, but it's a huge
opportunity to just move moremoney where it needs to go in
preparation for things likerequired minimum distributions
and legacy planning and so on,the list goes on and on and on.
David (09:37):
And so how would the average people out there, how
would they even know about allthese nuances and all this?
Mike (09:43):
It's so complicated. It it allows us to become nostalgic
for the good old days of thepension. Oh, yeah. When you
worked for thirty years, you gota pension, and you lived off it,
and all was well. There's areason why I think we as a
people really enjoyed thepension.
Now I know there are some peoplethat enjoy the four zero one k,
and they like the additionalflexibility, But when you get
(10:04):
down to the core of anindividual, I would say most
Americans would have ratherenjoyed a pension than the
additional responsibility ofhaving to figure out how do you
take this four zero one k andnavigate the tax nuance, the
income nuance, the marketnuance, even the health care
nuances, now it affects allthese different factors and the
longevity risk, and I mean, itjust there are 60 risks that you
(10:25):
may not know exist. But this ishow it is, and we move forward.
Yeah. So I wanna point outsomething that's really
important though in thisconversation. As humans, we like
simplicity, especially when itcomes to retirement planning.
But if you'll notice, there'sbeen a significant change, not
just in the tax planning side ofit, but a number of other parts
of now how our financial systemworks. If you're living off a
(10:49):
pension or if you bought anannuity and turned on that
lifetime income stream, there'sreally nothing you can do to
adjust your retirement to takeadvantage of these
opportunities. You are in areactive position. Now for all
those who built a plan thatoffered them growth and
flexibility with sufficientprotection, because when I say
sufficient protection, I meanthat they have enough protected
(11:11):
for the down markets. When themarkets crash, they can sail
through it.
For those that have thatflexibility, they're the ones
that are rewarded for thesechanges, because the tax code is
written in pencil. It changesfrom time to time, and unless
you can dynamically change yourplan, your income plan, your tax
plan, your health care plan, allof the above. You just might
(11:33):
miss these huge opportunities,and that's one of the biggest
takeaways I think from thisquestion. That's all the time
we've got for the show today. Ifyou enjoyed the show, consider
subscribing to it wherever youget your podcasts.
Just search for how to retire ontime. Discover if your portfolio
is built to weather flat marketcycles or if you're missing tax
minimization opportunities thatyou may not even know exist.
(11:55):
Explore strategies that may beable to help you lower your
overall risk while potentiallyincreasing your overall growth
and lifestyle flexibility. Thisis not your ordinary financial
analysis. Learn more about YourWealth Analysis and what it
could do for you regardless ofyour age, asset, or target
retirement date, go towww.yourwealthanalysis.com today
(12:17):
to learn more and get started.
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