Your clients’ taxes may change due to the rise in Social Security payments. Social Security benefits may become taxable when the beneficiary’s “provisional income” exceeds certain IRS-set levels. Clients may be required to pay tax on up to 85% of their gains at ordinary rates of income tax after applying the calculation.
The Provisional Income
The formula for provisional income can be challenging. Their Social Security benefits, which will be increased in 2023 because of the high cost-of-living adjustment, are included in their provisional income together with all other income taxes, such as dividends, realized interest, and realized capital gains.
Additionally, it includes nontaxable interest income from municipal bonds and other sources. Instead of using the whole income, the criteria for taxable advantages are imposed on the amount of provisional income.
You might assume that just 50% of the COLA would be taken into account when calculating the client’s taxable benefits because only 50% of income from Social Security is regarded as provisional income.
#BREAKING! About 70 million Americans will get a 8.7% increase in monthly #SocialSecurity benefits and #SSI payments in 2023. Check our blog for more information: https://t.co/01HEEzrljy #COLA #2023COLA pic.twitter.com/zPXqNTPaeq
— Social Security (@SocialSecurity) October 13, 2022
You might think of boosting IRA withdrawal by 7% to try to stay up with inflation when you match that with an approximately 7% rise in tax brackets for 2023, but the math doesn’t work. The criteria for calculating whether Social Security benefits are taxable are not raised even though tax brackets are, which leads to some odd outcomes.
Assessment Of Each Person’s Tax
The secret is to annually assess each client’s tax situation to determine the optimal mix of withdrawals from different sources to maintain the client’s marginal tax rate at a rate that is compatible with their long-term financial plan.
These calculations can be performed for you by some financial planning tools to expedite and simplify the process. Because Social Security payouts are immediately and directly linked to inflation, they are a special tool in a financial advisor’s toolbox.
According to conventional knowledge, owning stock is necessary for inflation to be beaten over time. However, during times of growing inflation, like we are currently seeing, equities do not always follow inflation and sometimes even decline. Since rising rates of interest typically coincide with inflationary periods, bonds are also no haven reports ThinkAdvisor.
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