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At Virtus Wealth Management, your Southlake independent financial advisors, we help our clients prepare for a financially-secure future by developing long-term strategies that focus on the “big picture” versus short-term gain, thereby managing risk.

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Virtus Wealth Management is the product of a 2016 merger between two well-established Texas wealth management firms.

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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.

Tax Planning – It Makes a Difference!

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  • Tax Planning – It Makes a Difference!

by | Jul 28, 2022

Does your CPA do more than your taxes? Tax planning is imperative. Doing your taxes after the fact doesn’t do you much good does it? We help our clients get ahead of their taxes by making proactive decisions to mitigate their tax burden down the road. How do we do it?

There are many strategies (like Roth conversions, capital gains management, and social security planning), but I’m going to highlight one of my favorites — “Avoiding the Tax Torpedo”. Yes, there is a Tax Torpedo, and, yes, it can be avoided or minimized with proper tax planning. The “Tax Torpedo” is related to Social Security taxation. It gets the name because the pile-on effect of taxes levied on Social Security benefits looks a torpedo at certain income levels when plotted on a chart.

In short, Social Security is taxed as follows:

  • No taxes are paid by beneficiaries with combined income equal to or below $25,000 for single filers and $32,000 for married people filing jointly.
  • Beneficiaries in the next tier of income–between $25,000 and $34,000 for single filers and between $32,000 and $44,000 for married couples filing jointly–pay taxes on up to 50% of their benefits.
  • Beneficiaries with income above those levels pay taxes on up to 85% of benefits.

This is where the torpedo can hit.

  • For each dollar of combined income above $34,000 for single filers and $44,000 for married couples, an extra $0.85 of Social Security benefits are taxed (until 85% of benefits are taxable, which is the maximum).
  • In this income range, each additional dollar of MAGI causes taxable income to rise by $1.85.
  • Thus, the marginal tax rate is 185% of the tax bracket. Yikes!

So, what to do?

  • Plan ahead. Build up after-tax as well as tax deferred savings. It gives you options in the early years of retirement that can reduce your total lifetime tax burden. It’s a snowball effect …
  • This allows you to use after-tax savings to live on before claiming social security or withdrawing from tax deferred accounts.
  • It puts you in a low marginal tax bracket allowing you to consider Roth Conversions at a favorable tax rate during this timeframe.
  • Roth Conversions ultimately reduce your RMD at 72 which is important because you will be claiming social security by then, even if you defer social security until 70.

Unfortunately, there’s no one size fits all rule here. Even if you don’t have after-tax savings, it may be worth it to strategically draw down your tax deferred accounts to delay social security. The analysis gets even more complex when you factor in spousal benefits for married couples. Determining the strategy that works best for your specific situation in advance is the key, so you can proactively plan accordingly and prepare as needed. We are here to help!

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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