Show clients how to cut tax on their Social Security benefitsArticle added by Jason Sandos on March 11, 2016
Jason Sandos

Jason Sandos

So Jordan , UT

Joined: October 13, 2006

Sponsored content

Most retirees aren’t aware that the tax deferral offered through annuities and single premium life has the ability to help them reduce or eliminate the tax on their Social Security benefits.

Tax deferral becomes a very powerful tool when you understand how the taxes on Social Security benefits are calculated. By simply showing retirees how tax deferral affects this calculation, you are in a great position to help them restructure their financial assets to realize a tax savings and potentially increase their net spendable income.

According to the Social Security Administration, more than one third of the 59.9 million people who currently receive Social Security pay income tax on their benefits, and more than $31.6 billion was collected in taxes on Social Security benefits during 2015 alone.

ProducersWEB Exclusive - Use the Social Security Tax Calculator Pro FREE for 2 weeks.



Every year more retirees are subject to this tax because the tax calculation used has not been indexed to inflation for over 33 years. Social Security benefits become taxable when your provisional income exceeds $25,000 for single taxpayers and $32,000 for joint. Provisional Income = Gross Income + Tax Exempt Interest for the year + 50 percent of Social Security benefits. Based on your provisional income, up to 85 percent of Social Security benefits can be taxable in a calendar year.

This table shows the percentage of Social Security benefits subject to taxation by the amount of provisional income.

Example #1: Reposition - Emergency Fund Assets that are Generating Taxable Interest

Bill, collects $18,500 from Social Security, $12,000 a year from a pension, and takes a $3,500 IRA distribution each year. Bill also has accumulated an Emergency Fund of $215,000 that is earning 3 percent taxable interest each year, or about $6,450, that he is not spending.

As you can see in the image below, we can easily show Bill how much tax he is paying on his Social Security benefits and the potential $1,451.25 tax savings he could realize by simply moving his emergency fund into a tax deferred annuity or single premium life so the tax on the interest earned is deferred and not included in the provisional income calculation. (Note there are several single premium life policies that offer living benefits in addition to the death benefit and cash accumulation that may be suitable based on the clients goals)


Example #2: Reposition Assets that are Generating Taxable Interest Income

Jon and Suzan collect $23,000 a year from his pension, $27,000 from Social Security, take an IRA distributions of $7,000 and $12,000 from a Roth. Jon and Suzan also have $265,000 in CD’s, savings and investments earning about 4 percent interest income or $10,600 that they are spending to supplement retirement.

In this situation, to help John and Suzan reduce the taxable amount of Social Security benefits and continue to provide the income they need a triple split annuity could be structured as followed.
  • A $74,000 SPIA provides income now that is tax favored with a 94.2 percent exclusion ratio. This means that only $455.88 is taxable each year of the $7,860 that is guaranteed for 10 years certain.

  • A $71,000 deferred income annuity provides income later that is tax favored at a 55.5 percent exclusion ratio and guaranteed for joint life starting in year 11 when the SPIA ends.

  • A $120,000 deferred annuity or a single premium life (depending on the client’s goals) acts as a tax deferred cash reserve that starts to re-accumulate what was used for the SPIA and deferred income annuity.

There are several benefits of restructuring assets this way such as reduced taxes, guaranteed joint life income and a cash reserve that will not affect the joint life income stream if an emergency comes up. I have structured this triple split annuity to keep the after tax income about the same but if the clients desired more income it is easy to allocate more to the SPIA and deferred income annuity.

The image below of the Social Security tax pro calculator illustrates the tax benefits in a side by side comparison. Allowing us to show Jon and Suzan how much tax they are currently paying on their Social Security benefits and the potential tax savings they could realize by restructuring financial assets into a triple split annuity. As you can see in the deferred scenario column the $455.88 taxable portion of the SPIA is added to line 16b pension /annuity income box, the $7,404 of excluded income from the SPIA is added to Roth & excluded income box and the $4,800 of tax deferred interest is put into the tax deferred interest box. This reduces the taxable portion of Social Security benefits, which then affects the total income subject to Federal income tax and creates a potential tax savings of $2,812.


It is a perfect time to talk with retirees about reducing or eliminating the tax on Social Security benefits. Now that 2015 tax returns are being filed, this information can be easily obtained from a client’s tax return form 1040A or 1040 and then simply entered in the appropriate boxes on the calculator.
The views expressed here are those of the author and not necessarily those of ProducersWEB.
Reprinting or reposting this article without prior consent of is strictly prohibited.
If you have questions, please visit our terms and conditions
Post Article