Ep 47: How to Get Your Social Security 100% Tax-Free with David McKnight

September 25, 2019
Social Security can indeed be taxed, despite the feeling that you’re getting taxed twice. This year, 89% of all federal tax revenue is only going to go towards four things: Social Security, Medicare, Medicaid, and interest on the debt. These are non-discretionary spending items. It would take an act...

Episode Transcript - How to Get Your Social Security 100% Tax-Free with David McKnight

A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
Hello there. David McKnight. Thanks for joining us on another episode of The Power of Zero show. We just keep on going, folks, there's no stopping this thing. I think we're up to 47 episodes now, grateful for all of you who are chiming in and taking a peek at this. As you well know, I'm the author of the best-selling book, The Power of Zero, sold over 200,000 copies, grateful for everybody in this audience who's bought a copy, appreciate your support, you're a part of this Power of Zero movement, this Power of Zero revolution. I'm grateful for all of you who've also been able to read Look Before You LIRP, which is a follow-up to The Power of Zero, as well as my most recent book entitled The Volatility Shield, that is, of course, a book that I wrote that is in fiction format. It’s a novella as opposed to a business book and I've gotten quite a bit of excellent feedback on that.
Today, we're going to talk about how to get your Social Security tax-free. Now, you may be thinking, “Wait a minute, you mean my Social Security can be taxed? Hey, it felt like a tax when it came out of my check, to begin with, now they're going to tax it for a second time? That feels like a double tax,” guess what, that is all too painfully true that they can actually tax your Social Security.
We're going to get into that here in a second, but before we do that, I want to touch on an article that one of our team members, Greg, brought to my attention, thank you, Greg, it was in The Washington Post, and it talks about how this year, 89% of all federal tax revenue that comes in is going to go towards only four things; Social Security, Medicare, Medicaid, and interest on the debt. Why is this scary? This is scary because this is what we call non-discretionary spending, we have no control over these expenses. Why? Because we're constrained by law to pay them. Even if we wanted to get around paying them, it would take an act of Congress, you'd have to get the House, the Senate, and the president to revise these laws. Did you know that Medicare and Social Security have to be paid out by law? Therefore, interest on the debt has to be paid, or we default on all of our debt, which would, of course, precipitate a worldwide depression because the world relies on the stability of the dollar and the stability of the American economy. What that means is only 11% is left for non-discretionary items, the FBI, national parks, the Smithsonian, all of these other things that are part of the budget, of course, there's going to be an additional trillion dollars that we spend that is above and beyond the federal tax revenue, that, of course, is what we call deficit spending which basically gets added to the national debt.
Why is this scary? Because, as Tom McClintock in our movie, The Power of Zero: The Tax Train Is Coming, so aptly puts it, we are going to come to a point when we experience a sovereign debt crisis. What is a sovereign debt crisis? That is when other countries decide to stop loaning us money because they don't think we can pay it back. What's going to happen at that point? If nobody else is going to loan us money—we can't print our way out of the problem because you can't print money to pay for Social Security and Medicare when those programs are also, by law, tied to inflation because as inflation goes up, the cost of those programs goes up commensurately—we're going to get to the point where we have to dramatically reduce spending, increase revenue, or some combination of the two. As we've long said on this podcast, we are most likely going to have to raise tax revenue and that's not going to be a pretty picture for people who have the lion's share of their assets accumulated in tax-deferred accounts like 401(k)s and IRAs.
There's that, now, let's get into the meat of today's podcast which is, “How can you get your Social Security tax-free?” Like I said before, a lot of people say, “I didn't even realize that my Social Security could be taxed, it felt like a tax coming out of my paycheck, to begin with, now when I get it, the government taxes me again, that's a double tax, doesn't seem fair.” Whether you think it's fair or not, the federal government is going to do it. Why? Because they keep track of something called provisional income, those are two dirty words that profane my lips every now and then, but when you hear the word provisional income, you should shake in your boots, why? Because the provisional income is the income the IRS keeps track of to determine if they're going to tax your Social Security.
What counts as provisional income? Any 1099s coming out of your taxable bucket count as provisional income. If you have investments in your taxable bucket that generate income or dividends, that's all going to count towards your provisional income. Any distributions coming out of your qualified plans or your 401(k)s and your tax-deferred bucket are going to count as provisional income. If you have a 401(k), chances are most people don't have any basis in their 401(k), in other words, none of those dollars have been taxed, not everybody, there are some exceptions there. Most people have not ever paid taxes, they've used pre-tax dollars to fund their 401(k)s or their IRAs or whatever pension plan you happen to have, and when you take those dollars out, the IRS is going to count them 100% as provisional income. You've got 1099s coming out of your taxable bucket, any distributions coming out of your tax-deferred bucket for the most part, if you happen to have rental income, maybe you have royalties on books, maybe you have farm income, any sort of taxable income that accrues to you during retirement is going to count as provisional income.
Here's the kicker, you're going to love this, one half of your Social Security counts as provisional income. The IRS takes all this provisional income, they add it up, and if as a single person, it adds up to more than $25,000, or if as a married couple, it adds up to more than $32,000, then watch how I word this, very important how I word this, up to 50% of your Social Security can become taxable to you at your highest marginal tax bracket—those words “up to” are very important, I'll explain why here in a second—then if you're a single person and you have provisional income that's more than $34,000, or as a married couple, you have provisional income that's more than $44,000, then “up to”, very important, those two words, up to 85% of your Social Security can become taxable to you at your highest marginal tax bracket, very important also to recognize that your standard deduction does not reduce your provisional income, it has nothing to do with your provisional income, your standard deduction. For example, if you add up all your provisional income and it adds up to, say, $50,000, you don't then apply your standard deduction to that provisional income, it's just your provisional income is what it is and you apply these formulas to it.
By the way, the formula to determine exactly what you're going to pay in tax is anything but simple, in fact, if you do the long-form on the internet, if you want to Google on or just Google “how much of my Social Security will be taxed?”, it'll take you to a calculator that will walk you through exactly how much of your Social Security will be taxed. When you look at the long-form, there are about 18 different lines, it goes something like this, “You take your total Social Security benefit, you take 1/2 of line 1, you take your adjusted gross income without adjustments, then you add back tax-free interest. By the way, interest off your municipal bonds does count as provisional income, that's one of the reasons why we're not huge fans of municipal bonds because they don't count as true tax-free investments because when you take the interest off municipal bonds, it does count as provisional income. Then you add lines two, three, and four, then you take deductible IRA contributions, then you subtract line six from five, you start to see how this goes. Then eighteen lines later, it tells you your taxable Social Security benefit is $25,500 and then the percentage of that subject to taxation is 85%. There's a long-form that you can use to figure this out or you can just use this calculator that does it for you, but I'm going to give you a shortcut here.
Before I get into the shortcut, part of the reasons I'm doing this particular episode on how to get your Social Security tax-free is because a lot of people think that, for example, if you're a married couple and you have $44,001 of provisional income, then automatically, 85% of your Social Security becomes taxable to you at your highest marginal tax bracket, that is not how it works, it is a graduated scale, it is not one of those things where if you hit $1 over that threshold, then all of a sudden, you get the worst possible penalty, that's not how it works, it's graduated. For example, if I were to do some calculations or if you were to go to the same website and use this calculator, take an IRA distribution of $50,000, take Social Security income of $30,000 for a total provisional income of $80,000, guess what, only 80% of your Social Security becomes taxable at that point. It's not the full 85%. What that goes to show is that you have to get well above that $44,000 of provisional income threshold to be taxed to feel the full brunt of the weight of that 85% tax. Here's the threshold, at $80,000 of provisional income, 80% of my Social Security gets taxed, when I go up to a $55,000 distribution from my IRA plus $30,000 of Social Security, that gets me to $85,000 of provisional income, at that point, the calculator will tell you that 85% of your Social Security will become taxable to you at your highest marginal tax bracket. Somewhere between the $80,000 provisional income threshold and the $85,000 provisional income threshold, your Social Security becomes taxed at that full amount, in other words, 85% of your Social Security becomes taxable to you at your highest marginal tax bracket. Think 85%, $85,000, $85,000 of provisional income gets you to the 85% portion of your Social Security that becomes taxable to you.
I wanted to bring this to your attention because I actually see financial advisors out there who are telling their clients, “If you get $1 over $44,000 of provisional income, 85% of your Social Security becomes taxable to you, therefore, we've got to move heaven and earth to keep you below that $44,000 of provisional income.” Granted our strategies are all about getting your IRA balances low enough so that not even 50% of your Social Security becomes taxable to you, but I think it's only fair that we recognize that this is not a cliff sort of a thing, it is a gradual progressive system just like that graduated cylinder with federal tax rates, it works in a very, very similar way so if you can stay below that $25,000 provisional income threshold as a single person, if you can stay below that $32,000 threshold for a married couple, then your Social Security will be tax-free.
This, of course, begs the question, “How do you get to the point where you have provisional income that's that low? How do you get to the point where your Social Security is not tax-free? You have to recognize that, let's say, if you're a married couple and you have to stay below that $32,000 threshold and you have $30,000 of Social Security, you already have $15,000 of provisional income before you take dollar one out of your IRA. What you have to do is you have to get your IRA balance low enough that that RMD coming out of that IRA, when coupled with one half of your Social Security, in this case, $15,000, is going to keep you below that $32,000 provisional income threshold. I found that for most people who have $30,000 of Social Security, that magic number is going to be about $350,000. If you have $1 million in your IRA and you want to get to a point where your Social Security is tax-free, you should probably start shifting dollars systematically from tax-deferred to tax-free such that you get to the point where you have about $350,000 in your IRA balance. That will produce an RMD that when coupled with one half of your Social Security, will keep you below that $32,000 of threshold and therefore get your Social Security tax-free.
Why do I make a big deal about keeping your Social Security tax-free? I make a big deal about it because, let's say, in this example that we just had from the website, you have $50,000 of distributions from your IRA, you've got $30,000 of Social Security, that means you will owe $5,610 in tax on your Social Security. How do most Americans go about plugging that hole in their Social Security? They take more money out of their IRAs and 401(k)s in order to pull it off. What would happen if tax rates doubled? What would happen if, like some of the experts are predicting, tax rates doubled, went up to 50%, how much money would you have to take out of your IRA to be able to pay the 50% tax to the IRS and then be leftover with $5,610 with which you could then plug the hole in your Social Security? The answer is double $5,610, so that would be $11,220. The reason I think this is a big deal is because I've done the math on this a hundred times for a hundred different clients and a hundred different ways and I have concluded that when your Social Security gets taxed, you run out of money five to seven years faster than people who do not have their Social Security taxed, why? Because the act of compensating for Social Security taxation forces you to spend down all your other assets that much faster. This is a big deal, folks, getting your Social Security tax-free.
Fortunately, The Power of Zero caters to people who do not want to have their Social Security taxed. If you are in a position where you need some help navigating all of this, of course, we're happy to help, go to and we are happy to show you how to navigate all the pitfalls standing between you and the 0% tax bracket. If you are a financial advisor and you want to learn how to do this for your clients, go to, opt into our video series and we would be happy to talk to you and share with you how you can learn how to do all this.
Thank you all for being on the podcast. I think we reached 10,000 downloads last month so we're growing by 10% per month and that's all because of you guys and gals and appreciate with all my heart for you, being willing to tune into this podcast. I think we've got a lot yet to explore, I'm not slowing down, there's still a lot of good material to cover out there so stay tuned for subsequent episodes.
Please subscribe. If you subscribe, you will get a little note in your inbox every week letting you know ahead of time what the topic is that we'll be discussing. Of course, if you want to buy The Power of Zero, Look Before You LIRP, or The Volatility Shield in bulk, you can go to If you want to buy our movie, The Power of Zero: The Tax Train Is Coming, you can buy those in DVDs in bulk, you can go to If you want to stream the movie, you can see that on, Amazon, iTunes, Google, YouTube, pretty much anywhere you can stream movies, you can find The Power of Zero: The Tax Train Is Coming. If you're an advisor, you want to hold a viewing of it in a theater near you, you can go to, put The Power of Zero into the search bar and it will let you know if it can be played in a movie theater near your community. Thank you so much for spending 18 minutes of your day with me today and we will look forward to chatting with you next week. Talk to you soon.

Subscribe to Our Podcast Updates

Get the latest updates and news right in your inbox.