What’s Surprising Retirees About Social Security Benefits?

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Social Security taxes are surprising some retirees. How to figure out if you’ll owe, and what to do to avoid penalties. Plus, Salesforce joins the dividend-paying club. When will the tech company pay its first dividend, and what does Morningstar think about the stock? This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Salesforce to Pay Quarterly Dividend

Salesforce CRM will issue dividends for the first time ever. The cloud-based software company will pay a quarterly dividend of $0.40 per share on April 11. It also expanded its buyback program by $10 billion. Salesforce reported strong performance and a mixed outlook in its fiscal fourth-quarter results. Revenue grew 11% year over year to over $9 billion. Software company MuleSoft, the data cloud, and solid execution from Salesforce drove the solid performance. Professional services missed Morningstar’s estimates, while multicloud deals were strong. Major restructuring from January 2023 at Salesforce is boosting margins. However, Morningstar sees opportunity for margins to expand as artificial intelligence grows. Salesforce’s ability to reduce unnecessary costs and raise prices will likely help margin growth in the next few years. Morningstar is raising its estimate for what Salesforce’s shares are worth to $300 from $265. The stock looks fairly valued.

Snowflake’s Leadership Change

Snowflake SNOW delivered a decent fiscal fourth quarter. But a disappointing 2025 fiscal outlook and the leadership change leave much to be desired. The cloud data platform company faced the surprise retirement of CEO Frank Slootman. Sridhar Ramaswamy will replace him. He joined the company last year. Snowflake reported quarterly revenue that was 2% higher than Morningstar’s estimates. However, the company’s outlook for fiscal 2025 growth is only 22%, falling short of Morningstar’s expectations. Snowflake’s long-term outlook has also weakened. Multiple factors like lower storage pricing and consumption patterns are affecting results. Maintaining the current growth momentum is key for a fast-expanding company like Snowflake. It likely needs to sell and improve more products to bounce back. Morningstar thinks Snowflake’s shares are worth $187, down from $231 per share. The stock appears fairly valued.

Macy’s to Close Underperforming Stores

Macy’s M reported mixed fourth-quarter results, including margin outperformance that made up for subpar sales. The retailer’s new strategic plan overshadowed the results. It’s planning to close about 150 underperforming stores over the next three years. Macy’s is struggling to move away from the broken department store model. Yet, Morningstar still identifies strengths like its more than 40 million annual customers, 30 million loyalty members, and more than $7 billion in annual digital sales. Macy’s hopes to open more Bluemercury and small-format Bloomingdale’s stores to go more upscale. Meanwhile, it will close more of its large department stores, many of which are in declining malls. However, Macy’s faces the risk of losing customers in this maneuver. It’s also facing a proxy battle that could result in the company going private. Morningstar maintains that Macy’s stock is worth $25 per share and looks undervalued.

Social Security Benefits Are Taxable

Hampton: Social Security taxes are likely coming out of your paycheck, and that tax burden may not end when you retire. The revelation is surprising many retirees who are collecting their Social Security benefits. Who gets the tax hit and how to avoid penalties at tax time? Mark Miller has written about the taxation of Social Security benefits. He is the author of Retirement Reboot and a Morningstar contributor.

Thanks for joining me, Mark.

Mark Miller: Hi, Ivanna. Nice to be here.

Hampton: Let’s start with why the federal government taxes Social Security benefits.

Miller: Well, the income that people receive from Social Security is really similar to other forms of retirement income, whether it’s from a pension or money coming out of an IRA, and those things are subject to income taxes. So distinct from the tax you pay on your wages while you’re working—the FICA tax, or the payroll tax, which is a tax on wages—some people pay taxes on Social Security income. When I say some, this is a tax that tends to hit higher-earning retirees. So, it’s a progressive tax in that sense. So, people who have income in retirement below a certain threshold pay no tax, and then it escalates from there. So, it depends very much on your personal financial situation in retirement. It’s a tax that tends to hit people who maybe are still working and still have a fair amount of income coming in from that, from wages, or people who have a lot of other pension income are people who tend to pay the tax.

Hampton: How do retirees figure out if their benefits will get taxed?

Miller: It is a very arcane, I would say, somewhat confusing formula that’s used to determine this. Social Security calls it “combined income.” It’s also sometimes called “provisional income.” But what this is, the definition of combined income is you take your adjusted gross income, you add in your nontaxable interest, and then you add in half of your Social Security benefit. And that can help you determine how much of your benefit is going to be subject to tax. So, if you have under $25,000 in combined income, you will not pay a tax as a single filer. If you have $25,000 to $34,000, up to half or half of your Social Security benefit will be subject to income tax. And above $34,000, 85% of your benefit is subject to tax. So, there are the three different tiers, and the numbers are a little different for joint filers. But that’s how it figures in. So, what we’re talking about here is what amount of your benefit will be figured into your overall income tax burden.

Hampton: And what are the options to avoid penalties at tax time?

Miller: Sure. Well, like any other income that isn’t taxed coming in, you have to pay quarterly estimated tax on it, or you can instruct the Social Security Administration to do withholding on your benefit. Those are your two choices. But you don’t want to just wait till the end of the year having done nothing.

Hampton: And there’s Democratic-sponsored legislation in Congress. It’s called the “You Earned It, You Keep It Act.” It proposes ending the federal tax on Social Security. Can you talk about what’s in the bill and whether you think it could pass?

Miller: Well, this is something that’s been proposed a number of times. This bill, this is not the first time this one has been filed. There are others that it proposed. For example, there’s a much more comprehensive Social Security Reform plan that has been sponsored by Democrats in the House that would not eliminate the tax on Social Security but lift those thresholds we were talking about to a higher level. One of the things about those thresholds is, they were created in 1983. Social Security benefits have only been taxed since the early 1980s, and those thresholds were set at that time, but the law does not index them for inflation and so they’ve stayed at that level ever since then, which means that over time more people are paying the tax as a result of inflation. The legislation I’m referencing would just lift those thresholds to much higher levels to exempt more people from it. A number of bills have been proposed to do this.

This particular legislation is notable in a couple of ways. It would eliminate, as you said, the tax entirely, but it also would pay for itself by adding new FICA taxes above the current cap that exists on the amount of wages that are subject to income. So, right now, that cap is $168,000 and change. You pay FICA taxes up to that amount of wages. This bill would create a new tier of FICA taxes above $250,000 and that’s a little bit like a number of other proposals. It also would pay for itself by for the first time infusing general revenue that the federal government collects into Social Security. That would be a first because Social Security up till now has been completely funded through the payroll tax and also interest income and funded in part by the taxes on benefits that we’re talking about here. So, if you eliminate this tax, you have to pay for it some way unless you want to accelerate the financial problems facing the Social Security Trust Fund. So, this bill aims to pay for it in those two ways, but adding general revenue to Social Security would be a first and I think a rather profound change in the program.

Hampton: Well, that is something to watch. I want everyone who is watching or listening to check out the show notes for a link to Mark’s article. It includes a graphic and a calculator to figure out whether your benefits are taxable. Thanks, Mark, for your time today.

Miller: My pleasure.

Hampton: Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. And thank you for watching Investing Insights. I’m Ivanna Hampton, a lead multimedia editor at Morningstar. Take care.

Read More About These Topics From This Episode

Salesforce Earnings: Firm Declares a Dividend

Snowflake Earnings: Revenue Outlook Disappoints; New CEO Taking Over

Macy’s Earnings: Another Strategic Plan Is Unveiled, but Sales Growth Elusive

Social Security Is Taxable? Don’t Be Caught Off Guard