Social Security Taxes?

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bigez17
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Social Security Taxes?

Post by bigez17 »

Haven't thought much about including any SS benefits in my retirement planning. Never thought it would make much difference in my lifestyle if I planned appropriately. Always thought of it as some icing on the cake.

Over the last few months the podcasts I listen to have had more discussion about SS benefit strategy - how to get the most out of SS with various choices (wait until full retirement age, file and suspend for one spouse, etc.).

That led me to do some research and the taxes on SS did surprise me. On the SS site it indicated that if married and you have income over $44,000 a year, up to 85% of your SS benefit will be taxed.

Looks like it is a good thing I am not depending on SS! So much for icing the cake!

Anyone with expertise on this or actually in this situation care to comment?

Thanks!
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Re: Social Security Taxes?

Post by richard »

You might want to estimate how much of your Social Security will be taxed and what the tax rate would be.
sscritic
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Re: Social Security Taxes?

Post by sscritic »

If 85% of your social security is taxed at 15%, what part of your social security do you send to the feds?

Reading note: up to 85% does not mean 85%, it means anything up to 85%.

Example: SS = 36000; other income = 26000;
18000 + 26000 = 44000
6000 of your 36000 social security will be taxable.

15% of $6000 = 900.
Your tax rate on your social security will be 900/36000 = 2.5%.

And I haven't even considered your exemptions and deductions. Your AGI is only $32000 on an income of $62,000. You could be in the 10% bracket.
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Re: Social Security Taxes?

Post by cheese_breath »

Just because your SS may be taxed up to 85% doesn't mean the govt. takes 85% of the payment. For example, assume you are in the 15% bracket and 85% of your SS is taxed. The worst case actual tax on your SS payment is 0.15 x 0.85 = 12.75%. The govt. takes 12.75% of your payment. You get to keep the rest.

edit: And as per sscritic's illustration it may be significantly less than 12.75% depending on your other income.
Last edited by cheese_breath on Sat Jul 19, 2014 12:55 pm, edited 1 time in total.
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sscritic
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Re: Social Security Taxes?

Post by sscritic »

Take my example, both be 66, and assume you are retired and the $26,000 of other income is qualified dividends and long-term capital gains. Take the standard deduction for people over 65 and your two exemptions. What tax do you pay on your $62,000 of income?
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Sheepdog
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Re: Social Security Taxes?

Post by Sheepdog »

85% of our SS is taxable. Our SS in 2013 totaled $32,458, but only $1,614 was taxable. That was because of tax planed investing at retirement (conversion to Roths, I Bonds, tax exempt income, eliminating taxable investments, etc). After deductions, no federal income tax was due(state,yes). We spend an average of $70,000 annually with none of that for federal taxes. It's all in tax planning on how much of your SS will actually be taxed.
Now, if you can't reduce your taxable income, then you will pay taxes on up to 85% of your SS at your normal tax rate, whatever that will be.
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Re: Social Security Taxes?

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Re: Social Security Taxes?

Post by sscritic »

Boglegrappler wrote:Deleted
You could have used the X (delete) as long as yours was the last post, but it's too late now. :)
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Re: Social Security Taxes?

Post by nisiprius »

bigez17 wrote:...That led me to do some research and the taxes on SS did surprise me. On the SS site it indicated that if married and you have income over $44,000 a year, up to 85% of your SS benefit will be taxed... Anyone with expertise on this or actually in this situation care to comment?
I think you misunderstand. We have Social Security and I get my form 1099-SSA and enter it on the worksheet (or let my tax software do it for me). 85% is taxABLE.

It does NOT mean that they take 85% of your Social Security benefits away as taxes.

It does NOT that if you receive $24,000 in benefits you only get to keep $3,600 of it.

It means that they count 85% of your Social Security benefits as part of your taxable income. It then gets added in the total. The personal exemptions and stuff get subtracted, it goes through the mill of tax calculations, and you pay according to what tax bracket you are in. That means you might pay like 20% of that 85%, or so.

P.S. Last April I sat straight up in bed at 3 a.m. and said "Yikes! I went through the steps to make sure my Social Security income was properly declared on my 1040, but I don't remember doing that on my state form!" I couldn't sleep until I went downstairs and fired up the computer and found out that in fact some states do tax Social Security income but thank heavens mine isn't one of them.
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DSInvestor
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Re: Social Security Taxes?

Post by DSInvestor »

Run some numbers with taxcaster. It is free, very easy to use and may help you better understand how social security and other types of income are taxed.
https://turbotax.intuit.com/tax-tools/c ... taxcaster/
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Re: Social Security Taxes?

Post by sscritic »

I am in that situation; 85% of my social security is taxed. One of the reasons my social security is being taxed is that I have tax-exempt income. Now this is not my exact situation, but consider this:

A person collects social security. None of it is taxed. The next year, he has $10,000 of tax-exempt income (line 8b). Now his social security is taxed. Question: is the tax on his social security or on his tax exempt interest? (I think this is some part of philosophy, but it has been so long). It was the collecting of the tax-exempt interest that made his taxes go up, not the social security. Having some of the social security be taxable was the mechanism, but in reality, that tax is a marginal tax on the extra tax-exempt interest.

That's the way our tax system works. You have income from three sources. You have exemptions and deductions. You pay a tax. How much of that tax was on each income source? Which income source did you take your exemptions against? Which income source did you take your deductions against? I know on my return, I have no clue. Everything just gets mixed together according to the rules and a tax pops out. By increasing or reducing each income source I can find a marginal tax rate, but the marginal rate might be different on each source. It's not like I can decide to take less social security next year (unless I can suspend).
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Re: Social Security Taxes?

Post by Toons »

Hey the way I view it,I'm thankful I am earning the income that puts me in a position to have 85% of my Social Security earnings taxed. :sharebeer
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Re: Social Security Taxes?

Post by Sagenick48 »

sscritic wrote:I am in that situation; 85% of my social security is taxed. One of the reasons my social security is being taxed is that I have tax-exempt income. Now this is not my exact situation, but consider this:

A person collects social security. None of it is taxed. The next year, he has $10,000 of tax-exempt income (line 8b). Now his social security is taxed. Question: is the tax on his social security or on his tax exempt interest? (I think this is some part of philosophy, but it has been so long). It was the collecting of the tax-exempt interest that made his taxes go up, not the social security.
This is an interesting question because it alludes to the basic constitutional law question of the ability of the federal government to tax interest paid by the states. I seem to remember that there was a SCOTUS decision maybe 60 or 70 years ago that said that the Feds could not tax the interest that the states paid. I am sure the Feds take the position that all income is taxed and only the Congress can decide otherwise. Still it seems to me that Congress has been careful not to expressly say they are taxing muny or state interest to avoid any constitutional challenge. So the answer is they are only taxing the social security income which they calculate a tax rate on based on all income including otherwise non taxable income. The same thing happens, I think, with the ACA (Obamacare) tax on investment income. If you did some checking in the staff reports you might find some discussion of this constitutional,issue.
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Re: Social Security Taxes?

Post by sscritic »

Sagenick48 wrote: This is an interesting question because it alludes to the basic constitutional law question of the ability of the federal government to tax interest paid by the states. I seem to remember that there was a SCOTUS decision maybe 60 or 70 years ago that said that the Feds could not tax the interest that the states paid. I am sure the Feds take the position that all income is taxed and only the Congress can decide otherwise. Still it seems to me that Congress has been careful not to expressly say they are taxing muny or state interest to avoid any constitutional challenge. So the answer is they are only taxing the social security income which they calculate a tax rate on based on all income including otherwise non taxable income. The same thing happens, I think, with the ACA (Obamacare) tax on investment income. If you did some checking in the staff reports you might find some discussion of this constitutional,issue.
I think you have identified the out; the tax is not on the tax-exempt interest per se, but the tax-exempt interest is used in a formula to determine what other of your income is. For example, your tax-exempt interest helps determine your Income Related Monthly Adjustment Amount (IRMAA), the additional Medicare premiums you pay if you are high income. In that case, the premium isn't even a tax, but the tax-exempt interest costs you. I don't know how many other MAGIs use tax-exempt interest, but social security and IRMAA are two.
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Re: Social Security Taxes?

Post by IlikeJackB »

Here's a link to the Bogleheads Wiki on the subject: http://www.bogleheads.org/wiki/Taxation ... y_benefits

Not yet mentioned in this thread, but beware the 27.75% marginal tax rate in the (otherwise) 15% tax bracket. Scroll down to Examples in the above Wiki for more info.
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Re: Social Security Taxes?

Post by Cut-Throat »

Toons wrote:Hey the way I view it,I'm thankful I am earning the income that puts me in a position to have 85% of my Social Security earnings taxed. :sharebeer
+1
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Re: Social Security Taxes?

Post by richard »

Sagenick48 wrote:This is an interesting question because it alludes to the basic constitutional law question of the ability of the federal government to tax interest paid by the states. I seem to remember that there was a SCOTUS decision maybe 60 or 70 years ago that said that the Feds could not tax the interest that the states paid. I am sure the Feds take the position that all income is taxed and only the Congress can decide otherwise. Still it seems to me that Congress has been careful not to expressly say they are taxing muny or state interest to avoid any constitutional challenge. So the answer is they are only taxing the social security income which they calculate a tax rate on based on all income including otherwise non taxable income. The same thing happens, I think, with the ACA (Obamacare) tax on investment income. If you did some checking in the staff reports you might find some discussion of this constitutional,issue.
The 16th amendment explicitly gives congress the power to tax income from any source.
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Re: Social Security Taxes?

Post by nisiprius »

sscritic wrote:...One of the reasons my social security is being taxed is that I have tax-exempt income. Now this is not my exact situation, but consider this: A person collects social security. None of it is taxed. The next year, he has $10,000 of tax-exempt income (line 8b). Now his social security is taxed. Question: is the tax on his social security or on his tax exempt interest? .... It was the collecting of the tax-exempt interest that made his taxes go up, not the social security. Having some of the social security be taxable was the mechanism, but in reality, that tax is a marginal tax on the extra tax-exempt interest...
The little worksheet for social security taxation has about four or five inequalities that create a complicated little curve, with corners whose position depends on the actual amounts of various things. It turns out that there is a peculiarity having to do with taxable distributions from TIRAs. Depending on when the little inequalities cut in, there can be a zone in which every dollar you take from a TIRA is taxed, and also causes a larger portion of your Social Security benefits to become taxable. The result is that if everything is at its worst, there can be a zone when the effective marginal tax rate for taxable distributions is almost 50%--that is, every additional dollar of TIRA distributions causes an increase of nearly $0.50 in taxes paid. However, the zone is fairly narrow, and as you keep taking additional dollars in TIRA distributions there comes a point at which one of those "copy of the larger of lines X and Y" cuts in, taxable Social Security has maxed out, and the effective marginal rate drops down to your regular tax bracket. It's not a crushing burden, it's some small number of thousands of dollars, but annoying if it happens to you. (It hasn't happened to me yet).
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Re: Social Security Taxes?

Post by Epsilon Delta »

South Carolina v. Baker

Since 1988 the tax exemptions on munis are statutory not constitutional.
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Re: Social Security Taxes?

Post by Cut-Throat »

Sagenick48 wrote: This is an interesting question because it alludes to the basic constitutional law question of the ability of the federal government to tax interest paid by the states. I seem to remember that there was a SCOTUS decision maybe 60 or 70 years ago that said that the Feds could not tax the interest that the states paid. I am sure the Feds take the position that all income is taxed and only the Congress can decide otherwise. Still it seems to me that Congress has been careful not to expressly say they are taxing muny or state interest to avoid any constitutional challenge. So the answer is they are only taxing the social security income which they calculate a tax rate on based on all income including otherwise non taxable income. The same thing happens, I think, with the ACA (Obamacare) tax on investment income. If you did some checking in the staff reports you might find some discussion of this constitutional,issue.
I think there are a lot of interesting books written by authors that eventually ended up in prison claiming that taxes are not 'constitutional'.
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Re: Social Security Taxes?

Post by Sagenick48 »

The most recent case on point is South Carolina v. Baker 485 U.S. 505 (1988). In that case the Supreme Court overruled a precedent from 1895 and found that Congress had the power under the 16th amendment to tax interest on "state issued bearer bonds" which in turn overcame South Carolina's 10th amendment claim that Congress could not tax the interest. Current federal tax law still does not tax state bond interest paid on registered bonds. As to whether the Baker decision is right or wrong, Justice Connor's dissent states the opposing view that Congress does not have unlimited power to tax.
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Re: Social Security Taxes?

Post by Enkidu »

bigez17 wrote:Haven't thought much about including any SS benefits in my retirement planning. Never thought it would make much difference in my lifestyle if I planned appropriately. Always thought of it as some icing on the cake.
When thinking about my retirement income I consider SS benefits as one element of my floor income rather than "icing on the cake". At this point the other part of my floor is my pension. Everything else, is incremental. So when I consider taxes, I first compute taxes on my floor income. Then I compute total taxes after adding incremental income from different sources. The difference is the incremental income from my other sources of income such as tax exempt, capital gains, or tIRA distributions. I can model different scenarios such as IRA conversions, taking capital gains, and tIRA distributions. The practical and actionable aspect is that the incremental taxes are related to incremental income above the floor provided by pensions, SSI, and annuities if you have them.

I use a spreadsheet where I have recreated the key IRS forms for my situation including the SS worksheet. Instead of a spreadsheet, you can also use commercial tax software and as already mentioned, Taxcaster is a free alternative for modeling income and taxes.

But my main point is the SS should be considered part of the floor income rather than icing on the cake.
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Re: Social Security Taxes?

Post by grabiner »

bigez17 wrote:That led me to do some research and the taxes on SS did surprise me. On the SS site it indicated that if married and you have income over $44,000 a year, up to 85% of your SS benefit will be taxed.

Looks like it is a good thing I am not depending on SS!
"Will be taxed" does not mean you lose that much to taxes. If you pay tax on 85% of your SS benefits, the tax will be 15% or 25% of the taxable amount (or more if you have very high income), just as with any other income. Most retirees paying tax on 85% of SS are in the 25% tax bracket and will lose 21.25% of the SS to taxes.
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Re: Social Security Taxes?

Post by letsgobobby »

Enkidu wrote:
bigez17 wrote:Haven't thought much about including any SS benefits in my retirement planning. Never thought it would make much difference in my lifestyle if I planned appropriately. Always thought of it as some icing on the cake.
When thinking about my retirement income I consider SS benefits as one element of my floor income rather than "icing on the cake". At this point the other part of my floor is my pension. Everything else, is incremental. So when I consider taxes, I first compute taxes on my floor income. Then I compute total taxes after adding incremental income from different sources. The difference is the incremental income from my other sources of income such as tax exempt, capital gains, or tIRA distributions. I can model different scenarios such as IRA conversions, taking capital gains, and tIRA distributions. The practical and actionable aspect is that the incremental taxes are related to incremental income above the floor provided by pensions, SSI, and annuities if you have them.

I use a spreadsheet where I have recreated the key IRS forms for my situation including the SS worksheet. Instead of a spreadsheet, you can also use commercial tax software and as already mentioned, Taxcaster is a free alternative for modeling income and taxes.

But my main point is the SS should be considered part of the floor income rather than icing on the cake.
one's perspective about how to count SS appears to vary considerably with age:

http://www.bogleheads.org/forum/viewtop ... 0&t=142962
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Re: Social Security Taxes?

Post by exoilman »

Cut-Throat wrote:
Toons wrote:Hey the way I view it,I'm thankful I am earning the income that puts me in a position to have 85% of my Social Security earnings taxed. :sharebeer
+1
+2
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Re: Social Security Taxes?

Post by TomatoTomahto »

exoilman wrote:
Cut-Throat wrote:
Toons wrote:Hey the way I view it,I'm thankful I am earning the income that puts me in a position to have 85% of my Social Security earnings taxed. :sharebeer
+1
+2
Many many years ago, my father and I had a discussion about how that year, he had paid more in taxes than he had made the year before. Three cheers for looking on the upside.

I'm not suggesting paying more than you owe, but rather than begrudging the college tuition checks or tax payments, what a wonderful world where we can do so much better than we should have any expectation of.
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Re: Social Security Taxes?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (Social Security taxes).

Also, see the wiki: Taxation of Social Security benefits
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