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SS and still working tax question

Posted: Sun Nov 15, 2020 7:00 am
by spdoublebass
I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 9:26 am
by teen persuasion
spdoublebass wrote: Sun Nov 15, 2020 7:00 am I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.
I get the same result on the first scenario.

On the second, I get $5500 Taxable SS income.
Non SS income $34k + half of SS income $9k = $43k
$43k - $32k = $11k in the 50% section
= $5500 Taxable SS
(none above $44k, so 0 in 85% section)

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 9:43 am
by spdoublebass
teen persuasion wrote: Sun Nov 15, 2020 9:26 am
spdoublebass wrote: Sun Nov 15, 2020 7:00 am I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.
I get the same result on the first scenario.

On the second, I get $5500 Taxable SS income.
Non SS income $34k + half of SS income $9k = $43k
$43k - $32k = $11k in the 50% section
= $5500 Taxable SS
(none above $44k, so 0 in 85% section)
I thought it goes:
0-12K = $0
12K-24K = 12000x.5 = 6000
24K-34K = 10000x.85 = 8500

Then add that together
0+6000+8500= 14500

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 9:59 am
by teen persuasion
The relevant section of the wiki on SS taxation is:
There are two relevant base amounts; unlike most income limits in the tax code, they are not adjusted for inflation. The lower base is $25,000 if you are single, $32,000 if married filing jointly. The upper base is $34,000 if you are single, $44,000 if married filing jointly.[5]

If your relevant income is below the lower base, none of your benefits are taxable. For every $1 of relevant income between the lower and upper bases, 50 cents of your Social Security benefits become taxable, up to 50% of your total benefits. For every $1 of relevant income above the upper bases, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85% of your benefits.[6]
You want the MFJ base amounts: $32k and $44k.

If your total of non SS income and 1/2 SS income is under $32k, taxable SS is zero.

The portion that falls between $32k and $44k is assessed at 50%, so max $6k.

The portion over $44k is assessed at 85%.

Add the parts together, and compare to 85% of total SS income. If the total is greater than 85% of SS, then cap at 85% of SS (which is what happened in your first scenario).

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 10:17 am
by teen persuasion
Is this section where you got your numbers from?
Married taxpayers:

If you are a married couple and receive $40,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $12,000.
For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.
Note that this is for a fixed $40k in SS, and computing on additional non SS income. It's in a section looking at the marginal tax rates when SS complicates tax rates, because each additional $ increases both tax bracket and the additional SS $ included in taxable income (50-85%).
But that's not HOW taxable SS is computed.

If you realize that $40k SS income would be $20k in the actual SS taxable formula, you can see that
$20k (SS) + that $12k base amount = $32k
And
$20 (SS) + that $24k base amount = $44k
Which are the same as in the SS taxation formula.

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 1:31 pm
by spdoublebass
teen persuasion wrote: Sun Nov 15, 2020 10:17 am Is this section where you got your numbers from?
Married taxpayers:

If you are a married couple and receive $40,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $12,000.
For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.
Note that this is for a fixed $40k in SS, and computing on additional non SS income. It's in a section looking at the marginal tax rates when SS complicates tax rates, because each additional $ increases both tax bracket and the additional SS $ included in taxable income (50-85%).
But that's not HOW taxable SS is computed.

If you realize that $40k SS income would be $20k in the actual SS taxable formula, you can see that
$20k (SS) + that $12k base amount = $32k
And
$20 (SS) + that $24k base amount = $44k
Which are the same as in the SS taxation formula.
First, let me say thank you for taking the time to respond.

Second, I am terribly confused.

Why then in the example under MFJ it lists:

Non SS income: $33,568
Taxable SS: $14,139
AGI: $47,139
Taxable Income: $19,901

In the example from the wiki (not the one in my OP), they have:
0-12000= 0
12000-24000= 12000x.5 = 6000
24000-33568= 9568x.85 = 8132.80

6000+8132.80= 14132.80 which is what they have for Taxable SS Income.

Why does this work but my original example is wrong?

The amount of SS only matters in that you pay a max of .85(your SS amount) in taxable SS income. That's how it reads to me anyway.

Again, thank you for taking the time to explain it to me.

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 2:34 pm
by spdoublebass
teen persuasion wrote: Sun Nov 15, 2020 9:26 am
spdoublebass wrote: Sun Nov 15, 2020 7:00 am I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.
I get the same result on the first scenario.

On the second, I get $5500 Taxable SS income.
Non SS income $34k + half of SS income $9k = $43k
$43k - $32k = $11k in the 50% section
= $5500 Taxable SS
(none above $44k, so 0 in 85% section)
Forget my last post.
I see what you are saying now. I read the IRS Publication 915.

Yes, you are of course correct.
It would be $34K+$9K (half SS)

Thank you very much. This is why I wanted to check what I was doing.
Very grateful to you for taking the time.

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 2:45 pm
by FiveK
spdoublebass wrote: Sun Nov 15, 2020 1:31 pm The amount of SS only matters in that you pay a max of .85(your SS amount) in taxable SS income. That's how it reads to me anyway.
That may be the main misunderstanding.

Instead of
In the example from the wiki (not the one in my OP), they have:
0-12000= 0
12000-24000= 12000x.5 = 6000
24000-33568= 9568x.85 = 8132.80
the calculations are
0-32000= 0
32000-44000= 12000x.5 = 6000
44000-53568= 9568x.85 = 8132.80

Re: SS and still working tax question

Posted: Sun Nov 15, 2020 2:56 pm
by spdoublebass
FiveK wrote: Sun Nov 15, 2020 2:45 pm
spdoublebass wrote: Sun Nov 15, 2020 1:31 pm The amount of SS only matters in that you pay a max of .85(your SS amount) in taxable SS income. That's how it reads to me anyway.
That may be the main misunderstanding.

Instead of
In the example from the wiki (not the one in my OP), they have:
0-12000= 0
12000-24000= 12000x.5 = 6000
24000-33568= 9568x.85 = 8132.80
the calculations are
0-32000= 0
32000-44000= 12000x.5 = 6000
44000-53568= 9568x.85 = 8132.80
Right.
I see my error now. I was too focused on the numbers in that second box diagram for MFJ and I didn't process the paragraph under "The Formula" at the beginning.

This really helped.
Thank you!!!

Re: SS and still working tax question

Posted: Mon Nov 16, 2020 3:56 am
by Carl53
spdoublebass wrote: Sun Nov 15, 2020 2:34 pm
teen persuasion wrote: Sun Nov 15, 2020 9:26 am
spdoublebass wrote: Sun Nov 15, 2020 7:00 am I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.
I get the same result on the first scenario.

On the second, I get $5500 Taxable SS income.
Non SS income $34k + half of SS income $9k = $43k
$43k - $32k = $11k in the 50% section
= $5500 Taxable SS
(none above $44k, so 0 in 85% section)
Forget my last post.
I see what you are saying now. I read the IRS Publication 915.

Yes, you are of course correct.
It would be $34K+$9K (half SS)

Thank you very much. This is why I wanted to check what I was doing.
Very grateful to you for taking the time.
It gets a little better than this. Putting $26000 in the 401k resulted in getting your AGI down to $39500. For 2021, AGI of $39500 and below are eligible for up to 50% of $2000 tax nonrefundable credit for retirement contributions up to $2000 made by taxpayer under the Retirement Saver's Credit provisions of the tax code. Since in your example all of the retirement savings was done by one person you would get a $1000 tax credit almost wiping out your tax liability. If you took some of the $26000 and diverted as little as $340 to a spousal IRA, all federal taxes would have been eliminated.

Re: SS and still working tax question

Posted: Mon Nov 16, 2020 8:01 am
by teen persuasion
Ooh, nice catch!

Re: SS and still working tax question

Posted: Mon Nov 16, 2020 11:55 am
by spdoublebass
Carl53 wrote: Mon Nov 16, 2020 3:56 am
spdoublebass wrote: Sun Nov 15, 2020 2:34 pm
teen persuasion wrote: Sun Nov 15, 2020 9:26 am
spdoublebass wrote: Sun Nov 15, 2020 7:00 am I'm just trying to understand this wiki page:

https://www.bogleheads.org/wiki/Taxatio ... ump_begins

It took me a little while but I think I got it figured out. Note: On the page I linked you have to scroll up a bit to the second box from the top.

I'm pulling random figures out of the air for an example:

Say a couple is MFJ and both over 65 and FRA. One person claims and receives $18K annually. One person is working, hasn't claimed SS, and makes $60K a year annually.

By using the above sheet listed on the wiki.

Non SS Income= $60K
Taxable SS income= $15,300
AGI= $75,300
Taxable Income= $47,500 (75,300- 27,800 Standard Deduction)


My question is any money that is contributed to a 401K lowers the Non SS income correct? So someone over 60 can contribute $26K to their 401K. This would lower their Non SS income from $60K to $34K correct?

So it would change things to:

Non SS income= $34K
Taxable SS Income= $14,500
AGI= $48,500
Taxable income= $20,700

Again, I think I have this right, but I wanted to double check.
I get the same result on the first scenario.

On the second, I get $5500 Taxable SS income.
Non SS income $34k + half of SS income $9k = $43k
$43k - $32k = $11k in the 50% section
= $5500 Taxable SS
(none above $44k, so 0 in 85% section)
Forget my last post.
I see what you are saying now. I read the IRS Publication 915.

Yes, you are of course correct.
It would be $34K+$9K (half SS)

Thank you very much. This is why I wanted to check what I was doing.
Very grateful to you for taking the time.
It gets a little better than this. Putting $26000 in the 401k resulted in getting your AGI down to $39500. For 2021, AGI of $39500 and below are eligible for up to 50% of $2000 tax nonrefundable credit for retirement contributions up to $2000 made by taxpayer under the Retirement Saver's Credit provisions of the tax code. Since in your example all of the retirement savings was done by one person you would get a $1000 tax credit almost wiping out your tax liability. If you took some of the $26000 and diverted as little as $340 to a spousal IRA, all federal taxes would have been eliminated.

Thanks!

Yeah, my example was fictitious, but very close to my parents situation.

My father is old enough to fall under the old law that he can claim spousal off my mother and wait until 70 to claim his own benefits. He’s 68 and wants to work until 70.

I know that I was ignoring the savers credit. I believe your example is what will happen if he contributed the max to his 401K and also contributed the max to each of their Roth IRA’s.

I can’t thank this forum enough. Such accurate and great information.