NOT taking Social Security - What is your marginal tax rate?

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Not taking Social Security - What is your marginal tax rate?

Poll ended at Thu Mar 17, 2011 9:46 am

0%
4
10%
25%
14
33%
28%
8
19%
28%
8
19%
33%
2
5%
35%
6
14%
 
Total votes: 42

Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

NOT taking Social Security - What is your marginal tax rate?

Post by Carl53 »

EDIT 1/2015: Not sure what happened to the poll data, but the graphics were no longer available through imageshack. Therefore I am deleting the old images and reloading them from imgur.

This poll is complementary to the one asking the same question for SS recipients. So please if you are taking SS use the other poll, not this one. I hope to generate a comparison of tax rates for those taking SS and those not. Of course your individual situation will determine whether or not you have reduced tax rates once retired, but hopefully we might gain some insight to the real world as to whether or not tax rates are higher or lower for SS recipients.

Take whatever tax prep software you are using and reduce your pension or interest or working income or RMD by $100 and see how much your taxes have changed. The change will be your marginal rate rounded to the nearest %. You should get one of the following -- 0%, 10%, 15%, 25%, 28%, 33%, or 35%. Also if you get a number substantially different than these then I apologize for not understanding the tax code or perhaps you are just on one side of a bracket and a $100 reduction in income moved you to the next lower bracket and what you are seeing is a blend of the two. In this case try adding $100 rather than subtracting to determine your bracket.

The last paragraph and charts are from the complementary thread for SS recipients. The No SS line is correct for those 65 and up and not taking SS. It assumes that you are getting the $1400/$2200 standard deduction for singles and marrieds at age 65. For those of you younger than 65, the No SS line would shift slightly to the left by the std deduction adjustments.

Below are two marginal tax rate charts generated from 2010 tax rates and exemptions for those 65 and up at various levels of SS compensation and other taxable income levels. I assumed that one was taking the standard deduction in all cases. I apologize in advance for including a 40K SS level for the singles rather than the current maximum of about $34K, but it will give you an idea of what is going on. Also, I calculated the marginal rates shown as the average rate over the last $5000 of non SS taxable income for simplicity, therefore some of the values are between the possible increments as the last $5000 straddled more than one bracket.

Image


Image

I plan to run this poll for 10 days.
Last edited by Carl53 on Thu Jan 22, 2015 6:32 pm, edited 1 time in total.
Sidney
Posts: 6750
Joined: Thu Mar 08, 2007 6:06 pm

Post by Sidney »

You are going to miss all of us who file between March 17 and October 15.
I always wanted to be a procrastinator.
User avatar
White Coat Investor
Posts: 14843
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Location: Greatest Snow On Earth

Post by White Coat Investor »

Sidney wrote:You are going to miss all of us who file between March 17 and October 15.
You have to do your taxes to know your marginal rate?

Of course, this is all just federal....
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic »

What happens March 17? I know it is St. Patrick's Day, but why can't you use your tax software before St. Patrick's Day? Is that some special Irish tax law that applies in the US?
Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

Post by Carl53 »

I thought I'd limit it to a short period expecting that most folks were already doing their taxes regardless whether they intend to extend to October. Also, if you know that you always are in the 25% marginal bracket then of course just go ahead and answer as appropriate.

We'll see what happens.

Thanks
Sidney
Posts: 6750
Joined: Thu Mar 08, 2007 6:06 pm

Post by Sidney »

sscritic wrote:What happens March 17? I know it is St. Patrick's Day, but why can't you use your tax software before St. Patrick's Day? Is that some special Irish tax law that applies in the US?
17th is when OPs poll closes. Many of us don't even start doing our taxes until summer.
I always wanted to be a procrastinator.
rai
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Joined: Tue Apr 06, 2010 7:11 am

Post by rai »

I would be more interested to know what the avverage tax rate people are paying.

taxes paid / income
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair
sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic »

Sidney wrote:
sscritic wrote:What happens March 17? I know it is St. Patrick's Day, but why can't you use your tax software before St. Patrick's Day? Is that some special Irish tax law that applies in the US?
17th is when OPs poll closes. Many of us don't even start doing our taxes until summer.
But the reference I was responding to was to filing. You can do your taxes in January and file in April. You can do your taxes today and file in October. If you don't start to do your taxes until October, you can't use this year's return, but you can use last year's. I assume you have completed your 2009 return.

The poll didn't ask for your 2010 marginal rate. The instructions were to
Take whatever tax prep software you are using and reduce your pension or interest or working income or RMD by $100 and see how much your taxes have changed.
I think you can do that if you have tax software. If you don't, then it doesn't matter when you file.
sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic »

rai wrote:I would be more interested to know what the avverage tax rate people are paying.

taxes paid / income
That is another recent thread. Search for it.

P.S. No one could agree on what "income" is. Let's not start that again here.
grberry
Posts: 234
Joined: Fri Jul 20, 2007 1:16 pm
Location: Boston, MA

Post by grberry »

I'm in the phase out zone for at least one credit. So my marginal tax rate is not listed above. I discovered this toying with the idea of making a traditional IRA contribution for my wife.
Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

Post by Carl53 »

Well this is embarrassing. I now realize that the graphs are not correct. I am rechecking, and will repost.
Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

Post by Carl53 »

Even more embarrassing. The graphs are correct, but I was lucky. Had the income increment been smaller a flaw in the spreadsheet would have been detected but apparently I was lucky and the graphs turned out OK but it did cause me to overlook the 22.5% marginal rate for those taking SS.
Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

Post by Carl53 »

I thought that BHs would be interested in a projection of the graphs I first presented assuming 100% inflation that I represent as the year 2034 (3% inflation for 24 years). I did not want to get into CPI-W vs CPI-U discussions or any of the nuances recently discussed so I used a 100% increase in SS benefits, with the same adjustments to standard deductions, exemptions and the like. The base taxable income, ie. pension, can be assumed to be the same, however if yours was due to a wage or RMD then likely it will be greater.

Image

Image
Last edited by Carl53 on Thu Jan 22, 2015 6:35 pm, edited 1 time in total.
Topic Author
Carl53
Posts: 1968
Joined: Sun Mar 07, 2010 8:26 pm

Post by Carl53 »

The following commentary is based on an evaluation of married couples graphs, but a similar case can be made for single filers. In an extreme case one where each spouse is entitled to SS benefits approaching the maximum, one can see that particularly in the 2010 case you will pay some heavy taxes with modest outside income. Considering the break points causes one to consider the possibility of benefiting from an optimization that minimizes taxes and maximizes net worth. Something akin to deduction shifting from year to year to reap the standard deduction in years which you have shifted deductions out of seemed possible.

For our personal case where we are not yet old enough to take SS, but have projected SS benefits (inflation adjusted) between the green and blue lines at age 70, I find that we can optimize one's situation to maximize one's net worth, or at least hopefully avoid a disaster. For instance if one were to convert TIRA funds before taking SS, one might be able to stay below the income at which the blue line bumps up. Another possibility comes from the dip in marginal rates that creates 15% top marginal tax rates for those just above the point their SS has been completely taxed. Notice how the tax rate drops to 15% for the red (even a small range of 10%) and yellow lines in the 50-55K range of non-SS income in 2010 and at a slightly higher dollar level in 2034. Also notice that over time a similar window of low 15% taxes opens up for the green line by 2034. I assumed a 2% real return on all asset classes and 3% inflation for everything else but health insurance(6% assumed inflation). I found that our long term fixed pension placed a floor on our minimum marginal tax bracket since every SS dollar above $44K of other income is taxed at 85%.
What I found for ourselves, is that whether there is little difference as to whether we take SS at 62 or 66 (SS benefits for us between the yellow and green lines) or wait until 70 and end up (SS between the blue and green lines) there was not more than about 7% difference in projected net worth at 90 years in age providing that the case was optimized. At age 80 our net worth for the SS at 70 case would be about 9% below that for either the SS at 62 or 66 cases . At age 100, the optimized SS at 62 case had a net worth that was about 17% below the wait until 70 optimized case. This could be compared to what one might presume to be a logical case, delay SS until 70, drain the Roth in the 60s, take RMDs from the TIRA at 70 when the tax rates are supposed lower in retirement and thereafter and investing the surplus in taxable accounts at that time. Those RMDs would place us to the right hand side on the 2034 chart solidly on the 25% line. While at age 80 it was close to the other cases in net worth except that 75% of it was still in a TIRA with taxes yet owed rather than in Roths or after tax savings. By age 90, the net worth of this case had shrunk to 75% of the other cases with over 60% still in the TIRA. By age 100, its net worth was only 37% of that for the optimized SS at 70 case and still had 38% of its net worth in the TIRA yet to be taxed. For us any of the optimized schemes played out better than this case.

Regarding ourselves taking SS at which age, other issues such as health may yet dictate what we do as I did look at a number of related possible cases such as pension going to PBGC, early death of myself, etc. Nevertheless, if we decide to wait until 70 we need to complete TIRA conversions to Roths by age 70 which for us would be doable while avoiding exceeding the 25% bracket. This keeps us with only a small amount being taxed at 27.75% and much of the SS tax free. We likely would be at greater risk to SS cuts down the road being large recipients. Taking SS at 62 or 66 brings SS benefits down to between the green and yellow lines. Optimizion of these two cases look rather similar, convert heavily prior to SS, reduce conversions at SS age to avoid virtually all of the 25% bracket (think filling in between the near vertical yellow lines at 50K and 70K on the 2010 graph), the reduced SS means less taxes, continue taking RMDs and converting more during our late 70s finishing up all by or before age 80. Thereafter, a little over half of the SS remains taxed with the top rate always being 18.5%.

I realize that a lot can change over time, but according to Proverbs 11:14 "Where there is no guidance the people fall, but in abundance of counselors there is victory". A little planning and a lot of BHs give me a lot more confidence.
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