Social Security Taxes

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Tea
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Social Security Taxes

Post by Tea » Wed Nov 29, 2017 11:17 pm

In "The Bogleheads' Guide to Retirement Planning", page 191, it states "The taxation of Social Security creates a tax hump in that if you are normally in the 15 percent bracket, your marginal tax rate can go from 15 percent to 27.75 percent during a certain income level and then back down to 15 percent". Can anyone please explain this situation?

Not Law
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Re: Social Security Taxes

Post by Not Law » Thu Nov 30, 2017 7:51 am

While in the "hump", for every dollar earned, you have to pay taxes on $1.85.

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neurosphere
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Re: Social Security Taxes

Post by neurosphere » Thu Nov 30, 2017 8:01 am

see if this article makes any sense to you, and if not, come back and ask more questions:

https://www.kitces.com/blog/the-taxatio ... -increase/

The summary is that at low (non-SS) income, none of SS benefits are taxable. At higher incomes, it's taxed at some max rate. So during the time your income is in the range between where SS begins to be taxable and where it ends up fully taxed, your marginal rate can be higher than when you are on either side (higher or lower) of that range.

Remember, while your marginal tax rate may be higher in this "hump", you still have more money on an after-tax basis for each extra dollar of income. On the other hand, there ARE (usually rare) situations where an extra dollar of income can cost you more than a dollar in tax.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

rkhusky
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Re: Social Security Taxes

Post by rkhusky » Thu Nov 30, 2017 8:09 am

neurosphere wrote:
Thu Nov 30, 2017 8:01 am
On the other hand, there ARE (usually rare) situations where an extra dollar of income can cost you more than a dollar in tax.
For example, the child tax credit is reduced in $50 chunks. If you are just below the border of one of the chunks, 1 extra dollar of income can increase your taxes by $50. Conversely, if you are just above the chunk, reducing your income by $1 can reduce your taxes by $50.
Not Law wrote:
Thu Nov 30, 2017 7:51 am
While in the "hump", for every dollar earned, you have to pay taxes on $1.85.
If in the "hump," and you add a dollar to your income, that pushes a dollar of SS into being taxed, where the tax is assessed on either 50% or 85% of the dollar. On the other hand, reducing your income by a dollar, by, for example, increasing your Traditional 401K or IRA amount, saves you a similar marginal amount.

This is similar to taxation of capital gains at the boundary of the 15% and 25% tax brackets. If your income plus cap gains are at or above the 15% bracket, adding an extra dollar to your income causes an additional dollar of cap gains to be taxed at 15%, whereas it was taxed at 0% previously. This leads to a marginal rate of 30%. Reducing your income by a dollar saves a corresponding amount.
Last edited by rkhusky on Thu Nov 30, 2017 8:22 am, edited 2 times in total.

cas
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Re: Social Security Taxes

Post by cas » Thu Nov 30, 2017 8:12 am

Another article explaining it is the Boglehead's wiki article "Taxation of Social Security Benefits": https://www.bogleheads.org/wiki/Taxatio ... y_benefits

It has some pictures (graphs), if that helps the thorough written explanation in the Kitces article click in.

JW-Retired
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Re: Social Security Taxes

Post by JW-Retired » Thu Nov 30, 2017 8:22 am

See the wiki link below. When taking both SS and other income such as pensions/RMDs, the federal marginal tax on this other income can be effectively as high as 46.25% until taxation of the SS is fully phased in. An extra dollar of other income causes another $0.85 of SS to be taxed, meaning in the 25% bracket that extra dollar is taxed at 1.85x25% = 46.25%.

For graphs of this see.....
https://www.bogleheads.org/wiki/Social_ ... calculator
JW

ps: I also like this one graph tells all link. The right portions of the curves are where the high marginal tax on other income is.
viewtopic.php?f=2&t=177441#p2686058
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Tea
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Re: Social Security Taxes

Post by Tea » Fri Dec 01, 2017 12:16 am

Thanks to everyone that responded, I found out exactly what I wanted to know.

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