Social Security “Hump” and the new tax rates???

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tamucpa
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Social Security “Hump” and the new tax rates???

Post by tamucpa » Fri Jan 12, 2018 10:00 pm

https://www.bogleheads.org/wiki/Social_ ... calculator

Wondering how this “Hump” will change with the new tax rates?

Any general thoughts from people? Or will things be very similar?

Any chance someone will update the wiki page.

Thanks in advance

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FiveK
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Re: Social Security “Hump” and the new tax rates???

Post by FiveK » Fri Jan 12, 2018 10:47 pm

One may generate similar charts using the personal finance toolbox spreadsheet. E.g., for a single 64 year old with $24K SS benefit and $2K in qualified dividends:

Image

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Watty
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Re: Social Security “Hump” and the new tax rates???

Post by Watty » Sat Jan 13, 2018 7:51 pm

FiveK wrote:
Fri Jan 12, 2018 10:47 pm
One may generate similar charts using the personal finance toolbox spreadsheet. E.g., for a single 64 year old with $24K SS benefit and $2K in qualified dividends:
I looked at that link but I could not find the a graph like that. Where was that?

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FiveK
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Re: Social Security “Hump” and the new tax rates???

Post by FiveK » Sat Jan 13, 2018 8:41 pm

Watty wrote:
Sat Jan 13, 2018 7:51 pm
FiveK wrote:
Fri Jan 12, 2018 10:47 pm
One may generate similar charts using the personal finance toolbox spreadsheet. E.g., for a single 64 year old with $24K SS benefit and $2K in qualified dividends:
I looked at that link but I could not find the a graph like that. Where was that?
The graph is on the 'Calculations' tab, starting ~cell F81. The spreadsheet cell values I used:
G2 = 1
G8 = 64
B38 = 24000
D25 = 2000

Then follow the instruction on the 'Instructions' sheet, ~rows 19-35, to use D31 as the "Column input cell:" for the data table that feeds the graph. The data table is outlined in bold, cells P82:R583, to make it easy to select.

Also set cell P82 = 100, and adjusted the y-axis scale on the chart to get the version posted.

If one is familiar with Excel data tables, this is all straightforward. If not, it's one of those things that may appear very complex at first, but once done a time or two is straightforward after all.

Any questions about the above, just ask. I can probably handle those. Detailed questions (or suggestions) may be best put on the MMM site where the tool is hosted. I believe @nolesrule mentioned getting a quick response there for something.
Last edited by FiveK on Mon Jan 15, 2018 12:10 am, edited 1 time in total.

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#Cruncher
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Re: Social Security “Hump” and the new tax rates???

Post by #Cruncher » Sun Jan 14, 2018 11:54 am

tamucpa wrote:
Fri Jan 12, 2018 10:00 pm
[Wiki's] Social Security tax impact calculator
Wondering how this “Hump” will change with the new tax rates? ... Any chance someone will update the wiki page[?]
Taking your second question first, tamucpa, you could send a private message to PapaGeek, the author of the Wiki page and the spreadsheet. From his profile, I see that he hasn't been on the forum since December 22nd.

As background to your first question for readers unfamiliar with it, the Social Security tax "hump" refers to the portion of a graph of marginal tax rate plotted against increasing non-SS ordinary income where the marginal rate exceeds the tax bracket rate. FiveK's graph above shows this "hump". [1] It is caused by the special way that Social Security benefits are taxed (explained in the Wiki's Taxation of Social Security benefits). The new tax law has not changed this treatment. Therefore, the new tax brackets only alter the size and extent of the "hump". In most cases it will still exist; but be smaller.

The following table is based on FiveK's example of a single filer age 64 taking the standard deduction with a $24,000 SS benefit and $2,000 of long term capital gains (LTCG) or Qualified Dividend Income (QDI). The "2018" column shows the dollar amounts corresponding to the steps in FiveK's graph. The "2017" column shows the corresponding steps for a 2017 single return with the same SS and QDI. The new tax law reduces the "tallest" part of the "hump" from 55.50% to 49.95%. In both years this high marginal rate results when each $100 of ordinary income causes $85 more of SS to be taxable. This total $185 of additional ordinary income pushes $185 of the QDI into the 15% bracket. When all of the QDI has been taxed, the marginal rate falls down to 46.25% in 2017 or 40.70% in 2018. [2]

Code: Select all

     Event                  2017              2018               Result of
--------------------   --------------    --------------    ----------------------
Reach bracket 1        10,400  10.00%                      B1
Begin 50% SS taxable   11,000  15.00%    11,667  15.00%    B1 X 1.5
Reach bracket 2        16,817  22.50%    18,017  18.00%    B2 X 1.5
Begin 85% SS taxable   20,000  27.75%    20,000  22.20%    B2 X 1.85
Start QDI taxable      31,811  55.50%    33,027  49.95%    B2 X 1.85 + 15% X 1.85
Reach all QDI taxed                      34,108  22.20%    B2 X 1.85
Reach bracket 3        32,892  46.25%    34,162  40.70%    B3 X 1.85
Reach max SS taxed     38,706  25.00%    38,706  22.00%    B3
Here is the detail behind the table. It was prepared with the Compare sheet of my Marginal Tax Rates spreadsheet. The first table is for a 2017 return and the second one is for a 2018 return.

Code: Select all

Social Security 50% threshhold    25,000   -------------------------------------------------->
Social Security 85% threshhold    34,000   -------------------------------------------------->
Rate: ord income bracket 1           10%   -------------------------------------------------->
Rate: ord income bracket 2           15%   -------------------------------------------------->
Rate: ord income bracket 3           25%   -------------------------------------------------->
Rate: LTCG & QDI bracket 2           15%   -------------------------------------------------->
Floor: ord income bracket 2        9,325   -------------------------------------------------->
Floor: ord income bracket 3       37,950   -------------------------------------------------->
Floor: LTCG & QDI bracket 2       37,950   -------------------------------------------------->

Social Security Benefit           24,000   24,000   24,000   24,000   24,000   24,000   24,000
LTCG & QDI                         2,000    2,000    2,000    2,000    2,000    2,000    2,000
Non-SS Ordinary Income            10,400   11,000   16,817   20,000   31,811   32,892   38,706
SS Relevant Income                24,400   25,000   30,817   34,000   45,811   46,892   52,706
50% SS taxable                       -        -      2,908    4,500    4,500    4,500    4,500
85% SS taxable                       -        -        -        -     10,039   10,958   15,900
Total SS taxable                     -        -      2,908    4,500   14,539   15,458   20,400
Adjusted gross income             12,400   13,000   21,725   26,500   48,350   50,350   61,106
Deductions plus Exemptions        10,400   10,400   10,400   10,400   10,400   10,400   10,400
Taxable Income                     2,000    2,600   11,325   16,100   37,950   39,950   50,706
LTCG & QDI Taxable                 2,000    2,000    2,000    2,000    2,000    2,000    2,000
Ordinary income taxable              -        600    9,325   14,100   35,950   37,950   48,706

Taxable: ord income bracket 3        -        -        -        -        -        -     10,756
Taxable: ord income bracket 2        -        -        -      4,775   26,625   28,625   28,625
Taxable: ord income bracket 1        -        600    9,325    9,325    9,325    9,325    9,325
Taxable: LTCG & QDI bracket 2        -        -        -        -          0    2,000    2,000
Taxable: LTCG & QDI bracket 1      2,000    2,000    2,000    2,000    2,000      -        -  
Tax: ord income bracket 3            -        -        -        -        -        -      2,689
Tax: ord income bracket 2            -        -        -        716    3,994    4,294    4,294
Tax: ord income bracket 1            -         60      933      933      933      933      933
Tax: LTCG & QDI bracket 2            -        -        -        -          0      300      300
Total tax                            -         60      933    1,649    4,926    5,526    8,215

Increased non-SS ordinary income          600    5,817    3,183   11,811    1,081    5,814
Increased taxable SS                      -      2,908    1,592   10,039      919    4,942
Increased tax                              60      873      716    3,278      600    2,689
Marginal SS taxable                     0.00%   50.00%   50.00%   85.00%   85.00%   85.00%
Marginal tax rate                      10.00%   15.00%   22.50%   27.75%   55.50%   46.25%

Code: Select all

Social Security 50% threshhold    25,000   -------------------------------------------------->
Social Security 85% threshhold    34,000   -------------------------------------------------->
Rate: ord income bracket 1           10%   -------------------------------------------------->
Rate: ord income bracket 2           12%   -------------------------------------------------->
Rate: ord income bracket 3           22%   -------------------------------------------------->
Rate: LTCG & QDI bracket 2           15%   -------------------------------------------------->
Floor: ord income bracket 2        9,525   -------------------------------------------------->
Floor: ord income bracket 3       38,700   -------------------------------------------------->
Floor: LTCG & QDI bracket 2       38,600   -------------------------------------------------->

Social Security Benefit           24,000   24,000   24,000   24,000   24,000   24,000   24,000
LTCG & QDI                         2,000    2,000    2,000    2,000    2,000    2,000    2,000
Non-SS Ordinary Income            11,667   18,017   20,000   33,027   34,108   34,162   38,706
SS Relevant Income                25,667   32,017   34,000   47,027   48,108   48,162   52,706
50% SS taxable                       333    3,508    4,500    4,500    4,500    4,500    4,500
85% SS taxable                       -        -        -     11,073   11,992   12,038   15,900
Total SS taxable                     333    3,508    4,500   15,573   16,492   16,538   20,400
Adjusted gross income             14,000   23,525   26,500   50,600   52,600   52,700   61,106
Deductions plus Exemptions        12,000   12,000   12,000   12,000   12,000   12,000   12,000
Taxable Income                     2,000   11,525   14,500   38,600   40,600   40,700   49,106
LTCG & QDI Taxable                 2,000    2,000    2,000    2,000    2,000    2,000    2,000
Ordinary income taxable              -      9,525   12,500   36,600   38,600   38,700   47,106

Taxable: ord income bracket 3        -        -        -        -        -        -      8,406
Taxable: ord income bracket 2        -        -      2,975   27,075   29,075   29,175   29,175
Taxable: ord income bracket 1        -      9,525    9,525    9,525    9,525    9,525    9,525
Taxable: LTCG & QDI bracket 2        -        -        -        -      2,000    2,000    2,000
Taxable: LTCG & QDI bracket 1      2,000    2,000    2,000    2,000      -        -        -  
Tax: ord income bracket 3            -        -        -        -        -        -      1,849
Tax: ord income bracket 2            -        -        357    3,249    3,489    3,501    3,501
Tax: ord income bracket 1            -        953      953      953      953      953      953
Tax: LTCG & QDI bracket 2            -        -        -        -        300      300      300
Total tax                            -        953    1,310    4,202    4,742    4,754    6,603

Increased non-SS ordinary income        6,350    1,983   13,027    1,081       54    4,544
Increased taxable SS                    3,175      992   11,073      919       46    3,862
Increased tax                             953      357    2,892      540       12    1,849
Marginal SS taxable                    50.00%   50.00%   85.00%   85.00%   85.00%   85.00%
Marginal tax rate                      15.00%   18.00%   22.20%   49.95%   22.20%   40.70%
  1. You can also generate the graph by entering the following in cells B1: B9 on the Main sheet of my spreadsheet:

    Code: Select all

    Row       Col A                        Col B
    ---  -----------------------------    ------
      1  Tax year                           2018
      2  Single or Joint Return           Single
      3  Number filers age 65 or older         0
      4  Tax exempt interest                   0  
      5  Non-SS Ordinary Income           <blank>
      6  LTCG & QDI                        2,000 
      7  Social Security Benefit          24,000 
      8  Deductions                       <blank>
      9  Exemption                        <blank>
  2. In 2017 the last dollar of QDI will be taxed at the same point where ordinary income goes from the 15% to 25% brackets. But in 2018 all of QDI will have been taxed just before ordinary income moves from the 12% to 22% brackets. This makes the marginal rate drop from 49.95% to 22.20% before jumping up to 40.70%. This arises because of a $100 difference in the 22% ordinary income tax bracket ($38,700) and the 15% LTCG/QDI tax bracket ($38,600). (See this 2018 Tax Rate Table in the Wiki.)

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Watty
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Re: Social Security “Hump” and the new tax rates???

Post by Watty » Sun Jan 14, 2018 11:12 pm

FiveK wrote:
Sat Jan 13, 2018 8:41 pm
Watty wrote:
Sat Jan 13, 2018 7:51 pm
FiveK wrote:
Fri Jan 12, 2018 10:47 pm
One may generate similar charts using the personal finance toolbox spreadsheet. E.g., for a single 64 year old with $24K SS benefit and $2K in qualified dividends:
I looked at that link but I could not find the a graph like that. Where was that?
The graph is on the 'Calculations' tab, starting ~cell F81. The spreadsheet cell values I used:
G2 = 1
G8 = 64
B38 = 24000
D25 = 2000

The follow the instruction on the 'Instructions' sheet, ~rows 19-35, to use D31 as the "Column input cell:" for the data table that feeds the graph. The data table is outlined in bold, cells P82:R583, to make it easy to select.

Also set cell P82 = 100, and adjusted the y-axis scale on the chart to get the version posted.

If one is familiar with Excel data tables, this is all straightforward. If not, it's one of those things that may appear very complex at first, but once done a time or two is straightforward after all.

Any questions about the above, just ask. I can probably handle those. Detailed questions (or suggestions) may be best put on the MMM site where the tool is hosted. I believe @nolesrule mentioned getting a quick response there for something.
Thanks for that information but I was not able to get it working so I will just calculate a few points manually.

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FiveK
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Re: Social Security “Hump” and the new tax rates???

Post by FiveK » Mon Jan 15, 2018 12:24 am

Watty wrote:
Sun Jan 14, 2018 11:12 pm
Thanks for that information but I was not able to get it working so I will just calculate a few points manually.
Hmmm. If it's unclear to you, it's probably unclear to others. That's unfortunate, because for some situations seeing a wider view can be more helpful than seeing only a few points, and this (or similar) tools can be useful in showing that view.

If you are trying this in a non-Excel (e.g., Google Sheets, etc.) spreadsheet, that's out of my ken and if interested you may want to ask on the MMM forum. But if you are using Excel it "should" be doable.

Could you clarify where things seem to go awry?

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kramer
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Re: Social Security “Hump” and the new tax rates???

Post by kramer » Mon Jan 15, 2018 8:22 am

I was able to download the latest MarginalRate spreadsheet from Number Cruncher's site last week (thanks so much!). However, to get it to work in Libre Office, I had to download the very latest version of Libre Office (5.4.4.2), it didn't work with an earlier version that was, I think, less than a year old. It was a formatting issue. I have run into this with other Excel worksheets and I had to add a space in each equation field ... but all worked fine with the latest Libre Office with no formatting changes.

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Watty
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Re: Social Security “Hump” and the new tax rates???

Post by Watty » Mon Jan 15, 2018 8:41 am

FiveK wrote:
Mon Jan 15, 2018 12:24 am
Could you clarify where things seem to go awry?
I tried it in Google sheets then Libreoffice and it was not showing any lines on the graph. It could be the version like the last post mentioned but I was able to figure out what I needed manually so I am not going to spend any more time trying to get it to work.

I would have thought that someone would have a website with a calculator that generates that graph but I was not able to find one.

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FiveK
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Re: Social Security “Hump” and the new tax rates???

Post by FiveK » Mon Jan 15, 2018 12:28 pm

Watty wrote:
Mon Jan 15, 2018 8:41 am
I tried it in Google sheets then Libreoffice and it was not showing any lines on the graph.
Thanks, the difference in programs probably explains it.

Alan S.
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Re: Social Security “Hump” and the new tax rates???

Post by Alan S. » Mon Jan 15, 2018 12:34 pm

In 2017 the last dollar of QDI will be taxed at the same point where ordinary income goes from the 15% to 25% brackets. But in 2018 all of QDI will have been taxed just before ordinary income moves from the 12% to 22% brackets. This makes the marginal rate drop from 49.95% to 22.20% before jumping up to 40.70%. This arises because of a $100 difference in the 22% ordinary income tax bracket ($38,700) and the 15% LTCG/QDI tax bracket ($38,600). (See this 2018 Tax Rate Table in the Wiki.)
There is speculation that this minor deviation will be eliminated by a technical correction of the tax bill to restore conformity with the QDI 0 rate and the top of the 12% bracket. That would simplify various charts and presentations.

The question is when we will know. There will probably be several technical corrections done as a package, so completing the package will take time. Further, since the 0 rate for QDIs will have to be raised, there will be a tax revenue cost to be absorbed.

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