Fun with Progressive Taxes--can you check my math?

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cresive
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Fun with Progressive Taxes--can you check my math?

Post by cresive » Mon Apr 13, 2020 7:40 pm

I hope I have posted this in the correct section. I have been trying to learn tax-friendly withdrawal strategies for when I reach retirement. I am just learning this, so I wanted to see if I am off base, or actually doing the math correctly. I have created a real-life scenario, using today's tax brackets and standard tax deduction. In this scenario, I will have three account from which to fund my retirement: Tax-deferred (TDA: IRA, 401K, etc), Tax excluded (TEA: Roth, etc.) and taxable.

Here it goes:

Given: tax brackets:
10% <$9,700
12% <$39,475
22% <84,200
24% <160725
Standard Deduction $12,000
SSA Benefit $25,000/year

Problem: I want $60,000 yearly income but do so tax efficiently. How do I make $60K but taxed at 12% rate?

Method: Take TDA funds until reach limit of 12% tax rate. With standard deduction, can make $39,500 + $12,000 or $51,475 and still have an AGI within 12% tax rate.
Withdraw funds from TDA account to reach $51,475– SSA Benefits. Therefore, can take $51,475 - $25,000 or withdraw $26,475 from TDA savings. Will need to make the rest using brokerage or TEA money. Will need $60,000 - $51,475 or $8,525 from taxable/Roth account.

How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed. Therefore, in my above scenario (pretending the SSA limit is $39,500 to keep the math simple), I only have $12,500 SSA benefits taxed. So reported income is $39,500 - $12,000 or $27,000, so technically I can take another $12,500 out of my TDA without incurring additional taxes.


So, with my reported income level or $39,450, I am really making:
SSA Benefit $25,000
TDA Withdrawal ($26,475 + 12,500) or $38,475
To equal $63, 475. So, I have essentially made my desired $60,000 income before I actually touch my taxable account. I am therefore free to tap these accounts for extras that I didn't include in my $60,000 income.

Does real life work this way, or am I making an incorrect assumption?

Thanks,
Ben

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Re: Fun with Progressive Taxes--can you check my math?

Post by niceguy7376 » Mon Apr 13, 2020 7:57 pm

I am not an expert to look at the calculations but I have a question.
What will be the RMDs that you need to take - Was this considered in your calculation?

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Mon Apr 13, 2020 8:02 pm

niceguy7376 wrote:
Mon Apr 13, 2020 7:57 pm
I am not an expert to look at the calculations but I have a question.
What will be the RMDs that you need to take - Was this considered in your calculation?
No, I haven't factored in any RMDs. I am just trying to get a grasp on the tax implications. This scenario will be for year 1 of retirement and well before RMDs would kick in. If my calculations are correct, I plan to work them out for multiple years and then RMDs will factor in. Baby steps for me though.

Ben

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Re: Fun with Progressive Taxes--can you check my math?

Post by Flobes » Mon Apr 13, 2020 8:09 pm

cresive wrote:
Mon Apr 13, 2020 7:40 pm
Standard Deduction $12,000
Standard deduction is increased by $1650 for those 65+ in 2020.

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Re: Fun with Progressive Taxes--can you check my math?

Post by dodecahedron » Mon Apr 13, 2020 8:13 pm

cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is not correct.

The amount of your SSA that is taxed does NOT depend on your taxable income. Taxable income depends on many factors that are quite irrelevant/orthogonal to the income concept that determines how much of your SS is taxable.

The income concept used in determining how much of your SS benefits are taxable is the sum of the following three components:
  • one half of your SS benefits
  • all of your non-SS gross income subject to taxation (e.g., wages, unemployment, dividends, interest, capital gains, self-employment income, taxable pensions, traditional IRA distributions, etc.)
  • your tax-exempt interest payments (i.e., muni bond interest)
If the above sum is between $25K and $34K and your filing status is single, then up to 50% of your SS benefits can be taxable.

If the above sum exceeds $34K and your filing status is single, then up to 85% of your SS benefits can be taxable.

More information here:

https://www.irs.gov/publications/p915

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Re: Fun with Progressive Taxes--can you check my math?

Post by kaneohe » Mon Apr 13, 2020 8:31 pm

You can use a calculator like this https://www.mortgagecalculator.org/calc ... ulator.php
to calculate the taxable part of SS.

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Re: Fun with Progressive Taxes--can you check my math?

Post by 02nz » Mon Apr 13, 2020 8:40 pm

Try TaxCaster: https://turbotax.intuit.com/tax-tools/c ... taxcaster/

But keep in mind tax brackets are indexed for inflation, so if you're projecting taxes far out in the future, use today's dollars for income.

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Re: Fun with Progressive Taxes--can you check my math?

Post by grabiner » Mon Apr 13, 2020 9:42 pm

cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is a common but incorrect characterization of the rule. If half of SS plus other income is less than $34,000, "up to 50%" the benefit is taxable, and if it is more than that, "up to 85%" may be taxable, Many articles ignore the "up to", and even the text in the IRS publication is not clear (although the worksheet is correct).

The correct formula is in Taxation of Social Security benefits on the wiki. If the number is between $25,000 and $34,000, every additional $1 of income makes 50 cents of SS taxable, so at $34,000, only $4500 of SS is taxable. Beyond that point, every additional $1 makes 85 cents of SS taxable, with a maximum of 85% of the total benefit being taxable.
Wiki David Grabiner

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Re: Fun with Progressive Taxes--can you check my math?

Post by kaneohe » Mon Apr 13, 2020 10:52 pm

grabiner wrote:
Mon Apr 13, 2020 9:42 pm
...........................................................

The correct formula is in Taxation of Social Security benefits on the wiki. If the number is between $25,000 and $34,000, every additional $1 of income makes 50 cents of SS taxable, so at $34,000, only $4500 of SS is taxable. Beyond that point, every additional $1 makes 85 cents of SS taxable, with a maximum of 85% of the total benefit being taxable.
SS=6K; other income 31K..................up to 4.5K of SS is taxable limited to 50% of SS = 3K?
The calculators will always get it.

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Re: Fun with Progressive Taxes--can you check my math?

Post by #Cruncher » Tue Apr 14, 2020 5:30 am

grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 6:50 am

Flobes wrote:
Mon Apr 13, 2020 8:09 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
Standard Deduction $12,000
Standard deduction is increased by $1650 for those 65+ in 2020.
Even Better, Thanks!!

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 6:53 am

dodecahedron wrote:
Mon Apr 13, 2020 8:13 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is not correct.

The amount of your SSA that is taxed does NOT depend on your taxable income. Taxable income depends on many factors that are quite irrelevant/orthogonal to the income concept that determines how much of your SS is taxable.

The income concept used in determining how much of your SS benefits are taxable is the sum of the following three components:
  • one half of your SS benefits
  • all of your non-SS gross income subject to taxation (e.g., wages, unemployment, dividends, interest, capital gains, self-employment income, taxable pensions, traditional IRA distributions, etc.)
  • your tax-exempt interest payments (i.e., muni bond interest)
If the above sum is between $25K and $34K and your filing status is single, then up to 50% of your SS benefits can be taxable.

If the above sum exceeds $34K and your filing status is single, then up to 85% of your SS benefits can be taxable.

More information here:

https://www.irs.gov/publications/p915
I don't understand how my calculations are different from your presentation? If I add $12,500 (half SSA benefits) plus my TDA withdrawals up to the limit, then half my SSA benefits do not figure into my wages that are taxable. That is what I was saying, with the correction that I used $39K to keep the math simple.

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 6:57 am

kaneohe wrote:
Mon Apr 13, 2020 8:31 pm
You can use a calculator like this https://www.mortgagecalculator.org/calc ... ulator.php
to calculate the taxable part of SS.
This is a fun tool. Thanks for the link!!

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 7:01 am

grabiner wrote:
Mon Apr 13, 2020 9:42 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is a common but incorrect characterization of the rule. If half of SS plus other income is less than $34,000, "up to 50%" the benefit is taxable, and if it is more than that, "up to 85%" may be taxable, Many articles ignore the "up to", and even the text in the IRS publication is not clear (although the worksheet is correct).

The correct formula is in Taxation of Social Security benefits on the wiki. If the number is between $25,000 and $34,000, every additional $1 of income makes 50 cents of SS taxable, so at $34,000, only $4500 of SS is taxable. Beyond that point, every additional $1 makes 85 cents of SS taxable, with a maximum of 85% of the total benefit being taxable.

Thank you for the clarification!! I think this is an important nuance I did not consider. I will have to incorporate this into my calculations. From a quick read, it looks like I may be better off than my original estimates.

Ben

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 7:05 am

grabiner wrote:
Mon Apr 13, 2020 9:42 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is a common but incorrect characterization of the rule. If half of SS plus other income is less than $34,000, "up to 50%" the benefit is taxable, and if it is more than that, "up to 85%" may be taxable, Many articles ignore the "up to", and even the text in the IRS publication is not clear (although the worksheet is correct).

The correct formula is in Taxation of Social Security benefits on the wiki. If the number is between $25,000 and $34,000, every additional $1 of income makes 50 cents of SS taxable, so at $34,000, only $4500 of SS is taxable. Beyond that point, every additional $1 makes 85 cents of SS taxable, with a maximum of 85% of the total benefit being taxable.
I am trying to make sure I understand your information. So the correct I need to make is this: If my SSA benefits are $25K, AND I begin to withdraw from my TDA, there is a ramp up of taxes. If I withdraw $5000, to give me a total of $30K in income, I am actually taxed on my TA $5K, plus $0.50/$1 of SSA benefits that are part of the extra $5K income over the $25,000 limit. So I may be taxed on $7,500 of income?

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 7:07 am

#Cruncher wrote:
Tue Apr 14, 2020 5:30 am
grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.

Thank you! This actually clarifies a lot, after reading a previous post. It looks like it is much more complicated than simple arithmetic. I guess I know what I will be working through for the rest of my Covid-19 isolation.

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 7:50 am

#Cruncher wrote:
Tue Apr 14, 2020 5:30 am
grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.

I am confused about the marginal tax increase around $36,730. Does anyone have an idea of why this bubble exists?

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Re: Fun with Progressive Taxes--can you check my math?

Post by teen persuasion » Tue Apr 14, 2020 8:17 am

cresive wrote:
Tue Apr 14, 2020 7:50 am
#Cruncher wrote:
Tue Apr 14, 2020 5:30 am
grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.

I am confused about the marginal tax increase around $36,730. Does anyone have an idea of why this bubble exists?
Every extra dollar withdrawn from an IRA is taxed at your marginal rate (22% here) PLUS that extra dollar pushes up the taxation on your SS (adds another .85 that is newly taxed). Eventually you reach the point that fully 85% of your SS is included in taxable income, and the rate reverts back to 22%.

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 8:40 am

teen persuasion wrote:
Tue Apr 14, 2020 8:17 am
cresive wrote:
Tue Apr 14, 2020 7:50 am
#Cruncher wrote:
Tue Apr 14, 2020 5:30 am
grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.
thanks


I am confused about the marginal tax increase around $36,730. Does anyone have an idea of why this bubble exists?
Every extra dollar withdrawn from an IRA is taxed at your marginal rate (22% here) PLUS that extra dollar pushes up the taxation on your SS (adds another .85 that is newly taxed). Eventually you reach the point that fully 85% of your SS is included in taxable income, and the rate reverts back to 22%.

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Re: Fun with Progressive Taxes--can you check my math?

Post by grabiner » Tue Apr 14, 2020 9:13 am

cresive wrote:
Tue Apr 14, 2020 7:50 am
#Cruncher wrote:
Tue Apr 14, 2020 5:30 am
grabiner wrote:
Mon Apr 13, 2020 9:42 pm
The correct formula [for determining how much of SS benefits are taxable] is in Taxation of Social Security benefits on the wiki.
This Wiki article is well worth reading. I modified its table of a single tax return for the original poster's case of $25,000 in SS benefits. I also added two columns showing the tax if all non-SS income is ordinary income (i.e., no qualified dividends or long term capital gains) and the after tax income (non-SS income plus $25,000 SS benefit minus tax).

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed                      After
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal              Tax
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate     Tax   Income
------   -------    ------    ------  -------  ---------  --------   -----   ------
12,500         0    12,500         0       0%       0.50      0.0%       0   37,500
13,533       517    14,050         0      10%       0.50     15.0%       0   38,533
20,117     3,808    23,925     9,875      12%       0.50     18.0%     988   44,129
21,500     4,500    26,000    11,950      12%       0.85     22.2%   1,237   45,264
36,730    17,445    54,175    40,125      22%       0.85     40.7%   4,618   57,112
41,206    21,250    62,456    48,406      22%       0.00     22.0%   6,439   59,767
For example, a withdrawal of $41,206 from an IRA plus the $25,000 in SS will net $59,767 after $6,439 of tax. This is almost the $60,000 target in the original post. At this point one has passed through the 40.7% "hump" and the maximum 85% of SS has become taxable.

I prepared this table using the "Wiki" sheet of my Marginal Tax Rates spreadsheet. The "Main" sheet shows the marginal tax rates graphically, and the "Retire" sheet computes the IRA withdrawal needed to fund a specified amount of after tax spending.

I am confused about the marginal tax increase around $36,730. Does anyone have an idea of why this bubble exists?
The marginal tax rate increases because the tax bracket itself increases. In this income range, every $1 of ordinary income makes 85 cents of SS taxable, so your marginal tax rate is 1.85 times your tax bracket. When the tax bracket increases from 12% to 22%, the marginal tax rate increases from 1.85x12%=22.2% to 1.85x22%=40.7%.

The bottom row is what happens after the phase-in of SS is finished. At that point, your marginal tax rate is just your tax bracket, so it goes back down to 22%.
Wiki David Grabiner

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Re: Fun with Progressive Taxes--can you check my math?

Post by kaneohe » Tue Apr 14, 2020 9:17 am

22% (1 + 0.85) = 40.7%. 1 is the extra dollar of ordinary income added; 0.85 is the extra SS taxed.

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cresive
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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Tue Apr 14, 2020 11:39 am

kaneohe wrote:
Tue Apr 14, 2020 9:17 am
22% (1 + 0.85) = 40.7%. 1 is the extra dollar of ordinary income added; 0.85 is the extra SS taxed.
Thanks. Funny how this works

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FiveK
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Re: Fun with Progressive Taxes--can you check my math?

Post by FiveK » Tue Apr 14, 2020 2:01 pm

cresive wrote:
Mon Apr 13, 2020 7:40 pm
Problem: I want $60,000 yearly income but do so tax efficiently. How do I make $60K but taxed at 12% rate?
As described by previous posts, that can't be done within the constraints given. :(

In picture form, the tax rates on tIRA withdrawals in 2020 for a single filer age 65+ with $25K SS benefit are
Image
cresive wrote:
Mon Apr 13, 2020 7:40 pm
I am just learning this, so I wanted to see if I am off base, or actually doing the math correctly.
If you are using a home grown spreadsheet, you might be able to take some of the formulas in the personal finance toolbox spreadsheet that was used to generate the chart above. $41,505 is the number I got, but if you have significant taxable interest, dividends, etc., those should be included in the mix.

Having your own spreadsheet that predicts your own tax situation well is a useful tool. :)

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dodecahedron
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Re: Fun with Progressive Taxes--can you check my math?

Post by dodecahedron » Wed Apr 15, 2020 8:20 am

cresive wrote:
Tue Apr 14, 2020 6:53 am
dodecahedron wrote:
Mon Apr 13, 2020 8:13 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is not correct.

The amount of your SSA that is taxed does NOT depend on your taxable income. Taxable income depends on many factors that are quite irrelevant/orthogonal to the income concept that determines how much of your SS is taxable.

The income concept used in determining how much of your SS benefits are taxable is the sum of the following three components:
  • one half of your SS benefits
  • all of your non-SS gross income subject to taxation (e.g., wages, unemployment, dividends, interest, capital gains, self-employment income, taxable pensions, traditional IRA distributions, etc.)
  • your tax-exempt interest payments (i.e., muni bond interest)
If the above sum is between $25K and $34K and your filing status is single, then up to 50% of your SS benefits can be taxable.

If the above sum exceeds $34K and your filing status is single, then up to 85% of your SS benefits can be taxable.

More information here:

https://www.irs.gov/publications/p915
I don't understand how my calculations are different from your presentation? If I add $12,500 (half SSA benefits) plus my TDA withdrawals up to the limit, then half my SSA benefits do not figure into my wages that are taxable. That is what I was saying, with the correction that I used $39K to keep the math simple.
You wrote of ¨taxable income¨ needing to be less than $34K to qualify for SS benefits to be excluded from taxation. Taxable income is defined completely differently from my definition above. Taxable income is defined as AGI minus standard or itemized deductions minus Qualified Business Income deduction.

Many folks incorrectly think that everything that they can do to affect their ¨taxable income¨ (e.g., increasing itemized deductions, having QBI) will affect the amount of their SS subject to income tax. This is not true.

So I was objecting to your use of the term taxable income. The income concept defined above is quite distinct and different from your taxable income. Taxable income can be either more or less than the income concept I defined above.

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Re: Fun with Progressive Taxes--can you check my math?

Post by cresive » Wed Apr 15, 2020 8:39 am

dodecahedron wrote:
Wed Apr 15, 2020 8:20 am
cresive wrote:
Tue Apr 14, 2020 6:53 am
dodecahedron wrote:
Mon Apr 13, 2020 8:13 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
How will SSA benefits be taxed?
If taxable income is < $34,000, then only half SSA benefits are taxed.
This is not correct.

The amount of your SSA that is taxed does NOT depend on your taxable income. Taxable income depends on many factors that are quite irrelevant/orthogonal to the income concept that determines how much of your SS is taxable.

The income concept used in determining how much of your SS benefits are taxable is the sum of the following three components:
  • one half of your SS benefits
  • all of your non-SS gross income subject to taxation (e.g., wages, unemployment, dividends, interest, capital gains, self-employment income, taxable pensions, traditional IRA distributions, etc.)
  • your tax-exempt interest payments (i.e., muni bond interest)
If the above sum is between $25K and $34K and your filing status is single, then up to 50% of your SS benefits can be taxable.

If the above sum exceeds $34K and your filing status is single, then up to 85% of your SS benefits can be taxable.

More information here:

https://www.irs.gov/publications/p915
I don't understand how my calculations are different from your presentation? If I add $12,500 (half SSA benefits) plus my TDA withdrawals up to the limit, then half my SSA benefits do not figure into my wages that are taxable. That is what I was saying, with the correction that I used $39K to keep the math simple.
You wrote of ¨taxable income¨ needing to be less than $34K to qualify for SS benefits to be excluded from taxation. Taxable income is defined completely differently from my definition above. Taxable income is defined as AGI minus standard or itemized deductions minus Qualified Business Income deduction.

Many folks incorrectly think that everything that they can do to affect their ¨taxable income¨ (e.g., increasing itemized deductions, having QBI) will affect the amount of their SS subject to income tax. This is not true.

So I was objecting to your use of the term taxable income. The income concept defined above is quite distinct and different from your taxable income. Taxable income can be either more or less than the income concept I defined above.
Thank you for the clarification. I think I had many misconceptions at the beginning.

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teen persuasion
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Re: Fun with Progressive Taxes--can you check my math?

Post by teen persuasion » Wed Apr 15, 2020 8:53 am

FiveK wrote:
Tue Apr 14, 2020 2:01 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
Problem: I want $60,000 yearly income but do so tax efficiently. How do I make $60K but taxed at 12% rate?
As described by previous posts, that can't be done within the constraints given. :(
The OP mentioned Roth and taxable assets. Why can't it be done, if OP uses Roth withdrawals to make up some of the required total?

The taxable account is more problematic. I'm guessing OP wants to make withdrawals in the 0% LTCG bracket (the requirement to remain within the 12% tax bracket), but doesn't realize that any taxable income both increases taxable SS and fills up part of the 12% bracket space. Even if OP doesn't withdraw/spend from taxable, dividends and CG from mutual funds increase the total income used to calculate how much SS is taxable (even if those div/CG are ultimately taxed at 0%).

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Re: Fun with Progressive Taxes--can you check my math?

Post by Dottie57 » Wed Apr 15, 2020 9:04 am

cresive wrote:
Tue Apr 14, 2020 6:57 am
kaneohe wrote:
Mon Apr 13, 2020 8:31 pm
You can use a calculator like this https://www.mortgagecalculator.org/calc ... ulator.php
to calculate the taxable part of SS.
This is a fun tool. Thanks for the link!!
+1 . Love that it displays taxable SS at the end.

MathWizard
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Re: Fun with Progressive Taxes--can you check my math?

Post by MathWizard » Wed Apr 15, 2020 9:13 am

Look at the results from i-orp.com .
This can give you a year to year plan which you can compare to yours. It includes taxes, at least federal.

It no longer does Roth conversions in the years before you take SS benefits. In my own calculations I saw that delaying SS to 70, drawing down tax deferred before 70, and converting some tax deferred to Roth up to the top of the 12% bracket (later 15%) .
This lessens the amount of taxable income in the calculation when you take SS.

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FiveK
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Re: Fun with Progressive Taxes--can you check my math?

Post by FiveK » Wed Apr 15, 2020 11:31 am

teen persuasion wrote:
Wed Apr 15, 2020 8:53 am
FiveK wrote:
Tue Apr 14, 2020 2:01 pm
cresive wrote:
Mon Apr 13, 2020 7:40 pm
Problem: I want $60,000 yearly income but do so tax efficiently. How do I make $60K but taxed at 12% rate?
As described by previous posts, that can't be done within the constraints given. :(
The OP mentioned Roth and taxable assets. Why can't it be done, if OP uses Roth withdrawals to make up some of the required total?
Yes, it can be done at 0% in a given year if one takes everything from Roth. As others have noted, the actual marginal rates on tIRA withdrawals can be >>12% for some amounts, so the summary in the OP is what "can't be done."

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FiveK
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Re: Fun with Progressive Taxes--can you check my math?

Post by FiveK » Wed Apr 15, 2020 11:35 am

MathWizard wrote:
Wed Apr 15, 2020 9:13 am
It no longer does Roth conversions in the years before you take SS benefits.
That's correct if one uses the version that Excludes IRA to Roth IRA conversions.

The Extended version will do Roth conversions as it sees appropriate.

MathWizard
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Re: Fun with Progressive Taxes--can you check my math?

Post by MathWizard » Wed Apr 15, 2020 1:25 pm

FiveK wrote:
Wed Apr 15, 2020 11:35 am
MathWizard wrote:
Wed Apr 15, 2020 9:13 am
It no longer does Roth conversions in the years before you take SS benefits.
That's correct if one uses the version that Excludes IRA to Roth IRA conversions.

The Extended version will do Roth conversions as it sees appropriate.
Thanks I guess:
EXTENDED ORP: Retirement Planning for Nerds
applies to me.

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