help to understand SS benefit tax calculation

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Chronos
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help to understand SS benefit tax calculation

Post by Chronos »

Hi Bogleheads,

I have trouble to understand the SS tax calculation on wiki https://www.bogleheads.org/wiki/Taxatio ... boundaries, particularly the marked row in this table. Can anyone explain how "Taxable SS" and "Adjusted gross income" are calculated on row 3? Thanks!

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Carl53
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Re: help to understand SS benefit tax calculation

Post by Carl53 »

The link has pertinent information right above the portion that you posted.
Single taxpayers:

If you are single and receive $20,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $15,000.
For every dollar between $15,000 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 $38,706, which makes the maximum $17,000 taxable.
The table below assumes that you take the standard deduction ($14,050 for a taxpayer over 65)
The taxable SS of $2975 is what it would be if you had $5950 of SS benefits and had $20950 of other income. (20950-15000)*.5= 2975
The adjusted gross is the sum of the taxable SS and other taxable income.
Taxable income is the adjusted gross less the standard deduction.
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Re: help to understand SS benefit tax calculation

Post by kaneohe »

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Re: help to understand SS benefit tax calculation

Post by #Cruncher »

Chronos wrote: Sun Sep 06, 2020 3:18 pmCan anyone explain how "Taxable SS" and "Adjusted gross income" are calculated on row 3?
According to the Wiki's formula:
The relevant income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50% of your Social Security benefits. ...

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.
Here it is illustrated for rows 3 and 5 of your table:

Code: Select all

Non-SS Ordinary Income     20,950    37,879
Social Security Benefit    20,000    20,000
"Relevant" Income          30,950    47,879 = non SS + 1/2 SS

Excess over $25,000 base    5,950     9,000 (up to $34,000 base)
50% SS taxable              2,975     4,500 (up to max 50% of SS benefit)

Excess over $34,000 base        0    13,879
85% SS taxable                  0    11,797

Total SS taxable            2,975    16,297 (up to max 85% of SS benefit)
Adjusted gross income      23,925    54,176
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grabiner
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Re: help to understand SS benefit tax calculation

Post by grabiner »

kaneohe wrote: Sun Sep 06, 2020 3:54 pm https://www.irs.gov/pub/irs-pdf/p915.pdf use this wksht
That worksheet is hard to follow, which is why the wiki page exists, rather than just a link to the worksheet. Line 16 of the worksheet tells you to compute 85% of the value on Line 12, and that amount is taxable, but it doesn't explain what the amount on Line 12 is. In order to figure it out, you have to work through the algebra: X=ordinary income, Y=SS income, Line 1=Y, Line 2=Y/2, Line 3=X, ..., Line 12=(X+Y/2)-34000, Line 16=.85*((X+Y/2)-34000).

The reason the highlighted line exists is the tax bracket boundary. For the example single taxpayer, the boundary between the 10% and 12% tax brackets is in the middle of the 50% phase-in range. Every dollar of income on either side of $20950 makes 50 cents of SS taxable, and thus increases your taxable income by $1.50. Since the tax bracket is 10% below taxable income of $9875 and 12% above $9875, the marginal tax rates in both ranges are 1.5 times the tax bracket, which are 15% and 18%.
Wiki David Grabiner
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Chronos
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Re: help to understand SS benefit tax calculation

Post by Chronos »

Thanks a lot, everyone. A few more questions:

1. For row 3, the SS tax would be = 9874*10% = 1* 12%?
For row 5, the SS tax would be = 9874*10% + (14450 -9874)*12% ?
This is only tax for SS benefit? you will still need to pay regular fed tax for Non-SS income? For example, for row 3, besides the SS tax calculated by above formula, you still need to pay fed tax for the $20950 Non-SS income based on 12% bracket?

2.I thought the final SS tax would be calculated by the "Tax bracket". what's the "Marginal tax rate" here for?
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Re: help to understand SS benefit tax calculation

Post by grabiner »

Chronos wrote: Sun Sep 06, 2020 4:57 pm Thanks a lot, everyone. A few more questions:

1. For row 3, the SS tax would be = 9874*10% = 1* 12%?
For row 5, the SS tax would be = 9874*10% + (14450 -9874)*12% ?
This is only tax for SS benefit? you will still need to pay regular fed tax for Non-SS income? For example, for row 3, besides the SS tax calculated by above formula, you still need to pay fed tax for the $20950 Non-SS income based on 12% bracket?

2.I thought the final SS tax would be calculated by the "Tax bracket". what's the "Marginal tax rate" here for?
The SS taxation formula is used to determine how much of your SS is counted in your income for tax purposes. You have a gross income, which includes both ordinary income and the taxable portion of SS. You then subtract the standard deduction to get your taxable income. Thus, on line 3, you have $20,950 of ordinary income, and the SS taxation formula makes $2975 of SS taxable, so your gross income is $23,925. Since you have a $14,050 standard deduction, your taxable income is $9875, and you use the standard tax formula to compute $988 as the tax on that income.

The reason for the "marginal tax rate" column is to show the influence of the SS phase-in on your taxes, which is important in making investment decisions. The marginal tax rate is the percentage of the last dollar of income received that is paid in tax, while the tax bracket is the percentage of the last dollar of taxable income on your tax form that is paid in tax.

Suppose that you have $20,950 in income for the year, and you need to withdraw another $1000. If you withdraw this from a traditional IRA, that creates $1000 of taxable non-SS income. The phase-in means that another $500 of SS becomes taxable, so your taxable income increases by $1500. Since you are in the 12% tax bracket, your tax increases by $180, which is 18% of the ordinary income. You can use this to decide whether it is better to withdraw from a traditional or Roth IRA, or better to do the withdrawal this year or next year (when you may have a different marginal tax rate).

(edited to correct definition; marginal tax rate is tax on last dollar)
Last edited by grabiner on Sun Sep 06, 2020 11:09 pm, edited 1 time in total.
Wiki David Grabiner
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Chronos
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Re: help to understand SS benefit tax calculation

Post by Chronos »

grabiner wrote: Sun Sep 06, 2020 6:00 pm
Chronos wrote: Sun Sep 06, 2020 4:57 pm Thanks a lot, everyone. A few more questions:

1. For row 3, the SS tax would be = 9874*10% = 1* 12%?
For row 5, the SS tax would be = 9874*10% + (14450 -9874)*12% ?
This is only tax for SS benefit? you will still need to pay regular fed tax for Non-SS income? For example, for row 3, besides the SS tax calculated by above formula, you still need to pay fed tax for the $20950 Non-SS income based on 12% bracket?

2.I thought the final SS tax would be calculated by the "Tax bracket". what's the "Marginal tax rate" here for?
The SS taxation formula is used to determine how much of your SS is counted in your income for tax purposes. You have a gross income, which includes both ordinary income and the taxable portion of SS. You then subtract the standard deduction to get your taxable income. Thus, on line 3, you have $20,950 of ordinary income, and the SS taxation formula makes $2975 of SS taxable, so your gross income is $23,925. Since you have a $14,050 standard deduction, your taxable income is $9875, and you use the standard tax formula to compute $988 as the tax on that income.

The reason for the "marginal tax rate" column is to show the influence of the SS phase-in on your taxes, which is important in making investment decisions. The marginal tax rate is the percentage of every dollar of income received that is paid in tax, while the tax bracket is the percentage of every dollar of taxable income on your tax form that is paid in tax.

Suppose that you have $20,950 in income for the year, and you need to withdraw another $1000. If you withdraw this from a traditional IRA, that creates $1000 of taxable non-SS income. The phase-in means that another $500 of SS becomes taxable, so your taxable income increases by $1500. Since you are in the 12% tax bracket, your tax increases by $180, which is 18% of the ordinary income. You can use this to decide whether it is better to withdraw from a traditional or Roth IRA, or better to do the withdrawal this year or next year (when you may have a different marginal tax rate).
Excellent explanation, grabiner! I finally understand it. Thank you!!!
Topic Author
Chronos
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Re: help to understand SS benefit tax calculation

Post by Chronos »

Above posts have already explained the calculations in details. Should be enough to understand and follow. Here is another article with detailed example just in case it might help anyone who are as confused as I was.

https://www.kitces.com/blog/the-taxatio ... 027.75%25!
marcopolo
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Re: help to understand SS benefit tax calculation

Post by marcopolo »

grabiner wrote: Sun Sep 06, 2020 6:00 pm
Chronos wrote: Sun Sep 06, 2020 4:57 pm Thanks a lot, everyone. A few more questions:

1. For row 3, the SS tax would be = 9874*10% = 1* 12%?
For row 5, the SS tax would be = 9874*10% + (14450 -9874)*12% ?
This is only tax for SS benefit? you will still need to pay regular fed tax for Non-SS income? For example, for row 3, besides the SS tax calculated by above formula, you still need to pay fed tax for the $20950 Non-SS income based on 12% bracket?

2.I thought the final SS tax would be calculated by the "Tax bracket". what's the "Marginal tax rate" here for?
The SS taxation formula is used to determine how much of your SS is counted in your income for tax purposes. You have a gross income, which includes both ordinary income and the taxable portion of SS. You then subtract the standard deduction to get your taxable income. Thus, on line 3, you have $20,950 of ordinary income, and the SS taxation formula makes $2975 of SS taxable, so your gross income is $23,925. Since you have a $14,050 standard deduction, your taxable income is $9875, and you use the standard tax formula to compute $988 as the tax on that income.

The reason for the "marginal tax rate" column is to show the influence of the SS phase-in on your taxes, which is important in making investment decisions. The marginal tax rate is the percentage of every dollar of income received that is paid in tax, while the tax bracket is the percentage of every dollar of taxable income on your tax form that is paid in tax.

Suppose that you have $20,950 in income for the year, and you need to withdraw another $1000. If you withdraw this from a traditional IRA, that creates $1000 of taxable non-SS income. The phase-in means that another $500 of SS becomes taxable, so your taxable income increases by $1500. Since you are in the 12% tax bracket, your tax increases by $180, which is 18% of the ordinary income. You can use this to decide whether it is better to withdraw from a traditional or Roth IRA, or better to do the withdrawal this year or next year (when you may have a different marginal tax rate).
grabiner,

I am hesitant to question this because you are usually spot on with your explanations. But, the above highlighted definition of marginal tax rate does not seem right to me. What you describe sounds more like the effective tax rate. I always thought the marginal tax rate was the percentage of tax paid on last dollar of income. Am i missing something?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: help to understand SS benefit tax calculation

Post by grabiner »

marcopolo wrote: Sun Sep 06, 2020 8:00 pm
grabiner wrote: Sun Sep 06, 2020 6:00 pm The reason for the "marginal tax rate" column is to show the influence of the SS phase-in on your taxes, which is important in making investment decisions. The marginal tax rate is the percentage of every dollar of income received that is paid in tax, while the tax bracket is the percentage of every dollar of taxable income on your tax form that is paid in tax.

Suppose that you have $20,950 in income for the year, and you need to withdraw another $1000. If you withdraw this from a traditional IRA, that creates $1000 of taxable non-SS income. The phase-in means that another $500 of SS becomes taxable, so your taxable income increases by $1500. Since you are in the 12% tax bracket, your tax increases by $180, which is 18% of the ordinary income. You can use this to decide whether it is better to withdraw from a traditional or Roth IRA, or better to do the withdrawal this year or next year (when you may have a different marginal tax rate).
I am hesitant to question this because you are usually spot on with your explanations. But, the above highlighted definition of marginal tax rate does not seem right to me. What you describe sounds more like the effective tax rate. I always thought the marginal tax rate was the percentage of tax paid on last dollar of income. Am i missing something?
You are correct; both definitions should be "last dollar", not "every dollar", and I corrected the post above.
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Re: help to understand SS benefit tax calculation

Post by MarkNYC »

Carl53 wrote: Sun Sep 06, 2020 3:51 pm The link has pertinent information right above the portion that you posted.
Single taxpayers:

If you are single and receive $20,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $15,000.
For every dollar between $15,000 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 $38,706, which makes the maximum $17,000 taxable.
The table below assumes that you take the standard deduction ($14,050 for a taxpayer over 65)
The taxiable SS of $2975 is what it would be if you had $5950 of SS benefits and had $20950 of other income. (20950-15000)*.5= 2975
That is not correct. The taxable SS of $2,975 is based on total SS benefits of $20,000 as stated in the example. Here is the calculation:

20,950 other income
10,000 half of SS benefits
30,950 provisional income
(25,000) base amount
5,950 excess over base amount
2,975 half of excess over base amount

The amount of SS that is taxable is the lesser of (1) half of SS benefits or (2) half of excess over base amount.
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Re: help to understand SS benefit tax calculation

Post by kaneohe »

Carl53 wrote: Sun Sep 06, 2020 3:51 pm .........................................................................

The taxable SS of $2975 is what it would be if you had $5950 of SS benefits and had $20950 of other income. (20950-15000)*.5= 2975
The adjusted gross is the sum of the taxable SS and other taxable income.
Taxable income is the adjusted gross less the standard deduction.
for $5950 of SS (round to 6K for simplicity) and $20950 of other income (round to 21K for simplicity).........
Relevant income= other income + 50% SS = 21K + 3K =24K which less than 1st base level of 25K.......so none of
SS is taxable in this case.
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Re: help to understand SS benefit tax calculation

Post by #Cruncher »

grabiner wrote: Sun Sep 06, 2020 4:45 pmThe reason the highlighted line exists is the tax bracket boundary. For the example single taxpayer, the boundary between the 10% and 12% tax brackets is in the middle of the 50% phase-in range. Every dollar of income on either side of $20950 makes 50 cents of SS taxable, and thus increases your taxable income by $1.50.
The example (from the Wiki) is for a single taxpayer with a $20,000 SS benefit. To see the tax bracket boundaries & SS threshold crossings for other SS amounts, you can use the Wiki sheet of my Marginal Tax Rates Excel workbook. For instance here it is for a single taxpayer age 65+ with a $40,000 SS benefit.

Code: Select all

        Plus 1/2   Versus   Versus                     $14,050          Additional
         $40,000  $25,000  $34,000    Total  Adjusted  Std Ded            SS Taxed
Non SS        SS     Base     Base  Taxable     Gross  Taxable      Tax   for each  Marginal
Income   Benefit   50% SS   85% SS       SS    Income   Income  Bracket  $1 Income  Tax Rate
------   -------   ------   ------  -------    ------   ------  -------  ---------  --------
 5,000    25,000        0        0        0     5,000        0       0%       0.50      0.0%
11,033    31,033    3,017        0    3,017    14,050        0      10%       0.50     15.0%
14,000    34,000    4,500        0    4,500    18,500    4,450      10%       0.85     18.5%
16,932    36,932    4,500    2,493    6,993    23,925    9,875      12%       0.85     22.2%
33,284    53,284    4,500   16,391   20,891    54,175   40,125      22%       0.85     40.7%
48,706    68,706    4,500   29,500   34,000    82,706   68,656      22%       0.00     22.0%
The transition from the 10% to 12% tax bracket occurs with $16,932 of non-SS income while each additional $1 causes $0.85, rather than $0.50, of SS to become taxable, resulting in a 22.2% marginal tax rate (12% * 1.85). And the range (sometimes called "the hump") where each $1 of non-SS income triggers a 40.7% marginal tax rate (22% * 1.85) extends for $15,400 ($33,284 to $48,706) instead of just $800 ($37,879 to $38,706).
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