IRS form 915 Social Security Taxes hasn't changed in decades

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corn18
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IRS form 915 Social Security Taxes hasn't changed in decades

Post by corn18 »

I have IRS Pub 915 in my retirement planning spreadsheet so I can accurately calculate the taxes on my SS. It helps me plan Roth conversions and RMDs. What I noticed is that the standard deduction used for the calculation has been fixed at $32,000 for MFJ since at least 1995 (farthest back I could find the form). I would have expected this to move with inflation like the 1040 standard deduction. That seems odd.

My question: I use real dollars for everything. I left all my state and federal taxes in real dollars (present day). This works for federal taxes because the rates stay constant but the std deduction goes up with inflation. Not sure how to treat taxes on social security as they seem to go up over time. Should I just ignore it? I think I shouldn't, because it makes a big difference over 30 years. The NPV of the deduction over 30 years goes down a LOT which means I pay tax on a larger portion of my SS.

An example:

If I leave my SS benefit in real dollars and keep the deduction constant @ $32,000, I pay tax on 62% of my SS benefit.

If I discount the deduction @ 2% inflation, then the deduction is only $17,666 in 30 years. That results in the max 85% of my SS being taxed.

In the grand scheme of things, it's not a huge change in my 35 year retirement plan, but it is irritating. The IRS really should adjust this for inflation.
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grabiner
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Re: IRS form 915 Social Security Taxes hasn't changed in decades

Post by grabiner »

Since this limit ($32,000 for 50% phase-in, $44,000 for 85% phase-in) is not adjusted for inflation, a reasonable assumption if you are a long way from retirement is that 85% of your SS will be taxable.
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corn18
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Re: IRS form 915 Social Security Taxes hasn't changed in decades

Post by corn18 »

grabiner wrote: Sat Oct 17, 2020 8:28 am Since this limit ($32,000 for 50% phase-in, $44,000 for 85% phase-in) is not adjusted for inflation, a reasonable assumption if you are a long way from retirement is that 85% of your SS will be taxable.
I am 54 and plan to retire next year and delay SS to 70. Based on my analysis, you are correct. At some point, unless they change that $32,000 number, everyone will be paying 85% on their SS. Backdoor tax increase, I guess.
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Carl53
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Re: IRS form 915 Social Security Taxes hasn't changed in decades

Post by Carl53 »

With the various steps for taxation of SS being not inflation adjusted, you are correct that more and more SS becomes taxed over time. However, even if you are blessed by being a married couple not taking SS until aged 70 and each getting the maximum benefit and having no other income, it would still take future accumulative inflation of nearly 100% before your benefits would actually incur income taxation since brackets and standard deductions are inflation adjusted. Unfortunately, most of us have other income and thus will get hit with this stealthy taxation of benefits sooner than later and it does not take much other income to push one's SS benefits into the taxable level if you are blessed with higher SS benefits.
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corn18
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Re: IRS form 915 Social Security Taxes hasn't changed in decades

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Carl53 wrote: Sat Oct 17, 2020 8:34 am With the various steps for taxation of SS being not inflation adjusted, you are correct that more and more SS becomes taxed over time. However, even if you are blessed by being a married couple not taking SS until aged 70 and each getting the maximum benefit and having no other income, it would still take future accumulative inflation of nearly 100% before your benefits would actually incur income taxation since brackets and standard deductions are inflation adjusted. Unfortunately, most of us have other income and thus will get hit with this stealthy taxation of benefits sooner than later and it does not take much other income to push one's SS benefits into the taxable level if you are blessed with higher SS benefits.
That's what I am dealing with planning RMDs and Roth conversions. I have a $50k COLA pension and $55k SS benefit @ 70. That puts me squarely in the 62% taxable SS benefit for MFJ. When I discount the deductions by inflation, I am above the 85% line. So no matter what I do for Roth conversions from 55 to 70, I still pay taxes on 85% of my SS, per the update model. I can be a little less aggressive early on with my Roth conversions. Just need to stay in the 12%/15% tax bracket throughout the whole process.
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Re: IRS form 915 Social Security Taxes hasn't changed in decades

Post by Carl53 »

corn18 wrote: Sat Oct 17, 2020 9:23 am
Carl53 wrote: Sat Oct 17, 2020 8:34 am With the various steps for taxation of SS being not inflation adjusted, you are correct that more and more SS becomes taxed over time. However, even if you are blessed by being a married couple not taking SS until aged 70 and each getting the maximum benefit and having no other income, it would still take future accumulative inflation of nearly 100% before your benefits would actually incur income taxation since brackets and standard deductions are inflation adjusted. Unfortunately, most of us have other income and thus will get hit with this stealthy taxation of benefits sooner than later and it does not take much other income to push one's SS benefits into the taxable level if you are blessed with higher SS benefits.
That's what I am dealing with planning RMDs and Roth conversions. I have a $50k COLA pension and $55k SS benefit @ 70. That puts me squarely in the 62% taxable SS benefit for MFJ. When I discount the deductions by inflation, I am above the 85% line. So no matter what I do for Roth conversions from 55 to 70, I still pay taxes on 85% of my SS, per the update model. I can be a little less aggressive early on with my Roth conversions. Just need to stay in the 12%/15% tax bracket throughout the whole process.
Now in our mid-late 60s but with pension and SS numbers that are ball park like yours, we've been converting to the top of the 12% bracket each year for better part of a decade and keeping the pre-tax retirement funds mostly level. I am resolved that 85% of SS will be taxed. Even if outside income was somewhat less, 85% remains taxed while in the 12% bracket making the tax on the other than SS income to be effectively 22+%. For us it looks like we will have some room for RMD or other income that remains in the 12% bracket after all of the SS is taxed with income above that wiped out by the use of QCDs. Eventually, RMDs and ever increasing SS will always cause us to be in the 22% bracket unless we get more aggressive with QCDs. At that point in time I may decide to do conversions in the 22% bracket but then again we will be in our 80s by then and a lot can change in that much time.
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