Proper term for Social Security Income

[Sandy & Shirley]

What is the proper terminology to use for your Social Security Income?

I’ve used the term deferred before, but that is not exactly right. That is the term for your 401K contributions. The taxation of that money is deferred for years until you withdraw it.

Your benefits are basically given to you tax free and then slowly taxed as your other income increases. This is basically the same as the way your Long Term Gains and Qualified Dividends are taxed, just different rules. It is possible that these income types could be partially taxed in a given year while the rest is never taxed because your income wasn’t high enough.

Tax deferred benefits?
Tax delayed benefits?

What is the proper economic term to use when talking about these income types?

 

[RunningBum]

Uh, why not just call is "Social Security income"? It's got it's own characteristics. Why obscure it with a term that would have people scratching their head wondering what you are talking about?

 

[Sandy & Shirley]

I’m trying to write a paper on retirement planning. A huge issue in that planning is the marginal tax rates that are created by the way your Social Security benefits are taxed at the same time as your regular income. You are in the 22% Federal tax bracket and take $100 out of your IRA. This causes $85 of your Social Security to become taxable so that $100 caused your taxable income to increase $185 which raises your tax due by $40.70, a 40.7% marginal tax rate.

When that happens while you are near the top of the 12% bracket your marginal rate is 22.2% and if that $185 also pushed $185 of your LTCGs over the $38,600 limit your taxes go up by another 27.75% giving you a total marginal tax on that $100 withdraw of 49.95%.

I’m looking for the proper way of saying that:

These ultra high Marginal Tax Rates are caused by the “delayed” taxation of your SSB and LTCGs.

Is delayed the proper economic term to use?

 

[marko]

How about 'conditional'?

 

[Sandy & Shirley]

Thanks marko, that does describe the situation better than delayed. Is "conditional" the proper economic term or just a better word to use?


Working on new wording, how does this sound?


The conditional taxation of your Social Security Benefits and your Long Term Capital Gains creates the situation where your normal income, SSB, and LTCGs are all being taxed at the same time resulting in Marginal Tax Rates as high as 49.95%.

 

[Newventurer]

I’m trying to write a paper on retirement planning. A huge issue in that planning is the marginal tax rates that are created by the way your Social Security benefits are taxed at the same time as your regular income. You are in the 22% Federal tax bracket and take $100 out of your IRA. This causes $85 of your Social Security to become taxable so that $100 caused your taxable income to increase $185 which raises your tax due by $40.70, a 40.7% marginal tax rate.

When that happens while you are near the top of the 12% bracket your marginal rate is 22.2% and if that $185 also pushed $185 of your LTCGs over the $38,600 limit your taxes go up by another 27.75% giving you a total marginal tax on that $100 withdraw of 49.95%.

I’m looking for the proper way of saying that:

These ultra high Marginal Tax Rates are caused by the “delayed” taxation of your SSB and LTCGs.

Is delayed the proper economic term to use?

In my simple mind the taxation of benefits is no more ‘delayed’ than the income itself. You were not eligible to receive the income so there were no taxes on it.

I am sure your writing will help your audience get a better understanding off the issues though. My DFIL decided he didn’t like paying 4% interest on their vehicle loan. He took a distribution from his IRA to pay off the loan. Found out at tax time that was a mistake - ended up paying taxes instead of interest, doh!

Perhaps ‘sequence of income streams’ connotates that income comes in at different times in ones retirement season and therefore there are tax consequences to consider, IDK, it’s early and now my brain hurts

 

[corn18]

Social Security is an insurance program. You are being paid benefits. Those benefits are taxable. So there is no delay. It is taxed as the benefit is received.

Also, be careful calling it social security income. That is a specific benefit, as is SSDI, spousal and survivor. They all have their own name and benefits. If you mix and match, you will lose your readers and credibility.

 

[marko]

Thanks marko, that does describe the situation better than delayed. Is "conditional" the proper economic term or just a better word to use?

I'm a word man, not an accountant. You would need to explain the reason the income is conditional however; it's an easy concept to grasp but hard to explain in a few words.

Just saying 'conditionally taxed income' might not be clear enough.

 

[RunningBum]

Yes, I've seen your posts about the hump since you've joined. I understand the basic concept, and while I was disbelieving at first that the marginal rate could get that high, you showed the numbers. In certain situations.

I found your graphs on this very busy and confusing. I don't know if it's really that complex or you are trying to stuff too many variables or scenarios in each graph or what. I also feel like it's too set on your certain set of inputs, and I don't easily see how to adjust it for my situation. You also don't spend much time talking about how to avoid the hump, if it is avoidable. I think it's in there, but it's lost in the jumble of those confusing graphs.

I think a better way to do it would be to have a tool where you input your marital status, and your income from various sources, and deductions. They you show your graph showing how each $100 is taxed, to show where and whether there is a hump. This lets people play with the numbers, and look at what happens if they don't have RMDs, so they can better decide the value of doing Roth conversions now--which I think is a big part of the whole point. If it's not, then you've really lost me on what you're trying to show.

I also think that introducing a new term to describe social security just further muddies the picture. Instead of using a well understood term you use something else, so that's one more thing I have to figure out.

Use this feedback how you wish. I'm not going to argue it. It's my point of view, and you're not going to be able to argue that you aren't presenting this in a confusing way to me when it is very much is confusing to me. I'm trying to offer constructive criticism and alternate solutions here. I wonder how many people tune out your posts because it's just too much, presented in an unclear way. It's not just me. When you initially presented this in http://www.early-retirement.org/forums/f27/marginal-tax-rates-repost-86048.html, there were comments like "over my head", "indecipherable", and "doubt any of my friends would make it past the first graph".

 

[Souschef]

I think your whole concept is flawed. Because of my other income, 85% of my SS is taxed to start with. If I take another $100 out of my IRA, it will not affect the tax on my SS. at all. I will just have to pay tax on the $100 at the marginal rate.

 

[RunningBum]

I think your whole concept is flawed. Because of my other income, 85% of my SS is taxed to start with. If I take another $100 out of my IRA, it will not affect the tax on my SS. at all. I will just have to pay tax on the $100 at the marginal rate.

Yes, this is part of the confusion I have, how to tell who it actually applies to. It won't apply to me either, as far as I can tell. Maybe we're anomalies, maybe not. A lot of presentation of numbers and graphs, without a lot of help on how to apply them.

 

[Souschef]

Yes, this is part of the confusion I have, how to tell who it actually applies to. It won't apply to me either, as far as I can tell. Maybe we're anomalies, maybe not. A lot of presentation of numbers and graphs, without a lot of help on how to apply them.

I think a brute force method would be to go to a tax program like Turbotax, assume a SS income of say $20,000, Then start adding income until the SS is taxed.
Looking at the form, if your other income is less than $32,000 MFJ, it is not taxed.

 

[pb4uski]

What is the proper terminology to use for your Social Security Income?

I’ve used the term deferred before, but that is not exactly right. That is the term for your 401K contributions. The taxation of that money is deferred for years until you withdraw it.

Your benefits are basically given to you tax free and then slowly taxed as your other income increases. This is basically the same as the way your Long Term Gains and Qualified Dividends are taxed, just different rules. It is possible that these income types could be partially taxed in a given year while the rest is never taxed because your income wasn’t high enough.

Tax deferred benefits?
Tax delayed benefits?

What is the proper economic term to use when talking about these income types?

My vote is for tax-deferred. Deferred and delayed are synonyms.

de·fer1
dəˈfər/
verb
past tense: deferred; past participle: deferred
put off (an action or event) to a later time; postpone.
"they deferred the decision until February"
synonyms: postpone, put off, delay, hold over, hold off (on), put back;

I think it is analogous to tIRA contributions that are non-deductible... you get taxed on the earnings and don't get a deduction... when you withdraw a portion of the earning are taxable and a portion are return of previously taxed contributions.... that is part of the reason why it is only up to 85%. Perhaps an even better analogy would be the taxation of contributory pension benefits... a portion of benefits is taxable and a portion is a return of contributions.... a key difference being that the taxation of SS benefits are broadbrushed and forumlaic and less precise.

We call all tIRAs tax deferred.... whether the contributions are deductible or not.

I agree that the hump graphs are confusing... and I'm a retired CPA and a numbers and pictures guy.

The key for each situation is defining marginal income which results in marginal tax which results in a marginal tax rate for that marginal income. So for example, if looking at the marginal tax rate on discretionary Roth conversions I only look at the increase in tax resulting from the conversion... all other income happened before. While I don't have SS income, that approach would include taxation on SS benefits only if the Roth conversion resulted in more SS being taxable... in that case the numerator would be the tax on the increase in taxable SS income and on the Roth conversion and the denominator would be the amount of the Roth conversion.

 

[Independent]

Thanks marko, that does describe the situation better than delayed. Is "conditional" the proper economic term or just a better word to use?


Working on new wording, how does this sound?


The conditional taxation of your Social Security Benefits and your Long Term Capital Gains creates the situation where your normal income, SSB, and LTCGs are all being taxed at the same time resulting in Marginal Tax Rates as high as 49.95%.

"Conditional" is definitely better than "deferred".

There is no "correct" word used by economists to describe this.
Tax accountants may have a phrase, I've never heard it.

Regardless, the concept is too complex to describe in one word.
Frankly, "complex" may be a good word.

 

[RunningBum]

I think a brute force method would be to go to a tax program like Turbotax, assume a SS income of say $20,000, Then start adding income until the SS is taxed.
Looking at the form, if your other income is less than $32,000 MFJ, it is not taxed.

Agreed. I think what S&S is attempting to do is explain when and why you'll see big jumps in the marginal rate, and whether they are short-lived, and presumably, if you can do anything about it with advance planning. It may be in some cases that the next $100 is taxed at 40+% but a few hundred $ later the rate drops back, such that it affects the action you take now. I think it's a worthwhile endeavor.

 

[kaneohe]

I agree that complex is a good descriptor. Perhaps it would be useful to go thru some examples of SS w/ different amounts of other income and actually using the formulas manually so that folks have a chance to really see what happens. Then perhaps they will really understand what's happening. You can show the different regions.......where SS is not taxed at all , the various complex intermediate regions, and then the saturated region where 85% of it is taxed. Same w/ the QDIV/LTCG taxation w/ the pictorial stacked bar charts that makes understanding much easier.

 

[audreyh1]

What is wrong about the term Social Security Income? That’s what the tax programs call it when you enter the amount. Seems pretty straightforward to me. I think anything else would confuse.

 

[Sandy & Shirley]

Some of you have asked for more numbers, so here are the numbers based on the 20K, 30K, and 40K SSB levels:


SSB + Other Income – Fed Tax = After Fed Tax Income
$20,000 + $36,865 - $4,453 = $52,412, next $1,841 at 40.7%
$30,000 + $34,568 - $4,453 = $60,115, next $9,138 at 40.7%
$40,000 + $32,270 - $4,453 = $67,817, next $16,436 at 40.7%

The $4,453 tax level comes from the $38,700 top of the 12% taxable income level.

A lot of discussion on this site revolves around early retirement and starting your SSB early at lower income levels. In our case, Shirley is a widow so she can have the best of both worlds!

She can start her survivor benefits early at a lower SSB level, wait until she is 70 then switch to her own maximum SSB level.

If your benefit level is $20,000 or less, who cares about paying 40.7% on less than $2,000 of income. At $17,000 the 40.7% bracket doesn't even exist. If your benefit level is $30,000, $40,000, or more you should definitely care about paying 40.7% on much larger income amounts.

If you are getting $40,000 in SSB and $32,270 from pensions, annuities, and IRA withdrawals, the basis for the taxation of your SSB is $52,270 which makes $20,030 of your benefits taxable, a fraction over 50%, the other 50% will be tax free. Your overall Federal tax rate is only 6.16%. If this is your situation, do you want to pay 40.7% on the next $16,436 of income?


Answer: NO! So do some things like Roth conversions early to avoid the situation, pay off some of your debt from your IRA before you start you ultra high benefits so you can lower your need for extra cash after you start your benefits!

 

[corn18]

What is wrong about the term Social Security Income? That’s what the tax programs call it when you enter the amount. Seems pretty straightforward to me. I think anything else would confuse.

SSI is a very specific Social Security disability benefit.

How many different types of Social Security disability benefits are there?
There are at least five major types of Social Security disability benefits.

Disability Insurance Benefits (DIB) is the most important type of Social Security disability benefits. It goes to individuals who have worked in recent years (five out of the last 10 years in most cases) and are now disabled.

Disabled Widow's and Widower's Benefits (DWB) are paid to individuals who are at least 50 and become disabled within a certain amount of time after the death of their husband or wife. The late husband or wife must have worked enough under Social Security to be insured.

Disabled Adult Child benefits (DAC) go to the children of persons who are deceased or who are drawing Social Security disability or retirement benefits. The child must have become disabled before age 22.

(For Disability Insurance Benefits, Disabled Widow's or Widower's Benefits and Disabled Adult Child benefits (DAC), it does not matter whether the disabled individual is rich or poor. Benefits are paid based upon a Social Security earnings record.)

Supplemental Security Income benefits (SSI), are paid to individuals who are struggle financially and who are disabled. It does not matter for SSI whether an individual has worked in the past or not. SSI child's disability benefits are a variety of SSI benefits paid to children under the age of 18 who are disabled. The way in which disability is determined is a bit different for children.

Child's Disability Benefits (CDB) are paid to children under the age of 17. CDB is another form of SSI, however, the Social Security Administration takes into consideration different factors when considering a child's claim versus an adult's claim. Children who may qualify for CDB are those that have severe or limiting physical and mental conditions. Additionally, there are also limitations with regard household incomes. Those households that exceed a certain amount are excluded from consideration.

 

[corn18]

Some of you have asked for more numbers, so here are the numbers based on the 20K, 30K, and 40K SSB levels:


SSB + Other Income – Fed Tax = After Fed Tax Income
$20,000 + $36,865 - $4,453 = $52,412, next $1,841 at 40.7%
$30,000 + $34,568 - $4,453 = $60,115, next $9,138 at 40.7%
$40,000 + $32,270 - $4,453 = $67,817, next $16,436 at 40.7%

The $4,453 tax level comes from the $38,700 top of the 12% taxable income level.

A lot of discussion on this site revolves around early retirement and starting your SSB early at lower income levels. In our case, Shirley is a widow so she can have the best of both worlds!

She can start her survivor benefits early at a lower SSB level, wait until she is 70 then switch to her own maximum SSB level.

If your benefit level is $20,000 or less, who cares about paying 40.7% on less than $2,000 of income. At $17,000 the 40.7% bracket doesn't even exist. If your benefit level is $30,000, $40,000, or more you should definitely care about paying 40.7% on much larger income amounts.

If you are getting $40,000 in SSB and $32,270 from pensions, annuities, and IRA withdrawals, the basis for the taxation of your SSB is $52,270 which makes $20,030 of your benefits taxable, a fraction over 50%, the other 50% will be tax free. Your overall Federal tax rate is only 6.16%. If this is your situation, do you want to pay 40.7% on the next $16,436 of income?


Answer: NO! So do some things like Roth conversions early to avoid the situation, pay off some of your debt from your IRA before you start you ultra high benefits so you can lower your need for extra cash after you start your benefits!

Stop comparing effective rates to marginal rates.

 

[audreyh1]

SSI is a very specific Social Security disability benefit.

How many different types of Social Security disability benefits are there?
There are at least five major types of Social Security disability benefits.

Disability Insurance Benefits (DIB) is the most important type of Social Security disability benefits. It goes to individuals who have worked in recent years (five out of the last 10 years in most cases) and are now disabled.

Disabled Widow's and Widower's Benefits (DWB) are paid to individuals who are at least 50 and become disabled within a certain amount of time after the death of their husband or wife. The late husband or wife must have worked enough under Social Security to be insured.

Disabled Adult Child benefits (DAC) go to the children of persons who are deceased or who are drawing Social Security disability or retirement benefits. The child must have become disabled before age 22.

(For Disability Insurance Benefits, Disabled Widow's or Widower's Benefits and Disabled Adult Child benefits (DAC), it does not matter whether the disabled individual is rich or poor. Benefits are paid based upon a Social Security earnings record.)

Supplemental Security Income benefits (SSI), are paid to individuals who are struggle financially and who are disabled. It does not matter for SSI whether an individual has worked in the past or not. SSI child's disability benefits are a variety of SSI benefits paid to children under the age of 18 who are disabled. The way in which disability is determined is a bit different for children.

Child's Disability Benefits (CDB) are paid to children under the age of 17. CDB is another form of SSI, however, the Social Security Administration takes into consideration different factors when considering a child's claim versus an adult's claim. Children who may qualify for CDB are those that have severe or limiting physical and mental conditions. Additionally, there are also limitations with regard household incomes. Those households that exceed a certain amount are excluded from consideration.

But I didn’t say SSI which stands for something else.

 

[marko]

What is wrong about the term Social Security Income? That’s what the tax programs call it when you enter the amount. Seems pretty straightforward to me. I think anything else would confuse.

I agree. But I think the OP is trying to convey the variability of the benefit due to taxes which may or may not come into play due to other income. That's why I suggested "contingent" SS benefit and taxes.

Having said that, I think the whole attempt is being over-thought with just too many variables.

My mentor was a physicist and a stickler for precision.
I once told him: "When you're selling something, sometimes you have to be vague in order to make things clear."

 

[W2R]

Uh, why not just call is "Social Security income"? It's got it's own characteristics. Why obscure it with a term that would have people scratching their head wondering what you are talking about?

I also think that introducing a new term to describe social security just further muddies the picture. Instead of using a well understood term you use something else, so that's one more thing I have to figure out.

Use this feedback how you wish. I'm not going to argue it. It's my point of view, and you're not going to be able to argue that you aren't presenting this in a confusing way to me when it is very much is confusing to me. I'm trying to offer constructive criticism and alternate solutions here. I wonder how many people tune out your posts because it's just too much, presented in an unclear way. It's not just me.

What is wrong about the term Social Security Income? That’s what the tax programs call it when you enter the amount. Seems pretty straightforward to me. I think anything else would confuse.

+1 to all of these quotes. I think you should step away from what you are trying to write about retirement planning, and then come back to it in a few months with the objective of making it excruciatingly simple and easy for anyone to understand. Complexity is not a virtue if you genuinely have something to say. Being able to express yourself simply and clearly is more difficult but worth the effort.

 

[audreyh1]

I agree. But I think the OP is trying to convey the variability of the benefit due to taxes which may or may not come into play due to other income. That's why I suggested "contingent" SS benefit and taxes.

Having said that, I think the whole attempt is being over-thought with just too many variables.

My mentor was a physicist and a stickler for precision.
I once told him: "When you're selling something, sometimes you have to be vague in order to make things clear."

But all types of income has variability due to being taxed at different brackets and rates due to the total income picture.

I’ve done some of my own future tax projections, and SS income doesn’t really seem any different from capital gains income, certain deductions, income subject to AMT, or NIIT, etc.

 

[Martha]

Thanks marko, that does describe the situation better than delayed. Is "conditional" the proper economic term or just a better word to use?


Working on new wording, how does this sound?


The conditional taxation of your Social Security Benefits and your Long Term Capital Gains creates the situation where your normal income, SSB, and LTCGs are all being taxed at the same time resulting in Marginal Tax Rates as high as 49.95%.

I think this sentence is confusing. What do you mean taxed at the same time? Do you mean that a person had this income all in the same tax year? When you say "conditional" are you referring both to the social security benefits and to Long Term Capital Gains? You might simply be crowding too many ideas into one sentence. (Rather than conditional in reference to Social Security benefits I might simply use taxable Social Security Benefits and elsewhere indicate how to determine when they are taxable.)