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Some stuff about taxes that I don't know
Old 09-27-2013, 11:08 PM   #1
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Some stuff about taxes that I don't know

First, some facts.

I’ll turn 70 early next year—unless something kinda’ bad happens to me between now and then.

I am self-employed (no one ever wanted to hire me—so, unfortunately I never had the chance to be a disgruntled employee).

I started working part time a few months ago. Next year will be the first full year I will be working part time (I can quit any time I like-- but, I think it's only right I give myself two weeks notice).

I have gross earnings and net earnings.

I started collecting Social Security at age 66. ($26,000 a year, before deductions for Medicare and Drug insurance).

That’s the end of the fact portion. So, here are the questions:

What do I have to watch out for next year? I’m mainly wondering about taxes. Is there a cut-off (or several different cut-offs) where it would make sense to stop earning money? I don’t want to just edge over some line and make an extra $600 and end up paying 42% in taxes instead of 20% in taxes. (In case you are wondering--I just made up those percentages).

Regarding taxed money: is Social Security monies and dividends and interest included? I assume that they are but maybe there’s a bit more to this than I am aware of. (Really, duck , something outside of your awareness regarding taxes? Hard to believe).

Just for the record, the air conditioning seems to be working well now. We haven't yet turned on the heat; when I do I will give an update.

And, yesterday Stockard Channing was right behind me in the grocery store line. In case you're wondering, she drives a Porsche Carrera. I was going to ask her about these tax questions, but we were in the express line and she seemed to be in a hurry--at least she was when I mentioned that I was almost seventy years old and I never had the chance to be a disgruntled employee. I'm not sure she would have been much help anyway. (Maybe that's me just be negative).

Anyhow, to refresh your memory (memories?): what do I need to look for re: taxes?
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Old 09-28-2013, 01:00 AM   #2
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edge over some line and make an extra $600 and end up paying 42% in taxes instead of 20% in taxes.
It doesn't work that way. A dollar you earn that is taxed at, say, 20% will remain taxed at 20%, regardless of how many additional dollars you earn. Those additional dollars may be taxed at higher rates, however.

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Regarding taxed money: is Social Security monies and dividends and interest included?
Dividends and interest are always taxed*. Social Security may be taxed up to 85%, depending on the level of your other income.

*With a few exceptions, like interest from municpal bonds.
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Old 09-28-2013, 06:17 AM   #3
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With taxes, a good place to look is the place that collects them.

They have this: Seniors & Retirees which has further links.

They also have a very nice overall publication to help folks:
http://www.irs.gov/pub/irs-pdf/p17.pdf

The string "age 70" (realy age 70 1/2) is mentioned 27 times in that link.
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Old 09-28-2013, 07:50 AM   #4
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If you do, or can do, your taxes, it is better to change the numbers there, and see what affect there is on the bottom line.

Each situation is different. You can download free software and use last years numbers as a start.
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Old 09-28-2013, 08:53 AM   #5
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RMDs for your retirement plans start after age 70.5 adding more income and taxes. Medicare premiums are tiered to income but if you are going from full-time to part-time that should benefit you.

For some free tools, google "tax calculators" . Check out Taxcaster and the HR Block one , among others.
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Old 09-28-2013, 09:47 AM   #6
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I would suggest that you enter your numbers from last year's return in TaxCaster or some similar tool. There will probably only be 10-20 numbers that need to be input. Then change your self employment earnings (Schedule C earnings) and see how your taxes change. I think what will happen is that as your self-employment earnings increase that the increase and a portion of your SS will become taxable.

If you keep your taxable income in the 15% tax bracket, your dividends and long-term capital gains should be subject to 0% tax on those items. Above the 15% tax bracket, you would typically pay 15% on dividends and long-term capital gains.
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Old 09-28-2013, 10:14 AM   #7
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Keep in mind that in the year you turn 70.5 (and going forward), RMDs from retirement plans are required to be taken. Retirement Plans FAQs regarding Required Minimum Distributions

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Old 10-14-2013, 04:24 PM   #8
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OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.
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Old 10-14-2013, 04:42 PM   #9
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Originally Posted by redduck View Post
OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.
Get a wife...then you'll sneak right into the 15% bracket for married filing jointly.

Keep in mind it's only 25% on the amount over $36,250. So your effective rate is somewhat lower.

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Old 10-14-2013, 04:44 PM   #10
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Quote:
Originally Posted by redduck View Post
OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).
If you are married and filing jointly, those numbers work out to the 15% bracket on federal taxes. Are you including state taxes to get you to the 25% number?
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Old 10-14-2013, 05:05 PM   #11
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Quote:
Originally Posted by redduck View Post
OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.
Keep in mind that your overall federal tax rate is about 11% ($7,560 tax in relation to $68,000 of income). Your marginal tax rate for SS or RMDs is 25% but your marginal tax rate for qualified dividends is only 15%. IOW, an additional $100 of SS or RMD income would result in an additional $25 of tax and an additional $100 of qualified dividend income would result in an additional $15 of tax.

Are the $16,000 of dividends you expect qualified or unqualified? You can get a sense by looking at last year's tax return if your portfolio hasn't changed a lot. TaxCaster assumes that dividends are qualified. Enter non-qualified dividends under "Miscellaneous Income."

All of the above assumes you are single, over 65 and use the standard deduction. If you take the standard deduction and have a mortgage you may be able to reduce your tax bill by using taxable funds to pay off the mortgage, which might bring your income down into the 15% bracket.
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Old 10-14-2013, 05:11 PM   #12
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Get a wife...then you'll sneak right into the 15% bracket for married filing jointly.

Keep in mind it's only 25% on the amount over $36,250. So your effective rate is somewhat lower....
I think you are confusing overall or average rates with marginal rates. With the progressivity built into the tax code, marginal rates are generally higher than overall or average rates. Overall or average tax rate is your tax in relation to your income. Marginal tax rate is the tax on your last $1 of income and in the case at hand would be 25% for SS/RMDs/unqualified dividends and 15% for qualified dividends.
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Old 10-14-2013, 05:16 PM   #13
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I think you are confusing overall or average rates with marginal rates. With the progressivity built into the tax code, marginal rates are generally higher than overall or average rates. Overall or average tax rate is your tax in relation to your income. Marginal tax rate is the tax on your last $1 of income and in the case at hand would be 25% for SS/RMDs/unqualified dividends and 15% for qualified dividends.
You are correct...effective tax rate is more appropriate?
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Old 10-14-2013, 05:22 PM   #14
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Yes, I think of effective, overall or average is being the same.
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Old 10-14-2013, 07:01 PM   #15
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If you are married and filing jointly, those numbers work out to the 15% bracket on federal taxes. Are you including state taxes to get you to the 25% number?
I am not married. I don't recall including or decluding state taxes.
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Old 10-14-2013, 07:13 PM   #16
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<snip>
Are the $16,000 of dividends you expect qualified or unqualified? You can get a sense by looking at last year's tax return if your portfolio hasn't changed a lot. TaxCaster assumes that dividends are qualified. Enter non-qualified dividends under "Miscellaneous Income."

All of the above assumes you are single, over 65 and use the standard deduction. If you take the standard deduction and have a mortgage you may be able to reduce your tax bill by using taxable funds to pay off the mortgage, which might bring your income down into the 15% bracket.
There is no mortgage. Qualified dividends: $7000. So, I guess non-qualified dividends add up to $9000.
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Old 10-14-2013, 07:23 PM   #17
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This thread is confusing to me. Redduck is not married, and he accurately states that he will be in the 25% marginal bracket, if he is using the standard deduction and the personal exemption for one 65 or over. This will be with him for a long time, likely until our faithful servants in Washington raise rates. 26000+.85*26000-3800-7400=36,900 which is greater than the top of the 15% bracket at 35, 350, without even considering any dividends or interest or earned income. 2013 levels will be a bit higher, perhaps enough to give him a few dollars of 15% ordinary income bracket, or 0% qualified dividends. But very possibly not.

I can't see any relevance to him of his average rate, or effective rate, or any rate other than marginal rate. I have never even considered my average rate; what difference can that make unless one is trying to make some political point? What he wants to decide is whether it is worth it for him to work. IMO, what is relevant is that he know where his marginal bracket becomes 28% after giving effect to his personal exemption and standard deduction, and how to stay beneath the $85,000 MAGI hard threshold for the first step up in Medicare pats B and D costs. These are not huge, but it is money. After paying the surcharges for several years I decided to get very vigilant about them, and have not breached the $85K since.

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Old 10-14-2013, 08:08 PM   #18
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I scanned the thread and didn't see anyone cut to the issue about earnings and Social security.

When you pay taxes on Social Security it's because your "Provisional income" is higher than one of two thresholds. Provisional income is your total worldwide income, including tax-exempt income, plus half of your Social Security benefits. If (for a single person) your provisional income is over $25k then you pay income taxes on half the amount over $25k.

If your provsional income (for a single) is over $34k then you pay income taxes on 85% of the amount over $34k.

So here's the rub...

Money over the $34k threshold gets taxed as income (as usual) plus it triggers the SS taxes of previously untaxed SS dollars for a whopper marginal tax rate.

For a single in a 25% income tax bracket, your marginal federal tax rate for dollars earned over the higher provsional rate is 25% + (25% X 85%) = 46.25% of those dollars in excess of the higher Provisional income threshold ($34k). Add in any state taxes and you can see that the total take can be well over 50% of those dollars.

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? | Kitces.com

Here's an example from the link...
Quote:
Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.
If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
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Old 10-14-2013, 09:11 PM   #19
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I scanned the thread and didn't see anyone cut to the issue about earnings and Social security.

When you pay taxes on Social Security it's because your "Provisional income" is higher than one of two thresholds. Provisional income is your total worldwide income, including tax-exempt income, plus half of your Social Security benefits. If (for a single person) your provisional income is over $25k then you pay income taxes on half the amount over $25k.

If your provsional income (for a single) is over $34k then you pay income taxes on 85% of the amount over $34k.

So here's the rub...

Money over the $34k threshold gets taxed as income (as usual) plus it triggers the SS taxes of previously untaxed SS dollars for a whopper marginal tax rate.

For a single in a 25% income tax bracket, your marginal federal tax rate for dollars earned over the higher provsional rate is 25% + (25% X 85%) = 46.25% of those dollars in excess of the higher Provisional income threshold ($34k). Add in any state taxes and you can see that the total take can be well over 50% of those dollars.

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? | Kitces.com

Here's an example from the link...
Well, that was certainly upsetting....but, probably helpful.

I really don't want to completely retire due to tax reasons, but maybe tax reasons are just as valid as most other reasons. Darn, and I was just about to start on my "Just One More Decade."
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Old 10-14-2013, 10:38 PM   #20
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I think the key thing that you need to know is that if you have self employment income in addition to your SS/RMDs and dividends, you'll be paying about 37% of your income in federal taxes.

You can see this by entering your situation in TaxCaster, noting the taxes with no self employment income, and then add $10k of self employment income and see the increase in tax. So by my calculations, over 1/3 of your self employment effort is going to the government.
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