Taking SS Early - Tax Related Question

[haha]

I believe that the monthly Medicare Part B premium can't increase by more $ than the CPI adjustment (in $) to your monthly SS payment, so I don't believe your scenario could actually happen.

This SS thread just gets thicker and thicker. I believe that what you said above may introduce a factor that might favor taking SS earlier rather than later.

The Medicare Premium will very likely increase at a faster rate than the CPI adjustment to SS. But there is a fail safe cap- your Medicare premium can only increase an equal $ amount to the CPI increase to your SS payment, so Medicare inflation is effectively capped- unless your SS is very large, in which case this cap on Medicare increases will not come into play. I suppose the intent is to prevent someone from having his nominal SS cash after Medicare premium decreasing. That would not play well in the voting booth!

Too confusing for me to parse out- but I think there is something here!

Ha

 

[chinaco]

I came across a well-written white paper that sets out many of the ideas discussed in this thread:

http://www.prudential.com/media/managed/IB-InnovativeStrategies.pdf

It includes an interesting analysis of how drawing down tax-sheltered accounts can help with minimizing SS taxation.

Peter

This was info I was looking for as well. Thanks

 

[REWahoo]

Here is another link regarding the same material:

http://www.pensionresearchcouncil.org/pdf/news/49.pdf

 

[MasterBlaster]

I came across a well-written white paper that sets out many of the ideas discussed in this thread:

http://www.prudential.com/media/managed/IB-InnovativeStrategies.pdf

It includes an interesting analysis of how drawing down tax-sheltered accounts can help with minimizing SS taxation.

Peter

The discussion in the link on SS, taxes, and qualified income was pretty good.

The Prudential solution using their annuity-related product is something that i would steer clear of though. Who needs Prudential in the equation and why should one cut them in.

 

[megacorp-firee]

The discussion in the link on SS, taxes, and qualified income was pretty good.

The Prudential solution using their annuity-related product is something that i would steer clear of though. Who needs Prudential in the equation and why should one cut them in.

Agreed! The white-paper was highly informative ... the 'ad' at the end was shameless. I ignored discounted that part of the paper.

 

[Peter]

This has been a very interesting thread. One further point emerged as I was doing various what-ifs:

While it's true that there is an effective marginal tax rate of 46% for someone in the 25% tax bracket, this rate only applies in the zone between paying no taxes on SS, at the low income end, and having so much income that your SS gets hit at the 85% level. Beyond that point, you're paying the same fixed dollar amount in tax on your SS, so the marginal rate on any extra income drops back to 25%. (Until you hit the next tax bracket, of course.)

This makes me feel slightly less bitter about the whole deal ...

Peter

 

[chinaco]

While it's true that there is an effective marginal tax rate of 46% for someone in the 25% tax bracket, this rate only applies in the zone between paying no taxes on SS, at the low income end

I read the article and the 46% TR... but it did not quite register. I saw the illustration add the 25% tax rate plus the 21% rate (.25*85%)... But I was not sure what that meant does that imply that my SS would be normally taxed at 25% no matter what. But since I have a higher income I will pay an additional 21% tax on my SS income?

 

[New Thinking]

There is a lot I would like to say but probably shouldn't in a public forum..Let's just say I tried to introduce an alternative concept that I believed would help some individuals secure their retirements..For the most part, it is not the people on this board who needed new solutions in a world of a "Do-It-Yourself" retirement.

 

[Martha]

New Thinking, you have always been curteous and helpful on this Forum as well as up front with you associations to the insurance industry. I know you take a fair amount of flak. I for one appreciate that you stick around and contribute to the discusssions.

 

[REWahoo]

I for one appreciate that you stick around and contribute to the discusssions.

I for two.

 

[Peter]

does that imply that my SS would be normally taxed at 25% no matter what. But since I have a higher income I will pay an additional 21% tax on my SS income?

No, not exactly.

In a nutshell, if you income is low enough, SS is not taxed at all. If it's high enough, 85% of it is taxed at whatever your marginal rate might be. In between, some proportion gets taxed at that marginal rate. It's the in-between zone that leads to the so-called tax torpedo.

A previous post pointed to this link:

http://www.fincalc.com/inc_08.asp?id=6

You can try various what-ifs, and quickly see how it works out. I found that you don't have to have huge IRA+pension+interest+dividend income to hit the 85% ceiling.

Of course 'huge' is a relative term!

Peter

 

[Peter]

There is a lot I would like to say but probably shouldn't in a public forum..Let's just say I tried to introduce an alternative concept that I believed would help some individuals secure their retirements..For the most part, it is not the people on this board who needed new solutions in a world of a "Do-It-Yourself" retirement.

New Thinking, I don't post much, but your contributions are always worth reading.

Peter

 

[haha]

I for two.

I for three. I think he is treated disgracefully.

Ha

 

[Freein05]

SS provides so little income I find it hard to believe people are worried about the taxes you would pay on it. If you receive income from qualified dividends or long term capital gains you only pay 15%. I also have T-notes to help reduce my Calif. taxes. I govern my income by setting the amount I will need and spend at the beginning of the year. Sales of stock or withdrawals from an IRA are only done if additional income is needed. My tax rate last year was 15%. Now it is more difficult to do that if you are receiving a pension which I don't.

The key is to manage your income.

I am taking my SS at 62 and enjoying the money and not worrying about the chump change in taxes.

 

[cute fuzzy bunny]

Just a word about the disgraceful treatment, since I think a fair bit of it originates from me.

I consider New Thinkings contributions to be very valuable, and see that he has thick skin. Which is a trait of a good salesman. And thats the hinge from which some of my criticism is swung.

His research and papers are designed to create an atmosphere in which his insurance company employer can sell annuities to people he just scared the bejesus out of. For some of these folks, it may be a great idea and what they really want.

That having been said I give sales people a hard time and make them earn their money.

So I agree that its good stuff, worth reading, and believe it or not, I'm glad he's hung in there with us through it all.

But I dont necessarily agree with everything he's put forth, and a few of our discussions in the past have left me with a bit of a bad aftertaste.

 

[chinaco]

... It's the in-between zone that leads to the so-called tax torpedo.

A previous post pointed to this link:

http://www.fincalc.com/inc_08.asp?id=6

You can try various what-ifs, and quickly see how it works out. I found that you don't have to have huge IRA+pension+interest+dividend income to hit the 85% ceiling.

According to this calculator and this article

When you begin receiving Social Security benefits, your provisional income determines if — and how much — your benefits will be taxed. How do you know what your provisional income is? Your 1040 instruction booklet and your tax adviser are best able to answer this question, but to get a rough idea, first determine your total income. Add together wages, taxable interest, tax-exempt interest, ordinary dividends, taxable IRA distributions, your taxable pension and annuity distributions plus one half of your Social Security benefits. This total will be your provisional income.

http://www.todaysengineer.org/2006/nov/tax_strategies.asp

Keeping cap gain in an after tax account has advantages when one draws income needs from cap gains... It does not look like it is counted as provisional income.


According to Kiplinger, a Roth dodges the bullet.
http://www.kiplinger.com/columns/taxexperts/archive/2007/04/0413.html

If one has a larger portfolio and intends to have a fairly large income in retirement... It could be advantageous to delay SS a few year to roll as much Trad IRA money into a Roth. Plus, keeping stocks in a taxable account.

This is just one more little complications to factor in.

 

[FIRE'd@51]

According to this calculator and this article

http://www.todaysengineer.org/2006/nov/tax_strategies.asp

Keeping cap gain in an after tax account has advantages when one draws income needs from cap gains... It does not look like it is counted as provisional income.

Unfortunately, capital gains count toward provisional income. See

http://www.irs.gov/pub/irs-pdf/i1040.pdf

Look at the SS benefits worksheet on page 28, line 3.

 

[Peter]

Unfortunately, capital gains count toward provisional income.

Right. But of course this would only apply to previously unrealized capital gains that you take as income while you are drawing SS.

So I think there could be a case for taking some or all of your capital gains before starting SS.

But as many have already noted, this is all so complicated that there are no general rules ... you just have to 'do the sums'.

Peter

 

[cute fuzzy bunny]

It appears that qualified dividends are not included...so a strategy of employing high dividend stocks as a portion of your withdrawal income wouldnt trigger higher SS taxation...

 

[FIRE'd@51]

It appears that qualified dividends are not included...so a strategy of employing high dividend stocks as a portion of your withdrawal income wouldnt trigger higher SS taxation...

Actually, they are included toward provisional income too, since they are also part of line 9a on Form 1040.

However, the "tax torpedo" effect is much smaller on qualified dividends and LT cap gains.

 

[cute fuzzy bunny]

I thought they were separated out to line 9b, which is not included. Not seeing anywhere that the qualified are rolled in under 9a...got a reference? Turbotax does that part for me, so I've never done it by hand...

 

[Peter]

It appears that qualified dividends are not included...

I don't think that's right. If you look at IRS pub 915, there's no mention of this. Also, in the worksheets shown in that publication, it says that the amount on line 9a of the 1040 is included. This line is for all dividends ... it includes qualifed dividends which are on line 9b.

Peter

 

[cute fuzzy bunny]

Hmmm...in looking at my turbotax prepared returns and my 1099's, it appears that ordinary dividends were added to and rolled to 9a while qualified dividends were added up and rolled to 9b. The qualified dividends dont appear to have been included in 9a, which makes sense because 9a specifically says "Ordinary Dividends", which the qualified dividends are not.

 

[FIRE'd@51]

Hmmm...in looking at my turbotax prepared returns and my 1099's, it appears that ordinary dividends were added to and rolled to 9a while qualified dividends were added up and rolled to 9b. The qualified dividends dont appear to have been included in 9a, which makes sense because 9a specifically says "Ordinary Dividends", which the qualified dividends are not.

Look at Line 9a in the right-most column of Form 1040 (there is no line 9b there). 9b is broken out to the left of that column, so it gets sent to another worksheet for the lower rates.

 

[Peter]

Look at Line 9a in the right-most column of Form 1040 (there is no line 9b there). 9b is broken out to the left of that column, so it gets sent to Schedule D for the lower rates.

Right, and reading the instructions I got from Fidelity, it's clear that qualified dividends are included in the ordinary dividends total. In my case, my 1099 shows the same amounts for lines 9a and 9b, since all my dividends were qualified.

Peter