Taxation of SS Benefits

[Tekward]

Interesting article about the marginal increases on taxes as SS benefits are phased into AGI based on provisional income:

"those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!"

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? - Kitces | Nerd's Eye View

 

[marko]

New flash: Taxes on everything are going to increase.
Stuff that wasn't even taxed before will be taxed soon. Interesting though, how one area of tax impacts another area...accident or by design?

"...should five percent appear too small, be thankful I don't take it all...and you're working for no one but me..." (Taxman, Beatles)

 

[ziggy29]

Interesting article about the marginal increases on taxes as SS benefits are phased into AGI based on provisional income:

"those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!"

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? - Kitces | Nerd's Eye View

This isn't unprecedented. The way the phase out of PPACA subsidies work, for those buying their own policies the phaseout works like a ~15% additional tax in solidly middle class tax brackets (for every extra $100 you earn, you could lose about $15 in subsidy). And that ONE DOLLAR that kicks you over 400% of the federal poverty line is taxed (effectively) at over 100,000%.

 

[gerrym51]

This isn't unprecedented. The way the phase out of PPACA subsidies work, for those buying their own policies the phaseout works like a ~15% additional tax in solidly middle class tax brackets (for every extra $100 you earn, you could lose about $15 in subsidy). And that ONE DOLLAR that kicks you over 400% of the federal poverty line is taxed (effectively) at over 100,000%.

I thought the MAGI for subsidies used all SS.

 

[ziggy29]

I thought the MAGI for subsidies used all SS.

I'm talking about a different issue here, not how SS affects the subsidy. I'm just saying that we already have a situation in law where, while "direct" tax brackets aren't increased, the "effective" tax rate a new dollar of middle class income can be a lot higher than the 15% or 25% it now pays in federal income tax.

 

[gerrym51]

Interesting article about the marginal increases on taxes as SS benefits are phased into AGI based on provisional income:

"those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!"

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? - Kitces | Nerd's Eye View

heres an easy taxable ss calculator
About.com: http://www.calcxml.com/do/inc08

 

[NanoSour]

heres an easy taxable ss calculator
About.com: http://www.calcxml.com/do/inc08

Thanks for the link. Looks like I'll be in the 85% taxable bracket. Good and bad I guess

 

[ziggy29]

The worst part about the taxation of SS benefits is that the thresholds are not indexed to inflation, making it a stealth tax increase year after year. When they were introduced in the 1980s, the thresholds were at reasonably comfortable levels of income. Now they are really not, and it will only get worse in the future.

 

[gerrym51]

Thanks for the link. Looks like I'll be in the 85% taxable bracket. Good and bad I guess

as i've posted before-there are good reasons to take ss at 62 as well as taking at 70.

since the taxable ss formula is not inflation adjusted it will hit more and more people just as the AMT did for 30 years before finally fixed.

t

 

[Semiretired2008]

I have never seen it covered, but I have always wondered whether or not the taxes on SS are put back into the SS pot of money to extend its calculated life or if they are counted as taxes to be used in other parts of the federal budget.

 

[Independent]

The worst part about the taxation of SS benefits is that the thresholds are not indexed to inflation, making it a stealth tax increase year after year. When they were introduced in the 1980s, the thresholds were at reasonably comfortable levels of income. Now they are really not, and it will only get worse in the future.

Right. For planning purposes, I just assumed that 85% of our SS benefits would be taxable in every year. If we can get under that in a few years, that's gravy.

 

[Independent]

Interesting article about the marginal increases on taxes as SS benefits are phased into AGI based on provisional income:

"those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!"

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? - Kitces | Nerd's Eye View

Yes, but ....

What can we do about it? The article doesn't give any numeric examples of effective strategies based on this observation.

The only general approach I can think of is to do some tIRA=>Roth IRA conversions before you start SS (if it makes for my tax bracket). I'm not sure exactly how I might use those Roth assets in the future, but I may see some possibilities for single year tax deductions some day.

 

[gerrym51]

Yes, but ....

What can we do about it? The article doesn't give any numeric examples of effective strategies based on this observation.

The only general approach I can think of is to do some tIRA=>Roth IRA conversions before you start SS (if it makes for my tax bracket). I'm not sure exactly how I might use those Roth assets in the future, but I may see some possibilities for single year tax deductions some day.

the other edged sword is ppaca(obamacare) since all ss is in it its a consideration in getting medical insurance subsidy.

things you do to avoid taxes in some areas may negate your subsidy in other areas-you can't win

 

[heeyy_joe]

Yes, but ....

What can we do about it? The article doesn't give any numeric examples of effective strategies based on this observation.

The only general approach I can think of is to do some tIRA=>Roth IRA conversions before you start SS (if it makes for my tax bracket). I'm not sure exactly how I might use those Roth assets in the future, but I may see some possibilities for single year tax deductions some day.

+1

 

[grasshopper]

My financial adviser, who's advice I follow to the letter Ms G. Says forget about it just stay with your plan, and we will just pay HI out pocket like we have for 8 years. But what Ms G hasn't realized is that after our HI doubles, we may need the subsidy. With great insight Ms G says, why doesn't Intuit have a fill in the blank program like Turbo Tax or Quicken. But my sweetie we may not know the final results until October. So Ms G says, better reason to forget about it. I think I will follow that advise.

 

[scrabbler1]

I have never seen it covered, but I have always wondered whether or not the taxes on SS are put back into the SS pot of money to extend its calculated life or if they are counted as taxes to be used in other parts of the federal budget.

I recall reading somewhere (maybe here, maybe in the SSA website, maybe somewhere else; sorry, I do not recall where) that those taxes are redirected into SS through some accounting entry which would, as you point out, extend its life.

 

[gerrym51]

I recall reading somewhere (maybe here, maybe in the SSA website, maybe somewhere else; sorry, I do not recall where) that those taxes are redirected into SS through some accounting entry which would, as you point out, extend its life.

since the government has no money no. ss keeps buying government bonds which they are supposed to redeem when necessary. since the federal government is broke what is is what is.

 

[packrat44]

I have never seen it covered, but I have always wondered whether or not the taxes on SS are put back into the SS pot of money to extend its calculated life or if they are counted as taxes to be used in other parts of the federal budget.

Sorry, I could not contain myself.

 

[Independent]

I have never seen it covered, but I have always wondered whether or not the taxes on SS are put back into the SS pot of money to extend its calculated life or if they are counted as taxes to be used in other parts of the federal budget.

Yes, most of the FIT on SS benefits goes into the SS Trust Fund.
Taxation of benefits

Of course, this has no direct impact on the total federal deficit.

However, it does have a legal significance. Under current law, SS is both permitted and required to pay current formula benefits as long as there is a positive balance in the Trust Fund. So, if the law isn't changed, this increases the amount of time that SS will be able to pay according to the current formula. That's significant for people trying to guess whether or not they will get SS benefits.

"But, Congress can change the law at any time, so that's irrelevant"? Technically true. However, I tend to look at how hard is is for Congress to agree on anything, and think the longer they take making a decision, the greater the chance that I'll get the current benefit.

 

[scrabbler1]

Independent, thanks for the link (and doing my dirty work and stopping me from scratching my head LOL!). I knew I saw it somewhere. The rest of the post was good, too.

 

[Animorph]

I used to have to deal with deduction/exemption rollbacks a few years ago (and they're back again now). There's also tuition credits and Roth contributions that get rolledback. These rollbacks also hit capital gains, so your CG tax might not be a simple 15%.

One strategy that I used was once you were over the "hump" in a given year, go ahead and load up on taxes up to the top of the bracket. So in most years you might try to stay below the rollback level, and in others you might go ahead and go way over.

With SS taxes, that might mean take a large tIRA or Roth conversion hit once every three years or so and minimize income the other two years so that your SS is not taxed. That will minimize the amount of your income that falls within the taxable SS range.

 

[sheehs1]

heres an easy taxable ss calculator
About.com: http://www.calcxml.com/do/inc08

Ball park estimate since I'm a few years away puts me in the bucket where 85% of my SSN will be taxed also.

Don't even want to think about this. I'm 57 so I have some years to think about things.

Thanks for the link for the calculation.