Taxing SS Benefits

[Jerry1]

Doing a friend's taxes and am wondering if there are any exemptions for pensions when looking at income to determine whether or not SS is taxable. It doesn't seem that I'm doing anything wrong, but looking at a single person with a $35K pension means that 85% of their SS is subject to tax.

In addition to trying to lower a friend's tax, this is also concerning to me as a soon to be retiree drawing on my 401K. I'll get a little more relief because I'm MFJ but it would be nice to exclude that income altogether. Just doesn't look like that's possible.

Am I missing something?

 

[GrayHare]

Sounds right. While you can't change that line on Form 1040 you can deduct against it. One way is capital loss harvesting which can put up to -3000 on Form 1040 on a line near that SS tax. Though it's too late now to loss harvest for tax year 2016, it's not too late for tax year 2017.

 

[haha]

Am I missing something?

Only a perfect world.

Ha

 

[meierlde]

Only a perfect world.

Ha

As noted you add 50% of ss payments to all other income. If the total is less than 25k single 32k mfj no ss is taxable. The 85% taxability for single is reached at a 34k level of the above total, for singles and 41k for mfj.

 

[youbet]

it would be nice to exclude that income altogether.

Of course. All taxes should be paid by those nasty 1%ers and we plebeians should enjoy a well-funded world of gov't benefits, services and infrastructure at no cost to ourselves.

 

[Independent]

Doing a friend's taxes and am wondering if there are any exemptions for pensions when looking at income to determine whether or not SS is taxable. It doesn't seem that I'm doing anything wrong, but looking at a single person with a $35K pension means that 85% of their SS is subject to tax.

You didn't mention the amount of your friend's SS benefit. Does that matter?

 

[meierlde]

You didn't mention the amount of your friend's SS benefit. Does that matter?

It does you take the other income on the 1040 i.e. lines 7,8a 8b,9a,10 thru 14 15b,`6b,17 thru 19 and 21. Note that this does then include tax exempt income in the total. Add them up add 1/2 of social security, and if the total exceeds 25k for a single Some SS is taxable. if the total exceeds 35k then 85% is taxable. So in the situation cited it would not make a difference because total other income came to 35k. But in general it can.

 

[Jerry1]

Of course. All taxes should be paid by those nasty 1%ers and we plebeians should enjoy a well-funded world of gov't benefits, services and infrastructure at no cost to ourselves.

Except that SS is not entirely a gov't benefit. For my friend, I was just trying to find a way to reduce the burden. She went from MFJ to Single (husband died) and the tax implication was significant. She's going to have to pay the same amount of tax as last year on $20,000 less income. She went from an average tax rate of 11% to just over 15%. Seems a little harsh even for someone like her netting about $60,000 in total income. Not exactly a 1%'er.

For me, it's just another thing I appreciate about this forum. Since I've been financially focused on retirement, these types of things come into focus. Glad to have some folks to help. I wonder how the modeling I do (Fidelity Retirement Planning tool) handles this.

Thanks all!

 

[bingybear]

Except that SS is not entirely a gov't benefit. For my friend, I was just trying to find a way to reduce the burden. She went from MFJ to Single (husband died) and the tax implication was significant. She's going to have to pay the same amount of tax as last year on $20,000 less income. She went from an average tax rate of 11% to just over 15%. Seems a little harsh even for someone like her netting about $60,000 in total income. Not exactly a 1%'er.

For me, it's just another thing I appreciate about this forum. Since I've been financially focused on retirement, these types of things come into focus. Glad to have some folks to help. I wonder how the modeling I do (Fidelity Retirement Planning tool) handles this.

The change from MFJ to Single is something often discussed and I've not seen lots of great plans. Often this is discussed more at RMD time. One passes, but both RMDs likely will continue. The will jump the tax rate just like you are seeing.

I'm expecting both are SS will be taxed unless tax or SS laws change. The tax will likely increase when one of us passes.

 

[pb4uski]

Except that SS is not entirely a gov't benefit. For my friend, I was just trying to find a way to reduce the burden. She went from MFJ to Single (husband died) and the tax implication was significant. She's going to have to pay the same amount of tax as last year on $20,000 less income. She went from an average tax rate of 11% to just over 15%. Seems a little harsh even for someone like her netting about $60,000 in total income. Not exactly a 1%'er.

For me, it's just another thing I appreciate about this forum. Since I've been financially focused on retirement, these types of things come into focus. Glad to have some folks to help. I wonder how the modeling I do (Fidelity Retirement Planning tool) handles this.

Thanks all!

15% average rate seems high if her only income is $35k pension and $25k of SS. Taxcaster suggests here tax would be a little less than $6k or a little less than 10% of income.

I suspect that perhaps you are excluding non-taxable SS in the denominator in getting the 15%?

I assume that she has no dependents and therefore does not qualify for Head of Household?

 

[Bir48die]

One solution to this whole issue. Have Federal witholding taken out to cover no matter what you think your income level is.

 

[pb4uski]

That is no solution... tax is still the same it is just how it is paid that differs.