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Originally Posted by megacorp-firee
Starting a new thread from the related subject of taking SS early.
Has anyone taken a look at the tax consequences of taking SS at 62 if you have a sizeable taxable income. For example a $50K pension and $20K of dividends and interest generated from portfolio. Assume that dividends are qualified and interest is taxed at regular income tax rates. Thanks.
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Income Tax on Social Security Benefits.
The Basic Rule. Up to 50% of Social Security benefits are taxable if total “provisional income” (adjusted gross income, tax-exempt interest and one half of Social Security benefits) exceeds a base amount: $25,000 for single taxpayers and $32,000 for married taxpayers filing jointly. At this level, taxes are payable on the lesser of (1) 50% of Social Security benefits received, or (2) one half of the difference between provisional income and the applicable base amount. Fortunately, this is the end of the income taxation picture for most recipients of disability benefits.
The Second Tier. A second tier of income tax - reaching up to 85% of Social Security benefits received - kicks in (1) for single taxpayers with provisional income over $34,000, (2) for married taxpayers filing jointly with provisional income over $44,000, and (3) for all married taxpayers who file separate returns, but do not live apart.
For these second-tier categories, income taxes are payable on the lesser of (A) 85% of Social Security benefits or (B) the total of (1) 85% of the difference between provisional income and the applicable adjusted base amount ($34,000/$44,000), plus (2) the lesser of (a) half the benefits or (b) $4,500 (for singles / $6,000 (for married couples filing jointly). The adjusted base amount for married persons filing separately but living together is zero; taxes are payable on the lesser of 85% of benefits or 85% of provisional income.
So just for fun lets look at the taxes on a dollar of earned income for someone over the second-tier threshold. You will pay the income taxes on that dollar and you will also pay income taxes on 85% of a dollar because you caused another SS dollar to become taxable.
If you are in a federal bracket of say 25% then you'll pay 25 cents regular income tax on that dollar plus 0.85% times 25 cents which is 21.25 cents SS tax. The total tax then would be 46.25 percent.
If you are in a state with income taxes then they may also want their cut. In California you'd pay 9.3 % plus 0.85 x 9.3 for a total of 17.25 percent. In California your total tax bite (Federal and State) then will be on the order of 63.5 percent.
That's a very steep tax to pay on that SS income. You only get to keep a third of every dollar you earn.
Perhaps the "take SS at 62" crowd might want to rethink their strategy just based on the taxes alone.
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