Calculate SS Tax Torpedo

[Montecfo]

Aha! so this is the one w/ the flawed formula.........I found a similar one by SS and sent them an error message. I sent this guy one too after I found an e-mail address that didn't threaten to charge me $200 for consulting.

I don't see where you got the 38% and 46% from.....perhaps you could detail that.

The tax torpedo is a nice image for selling books/advice etc.

Here's a different way of looking at it. Assume SS is just income that will be taxed like any other income. Then you find out that you get a gift if your other income is low enough and you aren't taxed on it at all. You should be happy.

Then you find out that if you have enough other income, that gift is taken back
but you are taxed on only 85% of your SS income. You should still be happy.

However in between because of the mechanics of how things work, your marginal tax bracket may be higher than your nominal one because you are being taxed on your normal income additions plus some of the gift is being taken back. The so-called tax torpedo..................

btw.........you still haven't given (in my mind anyway) a clear listing of your income streams and your ages (<65 for 1 or both of you) for when you are doing this calculation. The numbers you have given have been attached to other numbers like AGI, taxable income , provisional income that were confusing,when viewed w/ your income numbers.

Yes. I tend to think calling it a tax torpedo is a bit much. For sure it is something to plan for

 

[pb4uski]

And any tax torpedo shouldn't be a surprise for anyone who was paying attention.

 

[N02L84ER]

The information you quoted used a 25% marginal tax bracket. So, $1 extra income made $0.85 of SS taxable. $1.85 times 25% = $0.4625 of tax on $1 of extra income. This is the 46.25% tax torpedo to which they referred.

You are planning to be in the 12% marginal tax bracket. So, $1 extra income still makes $0.85 of SS taxable until you reach a level where the full 85% of SS is taxable. Anyway $1.85 time 12% = $0.222 of tax on $1 of extra income. This will be your 22% tax torpedo. Note, you never use the 22% rate (or 46%) in the tax calculations.

HTH

 

[pb4uski]

^^^^ plus, the income bands subject to 46.25% marginal tax rate is usually pretty narrow as I recall from the hump graphs.