I think I torpedoed myself ...

[Out-to-Lunch]

That's simply not true. Everyone should run their own numbers rather than believe this. I have a small pension and plenty of taxable income and I've projected that I might not have quite 85% of my SS taxed. Since I plan to delay SS to 70 by that time it probably will be over, but

Go to https://www.irscalculators.com/tax-calculator
For a single person, put in $40,000 unearned income and $35,000 for SS and you'll see that only $24,475 is taxed. 70% of SS. These are not my exact numbers but not that far off.

I concur.

We have what I consider healthy pensions (~$65k total). If my wife claims at 62 and I claim at 70, our SS would be ~$70k in today's dollars. If this were today, this would put us squarely in the torpedo zone (40.7% marginal).

I guess I will have to just BTD and push through the torpedo zone!

 

[Out-to-Lunch]

Going from 85% taxable to 100% taxable is a real thing now for some.

How so?

What circumstances would trigger this rule now? I have not heard of this.

 

[Chuckanut]

I do not see a way that less than 85% of our SS income will be taxed. Do you?


My best guess is that 100% of our SS income will be taxed one day. And our SS income will be reduced. Which would be unfortunate for us, since about 2/3 of our future planned income comes from SS.

Taxing 100% of SS would not be right. At least some of the money we get every month is return of what we put in and have already paid taxes on. I think that’s the reason they stopped at 85%. But, given the current crowd in D.C. (who we elected) I would not give them that idea. So hush!

 

[dknighd]

23% is a number that some say will happen if the funding problem is not corrected in some way.

I'm personally not bothered by that at this time, since I won't be here./

You could still be around. I'm also assuming that future changes will not effect me directly. I hope I'm not wrong.

 

[target2019]

How so?

What circumstances would trigger this rule now? I have not heard of this.

I fixed it.

 

[target2019]

You could still be around. I'm also assuming that future changes will not effect me directly. I hope I'm not wrong.

There is no possible way I'll be here in 10 years. We also have more than enough, so I really have no dog in the fight.

 

[Out-to-Lunch]

I fixed it.

Got it. Thanks!

 

[dknighd]

I could probably survive a 25% cut in SS. I would not be happy.

 

[LateToFIRE]

Capt. Bart Mancuso: I'll be damned.

Jack Ryan: What happened?

Capt. Bart Mancuso: Combat tactics, Mr. Ryan. By turning into the torpedo, the Captain closed the distance before it could arm itself.

 

[dknighd]

There is no possible way I'll be here in 10 years. We also have more than enough, so I really have no dog in the fight.

You never know.
Edit: I guess if you have more than enough it does not matter. No kids, too much money. Have fun.

 

[Chuckanut]

I could probably survive a 25% cut in SS. I would not be happy.

Before retiring I ran a 25% SS cut and a 20% pension cut through FireCalc. I will survive, but not more jetting to Paris for a weekend with dinner at Arpége. Instead it will be a drive to the Lost Pines Resort for their January turkey dinner special that includes a glass of cheap champagne left over from their New Years Eve bash I could no longer afford.

 

[dknighd]

Sometimes surviving is good enough.

 

[dknighd]

One day I will die.

 

[dknighd]

I'm not looking forward to it, but one day it will happen

 

[G-Man]

For many of us the SS tax torpedo is a myth. If you have pension income and taxable account income then SS will be taxed at 85% no matter what. No torpedo unless you were naive and thought that you SS would not be taxed.

I think the RMD tax torpedo is a bigger surprise to early retirees than that 85% of their SS will be taxed.

Agreed. Our pensions alone will result in SS being taxed at 85%. So, no surprise to us.

 

[Chuckanut]

Agreed. Our pensions alone will result in SS being taxed at 85%. So, no surprise to us.

Agree. The real threat IMO, is IRMAA, especially when the RMDs hit. I’ve minimized as much of that as I can. But, someday the government will probably get me unless I do something stupid like invest in whiskey barrels stored in Scottish caves or land in Palmdale where the new InterContinental airport for all of So. Cal will be built, someday.

 

[MichaelL]

I got concerned when I read "Tax Torpedo" but after reading more it seems that this applies to people in the 10 - 12 % tax bracket who don't want to get pushed to 22%. I'm in the 24% so I'm already torpedoed for the duration.

 

[pb4uski]

Yes, generally where RMDs (or perhaps SS) puts you into a higher tax bracket by 5 or more points.

 

[ERhoosier]

Taxing 100% of SS would not be right. At least some of the money we get every month is return of what we put in and have already paid taxes on. I think that’s the reason they stopped at 85%. But, given the current crowd in D.C. (who we elected) I would not give them that idea. So hush!

"Right" has nothing to to with it. Social Security benefits were originally intended to be income tax free under the original Act, so it was not "right" to change that original Gov't promise. But the Feds amended broke that promise by amending the Law to tax up to 50% of benefits in 1983, then later raising that to 85%. Given the financial state of the Trust Fund, moving the tax ceiling to 100% is (IMHO) highly likely within the next 5-10 years.

 

[Koolau]

"Right" has nothing to to with it. Social Security benefits were originally intended to be income tax free under the original Act, so it was not "right" to change that original Gov't promise. But the Feds amended broke that promise by amending the Law to tax up to 50% of benefits in 1983, then later raising that to 85%. Given the financial state of the Trust Fund, moving the tax ceiling to 100% is (IMHO) highly likely within the next 5-10 years.

This is me being surprised.

 

[TheWizard]

The feds?
Raising our taxes?
Come on now...

 

[pb4uski]

Taxing 100% of SS would not be right. At least some of the money we get every month is return of what we put in and have already paid taxes on. I think that’s the reason they stopped at 85%. But, given the current crowd in D.C. (who we elected) I would not give them that idea. So hush!

"Right" has nothing to to with it. Social Security benefits were originally intended to be income tax free under the original Act, so it was not "right" to change that original Gov't promise. But the Feds amended broke that promise by amending the Law to tax up to 50% of benefits in 1983, then later raising that to 85%. Given the financial state of the Trust Fund, moving the tax ceiling to 100% is (IMHO) highly likely within the next 5-10 years.

I agree with Chuckanut.

There was never any "promise" that SS would be tax-free. Early on there were a series of Treasury Department Rullings in 1938 and 1941 that made SS benefits exempt from tax.

In 1979 an Advisory Council was charged with studying the financing and benefit provisions of the Social Security program. The Council wrote extensively on the issue of taxation of Social Security benefits:

"The present tax treatment of social security was established at a time when both social security benefits and income tax rates were low. In 1941 the Bureau of Internal Revenue ruled that social security benefits were not taxable, most probably because they were viewed as a form of income similar to a gift or gratuity.

The council believes that this ruling was wrong when made and is wrong today. The right to social security benefits is derived from earnings in covered employment just as is the case with private pensions.

The council believes that the current tax treatment of private pensions is a more appropriate model for the tax treatment of social security, Pension benefits from contributory private pension plans (including those for government employees) are now taxed to the extent that the benefits exceed the employee's accumulated contributions to the plan. Cumulative retirement benefits up to the employee's own total contributions are not taxed because the income from which the contributions were paid was taxable. That part of the benefit representing the employer's contribution and interest income on both the employee's and the employer's contributions is taxed when received.

Estimates by the Office of the Actuary of the Social Security Administration indicate that workers now entering covered employment in aggregate will make payroll tax payments totaling no more than 17 percent of the benefits that they can expect to receive. The self-employed will pay no more than 26 percent on average. Therefore, if social security benefits were accorded the same tax treatment as private pensions, only 17 percent of the benefit would be exempt from tax when received, and 83 percent would be taxable. ...

So the 85% used today is a ballpark estimate of the amount of benefits that exceed your contributions. I recall doing an analysis of my contributions and benefits and it was pretty close, especially after adjusting for the fact that contributions are not solely for retirement benefits but also for disability and survivor benefits.

So the Treasury Department erred when they initially decided that SS benefits shoud be tax free and Congress later corrected it to be akin to contributory private pension benefits, non-deductible IRA withdrawals where contributions are exempt from tax and other similar contributory retirement benefits.

For that reason, you can bet the house that 100% of SS will never be taxed.

https://www.ssa.gov/history/taxationofbenefits.html

 

[Koolau]

For that reason, you can bet the house that 100% of SS will never be taxed.

Never bet against the house - and they are the gummint in this case. 100% taxation of SS IS possible. All it takes is the gummint's will to do it. "Double taxation" would not be illegal - just immoral (and they'd have to change the law - including the IRS - who certainly has no dog in this hunt.) YMMV