Proper term for Social Security Income

[corn18]

But I didn’t say SSI which stands for something else.

Ok, I guess I was being obtuse. I don't think introducing another set of words that start with exactly the same letters as another set of words in the context of describing social security is helpful.

 

[pb4uski]

+1 to all of these quotes. I think you should step away from what you are trying to write about retirement planning, and then come back to it in a few months with the objective of making it excruciatingly simple and easy for anyone to understand. Complexity is not a virtue if you genuinely have something to say. Being able to express yourself simply and clearly is more difficult but worth the effort.

+2 When I was working I had to deal with explaining a lot of detailed technical issues to executives with different backgrounds.... typically smart folks in their fields and in general... but even then it is best to gloss over some of the gory details if it contributes towards understanding.

When I was coaching younger colleagues and it got to convoluted I suggested that they write it so that their mother or grandmother could understand.... luckily while doing that I never ran across a colleague whose mother or grandmother was a PhD.

 

[bingybear]

I recall your posts in the past. IIRC you had one where you set the situation and had an emergency and needed some nominal amount that caused a large effective tax. I think I replied that I would take those dollars from my emergency fund.

But I understand these humps in effective rate exist especially when you set up a situation and then throw new money lower in the tax hierarchy.

The ACA cliff is another huge effective rate. However in my case I've been able to do roth conversions up to the top of the 15% bracket for much lower effective than projected marginal rates at RMD time. Part of this is due to having significant Qualified dividends in my income.

You talk about doing roth conversions to avoid these high effective rates of SS tax-ability. How much should you pay in roth conversion to lower these high effective rates. Will you pay more to do the roth conversions than you are saving? Yes this will be a more complicated of an analysis since the conversions likely have other benefits.

 

[kaneohe]

Social Security is an insurance program. You are being paid benefits. Those benefits are taxable. So there is no delay. It is taxed as the benefit is received.

Also, be careful calling it social security income. That is a specific benefit, as is SSDI, spousal and survivor. They all have their own name and benefits. If you mix and match, you will lose your readers and credibility.

SSI is Supplemental Security Income
https://www.google.com/search?q=ssi&oq=ssi&aqs=chrome..69i57j0l5.1770j0j7&sourceid=chrome&ie=UTF-8

 

[kaneohe]

............................................ You might simply be crowding too many ideas into one sentence. (Rather than conditional in reference to Social Security benefits I might simply use taxable Social Security Benefits and elsewhere indicate how to determine when they are taxable.)

Agree w/ Martha that you might be crowding too many ideas at once. Perhaps do separately:
1) SS benefits & taxable amount....line 20a & b on old 1040
2) How taxable amount of SS is calculated= f(0.5SS, tax exempt inc, other inc)
3) Taxable income = AGI - deductions
(some think taxable income is any income subject to taxation)
4) Taxable income brackets
5)Marginal rates (may not be same as bracket rates).....show separate examples of ordinary inc. & ss with increasing ordinary inc.; ordinary inc
and QDIV/LTCG with increasing ordinary income

 

[gcgang]

What do you call Social Security income? How 'bout, old fart welfare?

 

[corn18]

What do you call Social Security income? How 'bout, old fart welfare?

the ssa website refers to it as social security benefits. That covers all types of SS.

 

[Car-Guy]

Social Security Benefits = Government mandated retirement annuity.

It's not welfare, you were forced to pay for the retirement benefits, that you may receive.

 

[Sandy & Shirley]

Everyone keeps asking questions about "marginal" tax rates, the amount your taxes increase for every additional dollar earned!

	What	Data	Taxable			What	Data	Taxable		Delta
	SSB	$40,000				SSB	$40,000
	STCG	$28,216	$28,216			STCG	$30,216	$30,216		$2,000
	LTCG	$4,000				LTCG	$4,000
	Basis	$52,216				Basis	$54,216
50%	$9,000	$4,500			50%	$9,000	$4,500
85%	$18,216	$15,484	$19,984		85%	$20,216	$17,184	$21,684		$1,700
	Standard		($12,000)			Standard		($12,000)
	Over 65		($1,600)			Over 65		($1,600)
	Taxable		$34,600			Taxable		$38,300		$3,700
	Tax Due		$3,961			Tax Due		$4,405		$444
	TI+LTCG	$38,600				TI+LTCG	$42,300
	over 38.6K	$0				over 38.6K	$3,700
	at 15%		$0			at 15%		$555		$555

The first four columns illustrate how your taxes are calculated if you are getting $40,000 SSB, $28,216 STCG, and $4,000 LTCG. The “Basis” for how much of your SSB are taxable income is one half of your SSB plus your STCG and LTCG income. The basis amount from $25,000 to $34,000, $9,000 makes 50% of your SSB taxable, and the amount over $34,000 makes 85% of your SSB taxable until 85% of your benefit has been taxed. In the first four columns $19,984 of your benefit becomes taxable income. Add this amount to your STCG then take your Standard deduction and over 65 deduction to determine your taxable income the first $9,525 is taxed at 10% and the rest is taxed at 12%. You then add your LTCG to your taxable income and anything over the $38,600 limit becomes taxable LTCG at 15%. The first four columns were designed to be exactly at that limit for this example.

The only change in columns 6 through 9 was to add an additional $2,000 to your STCG so we can see the difference in your final tax due.

Looking at the Delta column:

The extra $2,000 made of STCG makes an extra $1,700 of your SSB taxable at the 85% level.
This raises your taxable income by the total of $3,700, not just the $2,000 of extra income.
At 12% this increases your tax due by $444.
It also increases your Taxable income plus LTCG amount so that it is now $3,700 over the $38,600 maximum for tax free LTCG.
That $3,700 is now taxed at the 15% LTCG rate and raises your tax due by another $555.
Your total tax increase is $999 for a $2,000 increase in STCG income which is a 49.95% marginal tax rate.

I hope these number make marginal tax rate clearer. They also illustrate how your extra income plus additional SSB plus LTCG income is all taxed at the same time to create this marginal rate.

 

[beowulf]

Sorry, I don't think the average person who uses H&R Block or some other mass tax preparer would have a clue as to what your table means. Those of us who more or less understand the tax tables don't need yet another table to understand what marginal rates are or how SS affects the taxes you pay. Or, to say it another way, I have no idea who your audience is. There is a ton of info on this topic available already and your example appears to be more complex than what already exists. My personal belief is that you're creating something to solve a problem that doesn't need solving as it is already solved.

 

[kaneohe]

Sorry, I don't think the average person who uses H&R Block or some other mass tax preparer would have a clue as to what your table means. Those of us who more or less understand the tax tables don't need yet another table to understand what marginal rates are or how SS affects the taxes you pay. Or, to say it another way, I have no idea who your audience is. There is a ton of info on this topic available already and your example appears to be more complex than what already exists. My personal belief is that you're creating something to solve a problem that doesn't need solving as it is already solved.

Unfortunately I have to agree w/ beowulf. SS taxation is not the easiest thing to understand which is the heart of the problem. Perhaps you might want to have a discussion of marginal rates where all income is ordinary. Then introduce the concept of surprising marginal rates w/ LTCG/QDIV where a simple bar chart can illustrate the doubling of rates for a finite "distance" and
then a return to normal rates. Finally just a mention that SS taxation has some similarity to the LTCG/QDIV calculation but is much more complex.

You can have curious ones do examples w/ a tax calculator so they can see the high rates for themselves. You can save the gory explanations for those who still persist at this point and not burden the main audience .

 

[pb4uski]

The bigger issue that I have is that it is contrived example because the base case is specifically designed to be on the edge of where LTCG are taxed at 0%... so even if there was no increase in taxable SS the marginal rate for the next $4,000 would be 27% (the ordinary rate plus 15% because any increase in ordinary income pushes LTCG into the 15% band) and that exacerbates the marginal rate.

The $999 increase in tax can be desconstructed as follows:

$2,000 increase in STCG @ 12%.................................$240
$1,700 increase in taxable SS at 12%.......................... 204
Push of $3,700 of LTCG from 0% to 15%...................... 555

While the marginal rate is indeed ~50% in this case it would be for the next $4,000 of income from the base case because of LTCG being pushed into the 15% tax rate and after that it is nil.

I guess my point is these outrageous marginal tax rates apply in few cases and to relatively narrow bands of income so while they are important to know about for decision analysis (what is the tax if I do an additional $2k of STCG or Roth conversion) they do not apply so broadly as to be cruicial to retirement tax planning generally.

 

[RunningBum]

The bigger issue that I have is that it is contrived example because the base case is specifically designed to be on the edge of where LTCG are taxed at 0%... so even if there was no increase in taxable SS the marginal rate for the next $4,000 would be 27% (the ordinary rate plus 15% because any increase in ordinary income pushes LTCG into the 15% band) and that exacerbates the marginal rate.

The $999 increase in tax can be desconstructed as follows:

$2,000 increase in STCG @ 12%.................................$240
$1,700 increase in taxable SS at 12%.......................... 204
Push of $3,700 of LTCG from 0% to 15%...................... 555

While the marginal rate is indeed ~50% in this case it would be for the next $4,000 of income from the base case because of LTCG being pushed into the 15% tax rate and after that it is nil.

I guess my point is these outrageous marginal tax rates apply in few cases and to relatively narrow bands of income so while they are important to know about for decision analysis (what is the tax if I do an additional $2k of STCG or Roth conversion) they do not apply so broadly as to be cruicial to retirement tax planning generally.

Good summary. I'm still trying to get a handle on how many cases this actually applies to.

Note that STCGs in S&S's table is really any regular income--wages, STCGs, interest income, Roth conversions, RMDs, etc. I think RMDs is the important factor here, because if you can avoid RMDs by doing conversions before you start taking SS, you can limit some of the taxation at this high marginal rate.

LTCGs includes qualified dividends

"Basis" is what the IRS calls Combined Income in pub 915. Another point of confusion since basis has a totally different meaning in tax terms so I don't know why it was used here.

A simple takeaway here is that when people are thinking of doing Roth conversions in the years before taking SS, the future tax rate may be higher than it seems. If it looks like you have the same tax rate now and in retirement, do conversions now, because it's likely that at least some of your RMD income will cause a higher marginal tax rate than you think. To see if it actually applies takes more work: see if it would push more SS into being taxed at 85%, and also if any LTCGs/QDivs would be pushed into being taxed at 15%. Also see if the extra SS taxable income pushed you into the next tax bracket.

 

[pb4uski]

Good summary. I'm still trying to get a handle on how many cases this actually applies to. ....

"Basis" is what the IRS calls Combined Income in pub 915. Another point of confusion since basis has a totally different meaning in tax terms so I don't know why it was used here. .....

+1. Using that term just added confusion.

 

[Sandy & Shirley]

I guess my point is these outrageous marginal tax rates apply in few cases and to relatively narrow bands of income so while they are important to know about for decision analysis (what is the tax if I do an additional $2k of STCG or Roth conversion) they do not apply so broadly as to be cruicial to retirement tax planning generally.

A simple takeaway here is that when people are thinking of doing Roth conversions in the years before taking SS, the future tax rate may be higher than it seems. If it looks like you have the same tax rate now and in retirement, do conversions now, because it's likely that at least some of your RMD income will cause a higher marginal tax rate than you think. To see if it actually applies takes more work: see if it would push more SS into being taxed at 85%, and also if any LTCGs/QDivs would be pushed into being taxed at 15%. Also see if the extra SS taxable income pushed you into the next tax bracket.

There is a 40.7% marginal tax rate that starts when you enter the 22% federal tax bracket and ends when 85% of your Social Security has been taxed. 185% of 22% is 40.7%.

The average yearly SSB in 2017 was only $16,320. At benefits levels that low the 85% already taxed point is reach before the 22% bracket so this large marginal bracket does not exist for most of us.

If you wait until age 70 to start your benefits, your benefits will be somewhere between $20,000 to more than $40,000. Here are the statistics for single individuals on the size of the 40.7% bracket at those SSB levels:

SSB + Other Income – Fed Tax = After Fed Tax Income
$20,000 + $36,865 - $4,453 = $52,412, next $1,841 at 40.7%
$30,000 + $34,568 - $4,453 = $60,115, next $9,138 at 40.7%
$40,000 + $32,270 - $4,453 = $67,817, next $16,436 at 40.7%

You said that these rates only apply in a few cases, but there is one segment of the population where they probably apply in the majority of cases, surviving spouses!

Shirley is a widow. We did a lot of pre-planning. She retired early and started her survivor benefits before the age of 62 and will wait until she is 70 to start her own benefits. This will place her in the category of facing the 40.7% marginal rate for a substantial portion of her future income. For her and most other surviving spouses this is not a “narrow band of income”.

Let me repeat something I said in an earlier post. “If you are getting $40,000 in SSB and $32,270 from pensions, annuities, and IRA withdrawals, the basis for the taxation of your SSB is $52,270 which makes $20,030 of your benefits taxable, a fraction over 50%, the other 50% will be tax free. Your overall Federal tax rate is only 6.16%. If this is your situation, do you want to pay 40.7% on the next $16,436 of income while the other half of your SSB is taxed?”

One interesting point here is that, regardless of your SSB level, the taxes paid at the point where you enter the 22% Federal bracket, 40.7% marginal, is:

Tax rate	Single	Tax
10%	Up to $9,525	$952.50
12%	$9,526 to $38,700	$3,501
		$4,453.50

If some of your extra $32,270 income is from LTCGs, they are tax deferred, so your taxes paid will be less, but the 40.7% bracket will start at the 49.95% level as your LTCGs become taxable.

Since the research that I am doing is designed for Widows and Widowers, I should probably preface most of my posts with a statement that they are meant for surviving spouses.

 

[RunningBum]

Why is this any different for surviving spouses than other people?

 

[Nature Lover]

I'd call it ss income.

 

[kaneohe]

..........................................
You said that these rates only apply in a few cases, but there is one segment of the population where they probably apply in the majority of cases, surviving spouses!
.................................................................

Since the research that I am doing is designed for Widows and Widowers, I should probably preface most of my posts with a statement that they are meant for surviving spouses.

Perhaps a simple graph illustrating the surviving spouse situation would tell the story better than 1K words (or numbers). You could even have 2 lines...1 for single and one for MFJ ......but please no more than that. You know the saying........too many lines (on a single graph) spoil ..............
Some of the earlier graphs tried to convey too much info in a single picture IMHO. http://www.early-retirement.org/forums/f27/marginal-tax-rates-repost-86048.html

 

[Choices]

I know I am not the sharpest knife in the drawer...this gives me a headache, and I know a bit about taxes and the progressive nature, thereof, etc.
I am not sure your target audience will get it, either.

 

[Sandy & Shirley]

Why is this any different for surviving spouses than other people?

First, it is not different for every surviving spouse, but in my opinion it is for the majority of them.

SS reports that the average annual Social Security benefit level is just under $16,500. One of the main reasons for this is that a majority of us start our benefits before our full retirement age and quite a few start as soon as possible at age 62.

We all have our own personal PIA, Primary Insurance Amount, based on our personal income history. This is the amount of SSB that you will receive if you retire at your full retirement age. You get less if you start your SSB early and more if you start them later.

If your spouse passes away before either of you start your SSB, the “normal” best thing to do is to start your survivor benefits early, getting less than their PIA, then change to your own maximum possible benefit when you reach age 70.

Yes, it is true that some of us non-survivors do wait until age 70 to start our own benefits, but that is a much smaller fraction than those who wait until 70 as survivors.

The option for survivors is to get a smaller amount for the first few years then change to the larger amount.

The option for non-survivors is to get nothing for the first few year then start your larger amount.

 

[imoldernu]

OMG!!!!!!
I just got around to reading this thread after posting the comment below on a different thread. It's a good thing I did that first, or I'd be in a panic.

It's why I'm not rich:

Our double entry accounting is keeping an amount in our checking account equal to four months "budget". Every two months... (thus the double entry) I take a look at the balance in the account. If the balance falls below a two month budget, I'll take a look to see why, but that doesn't happen very often.

DW pays bills that aren't automatic, with no late penalties for the past 20 years, when we began taking SS.

Haven't had to pay income taxes since we cashed out our IRA's a long, long time ago, and even then, minimal taxes.
(BTW... we DO file state and local every year even though it's not necessary.)

Guess you could call that boring...

Sometimes, being poor has benefits... one being less anxiety...

 

[RunningBum]

If your spouse passes away before either of you start your SSB, the “normal” best thing to do is to start your survivor benefits early, getting less than their PIA, then change to your own maximum possible benefit when you reach age 70.

Yes, it is true that some of us non-survivors do wait until age 70 to start our own benefits, but that is a much smaller fraction than those who wait until 70 as survivors.

The option for survivors is to get a smaller amount for the first few years then change to the larger amount.

The option for non-survivors is to get nothing for the first few year then start your larger amount.

And a higher SS benefit means the SS hump is more likely, and larger. That probably makes sense. Thank you. But I certainly wouldn't limit this to a survivor issue as there's no reason some non-survivors wouldn't hit this as well.

 

[SevenUp]

I’m trying to write a paper on retirement planning. A huge issue in that planning is the marginal tax rates that are created by the way your Social Security benefits are taxed at the same time as your regular income.

If you can explain it better than Taxation of Social Security benefits - Bogleheads, great.

Otherwise, perhaps just reference that wiki entry?

 

[beowulf]

The problem I see with all this is that there is almost nothing you can do about it if you have a pension, substantial RMDs, or lots of other income while collecting SS. If you want to plan to avoid having your SS taxed, you should probably start in your 20s, latest 30s. And if you are like many people, it’s simply irrelevant as our MAGI in retirement will always dictate that 85% of SS is taxed at our highest marginal rate.

 

[Koolau]

Once you've reached FIRE status, the big issues are probably avoiding the "gotchas" built in to the "system" - things like ACA and MC AGI cliffs, etc. Other than that, most of this stuff is baked into the cake once you pull the plug. You can't go back and fix it. All you can do is attempt to titrate your income sources to avoid as many of the cliffs as possible (we went over one not too long ago because we didn't figure our depreciation recapture upon sale of our old condo which we had both rented and then lived in.) Had to pay extra MC premiums for a year.

I DID see a treatise by Scott Burns some years ago (wish I could recall the venue) regarding some of the pieces of this discussion. HIS take was that having a second spouse working was often nearly a financial wash (maybe even a loss) once ALL factors, including SS rules (including, but not limited to taxes) were taken into account. I don't recall the details, but it was quite convincing. DW and I probably did everything wrong in this way, but we're fine financially, even though we've likely thrown away thousands in the way Burns described.

Throw in the fact that the rules change at political whim and you realize that "none of us gets out of here alive." YMMV