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Old 12-29-2018, 08:05 AM   #21
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Originally Posted by Sandy & Shirley View Post
I am making absolutely ZERO on my website. My obsession is to make sure that retirees are aware of the 40.7% and 49.95% marginal tax rates that they can face during retirement.
BTW, it is excellent! I learned a lot by reading it. Thanks
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Old 12-29-2018, 08:29 AM   #22
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Originally Posted by pb4uski View Post
No, if that extra $1 or$100 or $1,000 changes your taxable SS to go from $0 to 50% of SS or from 50% to 85% then the incremental tax cost could easily exceed the amount of the incremental income. Similar mechanics to the ACA cliff.

So let's say you have $16k of SS... the wrong move could add $8k or $13.6k to your taxable income, so at 10 or 12% would be $800 to $1,600 of additional tax.
You're going to have to show an example to show a marginal rate any higher than 49.95%. It's not my understanding that the extra $1 pushes all of your SS into 50% or 85% taxability, just that extra $1. That in turn can drag income and LTCGs into being taxed more, to a max of 49.95%.
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Old 12-29-2018, 09:04 AM   #23
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I don't have any personal experience w/ ACA but my impression is that there is a real cliff there as there is w/ Medicare IRMAA. $1 takes you over the cliff.
There are probably others (Savers credit) where the multiplying factor changes step-wise but I don't think it's very common.

I learned many yrs ago as a callow youth that you can read a lot of words in a physics textbook and think you understand it and then be shocked that you couldn't do a single problem correctly. It is often difficult to express in words (perhaps because the number of them is limited by an editor) the real meaning of them. It seems to be a fairly common misunderstanding that "if you are in the 0 or 12% tax bracket" that you can have unlimited amount of QDIV/LTCG and be taxed at 0%. I thought that once too because of reading words, not doing a real problem.

Same w/ SS.......I think those words are too simple and lead to misunderstandings. I posted that $1 question to be sure I understood how things work. My understanding is that there is no cliff w/ SS taxation.
If the combined income goes over $32K (MFJ), then if you go $1 over that, 0.50 of your SS is taxable. If you go 12K over, 6K is taxable.........so it is 50% of the overage that is taxable, not 50% of total SS. Same w/ the 85% rate and threshold.
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Old 12-29-2018, 09:26 AM   #24
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Originally Posted by kaneohe View Post

Same w/ SS.......I think those words are too simple and lead to misunderstandings. I posted that $1 question to be sure I understood how things work. My understanding is that there is no cliff w/ SS taxation.
If the combined income goes over $32K (MFJ), then if you $1 over that, 0.50 of your SS is taxable. If you go 12K over, 6K is taxable.........so it is 50% of the overage that is taxable, not 50% of total SS. Same w/ the 85% rate and threshold.
Yes, I agree, and that's what I'm talking about. The extra $1 can have a large marginal rate, but it's not going to cost you more than that $1 as do the ACA cliff and a couple others like you mentioned. For ACA it can cost me $8000 if I go just $1 over.
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Old 12-29-2018, 10:25 AM   #25
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It is my understanding that the average SS benefit is about $17.5k.
That is only true because of a lot of misleading information about the “Break Even” calculations for Social Security benefits. If your full retirement age is 66 where you will get 100% of your benefits, your age 62 and 1 month benefit is 75.42%. Yes if you compare $7,542 to $10,000, or any other numbers at that ratio, your break even will be between ages 77 and 78. But these numbers do not reflect reality!

Let’s say that you were earning an inflation adjusted earning of $60,000, slightly upper middle class! Yes the 62 vs 66 benefits are $19,179 vs $25,429 and break even on the GROSS income is around age 77. But, if you want a lifestyle with an after Federal tax income level of $48,000 you would have to get taxable income of $32,196 for the lower tax deferred benefits level and only $24,572 for the higher tax deferred benefits. Your Federal taxes due would be $3,375 vs only $2,001. If you compare your NET Federal income, Social Security benefit minus Federal Taxes, ($19,179 - $3,375 =) $15,804 vs ($25,429 - $2,001 =) $23,428, your break even drops 4 years from 77 to 73. We all live on NET income, not GROSS income!

If you use a higher income level, say $80,000 earnings with a lifestyle of $60,000, the 40.7% marginal tax hump gets involved and the break even drops even more, down to only age 71.

This was explained to me at one of those FREE retirement information dinners. If you delay your Social Security benefits by spending down your 401K/IRA early in order to get a larger guaranteed income for the rest of your life, and you die during the spend down period, “You had enough money to last you the rest of your life!” Not doing this, if you live past age 90, you might go broke!


The choice is yours!
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Old 12-29-2018, 11:11 AM   #26
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Yes, I agree, and that's what I'm talking about. The extra $1 can have a large marginal rate, but it's not going to cost you more than that $1
My understanding as well. Once you exceed $32k combined income, each dollar results in taxation of 50 cents of SS. So at 44k combined income (for MFJ) $6K of SS is subject to taxation. Past $44k, each increased dollar results in taxation of 85 cents of social security until you get to the maximum of 85% of the total.


So, assume you are just 1 cent below the $32K combined income. Your actual income is $36k in SS and $14k in other income (assume a pension). You take the standard deduction of $24k. Your taxable income is zero and you owe no tax on $50k actual gross income.

Let's look at three withdrawal scenarios

1. ) Same as base case but you withdraw $9K from your IRA, putting you over the combined income test by $9k. Each dollar of income over $32k subjects 50 cents of SS to tax. So, your AGI is (50% of ($39k - $32k)) +$14k pension + $9k IRA withdrawal = $26,500. You take the $24k standard deduction, so your taxable income is $2500 and you are in the 10% bracket. Your tax is $250.

2.) Same as base case, but now assume you take $12k from your IRA/401K, reaching the top of the SS taxation phase in band. Your AGI now equals (50% of $12k) + 14k pension + $12k IRA withdrawal = $32k. You take the $24k standard deduction, so your taxable income is $8k. You are in the 10% marginal bracket and you pay $800 in tax.

3.) Same as base case, but now you take $20k from your IRA. Now, $6k of your SS plus 85% of the amount over $44k combined income is subject to tax, up to the maximum of $30,500, which is 85% of $36k). So your AGI is (50% of 12K +85% of $8k) + $14k pension + $20k IRA withdrawal = $46,500. With a $24k deduction, your taxable income is $22.5k. Your tax will be $2319.



In this scenario, you will actually reach maximum taxation of social security when you withdraw a total of $40,941.18 from your IRA. (50% of $12000 + 85% of $28,941.12 = $30600). At that point, your AGI will be $30.6k SS + $14k pension + $40,941 IRA withdrawal = $85541. With a standard deduction, your taxable income will be $61,541 and you will be in the 12% bracket. Your taxes will be $7004.

From this point on, there is no difference to the taxation of a marginal withdrawn dollar. For comparison, now assume SS taxation suddenly went away. Your AGI is reduced by $30,600 and your tax by $3672. That is the maximum affect of the SS add in.

Obviously, there will be slight variations depending on the actual SS received, but you should get the picture that it is a limited dollar impact.
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Old 12-29-2018, 12:57 PM   #27
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Originally Posted by Sandy & Shirley View Post
That is only true because of a lot of misleading information about the “Break Even” calculations for Social Security benefits. If your full retirement age is 66 where you will get 100% of your benefits, your age 62 and 1 month benefit is 75.42%. Yes if you compare $7,542 to $10,000, or any other numbers at that ratio, your break even will be between ages 77 and 78. But these numbers do not reflect reality!

Let’s say that you were earning an inflation adjusted earning of $60,000, slightly upper middle class! Yes the 62 vs 66 benefits are $19,179 vs $25,429 and break even on the GROSS income is around age 77. But, if you want a lifestyle with an after Federal tax income level of $48,000 you would have to get taxable income of $32,196 for the lower tax deferred benefits level and only $24,572 for the higher tax deferred benefits. Your Federal taxes due would be $3,375 vs only $2,001. If you compare your NET Federal income, Social Security benefit minus Federal Taxes, ($19,179 - $3,375 =) $15,804 vs ($25,429 - $2,001 =) $23,428, your break even drops 4 years from 77 to 73. We all live on NET income, not GROSS income!

If you use a higher income level, say $80,000 earnings with a lifestyle of $60,000, the 40.7% marginal tax hump gets involved and the break even drops even more, down to only age 71.

This was explained to me at one of those FREE retirement information dinners. If you delay your Social Security benefits by spending down your 401K/IRA early in order to get a larger guaranteed income for the rest of your life, and you die during the spend down period, “You had enough money to last you the rest of your life!” Not doing this, if you live past age 90, you might go broke!


The choice is yours!
This part makes me ponder what the advantage was for the Broker at the retirement seminar........ who knows, maybe he is just a very nice guy.
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