Proper word for how we get Social Security?

[Sandy & Shirley]

I’m working on a personal webpage and I want to use the correct terminology when I talk about how we get our Social Security, and LTCGs, tax free, then pay taxes on them later as our other income grows. The way I said it was:

The individual is paying ZERO taxes on about their first $44,300 of gross income because Social Security benefits and Long Term Gains are "tax deferred" income.

But that is not exactly what tax deferred income is! What is the proper way to say that?

PS: Is it against forum rules for me to mention the URL of the page I am creating?

 

[MichaelB]

I’m working on a personal webpage and I want to use the correct terminology when I talk about how we get our Social Security, and LTCGs, tax free, then pay taxes on them later as our other income grows. The way I said it was:

The individual is paying ZERO taxes on about their first $44,300 of gross income because Social Security benefits and Long Term Gains are "tax deferred" income.

But that is not exactly what tax deferred income is! What is the proper way to say that?

PS: Is it against forum rules for me to mention the URL of the page I am creating?

Forum policy is to post about any blogs or websites once, here http://www.early-retirement.org/for...sic-and-art-created-by-our-members-64204.html

 

[VanWinkle]

LTCG and SS are taxed differently than ordinary income. They each have their own specific rules concerning when they are taxed above 0%.

 

[marko]

I thought we covered this about 6 months ago, but I'd use "tax dependent" as the taxes due--if any--depend upon several factors.

 

[braumeister]

This is identical to the thread you started just a few months ago:

http://www.early-retirement.org/forums/f27/proper-term-for-social-security-income-93454.html

Do we really need to rehash it all over again?

 

[gayl]

Either OP has no idea how to look up old threads or is trying to generate traffic to an alternative website

 

[kaneohe]

tax-favored?

 

[Gumby]

I do not understand this obsession with the concept that social security income is taxed when total income is above a certain amount. It is not different than increasing marginal rates at certain income levels, difference in treatment of capital gains at certain levels, losing deductions at certain levels or losing the ability to contribute to tax deferred accounts at certain levels. That's the tax regime we live under. We can't change it (at least, I can't), so just pay and move on. There are way better objects for your obsession.

 

[gayl]

[emoji106] but that wouldn't generate traffic to his website. I'm wondering if he gets pay per click. Nothing wrong with that

 

[pb4uski]

Not sure what I said a few months ago but I would refer to them as tax preferenced. SS is only partially taxable, anywhere from 15% to 100% is excluded from income based oon the amount of non-SS income. OTOH, LTCG is fully taxed but at preferential rates... 0% or 15% for most taxpayers.

 

[RunningBum]

I do not understand this obsession with the concept that social security income is taxed when total income is above a certain amount. It is not different than increasing marginal rates at certain income levels, difference in treatment of capital gains at certain levels, losing deductions at certain levels or losing the ability to contribute to tax deferred accounts at certain levels. That's the tax regime we live under. We can't change it (at least, I can't), so just pay and move on. There are way better objects for your obsession.

If there are things you can do about it, like converting your tIRA before MRDs, or bunching income in some years, it could be helpful. Otherwise I agree.

What I don't understand is the need to create new and confusing terms. I find the OPs posts and charts hard enough to understand as it is, and part of that is because obtuse terminology is used. Just stop.

 

[Sandy & Shirley]

[emoji106] but that wouldn't generate traffic to his website. I'm wondering if he gets pay per click. Nothing wrong with that

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.

 

[pb4uski]

I do not understand this obsession with the concept that social security income is taxed when total income is above a certain amount. It is not different than increasing marginal rates at certain income levels, difference in treatment of capital gains at certain levels, losing deductions at certain levels or losing the ability to contribute to tax deferred accounts at certain levels. That's the tax regime we live under. We can't change it (at least, I can't), so just pay and move on. There are way better objects for your obsession.

I agree, but at the same time for tax planning it is important that retirees understand the tax implications of certain moves. For example, the marginal tax rate on Roth conversions that end up taxed at theordinary rate and push long-term capital gains from a 0% rate to a 15% rate. Similarly, certain moves could result in a high marginal tax for Roth conversions if it causes more social security income to become taxable as well.

 

[Gumby]

I agree, but at the same time for tax planning it is important that retirees understand the tax implications of certain moves. For example, the marginal tax rate on Roth conversions that end up taxed at theordinary rate and push long-term capital gains from a 0% rate to a 15% rate. Similarly, certain moves could result in a high marginal tax for Roth conversions if it causes more social security income to become taxable as well.

True enough.

I guess my view is colored by the fact that I can't imagine retiring with an income less than the amount which implicates taxation of social security.

It is my understanding that the average SS benefit is about $17.5k. The formula for the SS taxation test is: non-taxable interest (like muni bonds) + other taxable income + 1/2 SS = combined income. If combined income is greater than $32k, then 50% of SS is taxed. If greater than $44k, then 85% of SS is taxed. So a married couple with average SS benefits can make only $49.5k in real total income (i.e. - adding back in the 1/2 SS), or only $14.5k of non-SS income, before SS begins to be taxed.

My plans have always assumed full taxation of social security. The fact that 15% of it actually will be tax-free is merely lagniappe.

 

[VanWinkle]

True enough.

I guess my view is colored by the fact that I can't imagine retiring with an income less than the amount which implicates taxation of social security.

It is my understanding that the average SS benefit is about $17.5k. The formula for the SS taxation test is: non-taxable interest (like muni bonds) + other taxable income + 1/2 SS = combined income. If combined income is greater than $32k, then 50% of SS is taxed. If greater than $44k, then 85% of SS is taxed. So a married couple with average SS benefits can make only $49.5k in real total income (i.e. - adding back in the 1/2 SS), or only $14.5k of non-SS income, before SS begins to be taxed.

My plans have always assumed full taxation of social security. The fact that 15% of it actually will be tax-free is merely lagniappe.

"A lagniappe (/ˈlænjæp/ LAN-yap, /lænˈjæp/ lan-YAP) is "a small gift given to a customer by a merchant at the time of a purchase" (such as a 13th doughnut on purchase of a dozen), or more broadly, "something given or obtained gratuitously or by way of good measure."

Sorry, I was not familiar with that word.

 

[DEC-1982]

"A lagniappe (/ˈlænjæp/ LAN-yap, /lænˈjæp/ lan-YAP) is "a small gift given to a customer by a merchant at the time of a purchase" (such as a 13th doughnut on purchase of a dozen), or more broadly, "something given or obtained gratuitously or by way of good measure."

Sorry, I was not familiar with that word.

Thank you for the explanation; I am always learning.

 

[kaneohe]

...........................It is my understanding that the average SS benefit is about $17.5k. The formula for the SS taxation test is: non-taxable interest (like muni bonds) + other taxable income + 1/2 SS = combined income. If combined income is greater than $32k, then 50% of SS is taxed. ............................. So a married couple with average SS benefits can make only ........................$14.5k of non-SS income, before SS begins to be taxed.

................................................

how much of SS is taxed if you make $14.5K + $1 of non-SS income?

 

[pb4uski]

And that's the point, that extra $1 or $100 or $1,000 of Roth conversions can cost you big time if you are not aware not how it works.

 

[RunningBum]

And that's the point, that extra $1 or $100 or $1,000 of Roth conversions can cost you big time if you are not aware not how it works.

That's only really true for the ACA subsidy cliff, right?

$100 extra in the SS calcs could cost you $41 or $50. A high marginal rate, but not a big dollar amount. You want to avoid it, but the price for slipping over isn't all that bad.

$100 extra in the 0% LTCG calcs could cost you $27. Same thing.

$100 extra for ACA subsidy calcs costs you whatever your subsidy at 400% FPL. In my case $100 extra would cost me about $8000. A huge rate and a huge dollar amount. You want to avoid at all costs.

 

[pb4uski]

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.

 

[ShokWaveRider]

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

 

[RunningBum]

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%.

 

[kaneohe]

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.

 

[RunningBum]

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.

 

[Sandy & Shirley]

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!