How is Social Security taxed?

[pb4uski]

Not only that, it doesn't really result in SS benefits being "cut every year" as GenXguy suggested.. to say that reflects a fundamental misunderstanding of how it works. For some people that may be the result, but once you have enough other income to be at the 85% level then you'll be at the 85% level forever so there is no cut additional cut every year.

PS... I think GenXguy meant FRA and not FTA, whatever FTA is.

[GenXguy]

Correcting for a small typo that apparently caused confusion among some people. It's been too long to edit my previous post.

On the topic of SS taxes, there's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years, but most people aren't aware of this.
The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/pe...xes-2019-01-07
https://www.fool.com/retirement/gene...-wreaking.aspx
http://www.foxnews.com/story/2007/03...-benefits.html
https://www.ssa.gov/policy/docs/issu...ip2015-02.html

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FRA for people within a decade of collecting SS.

At some point, the FRA will need increased for younger workers also as lifetime durations increase over time.

There was a bill introduced to address the problem of SS benefit taxation threshold levels to some degree, but it still wouldn't index it to inflation going forward. It doesn't look likes it's gone anywhere since it was last mentioned here.

https://www.congress.gov/bill/116th-...house-bill/860
https://larson.house.gov/sites/larso...019%200918.pdf

[GenXguy]

Quote:

Originally Posted by SevenUp Congress may not consider that a flaw.

Well, you would think they would see the obvious, and some apparently do, but I don't want to get any further into the politics of the situation here. Refer to the websites I referenced above.

[qwerty3656]

Quote:

Originally Posted by Gumby If you'll forgive me for tooting my own horn, you may find this post to be of assistance. https://www.early-retirement.org/for...ml#post2506932

So this is different than I was understanding from other posts. I thought people were saying at $32k provisional income, 50% is taxed and at $44k provisional income 85% is taxed, but you are saying even at $39k provisional income only 12.5% of social security is taxed?

[pb4uski]

From the dinkytown calculator... single:

SS	Other income	Total income	Provisional income	Taxable SS	%
30,000	10,000	40,000	25,000	0	0.00%
30,000	15,000	45,000	30,000	2,500	8.33%
30,000	20,000	50,000	35,000	5,350	17.83%
30,000	25,000	55,000	40,000	9,600	32.00%
30,000	30,000	60,000	45,000	13,850	46.17%
30,000	35,000	65,000	50,000	18,100	60.33%
30,000	40,000	70,000	55,000	22,350	74.50%
30,000	45,000	75,000	60,000	25,500	85.00%
30,000	50,000	80,000	65,000	25,500	85.00%

https://www.dinkytown.net/java/1040-tax-calculator.html

My earlier point was that if the next year you still have $30k of SS (say the COLA adj was 0%) and $45k of other income then $25.5k of SS will still be taxable... no increase in taxable income just because of time.

[qwerty3656]

Quote:

Originally Posted by pb4uski From the dinkytown calculator... single: SS Other income Total income Provisional income Taxable SS % 30,000 10,000 40,000 25,000 0 0.00% 30,000 15,000 45,000 30,000 2,500 8.33% 30,000 20,000 50,000 35,000 5,350 17.83% 30,000 25,000 55,000 40,000 9,600 32.00% 30,000 30,000 60,000 45,000 13,850 46.17% 30,000 35,000 65,000 50,000 18,100 60.33% 30,000 40,000 70,000 55,000 22,350 74.50% 30,000 45,000 75,000 60,000 25,500 85.00% 30,000 50,000 80,000 65,000 25,500 85.00% https://www.dinkytown.net/java/1040-tax-calculator.html My earlier point was that if the next year you still have $30k of SS (say the COLA adj was 0%) and $45k of other income then $25.5k of SS will still be taxable... no increase in taxable income just because of time.

I know I'm slow but in your example with $20k other income, you say $5,350 is taxed. So that would be $20,000 + $5,350 = $25,350 - $12,400 (standard deduction) = $12,950 of taxable income, right? I just want to make sure the "standard deduction" isn't hidden in your table some where.

[Gumby]

Quote:

Originally Posted by qwerty3656 So this is different than I was understanding from other posts. I thought people were saying at $32k provisional income, 50% is taxed and at $44k provisional income 85% is taxed, but you are saying even at $39k provisional income only 12.5% of social security is taxed?

You don't get to 50% of social security being taxed at $32k (MFJ). That's where you start paying tax on any of your social security. Above that, the exact percentage depends on the mix of social security and non-social security income, but will be 50% max in the range $32k to $44k. The percentage continues to increase above 50% as you go above $44k, but you won't get to 85% taxation until well above that. I gave you a shortcut to calculate that 85% point depending on how much social security you get and how much other AGI you have (it is based on AGI + a few other things like tax free muni interest). After you have computed your percentage of social security that is taxed, then you calculate your total taxable income, taking into account the standard deduction.

[pb4uski]

Quote:

Originally Posted by qwerty3656 I know I'm slow but in your example with $20k other income, you say $5,350 is taxed. So that would be $20,000 + $5,350 = $25,350 - $12,400 (standard deduction) = $12,950 of taxable income, right? I just want to make sure the "standard deduction" isn't hidden in your table some where.

Yes, right.... where I used the term taxed I meant the amount of taxable SS... just like it says in the column heading.... Taxable SS.

Taxable income would be $25,350 less deductions.

[Running_Man]

If a married couple over 65 has a combined SS Benefit of 50K and 35K of other the total Federal tax on the 85K of income using standard deductions is only $3,826 or 4.5% of total income. About 60% of what any working American is paying for SS taxes alone.

It is not until you get past 125K about 2X the median US household income that you would even be paying 10% of your income in income taxes, which would only be 2%+ more than SS/Medicare tax rate a Mc Donald's counter worker pays. I don't find taxes on Social Security to be very onerous.

And if you double the last line on pb4uski's table and have a couple with 60K in SS benefits and 100K in other income, that couple is only paying 13.6% Federal Income Tax rate, or 138K in spendable income. And most of the income is likely to have been sheltered from 25 and 30% rates when they were working.

A couple at the Median US Household income with 50K of SS Benefits pays no income tax, a couple working pays $10,032 in SS & Federal Taxes, about what the retiree couple at twice the median US household income is paying in Federal taxes.

[gayl]

I just assume it's all taxable whenever I get it so selected to have 22% withheld for taxes. Keeping 78c of each additional $ is better than not getting any $s

[monte1022]

Another calculator


https://www.irscalculators.com/tax-calculator

[pb4uski]

Quote:

Originally Posted by monte1022 Another calculator https://www.irscalculators.com/tax-calculator

I like that tool.

It is amazing to me how many people are totally clueless about what they pay income taxes and often think that they pay a lot more than they really do.

According to the calculator, a MFJ couple over 65 with $40k of SS and $60K of other income pay 7.56% of their $100k of income in income taxes. Change the $60k of other income to $110k and pay 11.39% of their $150k of income in income taxes.

ETA: A couple things on the tool. It doesn't provide for the deduction of up to $300 for charitable contributions but you can just reduce an ordniary income by $300 and state income tax exemptions and deductions were out of date.... also, the 2021 standard deduction for MFJ with both over 65 was off by $100... but still overall a very good tool.

[Retired Expat]

Quote:

Originally Posted by jkern Unfairly, IMO. The parameters for when it's taxed have never been adjusted for inflation.

To be fair your Social security a bit like your 401k. It was taken out pretax. You didn’t think they were going to forget that did you? Actually that up to 15% isn’t taxed is rather amazing. On the down side Social Security isn’t enough to live on!

[jldavid47]

Quote:

Originally Posted by Retired Expat On the down side Social Security isn’t enough to live on!

Speak for yourself. My wife and I are living just fine on our Social Security income.

[GenXguy]

Quote:

Originally Posted by Retired Expat To be fair your Social security a bit like your 401k. It was taken out pretax. You didn’t think they were going to forget that did you? Actually that up to 15% isn’t taxed is rather amazing. On the down side Social Security isn’t enough to live on!

That's not true. For an employee, you have to pay full income taxes on the income that is taken out of your paycheck to pay SS taxes. The payroll taxes / FICA taxes do NOT give you a deduction or otherwise reduce your taxable income. This is completely different from a traditional 401K pre-tax contribution where you do not pay any income tax on the money that comes out of your paycheck and goes into the 401K. So, just because you personally might have paid $7,000 in FICA tax, you still have to pay income tax on that $7000, again, unlike a 401K contribution.

Now, if you are self-employed paying both the employer and employee amounts of FICA, there is a deduction, but you can only deduct HALF in calculating your taxable income, so even for those people, it's not the same as a 401K.

Note, another thing in the mix is that for most people, an employer matches their SS taxes. But in the context of your post, it doesn't appear you were referencing that.

[GenXguy]

Quote:

Originally Posted by jldavid47 Speak for yourself. My wife and I are living just fine on our Social Security income.

But don't you have other savings or investments if needed?

On SS alone with current promised benefit levels, I calculate that taking it at age 62, I couldn't pay my bills. Taking it at age 65 would be tight, at best. Taking it at 67 would give me a few thousand dollars of breathing room for the year. Taking at 70 would give me about a $10,000 cushion over barebones. Fortunately, I won't be dependent on SS. I wouldn't want to work to age 60, let alone 70!

[Gumby]

Quote:

Originally Posted by Retired Expat To be fair your Social security a bit like your 401k. It was taken out pretax. You didn’t think they were going to forget that did you? ...

That is just wrong. You paid federal income tax on the full amount of your AGI, including the 6.2% that went to social security and the 1.45% that went to Medicare.

[Smitty700]

Quote:

Originally Posted by cathy63 Most people with $0 liability don't have to file, so if this situation arises again, you can simplify further by not even doing a return for him.

Good point about not needing to file. But there are a couple of reasons to file anyway. First is identity theft. Filing prevents someone filing a fraudulent return with his info, or at least you'll find out if someone did when you file. The second is filing gets his income on record with the IRS so if Congress keeps throwing stimulus money around, he can more quickly get his share.

[jldavid47]

Quote:

Originally Posted by GenXguy But don't you have other savings or investments if needed?

Of course. Having no debt to speak of keeps monthly expenses low enough so that we can live off of social security without feeling constrained. The post I was responding to implied it couldn't be done. It can if you have had good financial habits.

[Dtail]

Quote:

Originally Posted by jldavid47 Of course. Having no debt to speak of keeps monthly expenses low enough so that we can live off of social security without feeling constrained. The post I was responding to implied it couldn't be done. It can if you have had good financial habits.

Well more so, it depends on how much one wishes to spend.
Our combined SS when I hit 70 y.o. will be 70k which is enough spending for many, but will not cover what we wish to spend.