Some stuff about taxes that I don't know

[redduck]

First, some facts.

I’ll turn 70 early next year—unless something kinda’ bad happens to me between now and then.

I am self-employed (no one ever wanted to hire me—so, unfortunately I never had the chance to be a disgruntled employee).

I started working part time a few months ago. Next year will be the first full year I will be working part time (I can quit any time I like-- but, I think it's only right I give myself two weeks notice).

I have gross earnings and net earnings.

I started collecting Social Security at age 66. ($26,000 a year, before deductions for Medicare and Drug insurance).

That’s the end of the fact portion. So, here are the questions:

What do I have to watch out for next year? I’m mainly wondering about taxes. Is there a cut-off (or several different cut-offs) where it would make sense to stop earning money? I don’t want to just edge over some line and make an extra $600 and end up paying 42% in taxes instead of 20% in taxes. (In case you are wondering--I just made up those percentages).

Regarding taxed money: is Social Security monies and dividends and interest included? I assume that they are but maybe there’s a bit more to this than I am aware of. (Really, duck , something outside of your awareness regarding taxes? Hard to believe).

Just for the record, the air conditioning seems to be working well now. We haven't yet turned on the heat; when I do I will give an update.

And, yesterday Stockard Channing was right behind me in the grocery store line. In case you're wondering, she drives a Porsche Carrera. I was going to ask her about these tax questions, but we were in the express line and she seemed to be in a hurry--at least she was when I mentioned that I was almost seventy years old and I never had the chance to be a disgruntled employee. I'm not sure she would have been much help anyway. (Maybe that's me just be negative).

Anyhow, to refresh your memory (memories?): what do I need to look for re: taxes?

 

[Onward]

edge over some line and make an extra $600 and end up paying 42% in taxes instead of 20% in taxes.

It doesn't work that way. A dollar you earn that is taxed at, say, 20% will remain taxed at 20%, regardless of how many additional dollars you earn. Those additional dollars may be taxed at higher rates, however.

Regarding taxed money: is Social Security monies and dividends and interest included?

Dividends and interest are always taxed*. Social Security may be taxed up to 85%, depending on the level of your other income.

*With a few exceptions, like interest from municpal bonds.

 

[LOL!]

With taxes, a good place to look is the place that collects them.

They have this: Seniors & Retirees which has further links.

They also have a very nice overall publication to help folks:
http://www.irs.gov/pub/irs-pdf/p17.pdf

The string "age 70" (realy age 70 1/2) is mentioned 27 times in that link.

 

[target2019]

If you do, or can do, your taxes, it is better to change the numbers there, and see what affect there is on the bottom line.

Each situation is different. You can download free software and use last years numbers as a start.

 

[kaneohe]

RMDs for your retirement plans start after age 70.5 adding more income and taxes. Medicare premiums are tiered to income but if you are going from full-time to part-time that should benefit you.

For some free tools, google "tax calculators" . Check out Taxcaster and the HR Block one , among others.

 

[pb4uski]

I would suggest that you enter your numbers from last year's return in TaxCaster or some similar tool. There will probably only be 10-20 numbers that need to be input. Then change your self employment earnings (Schedule C earnings) and see how your taxes change. I think what will happen is that as your self-employment earnings increase that the increase and a portion of your SS will become taxable.

If you keep your taxable income in the 15% tax bracket, your dividends and long-term capital gains should be subject to 0% tax on those items. Above the 15% tax bracket, you would typically pay 15% on dividends and long-term capital gains.

 

[omni550]

Keep in mind that in the year you turn 70.5 (and going forward), RMDs from retirement plans are required to be taken. Retirement Plans FAQs regarding Required Minimum Distributions

omni

 

[redduck]

OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.

 

[RockyMtn]

OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.

Get a wife...then you'll sneak right into the 15% bracket for married filing jointly.

Keep in mind it's only 25% on the amount over $36,250. So your effective rate is somewhat lower.

 

[REWahoo]

OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

If you are married and filing jointly, those numbers work out to the 15% bracket on federal taxes. Are you including state taxes to get you to the 25% number?

 

[pb4uski]

OK, I trotted off to Taxcaster a few weeks ago and stayed there for awhile. It seems that I will be at the 25% tax rate based on:

$26,000 in Social Security per year
$26,000 RMD per year (starting next year when I turn 70 1/2.
$16,000 in dividends (not in a-tax advantaged account).

The only way (that I can see) to get into the 15% tax bracket is to have 3 more children--and it would be best if I had all of them in the upcoming year.

Anyhow, I am thinking of retiring or working very part-time starting the early part of next year, but maybe that's a topic for another thread.

Keep in mind that your overall federal tax rate is about 11% ($7,560 tax in relation to $68,000 of income). Your marginal tax rate for SS or RMDs is 25% but your marginal tax rate for qualified dividends is only 15%. IOW, an additional $100 of SS or RMD income would result in an additional $25 of tax and an additional $100 of qualified dividend income would result in an additional $15 of tax.

Are the $16,000 of dividends you expect qualified or unqualified? You can get a sense by looking at last year's tax return if your portfolio hasn't changed a lot. TaxCaster assumes that dividends are qualified. Enter non-qualified dividends under "Miscellaneous Income."

All of the above assumes you are single, over 65 and use the standard deduction. If you take the standard deduction and have a mortgage you may be able to reduce your tax bill by using taxable funds to pay off the mortgage, which might bring your income down into the 15% bracket.

 

[pb4uski]

Get a wife...then you'll sneak right into the 15% bracket for married filing jointly.

Keep in mind it's only 25% on the amount over $36,250. So your effective rate is somewhat lower....

I think you are confusing overall or average rates with marginal rates. With the progressivity built into the tax code, marginal rates are generally higher than overall or average rates. Overall or average tax rate is your tax in relation to your income. Marginal tax rate is the tax on your last $1 of income and in the case at hand would be 25% for SS/RMDs/unqualified dividends and 15% for qualified dividends.

 

[RockyMtn]

I think you are confusing overall or average rates with marginal rates. With the progressivity built into the tax code, marginal rates are generally higher than overall or average rates. Overall or average tax rate is your tax in relation to your income. Marginal tax rate is the tax on your last $1 of income and in the case at hand would be 25% for SS/RMDs/unqualified dividends and 15% for qualified dividends.

You are correct...effective tax rate is more appropriate?

 

[pb4uski]

Yes, I think of effective, overall or average is being the same.

 

[redduck]

If you are married and filing jointly, those numbers work out to the 15% bracket on federal taxes. Are you including state taxes to get you to the 25% number?

I am not married. I don't recall including or decluding state taxes.

 

[redduck]

<snip>
Are the $16,000 of dividends you expect qualified or unqualified? You can get a sense by looking at last year's tax return if your portfolio hasn't changed a lot. TaxCaster assumes that dividends are qualified. Enter non-qualified dividends under "Miscellaneous Income."

All of the above assumes you are single, over 65 and use the standard deduction. If you take the standard deduction and have a mortgage you may be able to reduce your tax bill by using taxable funds to pay off the mortgage, which might bring your income down into the 15% bracket.

There is no mortgage. Qualified dividends: $7000. So, I guess non-qualified dividends add up to $9000.

 

[haha]

This thread is confusing to me. Redduck is not married, and he accurately states that he will be in the 25% marginal bracket, if he is using the standard deduction and the personal exemption for one 65 or over. This will be with him for a long time, likely until our faithful servants in Washington raise rates. 26000+.85*26000-3800-7400=36,900 which is greater than the top of the 15% bracket at 35, 350, without even considering any dividends or interest or earned income. 2013 levels will be a bit higher, perhaps enough to give him a few dollars of 15% ordinary income bracket, or 0% qualified dividends. But very possibly not.

I can't see any relevance to him of his average rate, or effective rate, or any rate other than marginal rate. I have never even considered my average rate; what difference can that make unless one is trying to make some political point? What he wants to decide is whether it is worth it for him to work. IMO, what is relevant is that he know where his marginal bracket becomes 28% after giving effect to his personal exemption and standard deduction, and how to stay beneath the $85,000 MAGI hard threshold for the first step up in Medicare pats B and D costs. These are not huge, but it is money. After paying the surcharges for several years I decided to get very vigilant about them, and have not breached the $85K since.

Ha

 

[MasterBlaster]

I scanned the thread and didn't see anyone cut to the issue about earnings and Social security.

When you pay taxes on Social Security it's because your "Provisional income" is higher than one of two thresholds. Provisional income is your total worldwide income, including tax-exempt income, plus half of your Social Security benefits. If (for a single person) your provisional income is over $25k then you pay income taxes on half the amount over $25k.

If your provsional income (for a single) is over $34k then you pay income taxes on 85% of the amount over $34k.

So here's the rub...

Money over the $34k threshold gets taxed as income (as usual) plus it triggers the SS taxes of previously untaxed SS dollars for a whopper marginal tax rate.

For a single in a 25% income tax bracket, your marginal federal tax rate for dollars earned over the higher provsional rate is 25% + (25% X 85%) = 46.25% of those dollars in excess of the higher Provisional income threshold ($34k). Add in any state taxes and you can see that the total take can be well over 50% of those dollars.

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? | Kitces.com

Here's an example from the link...

Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.
If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
​

 

[redduck]

I scanned the thread and didn't see anyone cut to the issue about earnings and Social security.

When you pay taxes on Social Security it's because your "Provisional income" is higher than one of two thresholds. Provisional income is your total worldwide income, including tax-exempt income, plus half of your Social Security benefits. If (for a single person) your provisional income is over $25k then you pay income taxes on half the amount over $25k.

If your provsional income (for a single) is over $34k then you pay income taxes on 85% of the amount over $34k.

So here's the rub...

Money over the $34k threshold gets taxed as income (as usual) plus it triggers the SS taxes of previously untaxed SS dollars for a whopper marginal tax rate.

For a single in a 25% income tax bracket, your marginal federal tax rate for dollars earned over the higher provsional rate is 25% + (25% X 85%) = 46.25% of those dollars in excess of the higher Provisional income threshold ($34k). Add in any state taxes and you can see that the total take can be well over 50% of those dollars.

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? | Kitces.com

Here's an example from the link...

Well, that was certainly upsetting....but, probably helpful.

I really don't want to completely retire due to tax reasons, but maybe tax reasons are just as valid as most other reasons. Darn, and I was just about to start on my "Just One More Decade."

 

[pb4uski]

I think the key thing that you need to know is that if you have self employment income in addition to your SS/RMDs and dividends, you'll be paying about 37% of your income in federal taxes.

You can see this by entering your situation in TaxCaster, noting the taxes with no self employment income, and then add $10k of self employment income and see the increase in tax. So by my calculations, over 1/3 of your self employment effort is going to the government.

 

[redduck]

I'm back. And, I have one last (?) question(s).

The facts once again:

Next year I'll be 70 1/2
Single; No mortgage, no dependents
Self-employed

Income:
$ Interest: $1000
Dividends: $8000 qualified; $8000 unqualified
SS Benefits: $26,000
RMD: $$26,000
Net Income from job next year: $0-$35,000. ( I have my choice of working very part-time, or very-very part-time, or not working at all).

If I understand Taxcaster, even if I don't work, I will still be in the 25% tax bracket.

It seems that I can actually earn up to $35,000 from work and still be in the 25% tax bracket. I don't want to earn even close to that amount.

I still don't quite get when I get hurt regarding social security--that is, when I get taxed on 85% of what SS pays to me. And, is it actually a significant amount of dollars?

pb4uski has stated that I will be paying the federal government about 37% of my income in federal taxes. Then, California State taxes get added (thanks for that REWahoo). Guess that puts me at about 40%. And, have we included self-employment taxes yet? (I think we are as per Taxcaster) (I was a bit confused on this).

Anyhow, if anyone can sort of figure out how much total taxes (in terms of actual dollars) I would pay if I had a net income of $20,000 net from work plus the income mentioned above ($69,000, I think) and then again at $35,000 net from work, plus the income mentioned above ($69,000, I think), I sure would appreciate it.
I do have figures from Taxcaster, but I figure the odds are I didn't get it exactly right.

 

[pb4uski]

Here is what I came up for federal income and self employment taxes using Taxcaster and the data you provided.

No self employment income $8,535
$20k self employment income $15,999 (increase in taxes is 37.32% of $20k)
$35k self employment income $21,605 (increase in taxes is 37.34% of $35k)

Then add another 4.4-6.4% for California, so you're looking at a tax burden (including self employment taxes) in the vicinity of 41-43% on your self employment earnings. I probably wouldn't work knowing that much of what I earn is going to taxes.

 

[target2019]

One possible gainer in your favor is if you contribute to some type of retirement account. If you have a SEP-IRA, you could achieve a tax credit for some of your self-employment profit. Not familiar with other options, but probably different type of plan would let you put away larger amount.

With Intuit ProSeries I calculate $5,127 Fed inc tax., no self employment.
$20k self emp, $13,806.
$35k self emp, $19,135.

With a SEP contribution of $6505 for the year (based on $35k profit), you would have tax bill of $16,835.

Also, you need to make estimated payments to avoid a penalty.

 

[pb4uski]

I'm surprised the results differ so much. I wonder why since they are both Intuit products.

 

[target2019]

I'm surprised the results differ so much. I wonder why since they are both Intuit products.

This was 2012 taxes calculated. I used single, 70 years old.