Taking SS Early - Tax Related Question

[chinaco]

Quote:

Originally Posted by Peter ... It's the in-between zone that leads to the so-called tax torpedo. A previous post pointed to this link: http://www.fincalc.com/inc_08.asp?id=6 You can try various what-ifs, and quickly see how it works out. I found that you don't have to have huge IRA+pension+interest+dividend income to hit the 85% ceiling.

According to this calculator and this article

Quote:

When you begin receiving Social Security benefits, your provisional income determines if — and how much — your benefits will be taxed. How do you know what your provisional income is? Your 1040 instruction booklet and your tax adviser are best able to answer this question, but to get a rough idea, first determine your total income. Add together wages, taxable interest, tax-exempt interest, ordinary dividends, taxable IRA distributions, your taxable pension and annuity distributions plus one half of your Social Security benefits. This total will be your provisional income.

http://www.todaysengineer.org/2006/n...strategies.asp

Keeping cap gain in an after tax account has advantages when one draws income needs from cap gains... It does not look like it is counted as provisional income.


According to Kiplinger, a Roth dodges the bullet.
http://www.kiplinger.com/columns/tax...7/04/0413.html

If one has a larger portfolio and intends to have a fairly large income in retirement... It could be advantageous to delay SS a few year to roll as much Trad IRA money into a Roth. Plus, keeping stocks in a taxable account.

This is just one more little complications to factor in.

[FIRE'd@51]

Quote:

Originally Posted by chinaco According to this calculator and this article http://www.todaysengineer.org/2006/n...strategies.asp Keeping cap gain in an after tax account has advantages when one draws income needs from cap gains... It does not look like it is counted as provisional income.

Unfortunately, capital gains count toward provisional income. See

http://www.irs.gov/pub/irs-pdf/i1040.pdf

Look at the SS benefits worksheet on page 28, line 3.

[Peter]

Quote:

Originally Posted by FIRE'd@51 Unfortunately, capital gains count toward provisional income.

Right. But of course this would only apply to previously unrealized capital gains that you take as income while you are drawing SS.

So I think there could be a case for taking some or all of your capital gains before starting SS.

But as many have already noted, this is all so complicated that there are no general rules ... you just have to 'do the sums'.

Peter

[cute fuzzy bunny]

It appears that qualified dividends are not included...so a strategy of employing high dividend stocks as a portion of your withdrawal income wouldnt trigger higher SS taxation...

[FIRE'd@51]

Quote:

Originally Posted by Cute Fuzzy Bunny It appears that qualified dividends are not included...so a strategy of employing high dividend stocks as a portion of your withdrawal income wouldnt trigger higher SS taxation...

Actually, they are included toward provisional income too, since they are also part of line 9a on Form 1040.

However, the "tax torpedo" effect is much smaller on qualified dividends and LT cap gains.

[cute fuzzy bunny]

I thought they were separated out to line 9b, which is not included. Not seeing anywhere that the qualified are rolled in under 9a...got a reference? Turbotax does that part for me, so I've never done it by hand...

[Peter]

Quote:

Originally Posted by Cute Fuzzy Bunny It appears that qualified dividends are not included...

I don't think that's right. If you look at IRS pub 915, there's no mention of this. Also, in the worksheets shown in that publication, it says that the amount on line 9a of the 1040 is included. This line is for all dividends ... it includes qualifed dividends which are on line 9b.

Peter

[cute fuzzy bunny]

Hmmm...in looking at my turbotax prepared returns and my 1099's, it appears that ordinary dividends were added to and rolled to 9a while qualified dividends were added up and rolled to 9b. The qualified dividends dont appear to have been included in 9a, which makes sense because 9a specifically says "Ordinary Dividends", which the qualified dividends are not.

[FIRE'd@51]

Quote:

Originally Posted by Cute Fuzzy Bunny Hmmm...in looking at my turbotax prepared returns and my 1099's, it appears that ordinary dividends were added to and rolled to 9a while qualified dividends were added up and rolled to 9b. The qualified dividends dont appear to have been included in 9a, which makes sense because 9a specifically says "Ordinary Dividends", which the qualified dividends are not.

Look at Line 9a in the right-most column of Form 1040 (there is no line 9b there). 9b is broken out to the left of that column, so it gets sent to another worksheet for the lower rates.

[Peter]

Quote:

Originally Posted by FIRE'd@51 Look at Line 9a in the right-most column of Form 1040 (there is no line 9b there). 9b is broken out to the left of that column, so it gets sent to Schedule D for the lower rates.

Right, and reading the instructions I got from Fidelity, it's clear that qualified dividends are included in the ordinary dividends total. In my case, my 1099 shows the same amounts for lines 9a and 9b, since all my dividends were qualified.

Peter

[cute fuzzy bunny]

Wacky, so they report non-ordinary, qualified dividends separately on the 1099, then roll them into a box that says "ordinary dividends" on the 1040 when they're not ordinary.

I'm pleased as punch that I dont do all the tax calcs on paper and by hand, because my head would have exploded when I got to that part...if it hadnt already.

[Peter]

Quote:

Originally Posted by Cute Fuzzy Bunny Wacky

Yes indeed. Here's a further reference from Fairmark:

http://www.fairmark.com/mutual/ordinary.htm

Peter

[FIRE'd@51]

Quote:

Originally Posted by Cute Fuzzy Bunny Wacky, so they report non-ordinary, qualified dividends separately on the 1099, then roll them into a box that says "ordinary dividends" on the 1040 when they're not ordinary.

Not to defend the IRS, but the 1099 (and Form 1040) only say "Ordinary Dividends" with a sub-category of "Qualified Dividends". There is actually no such category as "non-ordinary" dividends.

[Martha]

Quote:

Originally Posted by FIRE'd@51 Not to defend the IRS, but the 1099 (and Form 1040) only say "Ordinary Dividends" with a sub-category of "Qualified Dividends". There is actually no such category as "non-ordinary" dividends.

Dividends are distributions from a corporation to its shareholders. Though the term "non-ordinary" is not used, dividends can be non-taxable return of capital. If taxable, they can be capital gain distributions or ordinary dividends. If ordinary dividends they can be qualified or not qualfied. FWIW

[SecondCor521]

I think the term ordinary is to distinguish them from stock dividends, which are relatively rare these days anyway.

2Cor521

[FIRE'd@51]

Quote:

Originally Posted by SecondCor521 I think the term ordinary is to distinguish them from stock dividends, which are relatively rare these days anyway. 2Cor521

I believe this is correct. Not so rare though, because a stock split is considered a stock dividend. Of course, a stock split is a non-taxable event so it would not be reported as an ordinary dividend.

[cute fuzzy bunny]

Maybe to help distinguish them they could call them "happily taxed dividends" and "we aint giving you the
reach-around taxed dividends"