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Taking SS Early - Tax Related Question
05-16-2007, 10:54 AM
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#1
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Thinks s/he gets paid by the post
Join Date: Apr 2007
Posts: 1,305
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Taking SS Early - Tax Related Question
Quote:
Originally Posted by megacorp-firee
I do have a question that has NOT been addressed here, and that is of the tax consequences of taking it early or late. If you have a lot of taxable income (say 70K counting pension and income from portfolio), does it make sense to defer to later so that you actually net more. DON'T ANSWER HERE... I will start another thread.
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Starting a new thread from the related subject of taking SS early.
Has anyone taken a look at the tax consequences of taking SS at 62 if you have a sizeable taxable income. For example a $50K pension and $20K of dividends and interest generated from portfolio. Assume that dividends are qualified and interest is taxed at regular income tax rates. Thanks.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 12:47 PM
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#2
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Full time employment: Posting here.
Join Date: Dec 2003
Location: San Carlos, CA
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Re: Taking SS Early - Tax Related Question
Good question, I've been wondering about this myself.
My hand-waving* analysis was that if you spend down the taxable part of your portfolio before taking SS, the amount of SS subject to tax will be reduced. But I haven't run any quantitative analysis yet.
*umm, maybe there's already enough handwaving on this topic already!
Peter
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Re: Taking SS Early - Tax Related Question
05-16-2007, 12:51 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2005
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Re: Taking SS Early - Tax Related Question
I think that's a "finger" waving... :P
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Re: Taking SS Early - Tax Related Question
05-16-2007, 12:56 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Apr 2007
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Re: Taking SS Early - Tax Related Question
Fortunately (or unfortunately ?) I will be in the position where I don't spend down much of the taxable side (remember I am one of those dinosaurs with a pension). So I anticipate that taxes on SS will still be an issue.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 02:35 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Jun 2005
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Re: Taking SS Early - Tax Related Question
Quote:
Originally Posted by megacorp-firee
Starting a new thread from the related subject of taking SS early.
Has anyone taken a look at the tax consequences of taking SS at 62 if you have a sizeable taxable income. For example a $50K pension and $20K of dividends and interest generated from portfolio. Assume that dividends are qualified and interest is taxed at regular income tax rates. Thanks.
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Income Tax on Social Security Benefits.
The Basic Rule. Up to 50% of Social Security benefits are taxable if total “provisional income” (adjusted gross income, tax-exempt interest and one half of Social Security benefits) exceeds a base amount: $25,000 for single taxpayers and $32,000 for married taxpayers filing jointly. At this level, taxes are payable on the lesser of (1) 50% of Social Security benefits received, or (2) one half of the difference between provisional income and the applicable base amount. Fortunately, this is the end of the income taxation picture for most recipients of disability benefits.
The Second Tier. A second tier of income tax - reaching up to 85% of Social Security benefits received - kicks in (1) for single taxpayers with provisional income over $34,000, (2) for married taxpayers filing jointly with provisional income over $44,000, and (3) for all married taxpayers who file separate returns, but do not live apart.
For these second-tier categories, income taxes are payable on the lesser of (A) 85% of Social Security benefits or (B) the total of (1) 85% of the difference between provisional income and the applicable adjusted base amount ($34,000/$44,000), plus (2) the lesser of (a) half the benefits or (b) $4,500 (for singles / $6,000 (for married couples filing jointly). The adjusted base amount for married persons filing separately but living together is zero; taxes are payable on the lesser of 85% of benefits or 85% of provisional income.
So just for fun lets look at the taxes on a dollar of earned income for someone over the second-tier threshold. You will pay the income taxes on that dollar and you will also pay income taxes on 85% of a dollar because you caused another SS dollar to become taxable.
If you are in a federal bracket of say 25% then you'll pay 25 cents regular income tax on that dollar plus 0.85% times 25 cents which is 21.25 cents SS tax. The total tax then would be 46.25 percent.
If you are in a state with income taxes then they may also want their cut. In California you'd pay 9.3 % plus 0.85 x 9.3 for a total of 17.25 percent. In California your total tax bite (Federal and State) then will be on the order of 63.5 percent.
That's a very steep tax to pay on that SS income. You only get to keep a third of every dollar you earn.
Perhaps the "take SS at 62" crowd might want to rethink their strategy just based on the taxes alone.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 02:58 PM
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#6
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Recycles dryer sheets
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Re: Taking SS Early - Tax Related Question
But let's assume that dollar is a SS dollar. Unlike the IRA dollar, there is no initial tax but it does go into the Combined Income formula. It only goes in at a 50% rate. Therefore 50 cents is the Combined Income amount and 85% of that (42.5 cents) is taxable income. Assuming the 25% tax rate (and it could be less due to a lower tax bracket - but hold that thought) the tax = 10.62 cents or 10.62% versus 46.25%...
Many states such as California exempt SS from state tax.
This is why the tax savings for those with $40,000 - $90,000 of after-tax income typically can be anywhere from $5,000 to $15,000 per year once the higher SS kicks in.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 03:10 PM
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#7
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Re: Taking SS Early - Tax Related Question
NewThinking:
I don't beleive that your example is correct.
You are correct though about California excluding SS benefits
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Re: Taking SS Early - Tax Related Question
05-16-2007, 03:25 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Re: Taking SS Early - Tax Related Question
The other flaw is that you arent taxed 25% on every dollar when in the 25% bracket. Its tiered.
And fortunately no rethinking required for this 'take it at 62' proponent. At 62 I will have no earned income, just qualified dividends and a smidgen of capital gains. And while paying taxes on the SS income at 62 seems difficult, I'm betting you're still paying them and more taking the higher amount at 70.
The only place I see the taxation issue bearing merit against the early/late discussion is if a) you're still working or b) you're filthy rich and have too much income.
In case (a), you've just fully qualified to suck at retiring early.
In case (b), taxation of your SS benefits isnt your biggest problem taxwise, and you're rich so shaddap.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 03:29 PM
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#9
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Re: Taking SS Early - Tax Related Question
Here is a little calculator that will allow you to do quick 'what if' scenario’s.
http://www.fincalc.com/inc_08.asp?id=6
It helps to know how your State treats SS income. However if you have more than 50K of other taxable income you're probably going to pay the max on SS income. If you’re close to the SS tax limits you can play games with Roth income to stay below the max rate for a while. I plan to do just that but my income needs are much less than most people.
If you face huge RMD's because of the size of your stash you may want to spend down some of that prior to 70.5 to avoid a larger tax bite.
Again, it's a very complicated individual calculation that each person must do for themselves.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 04:13 PM
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#10
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Re: Taking SS Early - Tax Related Question
It seems to me that perhaps what we should be doing is to reduce our "income" at the time we want to start SS payments. Think about the cash stash early on which we fund ER with. Would it not be better to take 72T dist on IRA earlier and hold the cash accounts in abeyance a bit to dist in early years of SS? I am not a math genius but see this as a viable option to reducing the tax on SS benefits in the 60's.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 04:19 PM
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#11
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Full time employment: Posting here.
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Re: Taking SS Early - Tax Related Question
Quote:
Originally Posted by Cute Fuzzy Bunny
The other flaw is that you arent taxed 25% on every dollar when in the 25% bracket. Its tiered.
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What Masterblaster is saying is that every extra income dollar above the threshold causes 25% direct tax, plus 0.85x25% tax on a SS dollar which would otherwise not be taxed.
Another way of putting is is that SS is already aggressively means tested!
Peter
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Re: Taking SS Early - Tax Related Question
05-16-2007, 04:27 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Re: Taking SS Early - Tax Related Question
I guess after he picked a state that doesnt tax social security, chose the state income tax level thats only applicable to the last dollar of the highest tier of the highest wage earners, then didnt specifically point out that he was just covering 'last dollar' taxation, the credibility was a little stretched.
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Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 04:42 PM
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#13
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Re: Taking SS Early - Tax Related Question
Ok, I think I've got it. I am scr*wed and will have to pay max taxes on my SS. So according to the math, for every dollar of SS I get I will pay 10.62 cents on the dollar that I gave to the government so they could give it back to me and tax me on it again.
.... hmmm time for another tea party I think .... nah ... cost of living in this great country
... most alternatives seem to be worse.
... and as CFB stated ... this is not my biggest tax problem.
now you all have surfaced another twist on this. One additional reason to NOT take SS early is to keep the income down so that one could convert their IRA to a Roth IRA at a reasonable marginal tax rate, .... say 20%. hmmm looks like another thread to start....
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Re: Taking SS Early - Tax Related Question
05-16-2007, 05:58 PM
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#14
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Re: Taking SS Early - Tax Related Question
Wait til 65 then you get to pay tax on Medicare Premiums you never see too.
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Re: Taking SS Early - Tax Related Question
05-16-2007, 08:23 PM
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#15
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Re: Taking SS Early - Tax Related Question
Quote:
Originally Posted by OAG
Wait til 65 then you get to pay tax on Medicare Premiums you never see too.
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Ahhhh couldn't you have waited a few posts.... now I don't have anything to look forward to.... :P
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Re: Taking SS Early - Tax Related Question
05-17-2007, 02:38 AM
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#16
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Re: Taking SS Early - Tax Related Question
Quote:
Originally Posted by megacorp-firee
...
now you all have surfaced another twist on this. One additional reason to NOT take SS early is to keep the income down so that one could convert their IRA to a Roth IRA at a reasonable marginal tax rate, .... say 20%. hmmm looks like another thread to start....
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It was a thread about a month ago. I suspect it has been in several threads.
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Re: Taking SS Early - Tax Related Question
05-17-2007, 02:49 AM
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#17
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Thinks s/he gets paid by the post
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Re: Taking SS Early - Tax Related Question
Do you have to take SS, can't you refuse it and not pay any tax
TJ
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Re: Taking SS Early - Tax Related Question
05-17-2007, 02:53 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Re: Taking SS Early - Tax Related Question
bettter idea, send it to me, ill gladely pay the tax .
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Re: Taking SS Early - Tax Related Question
05-17-2007, 11:38 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Re: Taking SS Early - Tax Related Question
SS tax question--
Most over 65 SS recipients have their Medicare Pt B premium deducted from the SS check. Does this money that gets spent on Medicare have to be included in SS income when trying to figure tax?
Given enough medical inflation and time, it would be theoretically possible for a recipient to pretty much use up her SS payment to pay her Medicare Pt B premium.
So if it is taxable, one could even have phantom income!
Ha
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Re: Taking SS Early - Tax Related Question
05-17-2007, 12:04 PM
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#20
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Re: Taking SS Early - Tax Related Question
You better believe the Medicare premiums are INCLUDED in your TOTAL SS benefit and are subject to possible TAXATION. The amount you pay in Medicare premiums are also NOW MEANS TESTED = you pay more the higher your income was in the PREVIOUS year. They are also increasing faster than the CPI, so yes it is possible you are paying taxes NOW on "phantom" income (if on MEDICARE). Oh, another thing if you delay taking your SS beyond age 65 (which more and more will HAVE to do to get FULL benefits) you MUST pay the Medicare premiums (if you want MEDICARE coverage) from age 65 through the date you actually start taking SS benefits out of your own pocket until the deduction is done for you out of the benefits. There are a FEW exceptions to this rule but the majority are not excepted.
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