Tax on Social Security Income has income cliff?

[John Galt III]

I searched in ER.org and only found posts about the ACA cliff, and I'm not asking about that. From some googling, it looks like there is an income cliff at which you will go from owing tax on none of your SS to owing tax on half of your SS. Boom, from zero to half, at the cliff income. The formula says if my AGI plus half of my annual SS amount is less than $25,000 (the cliff) I pay taxes on zero of my SS, so I would only pay tax on my AGI. But if over $25,000 I owe tax on my AGI and also on half of my annual SS income. My own scenario: AGI from pension and interest = $11,100. My SS is projected to be $26,600 per year age 66, full retirement age. Fortunately, that works out for me as $11,100 AGI plus $13,300 (half of $26,600) which equals $24,400, just under $25,000. Hooray. But I plunge off the cliff if my number goes up from $24,400 to anything over $25,000, when I suddenly owe tax on the $13,300, which is $1,330 at a 10 % tax rate. Ouch. Is this how it works? Thanks

 

[dtbach]

No, you would only owe 10% on whatever amount over $25K. So if you were over by $200, then the tax you would owe would be $20.

 

[jkern]

No, it doesn't quite work that way. It's complicated, but once your cross a certain threshold, your SS is taxable up to 50% (sliding scale). Once your cross another threshold it's taxable up to 85% (another sliding scale). Basically SS is taxable from 0 to 85% based on your SS amount and other income.

You can step through the SS Taxable Worksheet and see the differences.

 

[John Galt III]

No, you would only owe 10% on whatever amount over $25K. So if you were over by $200, then the tax you would owe would be $20.

Ah, thank you. That's much nicer!

 

[pb4uski]

Agree with others, it is progressive but not a cliff... and not near a draconian as going off the ACA cliff. You gan get a fair idea by using TT's What-If worksheet and plugging in different amounts of SS and seeing how your taxable income and total tax changes as a result.

 

[Dtail]

IIRC, the poster "Sandy and Shirley" had some charts on how taxable income including the SS income concept ramps up quickly on a marginal basis at a certain range of levels.

 

[Lawrencewendall]

To see how much of your SS is taxable

https://www.fool.com/retirement/2016/06/06/social-security-tax-calculator-are-your-retirement.aspx

 

[kaneohe]

https://apps.irs.gov/app/vita/content/globalmedia/social_security_benefits_worksheet_1040i.pdf

It would prob help if you did a few examples by hand following the wksht.
Similar to your numbers but rounded for simplicity.

Other income: 12K
SS: 26K
1/2 SS + other income : 25K = I

The thresholds for single are 25K and 34K.
I = 25K is right at the lower boundary so none of the SS is taxed.
******************************************************
Increase other income to : 16K
1/2 SS + other income = 29K = I
I is between the 2 thresholds of 25K and 34K
I exceeds the lower threshold by 4K
Take half of that = 2K and that is the amount of SS that is taxed
********************************************************
Increase other income to 21K
1/2 SS + other income = 34K = I
I sits on the upper threshold but does not exceed it
I exceeds lower threshold by 9K
Again take half of that and 4.5K is the amount of SS that is taxed
**********************************************************
Increase other income to 31K
1/2 SS + other income = 44K = I
I exceeds upper threshold by 10K
Now take 85% of that and get 8.5K
Add that to the number you got in previous example of 4.5K (which is half the amount between upper and lower thresholds)
The sum 13K which is the amount of SS taxed
The amount of SS taxed is limited to 85% of SS so you compare the calculation
with 85% of SS and pick the lower of the two.

50% of SS might be taxed or 85% of SS may be taxed but SS is not taxed at 50% or 85%. It is taxed according to your tax bracket.

 

[John Galt III]

Thanks everyone, for the leads. I'm also going to have to figure out what to do with the so-called RMD tax torpedo, whether to take distributions before 70.5, and delay SS til later than Full Retirement Age. Hope to find some planning tools for that stuff too out there.