The important "trigger" income levels 2020

[Gumby]

I always do my taxes with software. But if you really want to understand how something actually works, pencil and paper is the way to go (or building your own spreadsheet). I'm one of those guys who has called H&R Block to tell them that there is an error in their software. (they fixed it)

 

[RunningBum]

I always do my taxes with software. But if you really want to understand how something actually works, pencil and paper is the way to go (or building your own spreadsheet). I'm one of those guys who has called H&R Block to tell them that there is an error in their software. (they fixed it)

You're right about that. I did a few exercises on regular income and cap gains/divs by hand (pencil and paper) with the "Qualified Dividends and Capital Gains worksheet" to make sure I understood it. That's what Turbo Tax calls it anyway. I had to dig to find it buried elsewhere in H&R B a few years back when I gave that a try.

Maybe someday I'll do the same with social security but at 58 I'm not quite motivated yet to do that. I know enough to try to get my IRA fully converted before taking SS, or at least to a level where I'd use the rest for QCDs.

 

[RunningBum]

That's also why I don't want to pay to have my taxes done. I've learned a lot by doing them myself. If I pay someone else they may or may not tell me how to reduce taxes over my lifetime, and if they don't know all of my finances they may not even know how to do it. And unless I pay them more for that planning, why would they bother, since it's no skin off their noses.

It's like mowing the grass. I liked to see for myself the condition of the lawn, where I needed to do more weed control, and where to put down some Amdro for fire ants (when I lived in Texas).

 

[scrabbler1]

I always do my taxes with software. But if you really want to understand how something actually works, pencil and paper is the way to go (or building your own spreadsheet). I'm one of those guys who has called H&R Block to tell them that there is an error in their software. (they fixed it)

Building my own spreadsheet has shown me how different parts of the tax forms interact with each other, too. I can think of 2 times in the last 10 years or so when I thought small changes to items I entered had an effect on the bottom line even when I thought they wouldn't. It made me more mindful for when I made similar changes in subsequent years.

 

[Sue J]

I use this calculator. Very handy.

https://www.calcxml.com/calculators/how-much-of-my-social-security-benefit-may-be-taxed?lang=en

The range between 50% of your benefits being taxable and 85% being taxable is very small.

 

[cyber888]

Hi Gumby .. or anyone good at taxes ..

If you have the time, can you check if this tax calculator is correct. It calculates retirement income from Social Security + from retirement savings withdraws + wages .. and spews out what your Federal taxes and local taxes are .. What do you think I'm in NC, so it's set at NC .. all other states are available. It definitely shows taxes to be much lower if your social security income is higher than your 401k withdrawals

https://smartasset.com/retirement/north-carolina-retirement-taxes#kUolN2fjcy

 

[Gumby]

Hi Gumby .. or anyone good at taxes ..

If you have the time, can you check if this tax calculator is correct. It calculates retirement income from Social Security + from retirement savings withdraws + wages .. and spews out what your Federal taxes and local taxes are .. What do you think I'm in NC, so it's set at NC .. all other states are available. It definitely shows taxes to be much lower if your social security income is higher than your 401k withdrawals

https://smartasset.com/retirement/north-carolina-retirement-taxes#kUolN2fjcy

By my calculation (using the Publication 915 Worksheet 1 and IRS 2019 tax table in the Form 1040 instructions), if you filed MFJ, had a combined $28,000 in social security and $25,000 in tIRA withdrawals and you used the standard deduction of $24,400, then $3500 of your SS would be taxable and your taxable income would be $3500 + $25,000 - $24,400 = $4100. The tax rate is 10%, but the IRS tax tables say $413 in tax (for a range of $4100 to $4150 tax on half the increment is $2.50 rounded to $3).

However, the calculator you linked shows the federal tax for that scenario as $361, which is too low by 12.6% So there is something wrong with that calculator, but I can't tell what, because they don't show their work. I can't tell you if the state taxes are correct, but the error in the federal tax makes me suspicious.

As a general rule, however, you are correct - the greater the percentage of your total income that comes from social security, the lower your taxes will be for the same total income. If for no other reason than the fact that under federal tax law, 15% of your social security income is never subject to tax. Many states also privilege social security, some completely.

 

[cyber888]

Thanks Gumby.

But is it possible that they are using the 2020 standard deduction of $24,800, and not the 24,400 deduction for 2019.

So, 3,500 + 25000 - 24,800 = $3,700 .. that would be $370 at 10%. That would be closer to the $361.

 

[Gumby]

I have changed the numbers to include the CARES Act 2 ($600) credit phaseout.

 

[Gumby]

I have changed the numbers to reflect the 2021 American Rescue Plan COVID 19 credit ($1400/person), since eligibility is based on 2020 income, but it is a credit against 2021 taxes.