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Old 07-21-2017, 06:01 PM   #121
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No, the 28% marginal rate is not an error in Taxcaster... the 28% bracket is for taxable income from $151,901 to $231,450 in 2016 and in the example taxable income is $179,300. See https://taxfoundation.org/2016-tax-brackets/

LTCG are included in taxable income just like other forms of income... when the tax is calculated, taxable income is then implicitly bifurcated between ordinary income ($0 in this case) and preferenced income. Ordinary income is taxed first based on ordinary rates, then preferenced income is taxed at 0% up to the top of the 15% tax bracket and 15% thereafter (and higher rates when really high but not part of this discussion).

I guess it was self evident that if you add $100 of LTCG that the incremental tax is 15%.... but that does NOT mean that you are in the 15% tax bracket.
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Old 07-21-2017, 06:44 PM   #122
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How on earth can you be in the 28% bracket if nothing, not your last dollar, not your next dollar, nothing, is taxed at 28%?? Tax brackets are applied to income excluding LTCGs and Qualified dividends (and also subtracting deductions and exemptions). That's what you clearly see in the Qualified Dividend and Capital Gains Worksheet. QDivs and LTCGs are taxed with one method, and the rest of taxable income is taxed according to the tax brackets...the first few dollars at 10%, the next at 15%, then 25%, and so on.

If you want to claim that all income together puts you in a certain tax bracket, I can't stop you, but it's totally meaningless in a situation like this when your income is not being taxed at that tax bracket rate. If your last dollar of income isn't taxed at the rate of a bracket (or more, in cases like LTCGs being pushed into being taxable for an extra 15%), I don't see how you can possibly say you're in that bracket.

But I give up. Say whatever you want, but you don't look very credible when you say things like this, IMO.
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Old 07-21-2017, 09:33 PM   #123
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Originally Posted by RunningBum View Post
...Say whatever you want, but you don't look very credible when you say things like this, IMO.
You're the one making up stuff. TaxCaster and TurboTax are wrong according to RunningBum.

It's not just me saying that your tax bracket is based on your taxable income and filing status... that is the common definition of someone's tax bracket.

I guess you need to write to Fidelity and tell them that they are wrong too. In this webage they define "Tax Brackets" based on Filing Status and Taxable Income, as I did. In that webpage they say "...your tax bracket is based on your taxable income...".

https://www.fidelity.com/tax-information/tax-brackets
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Old 07-21-2017, 10:53 PM   #124
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I agree that one has to take into consideration their personal circumstances in making the decision, like family history longevity, personal health, etc. However, those who advocate delay would do it based on averages since that is all they have to go on. And you are right that you can only go on what you know when you make the decision and unpleasant surprises happen... those are the chances that you take... on the other hand... you might live long.

The numbers are pretty easy... you would get 100 at 66 and 132 at 70 (an additional 8% for 4 years).

While what you say about those wealthy enough to delay SS probably won't alter their spending may be true, that just means that they can spend more on heirs or charities or more will be left for heirs and charities when they pass on.

Actually, unclaimed SS payments don't go to other recipients... they just stop and don't get paid at all... incrementally they make the system more financially secure I guess.
.
The 8 percent argument is irksome because it is not 8 percent - it is flat eight percent of the original payment at full retirement age - for the last year the actual increase is only a 6.45% increase —— yet I keep seeing “where else can you get a guaranteed eight per cent per year." So the actual merits of waiting decrease by each year after the FRA.
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Would you delay taking SS?
Old 07-21-2017, 11:35 PM   #125
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Would you delay taking SS?

How do you figure it is only 6.45%? You literally get 2/3 of one percent for each month after FRA. 48 months past FRA, 2/3*48=32. Total of 32% increase at 70 vs at 66.
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Old 07-22-2017, 06:00 AM   #126
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([1+(8%*4)]/[1+(8%*3)])-1 = (132/124)-1 = 6.45% = the growth in the benefit from age 69 to age 70.

It is because the 8% is simple growth and not compound growth.

IOW, the 132 is 100 + (8%*4) if it were compounded it would be 100 * (1+8%)^4 or 136. It is what it is.... it doesn't make the decision any different because at the end of the day it is still good deal compared to the pricing of commercially available inflation adjusted annuities.

And for the record, where I said 8% for 4 years I was just trying to explain how the 132 was computed for those who may have thought the 8% was compounded. I recall that way back when I initially thought and would have expected it to be compounded but I learned that it is simple interest.
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Old 07-22-2017, 06:33 AM   #127
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Because an 8% a year increase, when typically discussed, is compounded. The 8% in SS is always a percentage of the original FRA amount. I also think it is a bit misleading, as it is simplified for increasing its apparent value. So the DIFFERENCE in actual SS between claiming at 69 vs claiming at 70 is 6.45% of the age 69 amount, not 8%. The difference between filing at 69 and 70 is 8% of what your FRA amount was. Who discusses increases as a percentage of what the total was years ago?

Just like some people that talk about the 8% ROI of delaying. There is no 8% ROI. When you delay, you are actually making monthly payments of increasing amounts per month (since every month you delay, you are forfeiting the increased monthly SS payment that would have gone to you) for an annuity. The actual ROI would be comparing what you would have earned on the original SS claimed, vs what you make investing the higher delayed amount for the later years. In some cases, of an early bull market, followed by a long bear, early filing for SS would come out way ahead. On the other hand, the opposite would give delayed filing a super ROI in short order. There is NO right or wrong answer.

If you need SS to survive at 62, then delayed filing is not an option. Yet people in that position still insist filing at 62 is the best option for everyone, because "what if you die before the break even point?"

There is no logic to that what so ever, but I read that argument almost weekly.

Whether you delay filing or not FINANCIALLY depends on whether you can
1. Afford to delay without affecting your lifestyle.
2. Whether you can reasonably expect to live beyond about age 82.
3. Whether the cost of the annuity is worth the diversification and longevity insurance for you and your spouse.
4. Whether the protection from increased Medicare Part B premiums are significant to your retirement income or not.

Then there is the emotional decision, which is often irrational but very real nonetheless. DW retired early at 55. She wanted hers at 62, because she wanted it now, not 4 years from now. That $48k was worth way more to her now, than the increase of $300/mo in 4 years, because $300/mo is didlly to our lifestyle once I retire. But $1200/mo now, while I am working and saving means $48k that is "free" for vacations, a new car, shoes, hair, whatever...because it is $1200/mo we didn't have the month before. Financially, that is all nonsense. But to her, with little financial acumen, it was a slam dunk argument. So for $300/mo (COLA!) I decided it was not worth the turmoil. Pick your battles. Better to delay mine to at least FRA where the dollar amount is more significant, like $1000/mo.
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Old 07-22-2017, 06:45 AM   #128
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And sorry, but I side with Runningburn on the tax rate. If an increase in income of $100, or $1000, causes it to be taxed at 15%, so you have a net of $85 or $850, then that is the real bracket you are paying at, regardless of whether by definition you are in the 28% bracket. Which is where my original LTCG statement came from in the first place. Also, as shown on both programs, the effective tax rate was about 7.5%. Which beats the cr@p out of the typical 15 -16% effective rate I pay now, while being in the upper end of the 25% bracket. It simply means that not all infome is created equally. Some is worth a lot more than others for the same face value.
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Old 07-22-2017, 07:43 AM   #129
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I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.
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Old 07-22-2017, 08:50 AM   #130
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Quote:
Originally Posted by Perryinva View Post
Because an 8% a year increase, when typically discussed, is compounded. The 8% in SS is always a percentage of the original FRA amount. I also think it is a bit misleading, as it is simplified for increasing its apparent value. So the DIFFERENCE in actual SS between claiming at 69 vs claiming at 70 is 6.45% of the age 69 amount, not 8%. The difference between filing at 69 and 70 is 8% of what your FRA amount was. Who discusses increases as a percentage of what the total was years ago?

Just like some people that talk about the 8% ROI of delaying. There is no 8% ROI. When you delay, you are actually making monthly payments of increasing amounts per month (since every month you delay, you are forfeiting the increased monthly SS payment that would have gone to you) for an annuity. The actual ROI would be comparing what you would have earned on the original SS claimed, vs what you make investing the higher delayed amount for the later years. In some cases, of an early bull market, followed by a long bear, early filing for SS would come out way ahead. On the other hand, the opposite would give delayed filing a super ROI in short order. There is NO right or wrong answer.

If you need SS to survive at 62, then delayed filing is not an option. Yet people in that position still insist filing at 62 is the best option for everyone, because "what if you die before the break even point?"

There is no logic to that what so ever, but I read that argument almost weekly.

Whether you delay filing or not FINANCIALLY depends on whether you can
1. Afford to delay without affecting your lifestyle.
2. Whether you can reasonably expect to live beyond about age 82.
3. Whether the cost of the annuity is worth the diversification and longevity insurance for you and your spouse.
4. Whether the protection from increased Medicare Part B premiums are significant to your retirement income or not.

Then there is the emotional decision, which is often irrational but very real nonetheless. DW retired early at 55. She wanted hers at 62, because she wanted it now, not 4 years from now. That $48k was worth way more to her now, than the increase of $300/mo in 4 years, because $300/mo is didlly to our lifestyle once I retire. But $1200/mo now, while I am working and saving means $48k that is "free" for vacations, a new car, shoes, hair, whatever...because it is $1200/mo we didn't have the month before. Financially, that is all nonsense. But to her, with little financial acumen, it was a slam dunk argument. So for $300/mo (COLA!) I decided it was not worth the turmoil. Pick your battles. Better to delay mine to at least FRA where the dollar amount is more significant, like $1000/mo.
Thanks for stating a few things so clearly:

1) Like the amount difference between 69 vs 70, which didn't stick in my brain until now.
2) That medicare cost yearly increase that is overlooked often if one choses to delay. If it was just $5/yr, then the benefit of delaying until 70 is reduced forever by ~$25 due to the increased Medicare B cost.

It was also funny to read the family dynamic about the "free" money..
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Old 07-22-2017, 08:52 AM   #131
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Originally Posted by pb4uski View Post
I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.
For folks not paying State taxes.
Here in the IL State it would be practically speaking 15% + ~5% = ~20%
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Old 07-22-2017, 09:03 AM   #132
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Originally Posted by pb4uski View Post
I agree that in the example that the marginal tax rate is 15% and that is the relevant rate for decision making.... but as "tax brackets" are typically referred to the example is in the 28% tax bracket (as shown in the Fidelity link). In many cases the tax bracket and marginal tax rate for ordinary income are the same, particularly for those with a lot of ordinary income, but the marginal tax rate can be different in certain circumstances.
Fine. I agree that these sites misleadingly refer strictly to taxable income when talking about the tax brackets. It's inaccurate because that's not the income number the tax is applied to, but that's what they say. I think it's also really bogus for you to correct someone on their discussion of a tax bracket because of this technicality.
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Old 07-22-2017, 09:19 AM   #133
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Noted. And I think it is really bogus for you to make up your own defintion of tax bracket rather than use the definition that the rest of world uses so I guess that we are even.
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Old 07-22-2017, 09:26 AM   #134
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It just seems to me that most articles on the subject dwell too much on the "8%" increase in monthly payments by waiting. Maybe just my perception. Sorry I don't understand your numbers, but what about the other side? Those that will live less than the average? Everyone seems to look at their LE based on average or better than average, just as you have. Individual SS terminates at death. Assets remain. Those wealthy enough to delay SS , probably won't alter there spending with or w/o SS, so why not just take it and save a few investment $$? Unclaimed SS payments due to death go to other recipients, nothing bad about that, but that is in the hands of others to decide. How many of us, after working hard to reach retirement, would decide to allocate an unknown amount of our assets to an unknown person or entity to decide how to use those funds?


Does your calculation account for the time value of money? It doesn't appear to. That would make the difference considerably smaller, wouldn't it?
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Old 07-22-2017, 09:31 AM   #135
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The IRS publications have no definition of tax brackets that I can see in the tax instructions. They have tax tables based on percentages and a tax computation worksheet that use percentages, and the tax computation worksheet says to use the taxable income on line 43, but with this note:

Note. If you are required to use this worksheet to figure the tax on an amount from another form or worksheet, such as the Qualified
Dividends and Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, Schedule J, Form 8615, or the Foreign Earned Income Tax
Worksheet, enter the amount from that form or worksheet in column (a) of the row that applies to the amount you are looking up.

See IRS Publication 17, "Tax Guide for Individuals"

Other people refer to tax brackets, and I assume it's for simplicity they use the term "taxable income", because it's too wordy to include all those caveats. I've always thought that it was understood that you include those caveats appropriately. Nothing else makes sense to me because it's inaccurate and meaningless otherwise.
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Old 07-22-2017, 10:46 AM   #136
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How to Determine Your Federal Tax Bracket: 8 Steps (with Pictures)

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Old 07-22-2017, 11:51 AM   #137
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The number listed as your tax bracket percentage is actually your marginal tax percentage. That is, it is the percentage you would pay of each additional dollar you made.

Hmm, see any problem here?
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Old 07-22-2017, 01:01 PM   #138
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In most situations your tax bracket and your marginal tax rate would be the same. Because ordinary income and preferenced income are taxed at different rates then it is possible that they might be numerous marginal tax rates within a tax bracket depending the taxpayer's mix of ordinary and preferenced income.

I cannot for the life of me figure out what is so hard for to understand.

Quote:
If your taxable income is:
Less than $18,150, your tax bracket is 10%
Between $18,150 and $73,800, your tax bracket is 15%
Between $73,800 and $148,850, your tax bracket is 25%
Between $148,850 and $226,850, your tax bracket is 28%
Between $226,850 and $405,100, your tax bracket is 33%
Between $405,100 and $457,600, your tax bracket is 35%
Over $457,600, your tax bracket is 39.6%[7]
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Old 07-22-2017, 01:22 PM   #139
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In most situations your tax bracket and your marginal tax rate would be the same. Because ordinary income and preferenced income are taxed at different rates then it is possible that they might be numerous marginal tax rates within a tax bracket depending the taxpayer's mix of ordinary and preferenced income.

I cannot for the life of me figure out what is so hard for to understand.
Post #135 is the best explanation I have.
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Old 07-22-2017, 01:40 PM   #140
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Looking at the Fidelity site you keep referring to:
https://www.fidelity.com/tax-information/tax-brackets
Quote:
In actuality, income is taxed in tiers. When your income reaches a different tier, that portion of your income is taxed at a new rate. Your marginal tax rate or tax bracket refers only to your highest tax rate—the last tax rate your income is subject to.
It sure seems to me that they must mean taxable income, with the caveats I talked before, like not including QDivs and LTCGs, otherwise this simply isn't true. But it's too wordy to include a longer explanation of exactly what "taxable income" refers to, so they omit the note.

The 0 regular income and 200K LTCGs is an extreme case, but, for another example, $125K regular income (after deductions and exemptions) and $25K LTCGs is not. You apparently would add them up to be $150K and put them in the 28% bracket. But their last dollar of regular income, or marginal tax rate, is taxed at 25%. Fidelity says the marginal tax rate is the tax bracket, which would be 25%, not 28%. This is why I don't think any of these sites mean "taxable income" is without the caveats, or notes in the IRS instructions.
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