For Seniors (65+) taking the Standard Deduction - $50K is the new Black

[anethum]

The subject says, "For Seniors (65+) taking the Standard Deduction - $50K is the new Black"

But all of the scenarios only involve couples. There are many seniors here that are not couples.

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Thank you for pointing that out. It is a useful reminder for everyone who posts, regardless of marital status.

 

[junkanoo]

I tried one of the tax calculators last week with a $2000 charitable contribution and $150,000 income, MFJ. The calculator reduced the contribution by the 0.5% of AGI. Does anyone know if the calculator was correct to do this when the standard deduction was used?

See Section 170(p) Special rule for taxpayers who do not elect to itemize deductions, and note that it says there to ignore Section 170(b)(I)(1). That's the section that describes the 0.5% floor.

So, based on that, the tax calculator you tried is wrong. Was it one of the ones covered in Tax estimation tools - Bogleheads? I tried the Case Study Spreadsheet and it appears correct (based on how I read the law above).

@SevenUp is spot on. Whatever calculator you are using is showing you itemizing charitable deductions.

Dinkytown works correctly with this. Naturally, this needs to be a max cash charitable deduction of $2K (MFJ) and $1K for a single, of course, taking the standard deduction.

The Case Study Spreadsheet is my go-to choice as well ... but, it does come with much more of a learning curve than Dinkytown.

 

[junkanoo]

Exactly. Nearly all tax advice or retirement planning advice is for married couples. Then the narrative is about the "widow cliff". What about folks who aren't married?

Also note the example of $1,925 taxable interest. Uh, come again? If that happens to be a person's financial position, OK then.... maybe we'd not be worrying much about taxes anyway. But one supposes that for a person whose situation is consistent with FIRE, that number - if we include taxable interest and dividends is, ahem, like maybe two orders of magnitude larger? At least? And that's before RMDs, before any inherited IRAs, before any proceeds of trading and so on

Your point about how realistic this situation is is quite valid. Again, I wanted to match up as apples-to-apples as I could to the scenario on the Internet. Thus, $1,925 was supplied along with the "Gross" Income target the couple wanted ($141,925).

So, let's adjust. Now the same couple has the same target, but now they have $10K in qualified dividends and $10K in taxable interest. Naturally, this means they need to take less in LTCGs from their taxable account and drawdown less from their T-IRA account. Like so:

Income
Qualified Dividends	$ 10,000
Taxable Interest	$ 10,000
T-IRA Distributions	$ 91,925
Social Security Payout	$ 20,000
Long Term Capital Gains	$ 10,000
"Gross Income --- Total	$ 141,925

So, the situation becomes more realistic for some, no doubt, yet the resulting taxes do not change a bit, with the couple's taxes still at 7,835.

 

[TheWizard]

Your point about how realistic this situation is is quite valid. Again, I wanted to match up as apples-to-apples as I could to the scenario on the Internet. Thus, $1,925 was supplied along with the "Gross" Income target the couple wanted ($141,925).

So, let's adjust. Now the same couple has the same target, but now they have $10K in qualified dividends and $10K in taxable interest. Naturally, this means they need to take less in LTCGs from their taxable account and drawdown less from their T-IRA account. Like so:

Income
Qualified Dividends	$ 10,000
Taxable Interest	$ 10,000
T-IRA Distributions	$ 91,925
Social Security Payout	$ 20,000
Long Term Capital Gains	$ 10,000
"Gross Income --- Total	$ 141,925

So, the situation becomes more realistic for some, no doubt, yet the resulting taxes do not change a bit, with the couple's taxes still at 7,835.

A small terminology quibble:
You show $10K of LTCGs.
I think what you really mean is: they withdrew $10K from their taxable account that had been invested for more than one year.
Depending on when those lots were purchased, the Gain percentage of that transaction could be small, 5-20% perhaps. Or in some cases, a Capital LOSS instead...

 

[GenXguy]

So the thread isn’t directed at you. Do you expect every thread to apply to everyone? No need to participate or comment on every thread, only those of interest to you...

Me? lol It seems you missed the point of my post.

 

[GenXguy]

A small terminology quibble:
You show $10K of LTCGs.
I think what you really mean is: they withdrew $10K from their taxable account that had been invested for more than one year.
Depending on when those lots were purchased, the Gain percentage of that transaction could be small, 5-20% perhaps. Or in some cases, a Capital LOSS instead...

5 to 20%? That would depend on the cost basis of the shares sold. Mine average closer to 75% in unrealized gains.

 

[TheWizard]

5 to 20%? That would depend on the cost basis of the shares sold. Mine average closer to 75% in unrealized gains.

Exactly right.
Some ETF shares I bought 6-10 years ago have gains over 200%, meaning they've more than tripled in value.
But the shares I bought in May are just up 2-4%.

General rule I follow when I need to sell shares in my taxable account is to sell those with the least percentage gain.

I am 98.6% sure that I will never sell those older lots with high unrealized gains. They will get stepped up basis eventually...

 

[GenXguy]

General rule I follow when I need to sell shares in my taxable account is to sell those with the least percentage gain.

I am 98.6% sure that I will never sell those older lots with high unrealized gains. They will get stepped up basis eventually...

Yes, exactly. Same plan - I'm just not selling anything yet, but I haven't been reinvesting dividends for a while and living off those, so I don't have much for recent share purchases.

 

[NomDeER]

Yeah. I just ran Dinkytown and the single having W2 income of $50k pays 7.65% effective! About 14% less than the 8.8% being paid in the example. Injustice!

The example gives an effective rate for the retired couple on AGI as 5.6% (after excluding 3k to get the AGI), not 8.8%. The 8.8% is only on taxable income, and using that number would miss the point. The seniors are getting a lot of deductions that the younger person is not.

And your calculation for the young single person appears to be based on AGI, not taxable, so you are comparing apples and oranges. The effective income tax rate on taxable income for the younger person earning 50k is about 11.3%. (I"m not including FICA, just federal income tax.) That younger person is going to be paying a higher effective federal income tax rate on both the total income and the taxable income and will be struggling in ways that the older married couple will not.

Putting comparisons aside, for a couple with an income of about 142K to pay an effective tax rate of 5.6% is very low IMO.

Yes, I prefer to look at financial metrics on a per person basis, whether income, net worth, or income taxes.
Many tax bracket kind of things are double for MFJ compared to Single, so that works just fine...

I see your logic, but I think most widows will tell you that their costs did not cut drop 50% when their spouse died and that their rate increased. And this is something single and divorced people deal with for a longer period of time. It's fine to dedicate a thread to married people, but the title of the thread is not limited to married people and the numbers and conclusions really are not the same for people who are not married.

 

[junkanoo]

A small terminology quibble:
You show $10K of LTCGs.
I think what you really mean is: they withdrew $10K from their taxable account that had been invested for more than one year.
Depending on when those lots were purchased, the Gain percentage of that transaction could be small, 5-20% perhaps. Or in some cases, a Capital LOSS instead...

Not a quibble, a valid point as I see it. So, let's say (for this example), they sold 100 shares of XYZ for 120 dollars a share where the basis is $20 a share. This gives them $10,000 in LTCGs and they immediately reinvest the $2k (from the gross sale) into another stock.

Naturally, the bigger picture is that they are staying under the Taxable Income threshold to which LTCGs and Qualified Dividends are taxed.

 

[DJRR]

Not sure what the point is. I itemize, and I still get to take all of the new deductions plus the extra that I itemize less the new .5% floor on charitable donations.

If you mean this gives me more space to do Roth conversions for the next 3 years, then I agree and am doing that in the 12% marginal bracket. Do you mean something else or just information on the OBBBA?

 

[Diogenes]

A small terminology quibble:
You show $10K of LTCGs.
I think what you really mean is: they withdrew $10K from their taxable account that had been invested for more than one year.
Depending on when those lots were purchased, the Gain percentage of that transaction could be small, 5-20% perhaps. Or in some cases, a Capital LOSS instead...

Yes, very good point. Adding to that, what matters especially for a buy-and-hold investor who is not making withdrawals from his or her account, is the dividend distributions. Those arise regardless of our spending-needs. And even if the cumulative capital gains are not spectacular, because the stock/fund was recently bought, or hasn't been performing all that well, the dividends may be large. This is especially the case for "old economy" stocks (oil, insurance, railroads, consumer goods, ...).

 

[pb4uski]

Except maybe the taxation of Social Security..... pretty important for retired singles or couples.

That was a bit of a surprise for us. I had always assumed that our SS would be 85% taxed given our other sources of income but before tIRA withdrawals and Roth conversions, however, that turned out not to be the case (but it was close).

So a small amount of Roth conversions get taxed at more than 12% because that income increases taxable SS and once SS is all 85% taxed the remainder at 12% since we stop Roth conversons at the top of the 12% tax bracket.

 

[pb4uski]

That was a bit of a surprise for us. I had always assumed that our SS would be 85% taxed given our other sources of income but before tIRA withdrawals and Roth conversions, however, that turned out not to be the case (but it was close).

So a small amount of Roth conversions get taxed at more than 12% because that income increases taxable SS and once SS is all 85% taxed the remainder at 12% since we stop Roth conversons at the top of the 12% tax bracket.

I played around with dinkytown this morning, and any Roth conversions or tIRA withdrawals will end up being at 22.2% because of the taxation of SS and the 12% tax bracket. Like I said, heretofore I assumed that we would be at 85% of taxable SS before any Roth conversions or tIRA withdrawals.

This surprise make the significant Roth conversions that I have done over the last 14 years at ~10% federal tax look better than I thought they were going to be but it looks like my Roth conversions are over.

I was planning to pay my income taxes via a tIRA withdrawal with 99% taxes withheld in December, but to avoid 22.2% tax I'll change that to be a Roth withdrawal with 99% taxes withheld.

 

[TheWizard]

I played around with dinkytown this morning, and any Roth conversions or tIRA withdrawals will end up being at 22.2% because of the taxation of SS and the 12% tax bracket. Like I said, heretofore I assumed that we would be at 85% of taxable SS before any Roth conversions or tIRA withdrawals.

This surprise make the significant Roth conversions that I have done over the last 14 years at ~10% federal tax look better than I thought they were going to be but it looks like my Roth conversions are over.

I was planning to pay my income taxes via a tIRA withdrawal with 99% taxes withheld in December, but to avoid 22.2% tax I'll change that to be a Roth withdrawal with 99% taxes withheld.

You might want to assess how much additional Ordinary Income it will take before you are through that transition zone and fully into the 85% SS being taxed.
It could be only a few thousand dollars...

 

[pb4uski]

Yeah, in our case it is more than a few thousand. With no tIRA withdrawals or Roth conversions and just SS, taxable account interest and dividends and my pension about 68% of our SS is taxable. It caps at 85% just below the amount of tIRA withdrawals or Roth conversions bring us to the top of the 12% tax bracket so now that I'm on SS all Roth conversions will be 22.2% [12%*(1+85%)].

 

[junkanoo]

Not sure what the point is. I itemize, and I still get to take all of the new deductions plus the extra that I itemize less the new .5% floor on charitable donations.

If you mean this gives me more space to do Roth conversions for the next 3 years, then I agree and am doing that in the 12% marginal bracket. Do you mean something else or just information on the OBBBA?

The point is to share a perspective. Now ... if someone has shared on this forum that a couple 65+ that have deferred one/both of their SS payouts could take the standard deduction resulting in 30K+ of their T-IRA never being taxed on the way out, please share the link.

The point is not what new deductions you might take, not every thread is about you, or me, as I itemized too. The wise person looks at the entirety of the relevant tax code, not just the newest. So ... let's take a look at what you and I are not getting.

1. We're not getting the $3,300 additional senior deduction that a couple 65+ gets just for staying alive.
2. We're not getting the full benefit of the $30,275 standard deduction that was bumped up considerably as part of the 2017 Tax Bill. And part of that bump up was based on the loss of SALT deductions. Now that SALT deductions are partially back ... did that bump up get brought back down? Nope.
3. It's not just that we lost with the new .5% floor; those taking the standard deduction gained with $2K charitable deduction ... so, in essence, they get the standard deduction and get to itemize (to a limited fashion).

As for your situation, if, first and foremost, you are charitably-minded and will be until you die ... great, the tax benefits come along for the ride. *IF* that's not the case and you're gifting significantly, then you would have to explain your strategy.

 

[DJRR]

The point is to share a perspective. Now ... if someone has shared on this forum that a couple 65+ that have deferred one/both of their SS payouts could take the standard deduction resulting in 30K+ of their T-IRA never being taxed on the way out, please share the link.

The point is not what new deductions you might take, not every thread is about you, or me, as I itemized too. The wise person looks at the entirety of the relevant tax code, not just the newest. So ... let's take a look at what you and I are not getting.

1. We're not getting the $3,300 additional senior deduction that a couple 65+ gets just for staying alive.
2. We're not getting the full benefit of the $30,275 standard deduction that was bumped up considerably as part of the 2017 Tax Bill. And part of that bump up was based on the loss of SALT deductions. Now that SALT deductions are partially back ... did that bump up get brought back down? Nope.
3. It's not just that we lost with the new .5% floor; those taking the standard deduction gained with $2K charitable deduction ... so, in essence, they get the standard deduction and get to itemize (to a limited fashion).

As for your situation, if, first and foremost, you are charitably-minded and will be until you die ... great, the tax benefits come along for the ride. *IF* that's not the case and you're gifting significantly, then you would have to explain your strategy.

OK. I guess I do not get what the "New Black" is. Do you mean that people with $50k in income pay no Federal income tax?

Only one thing matters to me - my itemization is worth more than the new adjusted standard deduction - so all the other calculations make no net difference to me. 2017 hurt me bad with the SALT limitation, even though I was still better off itemizing, and now that is back to where it was since I do not pay more than $40k SALT. If it does not apply to me then I will move on. Just didn't know if I was missing something.