Taxes & SS - Live and Learn

[Jerry1]

I just entered my taxes into TT. I realized that I was way off on my estimated taxes - bigger refund than expected. Ugh, what happened? Well, this was my first year with SS. Me and DW both started SS in 2023. In my tax planning, I assumed all of the SS would be taxable. Realistically, I knew the limit was 85% but to be safe, I assumed 100%. Well, it ended up being closer to 50%. I'll definitely have to understand that calculation much better going forward.

Had I realized where I was, I would have done a Roth conversion of about $30K. Not a lot but anytime I can get $30K out of my IRA under the 12% bracket, I want to do that. Given that I took a distribution from my IRA in 2023 of $20K (to replenish my cash from buying iBonds), I should be able to do a Roth conversion in each of the coming years of about $50K.

Live and learn - an expensive way to do business. I should have studied the SS form better instead of just assuming that 85% of it would be taxed.

 

[RunningBum]

Maybe you should have made a Roth conversion, maybe not. Since your SS wasn't fully taxed, additional income from a conversion would make more SS taxable. Both the conversion and the extra SS taxed could push more Qdivs into being taxed. You might find it's a 49.95% marginal rate rather than 12%, until SS if fully (85%) taxed.

See for yourself by adding an additional $30K income to your return, and see how much your taxes actually increase. Perhaps it won't be much if you are very close to having all SS taxed. I would try increasing $1K at a time to see what happens.

 

[Al18]

FYI here’s a link to a simple calculator to determine how much of your SS benefits are taxable https://www.covisum.com/resources/taxable-social-security-calculator

 

[Jerry1]

FYI here’s a link to a simple calculator to determine how much of your SS benefits are taxable https://www.covisum.com/resources/taxable-social-security-calculator

Thanks, but too simple of a calculator. As RunningBum indicates, I’m in between two break points. I’m going to have to add $1000 at a time and see what happens so I understand the cut off points. I’ll do that after I get everything loaded. I still have interest and dividends to add once I get my 1099’s from the brokerage. I think they’re due 2/15.

 

[pb4uski]

Try this one. https://www.irscalculators.com/tax-calculator

Put in everything except the Roth conversion and then duplicate the tab. In the duplicate tab add in the Roth conversion. The difference in tax divided by the Roth conversion amount is the effective tax rate on your Roth conversion.

Note that the tool also adjusts for the portion of SS that is taxable.

 

[target2019]

Open a parallel form and don't enter tax paid. Go back and enter tax paid. Watch the numbers on 1040 as you carry this out.

Our inputs have been different each year for the last decade. Others have more predictable income sources.

 

[MdaPetralia]

I just entered my taxes into TT. I realized that I was way off on my estimated taxes - bigger refund than expected. Ugh, what happened?

I use TT also to do my taxes. I try to have all my info as best as possible entered into TT by mid-Dec of the prior year so I can determine if I have any more room in/under the 12% bracket to do an extra ROTH conversion or not. While I would not have received any 1099-DIV's, -INT or -RET's, etc. yet, I log in to my accounts and add up all the income.

 

[Jerry1]

I use TT also to do my taxes. I try to have all my info as best as possible entered into TT by mid-Dec of the prior year so I can determine if I have any more room in/under the 12% bracket to do an extra ROTH conversion or not. While I would not have received any 1099-DIV's, -INT or -RET's, etc. yet, I log in to my accounts and add up all the income.

That’s exactly what I should have done and did not. I did a quick calculation in a spreadsheet and doing so, I assumed all my SS would be taxed. I didn’t even cap it at 85%. It’s on me. I’ll do better next year. I’m disappointed in myself for leaving any money in my IRA that I could have released in the 12% bracket.

 

[Healthy Lifestyle]

That’s exactly what I should have done and did not. I did a quick calculation in a spreadsheet and doing so, I assumed all my SS would be taxed. I didn’t even cap it at 85%. It’s on me. I’ll do better next year. I’m disappointed in myself for leaving any money in my IRA that I could have released in the 12% bracket.

Thanks for the heads up on SS taxes, as I would have thought the same.

As a new retiree, Federal & State tax filing, Roth & Traditional IRA's, efficient withdrawals, possible 85% tax on SSI. IRMAA, RMD's, etc., feels overwhelming!

 

[Jerry1]

Thanks for the heads up on SS taxes, as I would have thought the same.

As a new retiree, Federal & State tax filing, Roth & Traditional IRA's, efficient withdrawals, possible 85% tax on SSI. IRMAA, RMD's, etc., feels overwhelming!

It is a bit overwhelming but the benefits of getting it right are significant. Just back of the napkin - if I can get $30K out of my IRA at 12% versus 22%, that’s $3K just for being on top of it.

 

[RunningBum]

Try this one. https://www.irscalculators.com/tax-calculator

Put in everything except the Roth conversion and then duplicate the tab. In the duplicate tab add in the Roth conversion. The difference in tax divided by the Roth conversion amount is the effective tax rate on your Roth conversion.

Note that the tool also adjusts for the portion of SS that is taxable.

+1. That's my tax tool of choice and it is particularly helpful in this case for displaying the amount of SS that is taxable. I wish it also displayed the % taxable so you can easily see when you've hit 85%.

Jerry (OP), I suggest using this handy tool rather than your own spreadsheet when estimating taxes.

 

[Jerry1]

Jerry (OP), I suggest using this handy tool rather than your own spreadsheet when estimating taxes.

I’ll try the tool but my intent was just to use a copy of my Turbo Tax file and adjust it to see where I’ll be. I should have done that before the year end. I always get TT before the year end so had no excuse other than taking it too casually.

 

[Dtail]

My DGF has a fairly simple return and I just modeled the SS form into Excel and then easy to play with it. I follow her potential Roth conversion throughout the year.

 

[Rianne]

2024 is a sweet spot for us. Very little taxable interest income(~ $7K from I-bond redemption), low SS (mine taken at 65), and approx. $20K in CG and dividends. I'm thinking of a large Roth conversion. Our spending MM fund is set for the year. We'll stay in the 12% tax bracket.

 

[Jerry1]

2024 is a sweet spot for us. Very little taxable interest income(~ $7K from I-bond redemption), low SS (mine taken at 65), and approx. $20K in CG and dividends. I'm thinking of a large Roth conversion. Our spending MM fund is set for the year. We'll stay in the 12% tax bracket.

Good plan. I can’t think of a reason why anyone who can get funds out of their IRA at 12% shouldn’t.

 

[pb4uski]

I’ll try the tool but my intent was just to use a copy of my Turbo Tax file and adjust it to see where I’ll be. I should have done that before the year end. I always get TT before the year end so had no excuse other than taking it too casually.

Have you ever used the TurboTax What-If Worksheet? Handy and I suspect just what you need and easier than a duplicate TT file.

 

[Jerry1]

Have you ever used the TurboTax What-If Worksheet? Handy and I suspect just what you need and easier than a duplicate TT file.

Yes, I’ve used it. Unfortunately this was my first year with SS and I got caught.

 

[SevenUp]

The approach described in Roth Conversion with Social Security and Medicare IRMAA will show you various breakpoints for marginal tax rates as the Roth conversion amount increases.

 

[Lemonade]

Re: the IRS tax calculator. If I only have Roth conversions for the year, I would input those under Earned Income and uncheck the Social Security and Medicare tax boxes, correct? (Ie, only Federal income tax withheld doing a conversion, not other taxes?)

 

[Exchme]

It is a bit overwhelming but the benefits of getting it right are significant. Just back of the napkin - if I can get $30K out of my IRA at 12% versus 22%, that’s $3K just for being on top of it.

As I recall the calculation, once you pass the base, then for every dollar of additional income, 50 cents of your SS benefit is taxed until you pass 50% of your SS taxed, then it ramps up so that each $ of income causes 85 cents of your SS benefit to also be taxed, until the max of 85% of your SS is taxed. So if you were already at 50% of SS taxed, then additional conversions would make your effective marginal rate 1.85 X 12% = 22.2%. So no bargain Roth Conversions are available to you anymore.

If you are single, then it's possible for the SS taxation phase-in to go above the LTCG phase in, so your effective marginal rate would be (12%+15%)=27% x 1.85 = 49.95%. That would be brutal.

 

[SecondCor521]

Re: the IRS tax calculator. If I only have Roth conversions for the year, I would input those under Earned Income and uncheck the Social Security and Medicare tax boxes, correct? (Ie, only Federal income tax withheld doing a conversion, not other taxes?)

Roth conversions are not earned income, so that aspect would be incorrect; I'm not sure if it would make a difference in the IRS tax calculator. But Roth conversions are not subject to SS/Medicare, so that part would be correct.

 

[oldtimer]

It is a bit overwhelming but the benefits of getting it right are significant. Just back of the napkin - if I can get $30K out of my IRA at 12% versus 22%, that’s $3K just for being on top of it.

You need to use the IRS napkin - Worksheet 1. Figuring Your Taxable Benefits found in Publication 915. Easy to implement in a spreadsheet.

 

[RunningBum]

Re: the IRS tax calculator. If I only have Roth conversions for the year, I would input those under Earned Income and uncheck the Social Security and Medicare tax boxes, correct? (Ie, only Federal income tax withheld doing a conversion, not other taxes?)

I put Roth conversions as Unearned Income.

 

[braumeister]

I almost always do my tax estimating with this one and find it very easy and quick to use.

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[Lemonade]

I need to look at the calculator again - I didn't see a spot for unearned income, so my 'fix' was to put the conversion as Earned and remove the taxes for SS and Medicare. Thanks for the responses.