The Tax on Social Security
Who might care: Anyone with a retirement account
The point of this: Avoid taxes if possible
Why: To plan for Financial Security
Social Security is an important part of retirement planning. In my own personal financial planning I've been contemplating three mathematical problems: TAXATION (Part 3), Delayed (or Early) Retirement (Part 2), and Benefit Calculation (Part 1).
In 1983, under Ronald Regan, some stealth rules were put into the tax code to save Social Security from going bankrupt. The threshold taxation amounts are $25,000 for single and $32,000 for joint tax returns. These amounts have not been indexed for inflation. When the law was passed, hardly anyone noticed as these amounts were so large they only pertained to small numbers of recipients.
So, here we are in 2016 and those amounts don’t look so large. And, as we go forward, if something isn’t done, they will apply to almost every recipient.
The sad part about this is that Social Security is taxed at about 150% your normal tax rate. It appears they want to keep us in poverty. No other group is taxed so hard.
For example (Married Couple):
Situation 1:
Earns 31,000 (wages, pension, tax free municipals) & 24,000 in social security
Federal Tax is about $1,443 (Tax Bracket is 10%)
Situation 2:
Earns 41,000 (wages, pension, tax free municipals) & 24,000 in social security
Federal Tax is about $4,189(Tax Bracket is 10%)
Tax increase of $2,746 with a $10,000 increase in wages!
Take Note: If you’re on Social Security and you hit these thresholds be prepared to be ripped by this tax.
Revenue that activates this tax includes tax free muni interest. It’s very hard to avoid. When we were told by financial planners to put money into an IRA because we’d be taxed at a lower rate that was probably wrong.
Along the way, knowing about this problem, on low income years I’ve managed to CONVERT my much IRA to a ROTH (it’s probably good to have some combination of both). So I’m not misunderstood. Withdrawing for a IRA becomes a problem when you’re above/within the Social Security taxation threshold. It causes bad things to happen (taxation to go ballistic). IRA withdraws below the threshold, above scenario, are taxed at 10%.
https://joecobbonline.wordpress.com/2007/03/19/the-tax-on-your-retirement-savings/
Social Security Publication 915 – Worksheet 1 (I have not analyzed this)
https://www.irs.gov/pub/irs-pdf/p915.pdf
I use taxcaster to run retirement scenarios.
Conclusion: Prepare for large purchases like a New Van. I saw a poor retired couple get smoked for using the last of their IRA to buy their last new car. States often pile on with this tax.
Disclaimer: My opinion only. Do your own due diligence.
Who might care: Anyone with a retirement account
The point of this: Avoid taxes if possible
Why: To plan for Financial Security
Social Security is an important part of retirement planning. In my own personal financial planning I've been contemplating three mathematical problems: TAXATION (Part 3), Delayed (or Early) Retirement (Part 2), and Benefit Calculation (Part 1).
In 1983, under Ronald Regan, some stealth rules were put into the tax code to save Social Security from going bankrupt. The threshold taxation amounts are $25,000 for single and $32,000 for joint tax returns. These amounts have not been indexed for inflation. When the law was passed, hardly anyone noticed as these amounts were so large they only pertained to small numbers of recipients.
So, here we are in 2016 and those amounts don’t look so large. And, as we go forward, if something isn’t done, they will apply to almost every recipient.
The sad part about this is that Social Security is taxed at about 150% your normal tax rate. It appears they want to keep us in poverty. No other group is taxed so hard.
For example (Married Couple):
Situation 1:
Earns 31,000 (wages, pension, tax free municipals) & 24,000 in social security
Federal Tax is about $1,443 (Tax Bracket is 10%)
Situation 2:
Earns 41,000 (wages, pension, tax free municipals) & 24,000 in social security
Federal Tax is about $4,189(Tax Bracket is 10%)
Tax increase of $2,746 with a $10,000 increase in wages!
Take Note: If you’re on Social Security and you hit these thresholds be prepared to be ripped by this tax.
Revenue that activates this tax includes tax free muni interest. It’s very hard to avoid. When we were told by financial planners to put money into an IRA because we’d be taxed at a lower rate that was probably wrong.
Along the way, knowing about this problem, on low income years I’ve managed to CONVERT my much IRA to a ROTH (it’s probably good to have some combination of both). So I’m not misunderstood. Withdrawing for a IRA becomes a problem when you’re above/within the Social Security taxation threshold. It causes bad things to happen (taxation to go ballistic). IRA withdraws below the threshold, above scenario, are taxed at 10%.
https://joecobbonline.wordpress.com/2007/03/19/the-tax-on-your-retirement-savings/
Social Security Publication 915 – Worksheet 1 (I have not analyzed this)
https://www.irs.gov/pub/irs-pdf/p915.pdf
I use taxcaster to run retirement scenarios.
Conclusion: Prepare for large purchases like a New Van. I saw a poor retired couple get smoked for using the last of their IRA to buy their last new car. States often pile on with this tax.
Disclaimer: My opinion only. Do your own due diligence.
