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Old 04-12-2015, 01:03 PM
 
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Quote:
Originally Posted by petch751 View Post
mathjak, would you post the calculation please.
with the grand kids now so i can post some examples later
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Old 04-12-2015, 02:01 PM
 
Location: Grove City, Ohio
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Quote:
Originally Posted by mathjak107 View Post
i have written many posts about what happens when you just marginally take in a bit more money over the thresholds. it is insane.

you can get an extra 1k in taxable income and see 50% of it gone between the tax on the income and the increased tax on ss.

if anyone wants to see the math i will post it but i would think most saw it already as i posted it a few times.

despite the fact folks think that getting your ss taxed is not a low income problem it is a huge problem for those just over these low thresholds.
I saw your work and it helped a lot. Making even a little over the thresholds is more than insane.

Married couple saved and scrimped to put as much as they could into an IRA account.

They retire and receive a combined monthly ss benefit of $2,000/month but their IRA account allows them to withdraw $2,500/month for a total income of $4,500. They will end up paying $1,250/year in federal income taxes against their social security benefit in addition to what tax they will pay on the $2,500/month IRA disbursements.

In the meantime Couple B didn't save a dime but both worked and will receive a combined benefit of $2,250 each for $4,500/month.

Couple B will pay a big fat zero on their ss benefit. Nothing, not a dime tax on any of it!

How much of my social security benefit may be taxed?


Mathjak, now my question is how much of the IRA distribution will Couple B lose to income tax? What about state income tax on the IRA distribution? Assume the couple files short form.
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Old 04-12-2015, 02:14 PM
 
Location: Texas
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My wife and I are retired plus fall within the mandatory RMD guideline. We both receive SS and she has a pension. We file the standard income tax and pay our taxes quarterly. We have 15% withheld from the RMD's each month. After filing our federal tax return we paid around 11% adjusted.
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Old 04-12-2015, 02:18 PM
 
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why you have to be so careful with the taxing of ss is you have two moving targets involved which can make for some crazy increases in marginal tax rates..

these are great examples of how marginal rates can respond by adding only a few dollars more to agi when dealing with ss. these really explain well what you are up against

one thing you will note is incomes are NOT very high at all!.


Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.

If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!



" Jeremy and Martha have an AGI of $28,000 (and no tax-exempt or foreign income), and receive combined Social Security benefits of $14,000. As a result, their provisional income is $28,000 + $7,000 (half of Social Security benefits) = $35,000, which is $3,000 above the $32,000 threshold. This means that 50% x $3,000 = $1,500 of their Social Security benefits are subject to taxation, which ultimately increases their AGI to $28,000 + $1,500 = $29,500."

"Continuing the earlier example of Jeremy and Martha, if the couple decides to take another $1,000 out of their IRA, this will increase their AGI by $1,000 to $29,000. As a result, it will also increase their provisional income by $1,000, which leaves them $4,000 above the threshold, resulting in $2,000 of their Social Security benefits being taxable. In the end, this means Jeremy and Martha end out with a total AGI of $31,000... their AGI increased by $1,500 even though they only took out a $1,000 IRA withdrawal due to the taxation of Social Security benefits! If the couple is subject to the 15% tax bracket, their additional tax liability on $1,500 of income is $225, which equates to a marginal tax rate of $225 (additional taxes) / $1,000 (additional income) = 22.5%. In other words, even though the couple is in the 15% tax bracket, their $1,000 IRA withdrawal is subject to a 22.5% marginal tax rate due to the formulas triggering taxation of Social Security benefits!"

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Donald and Sarah have an AGI of $44,000 and receive combined Social Security benefits of $24,000. As a result, their provisional income is $44,000 + $12,000 = $56,000, which is $12,000 above the upper $44,000 threshold. This means that $16,200 of benefits are subject to taxation (which is technically 50% of the amount from $32,000 to $44,000 plus 85% of the excess above $44,000), which ultimately increases their AGI to $44,000 + $16,200 = $60,200.

Continuing the earlier example of Donald and Sarah, if they decide to take out another $1,000 from their IRA, their provisional income will rise to $57,000, and another $1,000 x 85% = $850 of Social Security benefits will be subject to taxation. This increases their AGI by $1,850, which leads to $277.50 of additional taxes. The end result: Donald and Sarah face a $277.50 / $1,000 = 27.75% marginal tax rate even though they're in "just" the 15% tax bracket, due to their greater income triggering taxation of additional Social Security benefits at 85 cents on the dollar!
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Paul and Megan have an AGI of $58,000 and receive combined Social Security benefits of $24,000. As a result, their provisional income is $58,000 + $12,000 = $70,000, which is $26,000 above the upper $44,000 threshold. This means that $20,400 of benefits are subject to taxation (which is the maximum 85% of the $26,000 excess above the upper threshold, capped out at 85% of their total Social Security benefits), which ultimately increases their AGI to $58,000 + $20,400 = $78,400.

Continuing the earlier example of Paul and Megan, if they decide to take out another $1,000 from their IRA, their provisional income will increase to $71,000. However, since they are already capped at 85% of their maximum Social Security benefits being subject to taxation, their AGI simply increases to $59,000 + $20,400 = $79,400. In other words, because the maximum amount of Social Security benefits were already subject to taxation, another $1,000 of income simply increases their AGI by... $1,000! Assuming the couple is subject to the 15% tax bracket (which they should be after personal exemptions and itemized deductions), the additional taxes on $1,000 of income will be $150, which means their 15% tax bracket really does mean a 15% marginal tax rate!
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Old 04-12-2015, 03:10 PM
 
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Taxation during retirement is one of the reasons I decided to finance and buy a much larger house. I get the benefit of property tax and interest deductions. If I paid rent those costs would be included in my rental costs but not deductible. My house is actually way bigger than I would need. We remodeled and added a second kitchen. My daughter and her family "rent" the other half and we get the deductions. It works out for all of us since they would not be able to afford to buy a house and they will eventually inherit the house. If the arrangements fall apart, the half of the house could be easily rented out at a very high rate. My house is virtually on the campus of a major university. There are plenty of grad students or new faculty members who want to rent in this area.

Taxes for us retirees go way up with additional income. They can also drop nicely with deductions.
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Old 04-12-2015, 03:31 PM
 
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property taxes and mortgage interest do not count in the calculation as far as whether or not ss is taxed. provisional income is before deductions .

deductions are expenses and as such are like spending 4 bucks over and above the house price to get one back.

there is rarely an instance the debt is not costing you more than any tax value.

even if it is an investment property spending your rental profits for expenses to get a dollar back is never a good thing . if you could ditch the expense piggy will have more money not less.
when you think about it renters usually get the biggest tax value. most renters get to fly the empty seats since few in the median income range or lower can itemize. they get the entire standard deduction without spending the actual dollars.

many home owners are actually spending all those standard deduction dollars . in fact if they get to itemize they spent all those dollars.

it is the renters who get money back they never spent in the first place.

Last edited by mathjak107; 04-12-2015 at 04:30 PM..
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Old 04-12-2015, 04:37 PM
 
Location: Sacramento
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Quote:
Originally Posted by jrkliny View Post
Taxation during retirement is one of the reasons I decided to finance and buy a much larger house. I get the benefit of property tax and interest deductions. If I paid rent those costs would be included in my rental costs but not deductible. My house is actually way bigger than I would need. We remodeled and added a second kitchen. My daughter and her family "rent" the other half and we get the deductions. It works out for all of us since they would not be able to afford to buy a house and they will eventually inherit the house. If the arrangements fall apart, the half of the house could be easily rented out at a very high rate. My house is virtually on the campus of a major university. There are plenty of grad students or new faculty members who want to rent in this area.

Taxes for us retirees go way up with additional income. They can also drop nicely with deductions.
Actually, in your situation you seem to have actually increased the problem.

The taxes on Social Security are based on the Adjusted Gross Income, which includes all income (including rental income) but excludes your itemized deductions and personal exemptions.
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Old 04-12-2015, 05:02 PM
 
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rental income goes on schedule c and is an above the line item as far as provisional income so if depreciation is added in if the number turns negative that would help.

but mortgage interest and property taxes are deductions and not part of the calculation. they would not help..
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Old 04-12-2015, 05:10 PM
 
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Mathjak, I understand you are a committed renter and some of your analysis makes sense. However you left out some pieces.

Spending $4 to save $1 seems to make little sense, except it does in fact cut our taxes down to virtually nothing. Even without the mortgage and property taxes we are ahead of the standard deduction. Buy or rent, we still need to spend quite a bit for housing/rent. Now it is deductible. And we in effect get to deduct what my daughter and her family used to spend on rent. My daughter pays no more but wins because she has a much nicer neighborhood and living space than before.

I just love having a mortgage for under 4% fixed for 30 years. I have been making about 10% - 4% = 6% on the bank's money. That could change but over the years it is highly likely I will average returns much more than my 4% cost. Plus I have the son in law to carry out the trash, mow the lawn, etc. I help but as I age the sil will take over most of the upkeep. Also I travel a lot. It is really helpful to have someone in the house to take care of it. It is nice to have someone available for emergencies, trips to drop off the car for service, someone to pickup some eggs or bread while they are out. We do the same for them. It is also great to have the grandkids next door. In the winter we hardly see them except we babysit the youngest most Wednesdays. It is fun for us and cuts back a bit on child care expenses. My wife takes the older grandkid to music class on Saturday mornings. Anyway having an extended family in a separate portion of the same house has lots of advantages although most of them are not financial.

So for the financial aspects, we save a lot on taxes and I really like using the banks money to earn way more than they charge us. The final financial issue is appreciation. It is all about location, location, location. We were both smart and lucky and bought at the bottom of the market in a special location. Our housing development is surrounded on all four sides by a major university. This area is going to continue to appreciate at a rapid rate. For the 2 years we have been owners the house has appreciated by an estimated $50k which has more than covered the combined total for taxes, insurance and mortgage. Did I mention we are within an easy mile walk to the center of campus and we can walk to classes. For the 2014-15 school year and a total cost of $300, I am taking 8 semester courses mainly in the arts and photography. There are a 1000 seniors in the program so it is a great place to meet others with intellectual or similar hobby interests. None of that would be possible if I tried to rent.
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Old 04-12-2015, 05:16 PM
 
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actually we are buying a co-op next year so i am not a committed renter.

investing your money and having a mortgage is a different reason and a different scenario as maybe some will invest maybe they won't but in either case borrowing money to invest is one thing ,borrowing for the purpose of having a tax deduction is quite another...

from just a tax standpoint though ask yourself in which case would your piggy bank have more money at the end of the year. paying all that mortgage interest and getting a small piece back or not having to pay the interest in the first place ?

easy answer..
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