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My wife and I's retirement plan is somewhat simple. Our thought is that, if the average person is supposed to spend no more than a 1/3 of their gross income on rent, then if we owned 3 rental units we wouldn't mind living in by the time we retired, then we should be set.
Unfortunately, I'm not sure we're going to get to 3, but we do have 2, and I think my SS benefits will be enough to fill the gap. However, I've read that SS benefits can get taxed at 85% if you keep working. Would rental income count as worked income for SS reasons? Do dividends or capital gains do the same? I'm hoping someone knows the answer to this.
Rental income you receive from real estate does not count for Social Security purposes unless:
You receive rental income in the course of your trade or business as a real estate dealer (see §§1214-1215);
Services are rendered primarily for the convenience of the occupant of the premises (see §1218); or
In the case of farm rental income, you materially participate in the production or in the management of the production of farm commodities on land rented to someone else. (See §§1221-1232.)
My wife and I's retirement plan is somewhat simple. Our thought is that, if the average person is supposed to spend no more than a 1/3 of their gross income on rent, then if we owned 3 rental units we wouldn't mind living in by the time we retired, then we should be set.
Unfortunately, I'm not sure we're going to get to 3, but we do have 2, and I think my SS benefits will be enough to fill the gap. However, I've read that SS benefits can get taxed at 85% if you keep working. Would rental income count as worked income for SS reasons? Do dividends or capital gains do the same? I'm hoping someone knows the answer to this.
All the Best,
Artillery
Where is this located? I'm aiming for Tennessee, tri cities area or Cleveland Ohio. I'll bet you get folks here on CD who are or may be interested. Especially since a lot of us want to rent before we buy somewhere.
the op is asking about whether rental income counts towards getting his ss taxed at 85% , not whether or not he loses a dollar for every 2 he makes over the limit . those are two very different issues .
YES YES YES the rental income counts towards getting your ss taxed as well does any other income like capital gains ,interest and dividends if it is taxable income . even tax free muni interest counts
what it does not count towards is losing 1 dollar for every 2 you earn over the 15k or so limit .. but that is separate from just getting your ss taxed at 85%
I agree, while the link was interesting, it didn't answer the question. The question was when SS payments are taxable, and if income from rental properties will be counted in that calculation. The answer is YES, income from rental property can cause up to 85% of your SS benefits to be taxable. The rate of taxation will depend upon your income from all sources and your deductions, exemptions, filing status, etc. It is not "taxed at 85%". Here's a link you might find helpful:
Run Turbotax or Taxcaster. Yes you get taxed 85% but that doesn't mean you can't be in 15% tax bracket. I had thought similar things until I ran my numbers. It depends on lots of things.
be very careful guessing at tax outcomes when dealing with the taxing of ss.
you have two moving targets that can do some crazy things with marginal tax rates .
a single person can take a mere 1k over the threshold for getting ss taxed and that 1k sees what amounts to a 46.50% marginal tax rate .
it is insane the way the 2 moving targets interact .
as an example :
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!
if you have to pay back the depreciation if you sell eventually then the results are pretty close to reality .
can you imagine clearing 1k after going through the hassles of tenants and rental issues and then seeing a 46.50% tax on that difference in income ?
that is why you can't guess at someone's tax outcome when it comes to dealing with ss and other income . at pretty low income levels it can do some strange things to your marginal rate .
That's a great point Chavak. I've been depreciating mine already, but my wife has never depreciated hers. I assumed I would never sell, and my wages would be lower in retirement so I'd rather pay tax then. Looks like she's the smart one again.
Time for some tax planning to look at trusts I guess.
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