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Old 02-20-2016, 12:52 PM
 
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Quote:
Originally Posted by DaveinMtAiry View Post
Yes but let's say you have $100,000 in post tax savings earning 5% in capital gains and dividends, So the $5,000 you remove is not coming from the post tax $100,000 principal, it is coming from your gains. Gains you would pay capital gains tax on. Would this $5,000 be counted by SS towards the $32,000?

On another note great points made earlier about being a widow and having your threshold now dropping to the single rate as well as how ridiculous it is that the figures have not been adjusted since 1983.
Just look at the 1040 Instructions. All income counts towards that number including part time Walmart greeter jobs, interest income, dividend income, 401(k) & IRA distributions, pensions, annuities, and tax free munis. Other than Roth IRAs and Roth 401(k)s, I don't know any way of escaping.

I'd be fine with it if they doubled the cutoff numbers and indexed them to inflation. That was the intent of the original law in 1983. If you "do it right" and save in a 401(k) and IRA, you're going to get nailed with taxes on your Social Security benefit with very modest distributions. If you're just crossing into that 50% or 85% threshold, it's an enormous amount of taxes. I know lots of people who hit 70, start having to take mandatory distributions, and get slaughtered in taxes.
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Old 02-20-2016, 02:28 PM
 
Location: Mount Airy, Maryland
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Quote:
Originally Posted by GeoffD View Post
Just look at the 1040 Instructions. All income counts towards that number including part time Walmart greeter jobs, interest income, dividend income, 401(k) & IRA distributions, pensions, annuities, and tax free munis. Other than Roth IRAs and Roth 401(k)s, I don't know any way of escaping.

I'd be fine with it if they doubled the cutoff numbers and indexed them to inflation. That was the intent of the original law in 1983. If you "do it right" and save in a 401(k) and IRA, you're going to get nailed with taxes on your Social Security benefit with very modest distributions. If you're just crossing into that 50% or 85% threshold, it's an enormous amount of taxes. I know lots of people who hit 70, start having to take mandatory distributions, and get slaughtered in taxes.
This is really brutal news and really hurts my plan. $32,000 a year for a couple is nothing today, obviously less than nothing in 10 years when it will effect me.
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Old 02-20-2016, 02:30 PM
 
Location: Mount Airy, Maryland
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Quote:
Originally Posted by biscuitmom View Post
We pay taxes as we go on our dividends from post-tax accounts and investments, so no tax is owed on any withdrawals.
I'm not sure what you mean by capital gains in the above example, capital gains usually aren't realized until the asset is sold.
By withdrawing a portion, the $5,000, are you not selling?
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Old 02-20-2016, 02:51 PM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by Escort Rider View Post
We don't have enough information from the OP to know if your suggestion makes sense or not. If his income is all or mostly from SS (that is, if he does not have other substantial income) then his SS will not be taxed at all.

Under more normal circumstances, 85% of our SS retirement benefit is subject to federal income taxation. Most states, including even California, do not tax Social Security income.
Or - a possible/likely outcome is that even though SS income (either 50% or 85%) will be included in computing modified adjusted income - the taxpayer will owe little or nothing in terms of taxes if SS is the taxpayer's only/primary source of income. There's a difference between the computation of modified adjusted gross income (the top line) - and what shows up on the bottom line - i.e., taxable income. After exemptions and deductions.

One also has to keep in mind that things that are included in computing modified adjusted gross may not be taxable at all (like tax exempt municipal bond interest) - or may be taxed at lower tax rates than other forms of income (like long term capital gains - the tax rate on long term capital gains can actually be 0% for some taxpayers).

I am not sure I see the injustice of including Social Security when it comes to computing modified adjusted gross income. And then taxing it at various (progressive) rates based on a taxpayer's overall bottom line taxable income. Sure - I'd like another middle class "tax freebie" - but don't feel aggrieved by its absence. Robyn
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Old 02-20-2016, 03:16 PM
 
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Quote:
Originally Posted by DaveinMtAiry View Post
By withdrawing a portion, the $5,000, are you not selling?
It can be from dividends
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Old 02-20-2016, 03:25 PM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by DaveinMtAiry View Post
By withdrawing a portion, the $5,000, are you not selling?
OK - let's go back to square one.

In a (generalized) nutshell (at the federal level) - you have a non-retirement brokerage account with $100,000 in whatever. You EARN $5000 on that $100k. The tax treatment depends entirely on how you earn the $5000. "Qualified dividends" are subject to the same tax rates as long term capital gains (no higher than 15% except for very high income taxpayers). Non-qualified dividends are subject to regular tax rates. Long term capital gains are treated one way (lower rates for most taxpayers - max of 15%) - short term capital rates are basically treated the same as ordinary taxable income.

If you own equity mutual funds - you will most likely get varying indeterminate amounts of these kinds of income every year. Without taking buying or selling the funds into consideration. Mutual funds pass on these things to shareholders every year. You pay the taxes (they don't).

Most interest is treated as ordinary income. Except for tax-free municipal bond interest (there are also taxable municipal bonds - where the interest is ordinary income).

If you buy/sell securities in a given year - you will owe capital gains taxes (long or short term rate depending on the holding period) if you have gains. If you have losses - you can write them off against long term capital gains (and - to some extent - ordinary income).

There are additional complications (e.g., if you sell shares in GLD - the gold ETF - you'll pay the capital gains tax rates on collectibles - higher than the regular LTGC rates). But let's keep it simple for now.

Note that all of this tax stuff is exactly the same whether or not you take money out of your brokerage account. You will get a 1099 form every year that shows what you made/lost and how you made it - and the 1099 is the basis of your tax reporting - no matter what you did with the money (left it in the brokerage account or spent it).

I can honestly understand why most people don't understand these things. It's complicated tax stuff - and Congress tends to change the rules over the years. Note that I understand these things (for the most part). Which is why almost 100% of our non-IRA taxable portfolio is in tax free bonds (with some taxable CDs to eat up our deductions). And I do anything more complicated than that in IRAs. I don't care to spend half my life figuring out tax stuff (or to pay our accountant to do it either!). Robyn
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Old 02-20-2016, 03:33 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,932,507 times
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Quote:
Originally Posted by DaveinMtAiry View Post
By withdrawing a portion, the $5,000, are you not selling?
P.S. Feel free to ask any questions you have. The only dumb questions are those you don't ask when you don't understand how something works.

Note that I don't understand how having any portion of your Social Security included in your modified adjusted gross income could "blow up" your retirement plans. Perhaps you're confusing 50% being included in modified adjusted gross income with paying 50% taxes on your Social Security (which isn't going to happen unless you're a very wealthy person in a high income tax state). Wouldn't blame you for your confusion - because there seem to be some "drama queens" here when it comes to discussing taxes.
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Old 02-20-2016, 03:50 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,932,507 times
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Quote:
Originally Posted by GeoffD View Post
Just look at the 1040 Instructions. All income counts towards that number including part time Walmart greeter jobs, interest income, dividend income, 401(k) & IRA distributions, pensions, annuities, and tax free munis. Other than Roth IRAs and Roth 401(k)s, I don't know any way of escaping.

I'd be fine with it if they doubled the cutoff numbers and indexed them to inflation. That was the intent of the original law in 1983. If you "do it right" and save in a 401(k) and IRA, you're going to get nailed with taxes on your Social Security benefit with very modest distributions. If you're just crossing into that 50% or 85% threshold, it's an enormous amount of taxes. I know lots of people who hit 70, start having to take mandatory distributions, and get slaughtered in taxes.
What is your idea of an enormous amount of taxes? For a single person - you're at less than 15% with a taxable (bottom line) income of < $37650. Less than 25% with a taxable income of < $91150. And the amounts are much higher for married people. That is hardly nosebleed tax territory.

And remember - seniors can have a lot of deductible expenses. Especially medical expenses - property taxes too. Which may make it worth their while to itemize deductions. For seniors in no income tax states like Florida - don't forget we can deduct sales taxes now too. And they're estimated based on our income. We don't have to buy a lot (or anything) to get the deduction (although we can get extra in a year when we buy something like a car). That deduction may be the difference between making itemized deductions more advantageous than using the standard deduction. Robyn
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Old 02-20-2016, 03:54 PM
 
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Seniors can also find themselves suddenly filing single if one of them dies so things can get worse tax wise at a bad time.
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Old 02-20-2016, 04:11 PM
 
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The biggest tax damage is on the lower incomes because of the way the two moving targets interact.

A single earning a mere extra 1k over the limit for having their ss taxed sees the equal to a 47.50% marginal tax rate on the overage.

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..

kitces gives 3 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!.

" 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!"

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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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