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Old 02-20-2016, 08:04 PM
 
Location: Gilbert, AZ
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Just FYI...

SS benefits, qualified dividends, and LTCG all play nicely together. A joint return with both filers age 65+ can have up to at least $98,000 in any combination from these sources and pay zero federal income tax.

There is such a thing as too much money in a 401k (non Roth, anyway).

Last edited by hikernut; 02-20-2016 at 08:12 PM..
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Old 02-20-2016, 08:36 PM
 
530 posts, read 537,630 times
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Quote:
Originally Posted by daves 57 View Post
I should have mentioned that im full retirement age 66 and im still working until September at which time ill have earned approx., 50,000. so if I add the 27,000 to the 50,000 that will put me at 77,000. maybe I should have my employer deduct an extra 100 dollars a week from my pay in federal taxes to help offset anything I might owe?
... I'm in a similar situation as you are, daves 57 ... I have a 401(k) through my employer, and recently upped the percentage of contribution to it (before taxes), along with the 'catch-up' contribution. That has helped make our "magi" number go lower - just not enough to completely-eliminate the tax burden resulting from basically having two incomes (Job and SS). But, this year, my DW is contributing more to her 401(k), which will also help reduce our tax obligation.
Of course, YMMV ...
...
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Old 02-21-2016, 04:14 AM
 
71,508 posts, read 71,674,131 times
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Quote:
Originally Posted by hikernut View Post
Just FYI...

SS benefits, qualified dividends, and LTCG all play nicely together. A joint return with both filers age 65+ can have up to at least $98,000 in any combination from these sources and pay zero federal income tax.

There is such a thing as too much money in a 401k (non Roth, anyway).
you can see some pretty high incomes tax free or almost tax free well up in to the 200k range but in practice most of us don't do so well .

the reason is it begins to require a perfect tax structure because while a couple can earn 70k in qualified dividends , and LT capital gains AT ZERO TAX THE WAY THOSE BUCKETS FILL UP CAN MAKE IT VERY DIFFICULT .

the way the bucket fills up is any taxable money goes in first so right off the bat if you get 30k in ss and 70k in dividends and long term capital gains 85% of the ss is taxed and fills up the bottom of that 70k allowance right from the go .


so now you only have 25,500 left you can apply to tax free long term capital gains and qualified dividends , not the 70k.

it is much easier to pay near zero while delaying ss .

http://www.forbes.com/sites/baldwin/.../#173eb5526bba

Last edited by mathjak107; 02-21-2016 at 04:28 AM..
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Old 02-21-2016, 05:04 AM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by mathjak107 View Post
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...
There may be good examples of this - but I don't think the examples mentioned are good examples. Because they all seem to be "top line" - not bottom line after personal exemptions and deductions (minimum of $23,200 for a 65+ married couple this year). Robyn
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Old 02-21-2016, 05:09 AM
 
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it is bottom line , the deductions and exemptions are different this year but not different enough that much changes from this example . all the examples are results after standard deductions and exemptions .


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!

Last edited by mathjak107; 02-21-2016 at 05:28 AM..
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Old 02-21-2016, 05:36 AM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,923,045 times
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Quote:
Originally Posted by mathjak107 View Post
you can see some pretty high incomes tax free or almost tax free well up in to the 200k range but in practice most of us don't do so well .

the reason is it begins to require a perfect tax structure because while a couple can earn 70k in qualified dividends , and LT capital gains AT ZERO TAX THE WAY THOSE BUCKETS FILL UP CAN MAKE IT VERY DIFFICULT .

the way the bucket fills up is any taxable money goes in first so right off the bat if you get 30k in ss and 70k in dividends and long term capital gains 85% of the ss is taxed and fills up the bottom of that 70k allowance right from the go .

so now you only have 25,500 left you can apply to tax free long term capital gains and qualified dividends , not the 70k.

it is much easier to pay near zero while delaying ss .

Forbes Welcome
It's much easier to keep it at or near zero while still taking SS by putting tax free bonds in taxable accounts - and other things in tax-deferred accounts. You're giving up something by doing this - the tax-favored treatment of qualified dividends and long term capital gains - also deductions for capital losses. Because eventual withdrawals from non-Roth accounts will be treated as ordinary income. OTOH - for people who use mutual funds (I don't) - the timing and amounts of distributions of various kinds of income are often uncertain. Makes things difficult in terms of planning in taxable accounts.

Overall - I think tax planning is important. But I think investment planning should come first for most people. Also - since many people have various kinds of investments - and many have both taxable and tax-deferred accounts - the primary issue is putting various kinds of investments in the different kinds of accounts.

When it comes to Social Security - it is honestly hard not to be in the category where 85% of Social Security is included in modified adjusted gross income - because the income limits are so low ($34k/single - $44k/married). It's possible for couples to get over these limits even if their only income is from Social Security! Robyn
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Old 02-21-2016, 05:43 AM
 
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muni income counts for the purpose of calculating whether or not ss gets taxed . but it can help if that isn't a concern
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Old 02-21-2016, 05:50 AM
 
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Quote:
Originally Posted by Robyn55 View Post
It's much easier to keep it at or near zero while still taking SS by putting tax free bonds in taxable accounts - and other things in tax-deferred accounts. You're giving up something by doing this - the tax-favored treatment of qualified dividends and long term capital gains - also deductions for capital losses. Because eventual withdrawals from non-Roth accounts will be treated as ordinary income. OTOH - for people who use mutual funds (I don't) - the timing and amounts of distributions of various kinds of income are often uncertain. Makes things difficult in terms of planning in taxable accounts.

Overall - I think tax planning is important. But I think investment planning should come first for most people. Also - since many people have various kinds of investments - and many have both taxable and tax-deferred accounts - the primary issue is putting various kinds of investments in the different kinds of accounts.

When it comes to Social Security - it is honestly hard not to be in the category where 85% of Social Security is included in modified adjusted gross income - because the income limits are so low ($34k/single - $44k/married). It's possible for couples to get over these limits even if their only income is from Social Security! Robyn
interesting enough over the long term even a 1% dividend distribution rate can wipe away any tax advantage by having special capital gains rates in a taxable account . the greater the fund turnover the more it can hurt .

most of us who do hold investments long term will end up behind by trying to keep these investments in our taxable account .

in the mean time we would be taking up valuable space in deferred accounts for income producing assets spinning off little in interest .
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Old 02-21-2016, 05:52 AM
 
71,508 posts, read 71,674,131 times
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Quote:
Originally Posted by hikernut View Post
Just FYI...

SS benefits, qualified dividends, and LTCG all play nicely together. A joint return with both filers age 65+ can have up to at least $98,000 in any combination from these sources and pay zero federal income tax.

There is such a thing as too much money in a 401k (non Roth, anyway).
as you see , it would take perfect structure to pull off since any income over 44k or so for a couple gets ss taxed at 85% so trying to draw 98k from anything but money already taxed would be a tall order . most will end up in the 15% bracket ,
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Old 02-21-2016, 06:15 AM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,923,045 times
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Quote:
Originally Posted by mathjak107 View Post
it is bottom line , the deductions and exemptions are different this year but not different enough that much changes from this example . all the examples are results after standard deductions and exemptions .


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!
Your numbers aren't right for people who are 65 or older. Standard deduction is $7850 (personal exemption this year has also increased to $4050).

And - although there are certainly little "gotchas" like you mention (usually right at the cusp of when things kick in/out when it comes to parts of the tax code) - they can often be avoided with the use of a tax calculator (except when it comes to things like RMDs - which - for most people - are probably more than $1000).

There are lots of other things around that have "gotchas" that are worse. Like making 10 cents too much to qualify for an ACA subsidy.

And FWIW - bottom line with Harry according to my tax calculator is his total tax bill on his $58k of income would be $5683 - or about 9.7% of his total income. Which is hardly onerous. Also - if Harry was making this money in a regular job - his tax bill would be $7296 - or about 12.5% of his total income. So Harry is still getting a decent tax break compared to young people who have to work for a living. Robyn
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