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Exactly! If a two earner couple with very high SS delays filing to 70, then just SS is almost $80k today. So one could easily have $20k in LTCGs or dividends, and pay no or very little tax. But the instant the extra income makes SS taxable (as 50% of SS is included in calculating AGI when there is other income), then taxes easily jump to 25% bracket at that level.
Well, I looked at two scenarios for age 65 couple.
(1) $50K SS and $50K LTCG ($100K total)
(2) $80K SS and $30K LTCG ($110K total)
Both of these couples have enough income that they pay a small amount (less than $1000) in federal income tax. Both are paying an effective marginal rate of 8.5% on their LTCG, because of the way SS and LTCG interact.
Now, they are both close to the point of LTCG being taxed outright, at which point they may see an effective LTCG rate of 15+8.5 = 23.5%. Then once they are past the "torpedo" situation they are back down to 15% for quite a long while.
It's a bit messy, obviously, and I think difficult to make sweeping generalizations.
That's what I also have calculated. Once you get above $120/30k then the torpedo is done and over and effective rate just steadily climbs.
Well, yes, then we're back to the rates we are used to seeing without SS in the picture. For LTCG it's 15% federal until one hits the Medicare surtax of 3.8% ($250K AGI for joint return) so we have 18.8%. The next bump up, to 23.8% total, is over $450K AGI.
we had a very high income in 2014 when we sold some commercial lease rights . we had a 20% capital gains rate plus , a 3.80% surcharge , the surcharge is not included in the 20% rate , it is on top of it . the gain now threw the entire rest of our income on to the amt tax system . .
the penalty was 16k additional in just amt over and above what we would have paid under the regular tax system . .
but it got worse , now we paid in a boatload of state taxes from the sale . the big state tax deduction the following year nailed us again with the amt tax even on our normal income .
the first year it got us on income , the 2nd year it got us on deductions .
but wait we are not done .
2 years later my wife went on medicare . they used 2014 income in 2016 to set her rate .
she got a 300 a month increase , if i was on medicare it would have been a 600 a month increase .
Thanks so much math, for that reminder. you've got me thinking again.
I'm 56 (57 next month) -- and left my job in march (RIF) -- so I'm thinking......maybe roll my 401k into a Trad IRA. Then maybe at some point start drawing that down (and just put the money some place else) -- so that -- later -- RMDs don't raise my taxes. I'll have to do the math on that. See how much to start pulling and when. ..... to see if its even worth it. That's a LOT of figuring and projection scenarios.
I've never looked at how much -- or how little -- one has to have before the "tax torpedo" is an issue.
Be careful.
You might want to leave the 401(k) in place until you turn 59.5 ... If you leave the plan after 55, you can make withdrawals after 55 without the 10% penalty. You can't do that from an IRA. That would give you greater flexibility if you should need the money before you hit the 59.5 threshold.
^^ Already checked that. My plan -- even though the IRS say you can -- doesn't allow for periodic withdrawals. So even though I left my job at age 56. I have to roll it all over to a new job 401K -- or roll it all over to a Trad IRA and lose the PRE-59 ability to tap it. Because it's then in an IRA, I'd be under the IRA rules and once again have to wait to 59 1/2.
Quote:
In general, you want to start drawing down your IRAs soon after age 59.5, and draw as much as possible , while staying in your minimum tax bracket. ( referred to as "topping up the bracket"). And before you start SS benefits.
Aaaah, yes. But if I'm just pulling it out in order to pay lower/less taxes later -- that creates the issue of where to now put that money. I'm taking it out -- just to -- what? reinvest it where? in what? Same funds but now in taxable accounts?? A PART of me think if that's all I'm doing it for just leave it be.
we had a very high income in 2014 when we sold some commercial lease rights . we had a 20% capital gains rate plus , a 3.80% surcharge , the surcharge is not included in the 20% rate , it is on top of it . the gain now threw the entire rest of our income on to the amt tax system . .
the penalty was 16k additional in just amt over and above what we would have paid under the regular tax system . .
but it got worse , now we paid in a boatload of state taxes from the sale . the big state tax deduction the following year nailed us again with the amt tax even on our normal income .
the first year it got us on income , the 2nd year it got us on deductions .
but wait we are not done .
2 years later my wife went on medicare . they used 2014 income in 2016 to set her rate .
she got a 300 a month increase , if i was on medicare it would have been a 600 a month increase .
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