how to calculate the tax implications of later social security inclusive of pension

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chipperd
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how to calculate the tax implications of later social security inclusive of pension

Post by chipperd »

Hello all.
A question occurred to me that I can't find a calculator to figure out.

Wondering if anyone has seen a calculator to assist a couple to plan that would include one current, fairly substantial pension, and two future social security benefits/payments?

Specifically wondering how delaying social security, and the resultant higher monthly/annual payments would impact us from a tax perspective, so I could figure out our future total benefits of all three incomes, inclusive of COLAS and net of taxes.

Looking to play around with different social security claiming strategies for myself and spouse, net of taxes.

Hoping not to have to do manually.

Thanks
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JoeRetire
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by JoeRetire »

I don't think there are any "calculators" that would make predicting your taxes much easier.
Either hire a CPA to do it for you, or do it yourself.

Remember, you'll need to include all income streams, including RMDs, to have any chance at being accurate. And of course predicting future tax laws is tenuous at best.

Don't let the tax tail wag the benefit claiming dog.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by dbr »

The calculator is filling out dummy tax returns or a spreadsheet that mimics your tax returns for your tax situation.

A dilemma is keeping up with shifting tax brackets that are adjusted for inflation and some others that are not. Also tax rates vary due to future law.

I have my own spreadsheet that goes through future tax estimates as they apply to me and I attempt to index the break points that seem to apply.

I have never seen a life cycle tax model, but you do have a good question.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by MJS »

Not taxes, but does model the effect on income of starting fixed income sources at different times.
https://engaging-data.com/will-money-last-retire-early/

Note that "Spending" should exclude "Extra Income". So if you have $100,000 in "Extra Income" from pensions, annuities, Social Security, etc and an annual budget of $120,000, your "Spending " is $20,000.
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FiveK
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by FiveK »

Would either of the spreadsheets mentioned in the Roth IRA conversion - Bogleheads wiki article be helpful?
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by chipperd »

FiveK wrote: Sun Sep 19, 2021 11:36 am Would either of the spreadsheets mentioned in the Roth IRA conversion - Bogleheads wiki article be helpful?
Possibly...I'll take a look.
Thanks
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chipperd
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by chipperd »

JoeRetire wrote: Sun Sep 19, 2021 6:10 am I don't think there are any "calculators" that would make predicting your taxes much easier.
Either hire a CPA to do it for you, or do it yourself.

Remember, you'll need to include all income streams, including RMDs, to have any chance at being accurate. And of course predicting future tax laws is tenuous at best.

Don't let the tax tail wag the benefit claiming dog.
Yikes, that would be quite costly I would think....
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by afan »

Maxifi Planner will let you set up SS, pension payments and investment returns. Among other things, it will them generate a table of taxes paid each year.
You can vary the amounts and dates of income to model different scenarios. It is mot a detailed tax program but it will do what you want.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by grabiner »

If you have a fairly substantial pension, your SS will probably be 85% taxable no matter when you take it. Thus it doesn't make much tax difference if you withdraw more from your IRA in order to delay taking SS.

See Taxation of Social Security benefits on the wiki for the formula.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by smitcat »

chipperd wrote: Sun Sep 19, 2021 11:48 am
FiveK wrote: Sun Sep 19, 2021 11:36 am Would either of the spreadsheets mentioned in the Roth IRA conversion - Bogleheads wiki article be helpful?
Possibly...I'll take a look.
Thanks
I believe the state you are in when you take the payments could/will affect the overall taxes on both SS and maybe the pension(s).
So any calculator you use would need to cover that as well.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by FiveK »

smitcat wrote: Sun Sep 19, 2021 2:58 pm
chipperd wrote: Sun Sep 19, 2021 11:48 am
FiveK wrote: Sun Sep 19, 2021 11:36 am Would either of the spreadsheets mentioned in the Roth IRA conversion - Bogleheads wiki article be helpful?
Possibly...I'll take a look.
Thanks
I believe the state you are in when you take the payments could/will affect the overall taxes on both SS and maybe the pension(s).
So any calculator you use would need to cover that as well.
The second one mentioned in that wiki, Personal finance toolbox, does do some state tax calculations. They may be accurate enough for this purpose. If not, a request posted in State Income Tax calculations - Crowdsourcing request might get a favorable response, based on a reading of that thread.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by smitcat »

FiveK wrote: Sun Sep 19, 2021 3:55 pm
smitcat wrote: Sun Sep 19, 2021 2:58 pm
chipperd wrote: Sun Sep 19, 2021 11:48 am
FiveK wrote: Sun Sep 19, 2021 11:36 am Would either of the spreadsheets mentioned in the Roth IRA conversion - Bogleheads wiki article be helpful?
Possibly...I'll take a look.
Thanks
I believe the state you are in when you take the payments could/will affect the overall taxes on both SS and maybe the pension(s).
So any calculator you use would need to cover that as well.
The second one mentioned in that wiki, Personal finance toolbox, does do some state tax calculations. They may be accurate enough for this purpose. If not, a request posted in State Income Tax calculations - Crowdsourcing request might get a favorable response, based on a reading of that thread.
Do you know if either of those calculators are updated for amounts of pensions and/or SS that is exempt from taxes?
Or do they just apply the standard tax rates for that state no matter what?
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by FiveK »

smitcat wrote: Sun Sep 19, 2021 4:19 pm
FiveK wrote: Sun Sep 19, 2021 3:55 pm The second one mentioned in that wiki, Personal finance toolbox, does do some state tax calculations. They may be accurate enough for this purpose. If not, a request posted in State Income Tax calculations - Crowdsourcing request might get a favorable response, based on a reading of that thread.
Do you know if either of those calculators are updated for amounts of pensions and/or SS that is exempt from taxes?
Or do they just apply the standard tax rates for that state no matter what?
I'm more familiar with the toolbox one. If I recall correctly, it knows which states don't tax SS at all, and it knows at least some of the states that don't tax IRA and similar distributions. If a state has more detailed conditions to assess pension/IRA/etc. taxability, it probably doesn't know those.

The good news is that all the calculations are visible, so one can tell what is and isn't addressed. The bad news is that some of those Excel "if" calculations can be complex....
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by JBTX »

https://www.bogleheads.org/w/images/b/b ... ed2021.png

I always find the linked social security marginal tax rate heat map helpful.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by tibbitts »

chipperd wrote: Sun Sep 19, 2021 5:21 am
Specifically wondering how delaying social security, and the resultant higher monthly/annual payments would impact us from a tax perspective, so I could figure out our future total benefits of all three incomes, inclusive of COLAS and net of taxes.
How are you choosing to adjust social security for the trust fund shortfall? Some calculators allow for the across-the-board cut, or for none, but I'm not sure if any allow for whatever customized reduction plan you have in mind.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by Beehave »

grabiner wrote: Sun Sep 19, 2021 1:36 pm If you have a fairly substantial pension, your SS will probably be 85% taxable no matter when you take it. Thus it doesn't make much tax difference if you withdraw more from your IRA in order to delay taking SS.

See Taxation of Social Security benefits on the wiki for the formula.
Yes, and the at most 85% taxable is key. Social Security is (1) income, (2) 15% of which is not taxed and (3) 100% of which grows compounded based on inflation.

For the average couple with both spouses working, a large pension, and two SS incomes; there are also very likely very significant other pre-and post-tax savings (stocks, bonds, cash, etc.). The COLA's, tax-preferred income, and surviving spouse getting the larger payout benefit for life are compelling reasons to max out SS, and (4) the fact that it's an asset diversifier is also compelling.

A printout showing the month by month increment in SS based on delay used to be available from the SS Office. I don't know if it still is or if you can print one out or download from the SS website. The app was an old mainframe one (good old IBM 3270-type) so I do not know if still available, but it made creating your own month by month delay implications spreadsheet easy to construct.

For what it's worth, under the "old rules," for someone who could afford to delay, it looked in general like taking at age 68.5 to maybe 69.5 was optimum. That's because the last few months of delay to age 70 are the most expensive for the fixed monthly gain you are buying by your delay. I waited until age 70 anyway because of the reasons 1-4 above and also for the benefit of maximizing the single payment for my spouse if I were to pre-decede.

Creating and studying a month-by-month cost and benefit spreadsheet that reflects your particular circumstances really is helpful. You can create one that shows each month how much you would have collected had you started earlier (the cost of delay) and how much more you will be getting as a result per month and at some age or ages in the future. From there you can look at 85% (or whatever) of that amount being taxable and see the effect of SS independent of your other finances, which keeps it pretty simple. If for some reason you need to tie in other factors, then it will complicate things but it is doable.

I created several spreadsheets for this very purpose. My initial feeling about the original post was "You can afford to wait until age 70, so why bother with a spreadsheet? Just delay until then." And then I recalled creating and poring over my own for this exact purpose - - so I understand the idea of doing your best to become very comfortable with a big financial decision.

Best wishes.

P.S. I'm not sure if or where my old spreadsheets are. But even if accessible, they were (a) not done in Excel and (b) inherently based on the old SS monthly increment schedule which changed around two or so years ago, and so, not really of value today.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by grabiner »

Beehave wrote: Sun Sep 19, 2021 5:24 pm For what it's worth, under the "old rules," for someone who could afford to delay, it looked in general like taking at age 68.5 to maybe 69.5 was optimum. That's because the last few months of delay to age 70 are the most expensive for the fixed monthly gain you are buying by your delay. I waited until age 70 anyway because of the reasons 1-4 above and also for the benefit of maximizing the single payment for my spouse if I were to pre-decede.
The spouse is what makes this clearly correct. For a single man with average life expectancy, the optimal claiming age is somewhere around 69, depending on the discount rate you use (it is better to claim at a younger age when TIPS yields are negative). For a woman, the optimum is still 70. Most men considering this decision will estimate that their own life expectancy is above average, and thus may get a slight advantage from waiting until 70.

But if you have a spouse and your benefit is higher than your spouse's, then the benefit for waiting lasts as long as either of you do, and your joint life expectancy is significantly higher than that for a single of either sex.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by smitcat »

FiveK wrote: Sun Sep 19, 2021 4:34 pm
smitcat wrote: Sun Sep 19, 2021 4:19 pm
FiveK wrote: Sun Sep 19, 2021 3:55 pm The second one mentioned in that wiki, Personal finance toolbox, does do some state tax calculations. They may be accurate enough for this purpose. If not, a request posted in State Income Tax calculations - Crowdsourcing request might get a favorable response, based on a reading of that thread.
Do you know if either of those calculators are updated for amounts of pensions and/or SS that is exempt from taxes?
Or do they just apply the standard tax rates for that state no matter what?
I'm more familiar with the toolbox one. If I recall correctly, it knows which states don't tax SS at all, and it knows at least some of the states that don't tax IRA and similar distributions. If a state has more detailed conditions to assess pension/IRA/etc. taxability, it probably doesn't know those.

The good news is that all the calculations are visible, so one can tell what is and isn't addressed. The bad news is that some of those Excel "if" calculations can be complex....
thank you
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by celia »

chipperd wrote: Sun Sep 19, 2021 5:21 am Specifically wondering how delaying social security, and the resultant higher monthly/annual payments would impact us from a tax perspective, so I could figure out our future total benefits of all three incomes, inclusive of COLAS and net of taxes.
Keep things simple and just use today’s values. The values you currently see for age 70 (or any other age) will be adjusted when you get to that point to include cost-of-living between now and then.
Hoping not to have to do manually.
If you use a tool, you’ll have to find out if it takes cost-of-living into account and if it asks what percentage of growth you expect for your account(s).

The simplest method I know is to build a spreadsheet showing a column for each year with today’s value of any Taxable Incomes. Try to keep the total Taxable Income level over all the years to keep projected taxes level too. That is what many Bogleheads found to work for them.

If you are planning Roth conversions, just assume that 85% of SS will be taxed and start the higher SS as late as possible. That’s two less variables to think about. You should also confirm each year’s taxes by running the numbers through tax software.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by chipperd »

afan wrote: Sun Sep 19, 2021 12:42 pm Maxifi Planner will let you set up SS, pension payments and investment returns. Among other things, it will them generate a table of taxes paid each year.
You can vary the amounts and dates of income to model different scenarios. It is mot a detailed tax program but it will do what you want.
Thanks I'll check that out.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by #Cruncher »

chipperd wrote: Sun Sep 19, 2021 5:21 am Specifically wondering how delaying social security, and the resultant higher monthly/annual payments would impact us from a tax perspective ...
My Marginal Tax Rates Excel workbook may help. The Main sheet can be set to graph the marginal federal income tax rate on the additional SS benefits you'll receive by delaying when you claim. Here is a sample graph from this 2015 post, with the following assumptions in cells B1:B9. But be aware that the graph can change significantly with different assumptions.

Code: Select all

B1:  Tax year                         2015
B2:  Single or Joint Return         Single
B3:  Number filers age 65 or older       1
B4:  Tax exempt interest                 0 
B5:  Non-SS Ordinary Income         33,000 
B6:  LTCG & QDI                          0
B7:  Social Security Benefit       <blank>
B8:  Deductions                    <blank>
B9:  Exemption                     <blank>
Image

The marginal tax rate on incremental SS benefits depends, naturally, on how much of each additional $1 of SS benefits is taxable. The graph below shows this, for the same assumptions as for the marginal tax rate graph above.
Image
The shape of the graph is highly dependent on the amount of non-SS income. Unless non-SS income is too large, the last marginal rate, 42.5%, will occur at some point of increasing SS benefit. At that point, if it is reached, for each $100 of additional SS benefits, taxable income will go up only $42.50. The larger the non-SS income, the higher the SS benefit must be before the 42.5% rate begins.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by chipperd »

Thank you for sharing your work. I will take a look when I get a moment or more.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by JoeRetire »

chipperd wrote: Sun Sep 19, 2021 11:49 am
JoeRetire wrote: Sun Sep 19, 2021 6:10 am I don't think there are any "calculators" that would make predicting your taxes much easier.
Either hire a CPA to do it for you, or do it yourself.

Remember, you'll need to include all income streams, including RMDs, to have any chance at being accurate. And of course predicting future tax laws is tenuous at best.

Don't let the tax tail wag the benefit claiming dog.
Yikes, that would be quite costly I would think....
I agree. Not something I'd bother doing.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by bberris »

grabiner wrote: Sun Sep 19, 2021 1:36 pm If you have a fairly substantial pension, your SS will probably be 85% taxable no matter when you take it. Thus it doesn't make much tax difference if you withdraw more from your IRA in order to delay taking SS.

See Taxation of Social Security benefits on the wiki for the formula.
I think it does make a difference. Timing a SS claim should maximize the tax favored income. By trading higher IRA withdrawals early for higher social security benefits and lower IRA withdrawals later, you lower your effective tax. This is true even when 85 % of ss benefits are taxable, because 100 % of non-Roth IRA withdrawals are taxable.
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Re: how to calculate the tax implications of later social security inclusive of pension

Post by grabiner »

bberris wrote: Mon Oct 04, 2021 7:10 am
grabiner wrote: Sun Sep 19, 2021 1:36 pm If you have a fairly substantial pension, your SS will probably be 85% taxable no matter when you take it. Thus it doesn't make much tax difference if you withdraw more from your IRA in order to delay taking SS.

See Taxation of Social Security benefits on the wiki for the formula.
I think it does make a difference. Timing a SS claim should maximize the tax favored income. By trading higher IRA withdrawals early for higher social security benefits and lower IRA withdrawals later, you lower your effective tax. This is true even when 85 % of ss benefits are taxable, because 100 % of non-Roth IRA withdrawals are taxable.
It only makes a difference if your tax bracket changes. If you are always in the 22% tax bracket, and 85% of your SS is always taxable, then your after-tax SS benefit is 81.3% of your pre-tax benefit, and your after-tax IRA withdrawals are 78% of your pre-tax withdrawals. Thus you can optimize your spending by assuming that your IRA has 78% of its actual value but is tax-free, and your SS has 81.3% of its actual value. This doesn't change the optimal claiming age.

But if claiming early, or claiming late, results in some income being taxed at 24% or 12% rather than 22%, then taxes do affect the claiming strategy. For example, if claiming early means that you will always be in the 22% bracket, but claiming later (and thus having less pre-tax income taxable) leaves you a bit of room in the 12% bracket after taking necessary spending out of your IRA, then claiming later is slightly more attractive because you can use this room to convert the from the traditional IRA to a Roth IRA at 12%. (This is still only a small benefit, as there won't be much room created.)
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