SS taxation amount
SS taxation amount
I am either misunderstanding something or my assumptions were wrong.
We have about 74,500 in SS payments in 2023, married jointly.
I am trying to figure our Roth conversion amount and something seems off.
We have about 6000 in tax free Muni interest and about 1000 in taxable interest and about 400 in qualified dividends.
When I used one of the tax calculators I put in other income, 45,000, for my conversion amount.
It said my taxable income was 95,000 something and my SS was only taxed at 38,000 something.
I was thinking 85 pct of our SS was taxed. No?
I am trying to stay at the top of the 12 pct bracket.
Thanks
We have about 74,500 in SS payments in 2023, married jointly.
I am trying to figure our Roth conversion amount and something seems off.
We have about 6000 in tax free Muni interest and about 1000 in taxable interest and about 400 in qualified dividends.
When I used one of the tax calculators I put in other income, 45,000, for my conversion amount.
It said my taxable income was 95,000 something and my SS was only taxed at 38,000 something.
I was thinking 85 pct of our SS was taxed. No?
I am trying to stay at the top of the 12 pct bracket.
Thanks
K.I.S.S........so easy to say so difficult to do.
Re: SS taxation amount
"Up to" 85 percent of your social security income is taxed. The IRS calculator is found here: https://www.irs.gov/help/ita/are-my-soc ... ts-taxable
If you input accurate data into the IRS calculator, the results are probably trustworthy.
The formula can yield interesting results. In 2021, 85% of my SS was taxable. In 2022 my income dropped just a bit and 70% or so of my SS was taxable.
You are in the income range where the amount of the Roth conversion will affect the percentage of SS that is taxable. Run the calculator assuming a 0 Roth conversion, your planned Roth conversion, and a larger Roth conversion.
If you input accurate data into the IRS calculator, the results are probably trustworthy.
The formula can yield interesting results. In 2021, 85% of my SS was taxable. In 2022 my income dropped just a bit and 70% or so of my SS was taxable.
You are in the income range where the amount of the Roth conversion will affect the percentage of SS that is taxable. Run the calculator assuming a 0 Roth conversion, your planned Roth conversion, and a larger Roth conversion.
- DeliberateDonkey
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Re: SS taxation amount
It's a little more complicated than a flat 85% of the total. Here is the relevant IRS worksheet if you want to see how the calculation works: https://www.irs.gov/publications/p915#e ... 1000293181
In your case, it would be something like (((AGI + muni interest - 50% of SS) - 44,000) * .85) + 6,000. Note that 6,000 is the portion of income between $32,000 and $44,000 of which 50% is taxable.
There is also a special rule around how the revenue generated by the 50% and 85% portions of the tax are used. You can read more about that here: https://www.ssa.gov/oact/progdata/taxbenefits.html
In your case, it would be something like (((AGI + muni interest - 50% of SS) - 44,000) * .85) + 6,000. Note that 6,000 is the portion of income between $32,000 and $44,000 of which 50% is taxable.
There is also a special rule around how the revenue generated by the 50% and 85% portions of the tax are used. You can read more about that here: https://www.ssa.gov/oact/progdata/taxbenefits.html
Last edited by DeliberateDonkey on Sat May 27, 2023 6:03 pm, edited 1 time in total.
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Re: SS taxation amount
Up to 85% of your SS income can be taxable, not 85% unless the overall taxable income rises high enough.
If you are using a reliable tax calculator you can rely on the results.
Cheers
If you are using a reliable tax calculator you can rely on the results.
Cheers
Re: SS taxation amount
Your marginal tax rate will never be 12% with your combination of income streams and current tax law.
Rates for various conversion amounts, given the other incomes in the OP:
See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
Rates for various conversion amounts, given the other incomes in the OP:
See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
Re: SS taxation amount
Do you mean I am above or below 12% ?FiveK wrote: ↑Sat May 27, 2023 6:36 pm Your marginal tax rate will never be 12% with your combination of income streams and current tax law.
Rates for various conversion amounts, given the other incomes in the OP:
See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
I can’t use excel.
K.I.S.S........so easy to say so difficult to do.
Re: SS taxation amount
That's unfortunate about Excel - it's a useful tool.
The gray line on the chart shows your federal marginal rate as you increase your conversion amount.
- From $0 to ~$12,400 you won't owe any federal tax at all.
- From ~$12,400 to ~$24,400 you'll pay 18% on the amount above $12,400.
- Etc.
Does that make sense?
Also, for $45K converted it appears $44,803 of the $74,500 SS will be taxable, giving an AGI of $91,203 and (assuming both filers age 65+) a taxable amount of $60,503 and federal tax of $6,775.
Re: SS taxation amount
The Taxation of Social Security benefits - Bogleheads wiki goes into more details on how that part works.
Re: SS taxation amount
Your marginal tax rate can be 12%. However, while your marginal tax rate is 12%, for each dollar you convert, you will increase the amount of taxable social security. For instance, consider what happens when you convert an extra $1000 over $20,000 for a total of $21,000. You are thinking about paying 12% or $120 on those 1000 converted dollars. But, since the extra conversion leads to an extra $500 of taxable social security, the tax increase is $1000*0.12+$500*.12=$180. So, for an extra $1000 of conversion, you have paid an additional $180 in tax or 18%. This is what FiveK is referencing.hoops777 wrote: ↑Sat May 27, 2023 6:44 pmDo you mean I am above or below 12% ?FiveK wrote: ↑Sat May 27, 2023 6:36 pm Your marginal tax rate will never be 12% with your combination of income streams and current tax law.
Rates for various conversion amounts, given the other incomes in the OP:
See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
I can’t use excel.
Re: SS taxation amount
Thanks.FiveK wrote: ↑Sat May 27, 2023 6:57 pmThat's unfortunate about Excel - it's a useful tool.
The gray line on the chart shows your federal marginal rate as you increase your conversion amount.
- From $0 to ~$12,400 you won't owe any federal tax at all.
- From ~$12,400 to ~$24,400 you'll pay 18% on the amount above $12,400.
- Etc.
Does that make sense?
Also, for $45K converted it appears $44,803 of the $74,500 SS will be taxable, giving an AGI of $91,203 and (assuming both filers age 65+) a taxable amount of $60,503 and federal tax of $6,775.
I really appreciate the numbers.
I can do a larger conversion than I was planning.
K.I.S.S........so easy to say so difficult to do.
Re: SS taxation amount
Not sure if you mean you don't have excel? Try Libre Office which is free. If you mean you don't know how to use it and don't want to learn that is another issue.FiveK wrote: ↑Sat May 27, 2023 6:57 pmThat's unfortunate about Excel - it's a useful tool.
The gray line on the chart shows your federal marginal rate as you increase your conversion amount.
- From $0 to ~$12,400 you won't owe any federal tax at all.
- From ~$12,400 to ~$24,400 you'll pay 18% on the amount above $12,400.
- Etc.
Does that make sense?
Also, for $45K converted it appears $44,803 of the $74,500 SS will be taxable, giving an AGI of $91,203 and (assuming both filers age 65+) a taxable amount of $60,503 and federal tax of $6,775.
Re: SS taxation amount
Yes. In other words, that's an 18% marginal tax rate, despite being in the nominal 12% bracket (and not having a 12% marginal tax rate on any conversion amount).
Would that the tax code were actually as simple, and the actual cost of increased income such as conversions as low, as the nominal bracket percentages.
Re: SS taxation amount
Unfortunately it appears (see Any LibreOffice Calc knowledge?) that Excel is the only (popular?) spreadsheet program that works to generate the charts in that tool. Based on that thread, the maintainer of that tool would be happy to hear otherwise.
Re: SS taxation amount
FiveK wrote: ↑Sat May 27, 2023 6:36 pmYour marginal tax rate will never be 12% with your combination of income streams and current tax law.
Yes, you can do a larger Roth conversion and stay within the 12% ordinary income tax bracket. Just bear in mind that the marginal rate will not be 12%. As shown in the table [*] below, it will be 0% up to a $12,512 conversion, 18.5% from there to $24,404, and 22.2% from there to $60,539 -- when taxable income reaches the $89,250 15% long term gain & qualified dividend (LTCG & QDI) bracket.
Code: Select all
Social Security 50% threshhold 32,000 ------------------------------------------------------->
Social Security 85% threshhold 44,000 ------------------------------------------------------->
Floor: ord income 12% bracket 22,000 ------------------------------------------------------->
Floor: ord income 22% bracket 89,450 ------------------------------------------------------->
Floor: ord income 24% bracket 190,750 ------------------------------------------------------->
Floor: LTCG & QDI 15% bracket 89,250 ------------------------------------------------------->
Tax exempt interest 6,000 ------------------------------------------------------->
LTCG & QDI 400 ------------------------------------------------------->
Social Security Benefit 74,500 ------------------------------------------------------->
Taxable Interest 1,000 ------------------------------------------------------->
Roth Conversions 12,512 24,404 60,539 60,755 60,864 66,791 157,125 <===
SS Relevant Income 57,162 69,054 105,189 105,405 105,514 111,441 201,775
Code: Select all
50% SS taxable 6,000 6,000 6,000 6,000 6,000 6,000 6,000
85% SS taxable 11,188 21,296 52,011 52,195 52,286 57,325 57,325
Total SS taxable 17,188 27,296 58,011 58,195 58,286 63,325 63,325
Adjusted gross income 31,100 53,100 119,950 120,350 120,550 131,516 221,850
Standard deduction 2 people 65 30,700 30,700 30,700 30,700 30,700 30,700 30,700
Taxable Income 400 22,400 89,250 89,650 89,850 100,816 191,150
LTCG & QDI Taxable 400 400 400 400 400 400 400
Ordinary income taxable - 22,000 88,850 89,250 89,450 100,416 190,750
Taxable: ord income 22% bracket - - - - - 10,966 101,300
Taxable: ord income 12% bracket - - 66,850 67,250 67,450 67,450 67,450
Taxable: ord income 10% bracket - 22,000 22,000 22,000 22,000 22,000 22,000
Taxable: LTCG & QDI 15% bracket - - - 400 400 400 400
Taxable: LTCG & QDI 0% bracket 400 400 400 - - - -
Code: Select all
Tax: ord income 22% bracket - - - - - 2,413 22,286
Tax: ord income 12% bracket - - 8,022 8,070 8,094 8,094 8,094
Tax: ord income 10% bracket - 2,200 2,200 2,200 2,200 2,200 2,200
Tax: LTCG & QDI 15% bracket - - - 60 60 60 60
Total tax - 2,200 10,222 10,330 10,354 12,767 32,640
Increased Roth conversion 11,892 36,135 216 108 5,928 90,334 <===
Increased taxable SS 10,108 30,715 184 92 5,039 -
Increased tax 2,200 8,022 108 24 2,413 19,783
Marginal SS taxable 85.00% 85.00% 85.00% 85.00% 85.00% 0.00%
Marginal tax rate 18.50% 22.20% 49.95% 22.20% 40.70% 22.00% <===
Code: Select all
-- Roth Conv -- Ord Inc Marg
From Range Bracket Rate Description
------ ------ ------- ------ -----------------------------------------------------
0 12,512 0% 0.00% no taxable income
12,512 11,892 10% 18.50% each $100 non-SS ordinary income makes $85 more SS taxable
24,404 36,135 12% 22.20% ditto
60,539 216 12% 49.95% each $185 of ord inc pushes $185 of qual divs into 15% bracket
60,755 108 12% 22.20% all $400 of qual divs have been taxed
60,864 5,928 22% 40.70% each $100 makes $85 more SS taxable
66,791 90,334 22% 22.00% maximum 85% of SS has been taxed
157,125 24% 24.00%
Re: SS taxation amount
Here's the tax bracket table for 2023. The 12% marginal tax bracket applies to MFJ who have Taxable Income (a line on the 1040 after standard or itemized deductions are subtracted) between $22,000 and $89,450. The big question, though, is how much of your SS will be taxed (ie, somewhere between 0% to 85%). The amount of SS to be taxed increases as other income streams are added. For example, add $1,000 of interest, and that can make another $1,000 of SS be taxed, until you top out at 85% of it being taxed.
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.
Re: SS taxation amount
I thought that an extra $1,000 of ordinary income can only make another $500 or $850 of SS to be taxed. --vtMaps
"Truly, whoever can make you believe absurdities can make you commit atrocities" --Voltaire, as translated by Norman Lewis Torrey
Re: SS taxation amount
Thank you for your time in explaining this in so much detail.#Cruncher wrote: ↑Sun May 28, 2023 11:52 pmFiveK wrote: ↑Sat May 27, 2023 6:36 pmYour marginal tax rate will never be 12% with your combination of income streams and current tax law.Yes, you can do a larger Roth conversion and stay within the 12% ordinary income tax bracket. Just bear in mind that the marginal rate will not be 12%. As shown in the table [*] below, it will be 0% up to a $12,512 conversion, 18.5% from there to $24,404, and 22.2% from there to $60,539 -- when taxable income reaches the $89,250 15% long term gain & qualified dividend (LTCG & QDI) bracket.Code: Select all
Social Security 50% threshhold 32,000 -------------------------------------------------------> Social Security 85% threshhold 44,000 -------------------------------------------------------> Floor: ord income 12% bracket 22,000 -------------------------------------------------------> Floor: ord income 22% bracket 89,450 -------------------------------------------------------> Floor: ord income 24% bracket 190,750 -------------------------------------------------------> Floor: LTCG & QDI 15% bracket 89,250 -------------------------------------------------------> Tax exempt interest 6,000 -------------------------------------------------------> LTCG & QDI 400 -------------------------------------------------------> Social Security Benefit 74,500 -------------------------------------------------------> Taxable Interest 1,000 -------------------------------------------------------> Roth Conversions 12,512 24,404 60,539 60,755 60,864 66,791 157,125 <=== SS Relevant Income 57,162 69,054 105,189 105,405 105,514 111,441 201,775
Code: Select all
50% SS taxable 6,000 6,000 6,000 6,000 6,000 6,000 6,000 85% SS taxable 11,188 21,296 52,011 52,195 52,286 57,325 57,325 Total SS taxable 17,188 27,296 58,011 58,195 58,286 63,325 63,325 Adjusted gross income 31,100 53,100 119,950 120,350 120,550 131,516 221,850 Standard deduction 2 people 65 30,700 30,700 30,700 30,700 30,700 30,700 30,700 Taxable Income 400 22,400 89,250 89,650 89,850 100,816 191,150 LTCG & QDI Taxable 400 400 400 400 400 400 400 Ordinary income taxable - 22,000 88,850 89,250 89,450 100,416 190,750 Taxable: ord income 22% bracket - - - - - 10,966 101,300 Taxable: ord income 12% bracket - - 66,850 67,250 67,450 67,450 67,450 Taxable: ord income 10% bracket - 22,000 22,000 22,000 22,000 22,000 22,000 Taxable: LTCG & QDI 15% bracket - - - 400 400 400 400 Taxable: LTCG & QDI 0% bracket 400 400 400 - - - -
The following shows how different marginal tax rates are triggered as the Roth conversion increases. Note the strange 49.95% -> 22.20% -> 40.70% transition over a small $108 increase is due to the weird $200 difference between the start of the 15% LTCG & QDI bracket and the third ordinary income bracket. These brackets used to start at the same amount, but a tiny discrepancy was introduced by the 2018 tax law and has never been fixed.Code: Select all
Tax: ord income 22% bracket - - - - - 2,413 22,286 Tax: ord income 12% bracket - - 8,022 8,070 8,094 8,094 8,094 Tax: ord income 10% bracket - 2,200 2,200 2,200 2,200 2,200 2,200 Tax: LTCG & QDI 15% bracket - - - 60 60 60 60 Total tax - 2,200 10,222 10,330 10,354 12,767 32,640 Increased Roth conversion 11,892 36,135 216 108 5,928 90,334 <=== Increased taxable SS 10,108 30,715 184 92 5,039 - Increased tax 2,200 8,022 108 24 2,413 19,783 Marginal SS taxable 85.00% 85.00% 85.00% 85.00% 85.00% 0.00% Marginal tax rate 18.50% 22.20% 49.95% 22.20% 40.70% 22.00% <===
* The table is prepared with the "Compare" sheet of my Marginal Tax Rates Excel workbook for a 2023 joint return using the standard deduction for an age 65+ couple. See the Wiki's Taxation of Social Security benefits for an explanation of how taxable SS is determined.Code: Select all
-- Roth Conv -- Ord Inc Marg From Range Bracket Rate Description ------ ------ ------- ------ ----------------------------------------------------- 0 12,512 0% 0.00% no taxable income 12,512 11,892 10% 18.50% each $100 non-SS ordinary income makes $85 more SS taxable 24,404 36,135 12% 22.20% ditto 60,539 216 12% 49.95% each $185 of ord inc pushes $185 of qual divs into 15% bracket 60,755 108 12% 22.20% all $400 of qual divs have been taxed 60,864 5,928 22% 40.70% each $100 makes $85 more SS taxable 66,791 90,334 22% 22.00% maximum 85% of SS has been taxed 157,125 24% 24.00%
I am sure it helped a lot of people besides me.
K.I.S.S........so easy to say so difficult to do.
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Re: SS taxation amount
That is a common misconception. That's the point of this thread.
Retired June 2023. AA = 55/35/10
Re: SS taxation amount
I don't think it's a misconception. Look at the heat maps in the wiki. The 10% federal bracket becomes either a 15% or 18.5% marginal bracket. That is because an additional $1000 of ordinary income causes either $500 or $850 of SS to become taxable.RyeBourbon wrote: ↑Tue May 30, 2023 12:26 pmThat is a common misconception. That's the point of this thread.
--vtMaps
"Truly, whoever can make you believe absurdities can make you commit atrocities" --Voltaire, as translated by Norman Lewis Torrey
Re: SS taxation amount
Clarifying the antecedent of the highlighted word might be useful.RyeBourbon wrote: ↑Tue May 30, 2023 12:26 pmThat is a common misconception. That's the point of this thread.