SS taxation amount

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hoops777
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SS taxation amount

Post by hoops777 »

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
K.I.S.S........so easy to say so difficult to do.
ehh
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Re: SS taxation amount

Post by ehh »

"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.
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DeliberateDonkey
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Re: SS taxation amount

Post by DeliberateDonkey »

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
Last edited by DeliberateDonkey on Sat May 27, 2023 6:03 pm, edited 1 time in total.
Silk McCue
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Re: SS taxation amount

Post by Silk McCue »

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
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FiveK
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Re: SS taxation amount

Post by FiveK »

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:

Image

See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
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hoops777
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Re: SS taxation amount

Post by hoops777 »

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:

Image

See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
Do you mean I am above or below 12% ?
I can’t use excel.
K.I.S.S........so easy to say so difficult to do.
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FiveK
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Re: SS taxation amount

Post by FiveK »

hoops777 wrote: Sat May 27, 2023 6:44 pm Do you mean I am above or below 12% ?
I can’t use excel.
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.
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FiveK
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Re: SS taxation amount

Post by FiveK »

The Taxation of Social Security benefits - Bogleheads wiki goes into more details on how that part works.
Katietsu
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Re: SS taxation amount

Post by Katietsu »

hoops777 wrote: Sat May 27, 2023 6:44 pm
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:

Image

See the personal finance toolbox if you can use Excel to do other "what if...?" scenarios.
Do you mean I am above or below 12% ?
I can’t use excel.
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.
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hoops777
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Re: SS taxation amount

Post by hoops777 »

FiveK wrote: Sat May 27, 2023 6:57 pm
hoops777 wrote: Sat May 27, 2023 6:44 pm Do you mean I am above or below 12% ?
I can’t use excel.
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.
Thanks.
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.
Dregob
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Re: SS taxation amount

Post by Dregob »

FiveK wrote: Sat May 27, 2023 6:57 pm
hoops777 wrote: Sat May 27, 2023 6:44 pm Do you mean I am above or below 12% ?
I can’t use excel.
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.
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.
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FiveK
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Re: SS taxation amount

Post by FiveK »

Katietsu wrote: Sat May 27, 2023 9:33 pm So, for an extra $1000 of conversion, you have paid an additional $180 in tax or 18%.
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. :(
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FiveK
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Re: SS taxation amount

Post by FiveK »

Dregob wrote: Sat May 27, 2023 9:55 pm Not sure if you mean you don't have excel? Try Libre Office which is free.
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.
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Re: SS taxation amount

Post by #Cruncher »

hoops777 wrote: Sat May 27, 2023 5:10 pmI am trying to stay at the top of the 12 pct bracket.
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.
hoops777 wrote: Sat May 27, 2023 9:36 pmI can do a larger conversion than I was planning.
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%     <===
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

 -- 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%
* 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.
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celia
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Re: SS taxation amount

Post by celia »

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.
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Re: SS taxation amount

Post by vtMaps »

celia wrote: Mon May 29, 2023 3:26 am 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.
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
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hoops777
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Re: SS taxation amount

Post by hoops777 »

#Cruncher wrote: Sun May 28, 2023 11:52 pm
hoops777 wrote: Sat May 27, 2023 5:10 pmI am trying to stay at the top of the 12 pct bracket.
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.
hoops777 wrote: Sat May 27, 2023 9:36 pmI can do a larger conversion than I was planning.
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%     <===
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

 -- 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%
* 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.
Thank you for your time in explaining this in so much detail.
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

Post by RyeBourbon »

vtMaps wrote: Mon May 29, 2023 4:00 am
celia wrote: Mon May 29, 2023 3:26 am 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.
I thought that an extra $1,000 of ordinary income can only make another $500 or $850 of SS to be taxed. --vtMaps
That is a common misconception. That's the point of this thread.
Retired June 2023. AA = 55/35/10
vtMaps
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Re: SS taxation amount

Post by vtMaps »

RyeBourbon wrote: Tue May 30, 2023 12:26 pm
vtMaps wrote: Mon May 29, 2023 4:00 am
celia wrote: Mon May 29, 2023 3:26 am 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.
I thought that an extra $1,000 of ordinary income can only make another $500 or $850 of SS to be taxed. --vtMaps
That is a common misconception. That's the point of this thread.
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.

--vtMaps
"Truly, whoever can make you believe absurdities can make you commit atrocities" --Voltaire, as translated by Norman Lewis Torrey
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FiveK
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Re: SS taxation amount

Post by FiveK »

RyeBourbon wrote: Tue May 30, 2023 12:26 pm
vtMaps wrote: Mon May 29, 2023 4:00 am
celia wrote: Mon May 29, 2023 3:26 am 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.
I thought that an extra $1,000 of ordinary income can only make another $500 or $850 of SS to be taxed. --vtMaps
That is a common misconception. That's the point of this thread.
Clarifying the antecedent of the highlighted word might be useful.
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