85% tax on social security; extra exemption at 65?

[mistymoney]

Since most of my money is pretax, it looks like I will be paying the max percentage of tax on social security.

I remember a few years ago someone complained to me that they were in the 85% range for social security taxes and I was really amazed and sympathetic. Because I thought that the tax rate on their social security was 85%, lol! I was no where near their level of wealth, and didn't think I ever would be.

Spoiler: show

Looks like I will be in the same ballpark! Time in the market is a miracle

However - I won't complain about this tax. :) I am like - 15% of my social security is tax free?? Whoopee!!

So, I wanted to take a moment to highlight this and to ask for verification/ask some questions.

For the highlighting:
Those considering taking social security early - this could be the treatment that makes waiting the winning argument! Waiting until 70 to take social security ups my "tax free" money by 3k a year compared to taking at 62. This seems way too good to be true!

So - on to my questions!
Is this really true? Am I thinking about this correctly?
Then there is the extra exemption at 65 (which I read every year while doing my taxes with pencil yars ago and never processed that I would ever benefit! Until now! This is just 7 years away for me.)

So:
standard exemption is 14,600
at 65 the extra is 1,950
at 70 the estimate is soc sec of 46k and that 15% is about 6,900

so from 70 onward, I would get 23,450 tax free income every year?

So If I was trying to figure out my future tax obligations on this, for a 100k year spend at age 70, and taking only from pretax and social security for my spend, I would just need to withdraw 70k from pretax.

70k from pretax + 46k social security = 116k
23,450 is tax exempt (15% of 46k, 14.6k, 1.95k)
taxes on 92,550 would be 15,414
leaving 100,586 for spending....on a 70k withdrawal from pretax.......

Just want to know if I have this figured out right......no need to buzz kill on only getting 50% of my earned soc sec by then!

[secondcor521]

You're accurate on some things and not on some others.

The following assumes a single person who isn't blind filing in 2025.

The standard deduction will be $15K next year plus $2K for someone who is 65 or older.  That $17K total means you have $17K of income that won't be taxed.  It offsets / erases $17K of income regardless of type of income - SS, W-2, interest income, capital gains, business income, etc.

Social Security is never taxed at at 85% rate.  First, you calculate what is called your provisional income, which is calculated as 1/2 of your SS benefit plus your other taxable income.  You then compare your provisional income against $25K; if it's less than that, then none of your SS benefits are taxable.  If it's more than that, then between 50% and 85% of your SS benefits become taxable at your ordinary income tax rate.

You can do the calculations yourself on Worksheet 1 in IRS Pub 915.  See also the instructions for Lines 6a and 6b of Form 1040.

A consequence of the previous two paragraphs means your math at the end of your post is wrong, but it's wrong in a good way - your actual tax situation is better than you've calculated because SS is not taxed as harshly as you are guessing.

Waiting to take SS, if you can, usually pays off quite handsomely because you get 8% more per year forever for each year you delay past FRA.  It also gives you more years to do Roth conversions, if those are applicable in your situation.  You can run your situation through opensocialsecurity.com to see what it recommends.

ETA:  By the way, don't feel bad about the "SS is taxed at 85%" misunderstanding.  It's an extremely common one.  There are also ranges and combinations of income where the marginal additional tax rates can be quite high because of phantom brackets - essentially if you add more ordinary income, it can cause both taxes on that additional ordinary income plus cause more of your SS to be taxed.  But that phantom bracket rate is still far lower than 85%.  Best way to figure this stuff out is to get out a tax software program and plug in some example numbers.

[MDM]

Best way to figure this stuff out is to get out a tax software program and plug in some example numbers.

+1

For example, the four entries circled in red, and changing cell R2 to 2025, in the Calculations tab of the Case Study Spreadsheet (CSS) are all you need for it to calculate the federal tax (based on tax year 2025 law) circled in green:



If you don't use Excel, web tools such as Dinkytown's 1040 Tax Calculator will do good estimates (although that one doesn't seem to be updated for TY 2025 yet - and none of them will show you a chart like the one below from the CSS, that highlights you are past the SS "phantom bracket rates" secondcor521 mentioned, and might be very close to hitting the first IRMAA tier):



Of course, much will change between now and when you hit 70 so don't sweat the details yet. :)

[mistymoney]

Best way to figure this stuff out is to get out a tax software program and plug in some example numbers.

+1

For example, the four entries circled in red, and changing cell R2 to 2025, in the Calculations tab of the Case Study Spreadsheet (CSS) are all you need for it to calculate the federal tax (based on tax year 2025 law) circled in green:



If you don't use Excel, web tools such as Dinkytown's 1040 Tax Calculator will do good estimates (although that one doesn't seem to be updated for TY 2025 yet - and none of them will show you a chart like the one below from the CSS, that highlights you are past the SS "phantom bracket rates" secondcor521 mentioned, and might be very close to hitting the first IRMAA tier):



Of course, much will change between now and when you hit 70 so don't sweat the details yet. :)

thank you for this!

[wageslave23]

Just wanted to add that the tax laws are set to change at the end of 2025. So I wouldn't plan anything tax wise until then.

I think it would be worth talking a knowledgeable financial planner and/or cpa. Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable. 

Also, $100k spend for a single person? That seems very high. Is that just temporary to pay off debts?

[MDM]

Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable.

Do you have some examples in mind that common tax software (TT, H&RB, etc.) wouldn't catch? 

For an individual return (i.e., not a business return), there are usually no "weird tricks" and "#4 is genius!" doesn't apply either. ;)

[mistymoney]

Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable.

Do you have some examples in mind that common tax software (TT, H&RB, etc.) wouldn't catch? 

For an individual return (i.e., not a business return), there are usually no "weird tricks" and "#4 is genius!" doesn't apply either. ;)

the last one no one can guess......

[mistymoney]

Just wanted to add that the tax laws are set to change at the end of 2025. So I wouldn't plan anything tax wise until then.

I think it would be worth talking a knowledgeable financial planner and/or cpa. Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable. 

Also, $100k spend for a single person? That seems very high. Is that just temporary to pay off debts?

Just a round number with the highest tax for social security applied to work off of to gain understanding on how it works. No idea what my spend might be at that point, thinking that would be about the highest I might have at that point. Will still have a mortage but not other debts I don't think.

based on the spreadsheet - it is quite nuanced. I thought it was either 0, 50, or 85% of ss taxed but seems all different levels are possible.

[MDM]

I thought it was either 0, 50, or 85% of ss taxed but seems all different levels are possible.

Yes, because it's "50% (or 85%) of the amount above [some number]".

[mistymoney]

I thought it was either 0, 50, or 85% of ss taxed but seems all different levels are possible.

Yes, because it's "50% (or 85%) of the amount above [some number]".

I guess I don't really understand then. The spreadsheet lists the percent of soc sec that is subject to tax, and if varies a lot.

so on the spreadsheet, if I put in 46k for social security and 5k out of ira, then 4k of social is taxed, but if I put 50k out of ira then it says 82% of social is taxed or 37,650.

So the "some number" is figured with social and non social income and lands at a lot of different places, and then whatever is over that number is either taxed at 50% of 85%? So lots of different configurations?

Just when I thought I was getting closer to 'getting it'....

Makes this spreadsheet super useful since I obviously wouldn't have ever figured out the numbers!

[Catbert]

Secondcor521 already mentioned this, but I want to ensure that you don't miss it.  Delaying SS beyond 62 means more years that you can do larger Roth conversions without SS taking any of the "space" of a particular tax bracket.

[mistymoney]

Secondcor521 already mentioned this, but I want to ensure that you don't miss it.  Delaying SS beyond 62 means more years that you can do larger Roth conversions without SS taking any of the "space" of a particular tax bracket.

Yes, I haven't fully considered this aspect of things but I should. The spreadsheet is great for helping to plan that kind of thing, also.

I'm not sure what my initial spend will be at retirement, let alone at 70. But waiting for 70 to take social security is getting to be a better and better deal than I ever imagined, and I was going to do it anyway given longevity in the family.

overall, I am expecting the required spend to decrease from now to retirement, and then even more so at 70. But I could also make large increases on discretionary spending to counteract that. Or maybe do a few big splurges before retiring instead of that?

Still contemplating it all!

[wageslave23]

Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable.

Do you have some examples in mind that common tax software (TT, H&RB, etc.) wouldn't catch? 

For an individual return (i.e., not a business return), there are usually no "weird tricks" and "#4 is genius!" doesn't apply either. ;)

I'm not talking about having a cpa do your tax return every year. I'm talking about strategizing one time with a certified financial planner who has a strong background in tax in order to come up with the most efficient financial plan for withdrawals and investments considering tax implications and bend points of Healthcare subsidies, capital gains, roth conversions, Medicare, social security taxation and timing, foreign tax credits, bond interest, etc.

[mistymoney]

Even if it costs a thousand for a consult, they will easily be able to save you more than that a year in taxes if they are knowledgeable.

Do you have some examples in mind that common tax software (TT, H&RB, etc.) wouldn't catch? 

For an individual return (i.e., not a business return), there are usually no "weird tricks" and "#4 is genius!" doesn't apply either. ;)

I'm not talking about having a cpa do your tax return every year. I'm talking about strategizing one time with a certified financial planner who has a strong background in tax in order to come up with the most efficient financial plan for withdrawals and investments considering tax implications and bend points of Healthcare subsidies, capital gains, roth conversions, Medicare, social security taxation and timing, foreign tax credits, bond interest, etc.

perhaps unmustachian of me, but I have a cpa/enrolled agent do my taxes each year. I had one consult with him a few years ago when I first got started with him, mainly about how to best use my side income money, and it was very helpful. I did not know I could do a sep-ira after maxing out the 401k at work, I never would have thought of that or even known to look into it. I consider this very special money that can only be used for special pampering during retirement. I love this tiny account (tiny because I don't make much on the side!), and watching it grow!

Maybe I will see if he can provide some advice on retirement spending and tax strategies.

The tax return is about 400, so just a little more than twice what turbo tax charges, and I have gotten loads of value out of it.

[MDM]

So the "some number" is figured with social and non social income and lands at a lot of different places, and then whatever is over that number is either taxed at 50% of 85%? So lots of different configurations?

Yes, it seems you get it!

Without getting into all the details for Taxation of Social Security benefits, maybe these made-up numbers will help:

• You have $30K SS benefits
• 50% of the amount above $25K is taxable: 50% * ($30K - $25K) = $2500
• That makes $2500/$30K = 8.3% of your SS taxable

[mistymoney]

So the "some number" is figured with social and non social income and lands at a lot of different places, and then whatever is over that number is either taxed at 50% of 85%? So lots of different configurations?

Yes, it seems you get it!

Without getting into all the details for Taxation of Social Security benefits, maybe these made-up numbers will help:

• You have $30K SS benefits
• 50% of the amount above $25K is taxable: 50% * ($30K - $25K) = $2500
• That makes $2500/$30K = 8.3% of your SS taxable

Thanks, this example did help!

[secondcor521]

Walking through Worksheet 1 in Pub 915 may also help clarify.  It steps through the process of calculating taxable SS.
 Although there are a lot of lines on that worksheet, and as usual it helps if you already know how it's supposed to work ;)

You could ask your CPA if they do multi-year tax planning and if they'd be willing to consult on that.  When I did a little bit of that, we paid the CPA $250 / hour.  It's a bit of a different (and more involved) thing than optimizing the current year.  Most tax folks will do the latter, but few will do the former.

[mistymoney]

Walking through Worksheet 1 in Pub 915 may also help clarify.  It steps through the process of calculating taxable SS.
 Although there are a lot of lines on that worksheet, and as usual it helps if you already know how it's supposed to work ;)

You could ask your CPA if they do multi-year tax planning and if they'd be willing to consult on that.  When I did a little bit of that, we paid the CPA $250 / hour.  It's a bit of a different (and more involved) thing than optimizing the current year.  Most tax folks will do the latter, but few will do the former.

thanks, that phrasing helps!

i'll look into this next summer. I know he gets very busy around now.