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Previous posts have stated that unearned income (dividends & interest) are not calculated to determine ss benefit amt. however, it clearly states in tmf pixy's article (1/18/00) that unearned income is calculated. I find this confusing. Next year, at age 62, i wish to take ss benefits. Although, I have no earned income, I do have a high investment income and am told by my accountant that i will be giving most if not all of the ss benefits back in taxes. It seems so very unfair.
anyway, would appreciate a clear statement on whether or not unearned income factors into the ss payout amt.
also would like to say how useful and enjoyable this board is. I thank everyone.
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Greetings, Carolr5204, and welcome. You wrote:

<<Previous posts have stated that unearned income (dividends & interest) are not calculated to determine ss benefit amt. however, it clearly states in tmf pixy's article (1/18/00) that unearned income is calculated. I find this confusing. Next year, at age 62, i wish to take ss benefits. Although, I have no earned income, I do have a high investment income and am told by my accountant that i will be giving most if not all of the ss benefits back in taxes. It seems so very unfair.
anyway, would appreciate a clear statement on whether or not unearned income factors into the ss payout amt.
also would like to say how useful and enjoyable this board is.>>


There are two issues involved, forfeiture of Social Security because you work and taxation of Social Security if your adjusted gross income exceeds certain threshholds. These issues are separate and distinct.

In your case, up to 85% of your Social Security benefit will be taxed because of your investment earnings. That is not the same as forfeiture. For an example of that taxation, see my article "It's Income Tax Time" at http://www.fool.com/retirement/retireeport/2000/retireeport000118.htm. That will help clarify your situation. As to forfeiture because of work, that you can find examples of in previous posts on this board over the past three days.

In next Monday's article I will try to clarify these issues. Because of the "apples and oranges" statements I have seen in various posts (yours included) over the past week, I thought further discussion was necessary.

Regards..Pixy
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Recently, I ran an anaylsis of the effect of taxation on a retire's SS income. And was that enlightening, especially when looking at the effect on one's marginal taxation rate.

For those who don't know what marginal rate is, it is the rate of taxation on the next dollar of income.

For retirees of relatively moderate incomes the marginal rate goes to a high of 52%! This means you only get to keep 48 cents out of the next dollar of income!

My analysis was based on 1998 tax rates, for a married retired couple age 63 and 66, with a SS income of $20K and the assumption that all income was classed as ordinary (that from an IRA or dividends, etc.).

For Ira income up to $22.5K, the marginal rate is 15%.
However at that point you begin to get hit with ss taxation and the marginal rate goes to 22.5%.

At about $33K of IRA income your total income is such that your marginal rate goes to about 28%.

When your IRA income reaches $43K puts you at an astounding 52% marginal rate. However when your IRA income goes above $48K you drop back to a marginal rate of 28% because at that point all 85% of your SS income has been taxed and they don't hit the ss income any harder than that.

Of course as your IRA income goes above that point you will get to the next tax bracket and there you go to 31% and as you go higher you progress through the published bracket rates.

If your income is LT capital gain instead of IRA, the marginal rate drops by 10%.

My point is that many people don't realize, how high the marginal rate can get, though temporarily, before dropping back to the bracket rate.

jensor
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<<would appreciate a clear statement on whether or not unearned income factors into the ss payout amt.>>

Unearned income (i.e. dividends, capitol gains, interest) ARE NOT used in determining your monthly benefit amount (payout). They are used in calculating your adjusted gross income for IRS purposes which in turn in used to calculate whether or not you pay taxes on your monthly SS benefit. Hope this clarifies it, even though I know it's not the answer you want to hear.
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TMF Pixy, I just read your 'soapbox' article on Social Security. Right on!

I agree with you completely. I DO NOT need the social security funds to maintain my style of living - thanks to Foolish investments. However, my parents certainly did. Those of us who earn enough to be taxed on our social security benefits should be grateful to be so fortunate. Anyone living strictly on SS is not living very well. I don't like taxes much either, but I view this particular version as being my payback for living in a country that has enabled my success.

FYI. I'm not yet collecting. I just turned 58 and have been retired for nearly 2 years. Fool on!
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The amount of social security benefits depends on the
earned income, wages salary etc not dividends or
captial gains. I suggest you contact the social security admin near you and request the form to get
your earnings statment. Fill it out and SS will sned
back your estimated benefits depinding on your earned
income and when you retire. Do this BEFORE you retire.

The other factor is how much of your ss benefits
is taxable. To determine this all your income, earned,
unearned are included. The best way to estimate is
get the 1040 instructions along with the 1040 form
and go through the worksheet using the estimated
amount of benefits you will receive. This excersize should give you a ball park number. You accountant is correct, if you have high divdends and capital gains etc, the amount that your ss is taxed could be high.

This has nothing to do with the recent legislation
just signed by the president that allow retirees, 65- 70 to earn as much as thye like. However, they too will find if they have a higher income, they wont lose any benefits but more of the SS benefits will likely be taxed. That little pice of information the govt and the news media for the most part leave out.
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I don't know why people aren't picking up on this "little piece of information". Doesn't it mean that not only are working seniors going to pay immediate social security tax on their earnings out of their checks, but then at tax time are going to pay additional tax on their benefit + most of any other income. Which is then taxed again at the final calculation...
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Failte1 writes:

<<I don't know why people aren't picking up on this "little piece of information". Doesn't it mean that not only are working seniors going to pay immediate social security tax on their earnings out of their checks, but then at tax time are going to pay additional tax on their benefit + most of any other income. Which is then taxed again at the final calculation... >>

Yes, it could depending on the potential excess over the income threshholds for the taxation of benefits. Keep in mind that many benefits recipients are not aware such taxation is possible. Many discover it only at tax filing time. Obviously, they don't pay attention to the literature they receive because it's not a secret and is highlighted in many SSA pubs and in the media from time to time.

Regards..Pixy
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Pixy writes:

<<Yes, it could depending on the potential excess over the income threshholds for the taxation of benefits. Keep in mind that
many benefits recipients are not aware such taxation is possible. Many discover it only at tax filing time. Obviously, they don't
pay attention to the literature they receive because it's not a secret and is highlighted in many SSA pubs and in the media from
time to time.>>

I agree that the decision of taking it or waiting has to be crefully thought out. I am 66 and can go to the SS trough now while I am still working full time. I really do not need the "extra" money now. However, if I do jump on the SS train, I will go to a higher IRS bracket. In adition, I will lose out on 1040 deductions because my itemized deductions will be sqeezed lower. And I might even be faced with an AMT.
And, as Pixy pointed out in another post, by working, I still would have to pay FICA/SS on the work-earnings, even while collecting SS; and I would NOT be eligible for the 5.5% kicker each year.

I calculated, that, if I wait, (I was planning to work to 68.3 years), I would gain the 5.5% kicker each year provided to those born in 1934. In addition, waiting, as a further bonus, would give my wife an additional $3600 per year (50% of my SS times 80% [she retired at 62 on her earnings]) once I "finally" retired and got on the SS bandwagon.

I am leaning in the direction of waiting.
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Thanks, Pixy. I'm sure the powers that be are hoping we won't notice it until after the election or at tax time next year. The limits ($25K/$34K) seem so low and then the hungry tax monster takes a GREAT BIG bite out of everything else. It's really going to hurt a lot of unaware seniors.
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I believe that your accountant is talking about the fact that all of your income, plus one-half of your SS benefit, is totalled to see if it exceeds a limit set by IRS. If it does, you will be taxed on your SS on a sliding scale up to 85% of your benefit. In your case it sound like that total hits the maximum limit and you will be paying taxes on 85% of your benefit. There are a number of factors that enter into your situation: If your taxable SS pushes you up into a higher bracket, then your investment income (short-term) will be taxed at that higher rate. On the other hand, you have to pay taxes on your investment income and it has to come out of something, interest, dividends, or SS. You need to have someone analyze this given different scenarios with the real numbers. Don't confuse this with the fact that you are allowed to only earn so much before your benefits are reduced. In that case, the actual amount you receive is reduced.
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Your accountant exagerates when he says "most, if not all" in my opinion. If "most" means over 50%, I have heard that it is possible, but have not been able to generate a figure as high as 50%.

First, obtain an estimate from SS admin. on your SS benefits at age 62. You should have been already notified of this by SS administration if you are within a year of that age.

If you, or your accountant, used a computer program for your taxes, I believe the easiest way to get an exact estimate of the impact is to take last year's data, then insert the estimate of SS benefits as if that amount was received on form SSA-1099, then put down 50% of that figure as tax withheld. Have your tax program recalculate your taxes, and then see if the total is higher or lower than before.

If these numbers lowered your taxes, then the incremental rate in your case is less than 50%.

Or, you can NOT put in the ficticous tax withheld with the projected SS. Then take the increased taxes and divide by the estimated SS benefits to check on the rate. With a $500K interest income, and $20K SS, my Year 2K program gave a rate of 32.7%, well below "most, if not all," but enough to hurt, even if it is below the incremental rate of other income.

The calculations are possible without a computer program of course, but are not easy.

-Dale-

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jsensor,

Concerning your post to the Retired Fools board (#3047 3/21/2000),
I tried to verify your figure of a 52% tax rate using your assumptions:
"married retired couple age 63 and 66, with a SS income of $20K and the assumption that all income was classed as ordinary (that from an IRA or dividends, etc.)".

With an income of $43K you reported an incremental tax rate of 52%.
However, I put these same figures, granted using a tax program for year 2000, in and I showed a tax of $6,565. Then I increased the income to $43,100 and tax was 6,559, a difference of $26, corresponding to a 26% incremental rate.

What did I do wrong, or was your calculation in error? I know of no changes between 1998 and 2000 tax rules to cause this difference. Has there been a correction in the tax laws since 1998 to aleviate this problem?

Other Retired Fools can reply.
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zzyp-
Ref your msg #7110

I did some checking. Using TaxCut2000 and inputing a married couple, ages 63 & 67 with a combined SS income of 20K and only 100% taxable income from an IRA of 43.1k and 43K I show a tax of 6454 and 6431 which yields an incremental rate of 23%.

Now when I change the inputs to an SS income of 19K and IRA income of 44.1K and 44K it shows a tax of 6753 and 6697. This shows an increase in taxes of $56 for the additional $100 of income.

SS income is an important factor when looking at the effective marginal tax rate.
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