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Social Insecurity (redux)

I wrote about the high Phantom Rates one may encounter due to the taxation on Social Security benefits, and I continue to receive positive feedback on that article.

I received two questions which I thought appropriate to address here.

Is there an age after which you can earn as much as you want and the phantom tax does not apply?

If you are under ‘full retirement age’ $1 in benefits are lost for each $2 you earn above $12,960. That’s quite a hit, and someone who is working should think about whether it makes sense to draw any benefits earlier than full retirement age. Note: full retirement age changes based on the year you were born. The Social Security web site has a link to see your retirement age.

Do you count passive income the same as earned income when doing these calculations?

For the phantom tax bubble I illustrated, I show either earned income or 401(k)/ IRA withdrawals which are taxed the same. Dividends or Capital Gains have their own curves which are unpleasant in their own right, the marginal rate appearing to be 32% on what should be 5% rate dividends. The best advice is to go to www.ssa.gov which is an easy site to navigate, and to buy a copy of TurboTax, and run your own scenarios. To produce those charts, I set a fixed SS payment, changed income by $1000 increments, and charted the numbers. I offered two examples, one from experience, the other at a reader’s request. The tax software will make your exact situation clear to you.

JOE

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