Taxation of Social Security
It appears to me that ES Planner is miscalculating the taxes on Social Security benefits in some scenarios.
Given: a 70 year old couple receiving total SS benefits of about 69,000 in 2009 (they earned the maximum social security income and delayed until age 70). Also they have a special taxable receipt in 2009 of $30,000. No other income or assets.
ES Planner generates a Federal Tax amount of about $8500 for 2009. ES Planner must be assuming that a substantial portion (about 80%) of the SS benefits are taxable. I calculate that only about 1/3 of the SS benefits are taxable.
If you plug the $69K SS receipts and plus the $30 K of other income into the table on page 27 of the 2008 1040 Instruction Book entitled “Social Security Benefits Worksheet” (the purpose of which is to calculate how much of ones social security is taxable), the result is about $23.4K. Then I figure taxable income at 30+23.4 – 10.7 (standard deduction) – 2.1 (elderly credit) – 7 (pers exemptions) = 33.4. Taxes on 33.4 should be about 4.2K.
RSS
I believe that you're mistaking taxable income and adjusted gross income.
Line 3 of the Social Security Worksheet (SSW) is close to gross income.
Line 4 of the SSW is taxable interest.
Line 5 of the SSW is gross income.
Line 6 which is where the deductions from income occurs produces the adjusted gross income [more or less] used throughout the rest of the 1040. Taxable income (which we do not believe is being used in the SSW) is indeed the AGI less the deductions and exemptions you mention above, but that isn't what the SSW appears to be using in its calculations.
It's more than possible that Larry and I have our heads wedged on this (we've been wrong before when applying the rules in the various forms) but we've been over the SSW line by line and we think we're applying the form properly.
Best,
Dick Munroe
I don’t think this is the problem, but if you’ll bear with me I will go through all the steps. It’s actually a fairly simple example. (nevertheless, apologies in advance for the length).
Hus & Wife are 70, and will take a 30K IRA distribution in 2009. Both collect 2875/mo in social security. That’s all.
So Total income (1040 line 22) is simply the 30K plus the result of the SSW.
Here is the SSW:
Line #, Description, Amount
1 Total Soc Sec Receipts= $69,000
2 .5*line1= $34,500
3 Inc items EXCLUDING Soc Sec= $30,000
4 interest= 0
5 2+3+4 (inc + .5*SS)= $64,500
6 deductions for AGI= 0
7 line 5 minus line 6= $64,500
8 1st MFJ entry= $32,000
9 line 7 minus line 8= $32,500
10 2nd MFJ entry= $12,000
11 line 9 minus line 10= $20,500
12 minimum (line 9, line 10)= $12,000
13 .5 * line 12= $6,000
14 minimum (line 2, line 13)= $6,000
15 line 11 * .85= $17,425
16 line 14 + line 15= $23,425
17 line 1 * .85= $58,650
18 minimum (line16, line17)= $23,425
Line 18 is Taxable Social security benefits, which goes onto line 20b of the 1040.
This results in total income of $23,425 + $30,000 = $53,425.
Since there are no deductions for AGI, this number is also AGI.
On the Taxes & Credits section of the 1040 things are simple. $53,425 AGI less $10,900 standard deduction and $7000 personal exemptions yields taxable income of $35,525 and therefore taxes of $4526.
ES Planner generates taxes of $8520, but this only makes sense to me if a much larger portion of the Social Security benefits are being taxed.
You're absolutely correct. We misread the instructions (more than once, too). This is a bug and will be corrected in the next update.
Best,
Dick Munroe
This does appear to be fixed in 2.14.1. Thanks.
I appreciate these type of instructions and guidelines for the beginner and sometimes it useful fr professionals as well. But that isn't what the SSW appears to be using in its calculations. There are certainly a lot of details like that to take into consideration.