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I have been following the passage of the new bill signed today. I thought the deduction was 6K for couples, but it is per person. Here is information on the specifics from an AI source:
The (bill) includes a significant tax break for older Americans, specifically a new $6,000 “bonus” deduction for those 65 and older. This deduction is targeted at those with modified adjusted gross incomes up to $75,000 for individual filers and $150,000 for joint filers. The deduction phases out at higher income levels, and it is not available for those earning more than $175,000 (or $250,000 for couples).
My wife and I will be able to take full advantage of this deduction. I will be increasing my wife’s Roth conversions by another 12K and still stay in the 12% tax bracket. This will assist in trying to convert the total amount of her traditional IRA before she runs 70 in 3 1/2 years. The deduction is through 2028. I just hope we won’t pay for it in the future with reduced Social Security checks in the future, as it has been reported these payments will cause the trust fund to run dry six months earlier then current projections.
It also pains me that so many in the crypto and tech communities use social media to spread the lie that Social Security is a Ponzi scheme.
It’s a catchy line but so wrong.
Because, unlike a Ponzi scheme, it’s legal, transparent, backed by US law, adjustable by Congress, and backed by taxes!
Ponzi schemes are designed to collapse and enrich the creator. Social Security is designed to last and support retirees.
There is so much misinformation information it is depressing what people willingly accept without any effort to check the facts.
David Enna wrote an article on topic at tipswatch.com that is worth a read.
I received an email from My Social Security about the new legislation on July 3. It contained inaccurate information and was political in tone.
“The bill ensures that nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits, providing meaningful and immediate relief to seniors who have spent a lifetime contributing to our nation’s economy.
The new law includes a provision that eliminates federal income taxes on Social Security benefits for most beneficiaries, providing relief to individuals and couples.”
Did anyone else get this?
I plan to call my Representatives this week.
The new phaseouts create a new temporary marginal tax rate 6% higher. When will Congress stop making taxes more complicated?
A couple weird things:
-This doesn’t make Social Security tax free. It reduces taxes for those over 65, but many people delay taking SS until FRA (of like 67) or even to age 70 if they expect a long life.
-Someone taking SS at age 62 (or 63 or 64) isn’t eligible for that extra deduction.
-Social Security was already lightly taxed for those with low incomes, or should I say *taxable* incomes, because if you’re getting a high income but it’s coming from Roth IRA/401k money, it’s not taxable.
-It’s good for four years. How do you make a good long term plan when stuff changes materially so often?
I with they would have just upped the breakpoints for the 50% and 85% taxability to account for inflation.
“I with they would have just upped the breakpoints for the 50% and 85% taxability to account for inflation.” Then the bill would not have been passed in the Senate. It would have required 60 votes to pass if they had touch SS laws.
Good point that those taking SS at 62 are not elegible as it is not directly related to SS. It is for anyone over 65 up to $250,000 income (from $150 k to $250k they get a percentage of the deduction). It indirectly reduces the taxable SS as it lowers the AGI but is not a direct deduction from SS tax. In fact in this section of law it does not mention SS at all.
This is another case of the administration not being succinct in their verbiage. They’re trying to claim that they eliminated the tax hit for 90% of all Medicare recipients to try and show they nearly met a campaign promise, instead of saying clearly and correctly that is a deduction for all seniors 65+ old.
There may be some who are like us 65+, but delaying Social Security income who: 1) may file for SS benefits thinking they need to claim to get the deduction, or 2) who are 65+ who are not claiming SS benefits that think they are not eligible for the deduction.
Another case of the government complicating something unnecessarily.
Once again, someone is quoting the numbers for married filing jointly, ignoring everyone else.
It would be so much easier to plan w/o the temporary tax law changes. I agree, I’d rather see the SS tax breakpoints increased for inflation. Still have the issue where Roth conversions increase your modified adjusted gross income (MAGI), which pushes more of your Social Security benefits into the taxable range.
History from ssa.gov
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html#:~:text=OBRA%2093%20established%20the%20second,income%20has%20risen%20over%20time
The last few years, I have been doing partial Roth conversions, which add to taxable income and increase AGI. I’ve been careful to make sure the AGI is below the amount that would trigger IRMAA. Now, AGI will have to be lower to take the extra over-65 deduction, and I’d rather take a known tax break now than keep a higher Roth conversion and lose that extra standard deduction.
This will be the last year of HSA eligibility, so I’ll max out on that. I don’t see any other ways to keep AGI down besides really reducing the Roth conversions. Have I missed anything useful?
I guess this is one of those “good ‘problems’ to have,” but I’d still like to keep doing bigger Roth conversions prior to going on Social Security.
It won’t affect us because my husband is still working and I’m getting pensions. It should help my mother, whose main income is Social Security with a small amount of income from savings.
The tax deduction on tipped income will definitely benefit my daughter, who works as a restaurant server.
While I am happy for your daughter’s sake that she won’t have to pay income tax on her tips, I just don’t understand how the federal gov can justify tips not being taxed when all other forms of income are taxed. This seems more to be for influencing votes than it does make tax revenue equality. Tips, to me, are the same as my getting paid by my doggy training clients as an independent contractor. I’m paid for my services. She is paid for hers directly by the customer. What am I missing here?
You are not missing a thing Sue. Further, of all the tax returns I prepared for servers, never once did anyone ever claim their cash tips as income; if they weren’t on the W2, they weren’t on the tax return.
It seems they are now considering tips as a gift from the customer to the server.
Will the income from the Roth conversion effect modified AGI, pushing you above the $150K threshold?
No, I even can deduct 3K for bond capital loss from the 2022 debacle included. Our expenses are so low that almost half of our MAGI will be the Roth conversions.
Given the average effective tax rate of 3.7% for 50% of taxpayers, the $6,000 deduction may be worth $222 a year for those seniors that actually paid taxes on their SS even when it was taxable income.
Too bad congress didn’t put as much effort over the last 12 years into assuring SS and Medicare trust funds were made solvent and sustainable.
A portion of SS being taxable is perfectly logical and necessary. The American people have been duped once again. That’s why the deduction was used so the lost revenue didn’t come directly from the SS trust but simply added to the overall deficit. 😡😢
To determine the savings from the new deduction, you use the marginal tax rate(s), not the effective rate.
Agree – we gain a little bit over the next 4 years but it does not make up for the projected 23% cut in our social security benefits beginning in 2032 (per many sources).
Well, if someone’s paying an effective tax rate of 3.7%, all their income is pretty close to tax free already.
…but, but, but, the child tax credit was bumped up too, by a whopping…$200 per child! Meanwhile that 65+ bump-up to the standard deduction of $12k per couple could be worth up to $1,440, maybe more, for those in the Social Security tax torpedo. So, the over-65 couple living on $150k a year gets an extra $1,440, and the (probably struggling) family making maybe $60k a year, with 3 children gets…an extra $600 (maybe). All righty then…
For my money–speaking as a tail-end boomer–this is exactly backwards, and is, well, let me attract some down-votes here–completely nuts. I’d obviously make a lousy politician.
Tsk tsk wtfwtjd. You seem to have no compassion for our current party in power who intends to stay in power by offering tidbits to the voters NOW and forgetting to add that these reductions in tax revenue through the cuts will (per many sources) lead to Social Security benefits being reduced one year EARLIER than previously predicted. So we lose out if we live beyond 2032 but shall enjoy our deductions until then ..
I submit that the effective tax rate isn’t even the most accurate metric, as it is based on taxable income.
For example, we only pay income tax on a portion of SS. By adding our total benefit with all other types of income, and ignoring the standard deduction our real income hits 6 figures. Dividing our income tax liability by our real income results in a real tax rate of only 2.7%.
Under the new rules, our real tax rate will probably land around 1.5%. While I’ll never voluntarily pay more, I have to say that 1.5% ain’t asking much.
I think we are going to be about where you are, Dan. Chris
I totally agree Dick. FYI, you do not have to be receiving Social Security to take the deduction, just be 65 years old or older. We are living off our assets while delaying claiming in 2 1/2 and 3 1/2 years and will still qualify. This feature in the bill is just another giveaway for the better off. We are a perfect example of such a gift.
The deduction diminishes and then goes away entirely for people with higher incomes. Those who saved and are now having to take RMDs, for instance….
Good point about RMDs. I bet more than a few people will be surprised at tax time.
Good point, R Quinn. For those who are turning 73 this year, they have the option of taking their RMD this year or waiting until 2026 and taking both RMD’s next year. So if they have unpredictable income from independent contractor gigs, etc it behooves them to start taking a look now at what their projected incomes will be so they can decide on when to take their RMD and/or wait until Dec to calculate which year to take it in so they don’t miss out on the deduction if they otherwise qualify.
That is why I am converting all of my wife’s traditional to a Roth before we claim Social Security. Her retirement accounts are about 1/4 of our portfolio. The total conversion of her traditional account will decrease the tax hit in the future, and make only my traditional account subject to RMDs. If I were to convert my account we would be in 22% bracket which I’m not willing to go there.
It sounds like you’ve done your homework David–good for you. I’ve bumped into people in the past, who don’t seem to understand, that converting now at 22%, to avoid maybe paying…22% (much later) doesn’t really make a whole lot of sense. And depending on your state, if you have state tax on top of that 22% now, you might be paying something like 27% in an attempt to avoid that possible 22% later, which really makes no sense.
Whereas, as explained in the excellent material by Ed McQuerrie, paying 12% now is apt to have little downside, while having the potential for a much greater (future) upside.
Thanks for your input. Once we are receiving our maximum Social Security income, plus my small pension and RMDs we may be in what is the current the 22% tax bracket. Even if not, my wife has an excellent chance of living to 100 based on her family’s longevity. I plan on tapping only my traditional account for expenses during our lifetimes. If that plan comes to fruition she will have at least another 30-35 years of tax free growth, then our children could have an additional 10 years as well (based on today’s tax law).
Frankly, many seniors, my wife and I included, do not need an additional $6000 “bonus” deduction. In general, paying less taxes is better than more taxes. However, as the gap between the haves and the have nots widens in the US, I fear for the long-term impact of the recently enacted tax cuts on the viability of social security and the ability of low income people to access health care. I would rather pay more in taxes to enable the government to subsidize low income housing, build more affordable housing, and provide support to young families and children. As one of the wealthiest nations on the planet, it is shameful that so many of our children go hungry and that their most reliable meals are served at school and in afterschool programs.
Do most seniors in retirement earning above the median income for their age group need an additional $6000 bonus deduction?
Ocher,
I hope you follow through on your feelings by giving large donations to charities that feed children and help shelter the homeless.
Agree with you on the policy and long term impacts. I’d guess the extra deduction seems like to help some middle income seniors. While it’s useful for planning to have some certainty after the bill gets analyzed and hopefully fully understood, at first glance I don’t think there will be much impact out planning or significant new benefits. We might have to do a bit of analysis but with just a few years left to RMDs and a late start, we are likely to still execute the remainder of the planned partial Roth conversion this year and spike our income up into the 24% bracket while accepting the extra IRMAA and losing the potential bonus opportunity.
I entirely agree with you about tax policy in general, as I have written here before. However, there is an income test for this deduction and I don’t expect to see much of it, given I have to take RMDs on top of a pension and SS.
I totally agree with all you say, but will still do what is in the best interest of my wife and me. That is the same argument I have made when people complain about IRMAA payments, as only those Medicare recipients with income in the top 7% pay it. I would love to be in that club, and would gladly pay the surcharge, but alas that will never happen. But again I don’t blame those who try to structure their income to try and avoid paying it, just those who complain about it.
PS When my wife and I were working our combined income with two college degrees rarely exceeded the minimum income that an individual has to make, in retirement, to be required to pay IRMAA, but are living quite comfortably in retirement. Not complaining, just a fact.
Careful about wanting to be in the IRMAA paying club. I know many couples who didn’t, but after the death of one spouse, were suddenly thrust into that club because the income limits go down by half for singles.
Thanks for the input Hugh. I did a quick back of the envelope calculation based on the RMD at 73 for just my traditional account, plus my expected SS income, as well as my 100% survivorship pension. This assumes I am successful in converting all of my wife’s traditional IRA to a Roth. Using today’s governmental laws, if one of us were to die the year I turn 73 the survivor would have income requiring IRMAA payments.
However I still stand by my statements in the past that I would feel privileged to be in the top 7% of retiree incomes.
I might have to look at a QLAC to see how that might affect our income to avoid paying. Of course that is inheritance my children will be missing out on, but both are doing very well financially, ie making more than my wife were making combined for the majority of our working life, which ended in 2020.
It’s not terrible if a tax is unavoidable due to you being at the very top of the income pyramid. However, if someone can foresee this and pay tax early (pre-SS & pre-Medicare) by doing Roth conversions, they may be able to avoid:
-The taxable IRA income causing their Social Security going from 0% or 50% taxable to being taxed on 85% of it
-Paying IRMAA, which is money out for no additional benefit
-Possibly paying taxes in the next higher bracket
Imagine a scenario where someone with a Roth IRA would have tax-free Social Security, but drawing from a regular IRA would put their provisional income in the level that would make it 85% taxable…that’s a 42% marginal tax rate if in the 22% bracket (22% + 22% x 85%)!
That may not be avoidable if a person is getting a generous (taxable) pension, but those are becoming less common, so people are increasingly living off of their Social Security + IRA (taxable or Roth).
Well said. Fully agree. There is a sad lack of long term thinking.
Yeah, it’s going to take a bit to sort out the changes and figure out rational responses.
Mine probably also Roth related. I had planned on playing the ACA tax credit game for one more year, but it looks like the rules around it just got more complicated …. so I’m going to bag it, move to one of the medical cost sharing ministries for medical, take advantage of the opportunity to sell appreciated assets and start Roth conversations a year earlier. I may or may not be money ahead, but I just don’t need more complexity. Thank you US tax code.