Question RE: Tax on Social Security Benefits

[Jay968]

What is the name of your state?California

I am starting to collect social security for the first time starting next month and would like to see if I understand how taxes work.

Hypothetical example:
Married male earns $30.000 in social security in 2019 and has no other income.
Wife still working earns $80,000 in 2019.

Here is my understanding. Someone please either confirm or explain if I am not understanding correctly.

85% of the $30,000 SS benefits will be taxed. This comes to $25,500 that will be subject to tax.
$25,500 (taxable portion of the SS) plus $80,000 (wife's salary) brings the couple to $105,500, which after standard deduction for a married couple equals $81,100.

Conclusion: The tax rate would be 12% for the first $78,000 and 22% for the remaining $3,100.

Am I correct or am I calculating something wrong?

Thanks so much for any help anyone can provide.

 

[ShyCat]

Almost but not quite: you missed a tax bracket.

10% up to 19400
12% 19051 – 78950
22% 78951 – 168400

Total tax would be $9559, an effective tax rate of 8.7%.

 

[Jay968]

Thanks. Yes I forgot about the 10% bracket.
But my understanding otherwise is sound? Seems to be.

Also, one thing I can never understand is how the effective tax rate (8.7% in this example) is calculated. If the tax brackets are 10%, 12% and 22%, how is it that the effective rate ends up lower than even the lowest bracket amount?

 

[Taxing Matters]

Also, one thing I can never understand is how the effective tax rate (8.7% in this example) is calculated. If the tax brackets are 10%, 12% and 22%, how is it that the effective rate ends up lower than even the lowest bracket amount?

Because the effective tax rate is based on your total income, in this case $110,000. But your taxable income is much less, $81,100. It is on that amount that the tax rates are applied to determine your tax.

 

[Jay968]

Because the effective tax rate is based on your total income, in this case $110,000. But your taxable income is much less, $81,100. It is on that amount that the tax rates are applied to determine your tax.

I may be too stupid to understand this but it sounds like effectively they are considering the standard deduction as being part of the tax paid, and since I am NOT, it effectively puts me into an 8.7% bracket...for $110,000...yes?

 

[LdiJ]

I may be too stupid to understand this but it sounds like effectively they are considering the standard deduction as being part of the tax paid, and since I am NOT, it effectively puts me into an 8.7% bracket...for $110,000...yes?

Its simpler than that. Your gross income is 110,000. Your tax calculates to be $9559.00. That is 8.7% of $110,000. The 10, 12 and 22% tax brackets are applied to taxable income rather than gross. Don't get too caught up in the word "effective".

 

[Jay968]

OK I get it now.
I'm not sure what purpose it has in even mentioning it, but now I at least I understand how it's derived.
Thanks to all.

 

[LdiJ]

OK I get it now.
I'm not sure what purpose it has in even mentioning it, but now I at least I understand how it's derived.
Thanks to all.

Some people care about that. Others do not.

 

[Taxing Matters]

OK I get it now.
I'm not sure what purpose it has in even mentioning it, but now I at least I understand how it's derived.
Thanks to all.

The purpose for it is to compare the true tax impact of a particular income tax set up. The tax rate tables do not tell the whole story. State A might appear to impose a higher tax because its tax rate tables are higher than State B, but if State A allows a lot more deductions than State B it may be that State A ends up with a lower effective tax rate on that income than State B, i.e. you actually would pay less tax in State A despite the higher tax rate tables. So if you were trying to decide in what state you wanted to live and wanted to go to the one with the lower tax burden, you'd want to know what the effective tax rates would be on your income.

 

[Jay968]

Gotcha, thanks!