I had commented on a post earlier this week that a person receiving SS benefits can run into a net tax of 27.75% taking into account that the additional income will make more of SS taxable.

This is true for people in the 15% marginal rate. I was thinking that for someone to be in a higher than 15% marginal rate, they would already be at the 85% max SS taxability. This turns out to not be true.

Example: single person age 65 or older, SS benefits 22K and pension/IRA of 35K. They would have 14,700 of SS benefits taxable, and after std deduction and personal exemption they would have taxable income of 37,800 which is just a tad over where 25% rate starts. Total tax is 5,221.

Now if the pension/IRA income is 36K, taxable SS is 15,550 (850 more), taxable income is 39,650 and tax is 5,684. The 1K additional income results in $463 additional tax, or a 46.25% rate. This is verified by 25% + 21.25% (25% x .85).

This net rate would hold true until pension/IRA income is over 40K. At that point the 85% max taxability takes effect and additional income would result in the regular marginal rate of 25%.

For reference 1M in IRA's would have a 36.5K RMD at age 70.5.

The numbers are crazy, but something people projecting tax for clients in retirement years should be aware of. Something else to keep in mind is that is future years this will become more common due the fact that the amounts used to determine SS taxability have never been indexed for inflation.