I have a client who is retired and has Social Security. I go through and do his taxes and he ends up with 50% of his SS being taxed. Besides SS his other income (pensions, IRA) is $41,645. His previous tax preparer (who has done his taxes for 20 years) only taxes his SS at 12%, which is his tax rate. I am not familiar with that method. Is that correct?
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Originally posted by rwm221 View Post
Those are two different things, and yes, both could likely be correct.
The 50% is the percentage of the Social Security that is SUBJECT to tax. The 12% is the tax rate.
So if the taxpayer received $20,000 of Social Security, only $10,000 (50%) would be subject to tax, and that $10,000 would be taxed at the 12% tax rate.
Does that clarify it? Or am I misunderstanding what you are asking? -
Unless there was lower income AND a coincidence to give 12%, "that method" is absurd.
Any tax software worth a hoot will first run the Soc Sec numbers through the appropriate worksheet.Comment
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Their income was 41,645 - Their SS was 36,758. The software calculated 19,603 of their SS as taxable. If I use the 12% method only 4410 would be taxable. Which is correct and how would I explain it to my client.Comment
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There is no such thing as the "12% method". Did you actually see a prior year return, or are you going on them telling you it was 12% taxable? I learned a long time ago to look at the documents instead of what people say as they are often confused.Originally posted by rwm221 View Post
As far as how to explain it to clients, your software probably has a taxability worksheet that shows the calculation that you can print out. Even better print out a blank one and use a pencil and calculator. You are more likely to understand and remember how the calculation works doing that than relying on software.Comment
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I did actually see his previous return and his SS that was taxable was only 2300. He called his previous tax preparer who directed him to this article on how he figures what portion of his SS itaxable
cbsnews.com/news/do-you-pay-taxes-on-social-security-benefits. Not sure
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That would mean that in 2021 his other income was around 20K? If he more than doubled his other income of course a lot more SS is going to be taxable.Originally posted by rwm221 View Post
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BTW, that article is horrendous. Very misleading.
Follow the worksheet in Pub 915.
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Oh my gosh! Please read IRS publications before you rely on CBS. Go to the IRC to make your case to your client or to that other preparer.Comment
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Years ago I built a spreadsheet to calculate SS taxability and the effect on tax. Hardly a day goes by that I don't use it for planning purposes.Originally posted by Lion View PostComment
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How long have you been preparing tax returns for compensation? I’m sorry but you seem to have no concept about SS taxation. Review IRC 86 and do some calculations on paper to help you get a grip on this.Originally posted by rwm221 View PostComment
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When you rely on CBS News for tax guidance, especially as a "professional," there is a real problem at hand.
Aside from any understanding of fundamental tax rules, all tax software will accurately calculate the proper taxable amount of Soc Sec benefits, to include the impact of any tax-free muni income. No spreadsheet needed. I assume the applicable worksheet lurks in various IRS publications.
As a previous poster noted, it might not be a bad idea to find the worksheet, grab a pencil and a calculator, and determine the taxable amount on your own. Consider it a learning experience?
The maximum amount that is subject to federal taxation and the applicable tax rate are totally separate issues.
I also concur with NY EA's comments.Comment
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[QUOTE=FEDUKE404;n309628. No spreadsheet needed. [/QUOTE]
I didn't say it was needed. I do find it very helpful when doing long term planning. If someone is currently in the 12% bracket I discourage them from putting money into a Traditional if when they take it out they will be paying an effective rate of 22.2% if taking more out makes more SS taxable.
For me, the compliance part of preparing returns is rather boring. The fun part comes when I can project into the future to have them structure transactions to minimize long term tax obligations.
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Did not intend to step on any toes.Originally posted by kathyc2 View Post
Planning ahead is indeed a good part of my services. Everything from dealing with accurate estimated tax payments to recharacterizing funds into Roth IRAs or (very rarely) having to deal with Traditional IRA funding.
But there is much more in play with a schizophrenic stock market, arrivals of RMDs, and having to contend with Miss IRMAA and NIIT.
The vast majority of my clients who receive Soc Sec are already at the 85% taxable level, so at least for me there is not a lot of "calculating" I have do deal with re taxation of any Soc Sec benefits.Comment
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No worries. I don't get offended that easily.Originally posted by FEDUKE404 View Post
Around here pensions other than teachers and other gov't employees rarely amount to much. I have very few that are at 85%. A single person with 30K SS would need around 43K additional income to hit the 85%. For the 43K to be an RMD would mean over 1M in IRA type accounts.
With the 8.7% COLA in 2023 many who are under the 85%, will have a higher dollar amount taxable but less of a percentage taxable.Comment
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