The graph at the top of this page represents the Marginal Tax Brackets faced
by a retired individual, over 65, with a $30,000 annual Social Security benefit,
and $3,000 in Long Term Capital Gains. This graph could be divided into 4 logical
The individual is paying ZERO taxes on about their first
$44,300$44,567 of gross
income because Social Security benefits and Long Term Gains are "tax
Over the next $20,100 their marginal tax rates are similar to the 10%, 12%,
and 22% standard tax brackets that we are all used to before retirement.
Their actual “marginal tax rates” created by what we call “Parallel
Taxation” will be 15%, 18.5%, and 22.2%.
Then comes the problem that we will discuss in great detail on this website,
the “Tax Hump”. Over the next $9,100, from about $64,500 to $73,600 of
gross income, they will pay marginal tax rates of 49.95% and 40.7%. Their
overall taxes paid during this income range will be $3,841 for an average tax
rate of 42.21%, more than 5% higher than the maximum Federal bracket of 37%
paid by millionaires and billionaires!
After their gross income reaches about $73,700, their “Parallel
Taxation” ends and their tax rates will return back to “normal”, 22%,
Don’t let the Tax Hump scare you. Its location and size is based
on the amount of ZERO tax income you can create. So, do what you can to make it as
large and scary as possible, just be aware that it is there and also do what you can
to make sure that your retirement income sources will keep you in sections A and B
while you enjoy enjoy the retirement lifestyle that you have been dreaming about.
I am not a qualified Investment Advisor or Tax Accountant or CPA. I am totally
unqualified to give you any of this advice. So, use the information in this
presentation at your own risk! The problem here is that no one else will give
you this information.
If you ask your broker or investment advisor about the marginal tax rates you pay
while receiving Social Security, they will tell you to talk to your tax accountant.
They can literally lose their brokers license if they give you tax advice!
Your tax accountant at H&R Block or other storefront tax services rarely have any
idea which are the best investment strategies to use or which stocks, bonds, or funds
to invest in.
A CPA can give you this advice, but let's be honest, is it worth their time and
effort to help you save maybe 1, 2 or 3 thousand dollars a year? How much are you
willing to pay for the time necessary to provide that service? I talked to the
investment guy at my bank and that is exactly what he told me.
A quick overview!
July 22, 2018 The Bureau of Labor Statistics says that the average household led
by a retiree, over 65, makes $48,000 annually before taxes. The highest Federal
Tax Bracket for someone making over $500,000 is 37%.
If you are retired and single with a gross income of $46,200 or married
with a gross income of $86,700, your “Marginal Tax Rate” as your income and your
Social Security Benefits are being taxed at the same time could be as high as 40.7%
and if you also have Long Term Capital Gains from your investments that marginal
rate could be 49.95%.
These marginal rates are real. The remainder of this article and the accompanying
Excel spreadsheet will help you to find out if your personal income sources during
retirement will expose you to these extreme rates and help you find ways around
them if possible.
This graph illustrates the situation perfectly. The green line in this graph starts
at a significantly higher gross income level than the red line. You are initially
saving a considerable amount of tax dollars because your Social Security benefits
and Long Term Gains are “tax delayed”. They are not “tax free”, and as your other
income increases the government forces you to return most of those tax savings. It
is not difficult to see the “Tax Hump” that occurs while the IRS starts taxing your
Long Term Gains and slowly makes 85% of your Social Security benefits taxable income.
The tiny gaps on the remainder of the graph
show where 15% of your Social Security benefits continue to be tax free.
Social Security started in 1935 and the benefits were expressly
excluded from federal income taxation under Treasury Department
Tax Rulings. This all changed with the 1983 amendments to the
Social Security Act. A typically complex government formula was
created to define the basis for the taxability of your benefits.
The “basis” for taxation is one half of your Social Security
benefits plus your other taxable income. This is the Government,
so other taxable income includes “tax delayed” Long Term Capital
Gains, municipal bond interest, and a few other things. Income
from a Roth account is NOT included!
Beginning in 1983 if your basis income exceeded $25,000 for an
individual or $32,000 for a married couple filing jointly up to
50% of your SS benefit was subject to your marginal tax rate.
So for the first time in history SS benefits became subject to
The 1993 Omnibus Budget Reconciliation Act (the OBRA) contained
a provision that altered this rule and created a second threshold
that would subject up to 85% of your SS benefit to taxation if
your basis income exceeds $34,000 for an individual or $44,000
for a married couple filing jointly.
One thing to note is that these thresholds are not indexed for
inflation. They are still the same amounts as when they started
in 1983 and 1993. This has the effect of capturing more and more
people within the taxation net each year. In 1983 less than 10%
of all benefit recipients were subjected to taxes on benefits,
but currently that number is over 30% and will continue to rise.
Marginal Tax Brackets
Taxable at 50%
Taxable at 85%
LTCGs at 15%
As each additional dollar of income causes
50 cents or 85 cents of your Social Security Benefits to also become taxable
income, your taxable income increases by $1.50 or $1.85, not just one dollar,
which creates the following marginal tax brackets.
Let's zoom in on the problem!
Everyone has their own "Personal Tax Hump". The size and shape of your personal
hump will depend on the size of your personal Social Security Benefit level and your
other sources of retirement income.
This interactive image is based on the 2019 tax brackets!
The red “Working” line is relatively constant in each image with the
exception of the effect of Long Term Capital Gains. Note how the blue line
changes as you click the various radio buttons in the form above the image. Also
take note of how the size and shape of the tax “Save” line changes in
conjunction with the changes to the blue “Retired” Marginal Tax Rate line.
The income from your Social Security benefit is "Tax Delayed", you initially get it
tax free, then, as your income increases your benefits slowly become taxable income.
The solid red line in each of these examples is a constant which represents your
normal tax brackets over age 65 without any Social Security income. The solid blue
lines are created by the interaction of the dotted red Federal tax bracket lines and
the dotted green taxability level of your Social Security benefit lines in each example.
The first blue line starts at exactly $33,600, $20,000 from Social
Security plus $12,000 standard deduction plus $1,600 over age 65. The first blue line starts at exactly $33,850, $20,000 from Social
Security plus $12,200 standard deduction plus $1,650 over age 65.
Since the dotted green line, the taxation of your SSB, has not
started, the initial marginal tax bracket of the $20,000 example is 10%.
As your benefit level increases, the additional delayed income pushes the start of
your Federal taxation beyond the start of the taxation of your Social Security
benefits. This causes your marginal brackets to start at 15%. As you can see in the
3 examples, the blue marginal tax bracket lines all follow different patterns. This
is why you will need your own personal spreadsheet to give you a picture of your
own personal marginal tax brackets.
The value of this presentation depends on your filing status, the size of your
personal Social Security benefits and the cost of the lifestyle you want to live
After 2018 Taxes
Your Personal Tax Hump
After 2018 Taxes
Your Personal Tax Hump
After 2019 Taxes
Your Personal Tax Hump
After 2019 Taxes
Your Personal Tax Hump
If you are among the 45% of all Americans who start their Social Security Benefits
at the age of 62, and your SSB is so low that the Width of Your
Personal Tax Hump is extremely narrow or does not even exist, then this site will
be of little or no value to you. Every $100 you can eliminate from your personal
hump will only save you $18.70 in Federal taxes. If your personal tax hump is only
$200 wide, is it worth the effort necessary to save less than $40 a year?
A special note here! Yes it is true that higher Social Security benefits create
larger tax humps, but they also give you the opportunity for more Tax Free
income. Also take note that the Start of Your Personal Tax Hump is the
start of your 22% Federal tax bracket. The total Federal taxes due at the Start
of Your Personal Tax Hump if you are single is only
$4,453.50 and only $8,907$4,543 and only $9,086
if you are married.
Could you live comfortably on your After Tax, Pre-Hump, income level
while paying a very small Federal Tax Rate? With proper pre-planning for
your retirement, you could also supplement this income level with additional tax
free cash from sources like a Roth account!
If your desired lifestyle puts your taxable gross income well above the End
of Your Personal Tax Hump, the amount of effort that will be required to
eliminate your extreme Marginal Tax Rates might be overwhelming. But, if the
expected Width could be large and you can live comfortably on a gross
taxable income near the Start of Your Personal Tax Hump, maybe enhanced
with some tax free income from a Roth or other sources, the information in this site
could be very valuable to you. Again, as you should do with all financial advice,
double check this information with other sources.
Do not rely on these estimates, contact Social Security to get your actual numbers! These
are rough estimates of your annual benefits based on your average inflation adjusted income
over the top 35 years of employment based on Social Security’s on-line social estimation
In 2018 your Social Security benefit level will be 90% of the first
$10,740, plus 32% of the next $54,024, plus 15%In 2019 your Social Security benefit level will be 90% of the first
$11,112, plus 32% of the next $55,884, plus 15%
of your remaining average inflation adjusted income.
The top blue two lines shows the percentage of individuals who start their benefits
at various ages. The top line indicates which column to use based on your retirement age if
you were born before 1954. The bottom two lines show the same information if you were born
We are providing an Excel spreadsheet that you can use to determine if you have a
marginal Tax Hump, how large your personal hump is, and help you find ways to avoid it.
The spreadsheet is on our personal google drive. Our spreadsheet is less that 1 MB and
according to google every file which is less than 100 MB is scanned for viruses. This
is the best we can do to make sure that what we are giving you is virus free, but
download and use it at your own risk!
Our Social Security benefits are "tax delayed". We get them tax free, then as our
income increases, the benefits slowly become taxable until 85% of our benefits have
been taxed. The "Marriage Penalty" is that a married couple's benefits are taxed at
lower income levels then single individuals!
There are a lot of web conversations that say if you start your Social Security
at age 66 vs age 62, you will not Break Even until age 77 or 78. Based on the way
they do their calculations these number are correct and real, but they do
not represent reality! Their calculation are based on the Gross amount of
Social Security benefit that you are getting from the Government.
The reality is that we do not live on our gross incomes, we live on our net, after
tax, incomes. Getting less “tax delayed” income means that you will need more “taxable”
income to reach the same after tax desired standard of living. When you redo the
Break Even calculation using net income, the Social Security benefit you are getting
from the Government minus the Federal Taxes you are giving back to the
Government, your Break Even age drops to 73, and if the tax hump is involved, even
as low as 71.
Roth contributions and conversions are a good way to avoid your Tax Hump if you do
them early enough. There is a 10% penalty if your withdraw money from a Roth within
the first 5 years of opening the account.
As a survivor, you probably have to plan for retirement twice, once for your
survivor benefits and again for your own. It is far easier for a surviving spouse to
wait for a much higher final Social Security benefit. This will make it easier for
them to reach
a retirement “Sweet Spot” where their after
Federal tax income levels could reach $50,000 to $65,000 or more with overall Federal
Tax Rates of considerably less than 10%.
This Social Security form shows you how your full retirement age benefits
are calculated. Take special note of the “Index factors” that are used to
adjust each year’s earnings for inflation before choosing the 35 years with
the highest amounts to calculate your benefit level.