What you need to know about retirement
The marginal tax rates that we all face during retirement can be extreme and they
are not well published. Federal tax “Brackets” are basically the same for all of us
while there are literally thousands of different “Marginal” tax rate brackets based
on your personal financial situation.
Use the following form to define your marital status, estimated annual Social
Security benefit, other taxable income, and personal brokerage investments (if you
have any). As you make your changes the chart will interactively change to show you
how each option affects your retirement marginal tax rates.
Each chart was created using my
downloadable spreadsheet to which I added the green taxes saved line.
- The red line indicates the normal tax brackets we are all used to while we are
- The blue line represents the marginal tax rate we pay while receiving
Social Security benefits and we will discuss why it has this shape as we continue
- The chart title indicates your maximum tax savings and your final tax savings
after 85% of your benefits have been taxed.
- The solid green line shows your tax savings as income increases.
- The dotted
green line indicates the income levels where the deferral period ends and the 50%
and 85% taxability happens.
- The dotted red line shows how the standard tax
brackets are moved due to the deferral of your SS benefits.
- Note that the income scale remains constant and is merely doubled for a married
- Note how the blue line moves to the right as your Social Security benefit
- The green line continues to grow as the blue line moves right and the size of the
46.25% bracket increases because we now have more tax savings to give back.
- The large "Tax Hump" starts before the 25% bracket when you include Long Term C
apital Gains or Qualified Dividends because of the way their deferral period
In general, the larger your Social Security benefit, the more deferred tax income,
the more the blue line moves to the right, the higher the green tax savings line gets
and the wider the blue tax rate hump gets because you now have more tax savings to
give back to the IRS.
Married couples pay taxes on their Social Security benefits earlier so the blue line
shifts left, their savings are less so their Tax Hump is smaller, but when the taxes
are given back and the green line levels out at the almost same per capita tax
The LTCG and QD tax hump is the same width but it just starts our higher because the
additional deferred income has move the start of the blue line further to the