Normal Taxation while Employed
The amount of income you earn up to your deductions and exemptions is tax free.
The amount over that is then taxed at the Federal Tax Brackets. The width of each
bracket is always the same.
Income plus Social Security Benefits
Your Social Security benefits are tax deferred, basically they are given to you
tax free and then slowly taxed at the same time, in parallel, as your income exceeds
certain predefined levels.
Your benefits are then taxed until 85% of your benefit have been taxed. The width
of each bracket changes based on when your 50% and 85% taxation levels start and
Income plus Gains and Dividends
Long Term Capital Gains and Qualified Dividends are also tax deferred, they are
tax free until they are pushed into the 25% tax bracket by your other income.
Prior to Social Security, $100 of income at the top end of the 15% bracket would
make $100 of your gains taxable also at a reduced 15% bracket, in parallel.
Parallel Taxation of Parallel Taxation!
When deferred dividends are combined with deferred SS benefits $100 of income
causes $85 of your benefits to become taxable and this combined taxable income
increase of $185 caused $185 of your dividends to also become taxable.
This results in a total taxable income increase of $370 which at the 15% Federal
bracket is $55.50 in additional tax due because of an additional $100 of additional
income. This is basically parallel taxation of parallel taxation!