Tax Question [Social Security income and fund distributions]
by rec7 » Fri Jun 14, 2013 4:52 pm
If a person is 65 years old and has 16k income from Social Security how much can they have in Vanguard Target Retirement 2015 Fund (VTXVX) before they would pay taxes? This is all taxable money. Social Security is there only income.
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Re: Tax Question
by damjam » Fri Jun 14, 2013 6:13 pmrec7 wrote:If a person is 65 years old and has 16k income from Social Security how much can they have in Vanguard Target Retirement 2015 Fund (VTXVX) before they would pay taxes? This is all taxable money. Social Security is there only income.
Not a straight forward question to answer since we don't know how much money in dividends and capital gains will be generated from the fund.
Just fooling around with Taxcaster. I found you could have a little more than $33,500 total of qualified dividends and long-term capital gains before any tax was due. However, Vanguard Taraget Retirement 2015 does distribute short-term capital gains (I also don't know what percentage of dividends are "qualified") so your total income from investments would have to be something less than $33,500 to avoid triggering taxes.
If I make the assumption that the distributions from the fund will be around 6% and all distributions are tax favored, then a single person aged 65 or older could have somewhat north of $550,000 in that fund and not have to pay any tax.
Your best bet would be to use last years tax software to run some simulations, realizing of course that the standard deduction and personal exemption will be raised for 2013. The standard deduction for a single person 65 or older is $7,600 for 2013 and the personal exemption is $3,900 for 2013. So you will have $300 more reduction in taxable income in 2013 than in 2012. Not a huge difference, so simulations run with last years parameters should be sufficient.
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Re: Tax Question
by rec7 » Fri Jun 14, 2013 7:31 pm
The fund is about 50/50 so I am guessing only half the dividends will be qualified dividends. The other half would be bond interest. Going by the yield I was thinking a person could have close to one million in the fund in this case with no taxes but I am not sure. I think the distributions will be around 2% since the capital gains are small. It is the non qualified dividends that cause the taxes fast because at age 65 a person can only make about 13k before taxes kick in on non qualified dividends. Since the person has no other income other than SS.
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Re: Tax Question
by BruceM » Fri Jun 14, 2013 8:21 pmrec7 wrote:If a person is 65 years old and has 16k income from Social Security how much can they have in Vanguard Target Retirement 2015 Fund (VTXVX) before they would pay taxes? This is all taxable money. Social Security is there only income.
Provisional Income (PI), used to calculate how much of one's SS benefit will be includable as ordinary income, = 1/2 SS + Modified AGI + any mini bond interest. For a single person, if this exceeds $25,000 but is less than $34,000, then the lesser of 1/2 of SS or 1/2 the amount the PI exceeds $25,000 will be includable as ordinary income.
So with an AGI (I assume there are no above-the-line deductions and no muni bond interest) of X and 1/2 SS = $8,000, the above formula would mean X= 25,000 - 8,000 = 17,000 from VTXVX. For 2012, VTXVX distributed $.316/share of 'dividends', which I assume would all be taxable (whether they are qualifying or made up of capital gains would not matter). So 17,000/.316 = 53,800 (rounded) shares. At today's price of about $14.09, that would represent about $758,000 of VTXVX.
Bet it ain't a problem.
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Re: Tax Question [Social Security income and fund distributi
by grabiner » Fri Jun 14, 2013 8:47 pmrec7 wrote:If a person is 65 years old and has 16k income from Social Security how much can they have in Vanguard Target Retirement 2015 Fund (VTXVX) before they would pay taxes? This is all taxable money. Social Security is there only income.
Wiki article link: Taxation of Social Security benefits
I will estimate a 2.5% distribution yield and 50% qualified dividends from the fund; these are close to last year's numbers.
The standard deduction and personal exemption for a single taxpayer over 65 is $11,500.
If you have $16,000 in Social Security, then none of your SS is taxable until you have $17,000 of other income (other income plus half of SS must be $25,000). After that, until you have $26,000 of other income, every dollar of income makes 50 cents of SS taxable.
Thus, if you have $20,000 of income from the Vanguard fund, $1500 of your SS is taxable. Your total income is $21,500, but $10,000 of that is qualified dividends, which are taxed at 0% in your tax bracket. The remaining $11,500 is eliminated by the standard deduction and personal exemption.
As long as you don't withdraw anything from the fund, you can have $800,000 in the fund and have only $20,000 in income from it. If you withdraw from the fund, any capital gains are taxable; while you pay 0% tax on those capital gains, they do count towards making SS taxable.
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Re: Tax Question
by damjam » Fri Jun 14, 2013 9:07 pmrec7 wrote:The fund is about 50/50 so I am guessing only half the dividends will be qualified dividends. The other half would be bond interest. Going by the yield I was thinking a person could have close to one million in the fund in this case with no taxes but I am not sure. I think the distributions will be around 2% since the capital gains are small. It is the non qualified dividends that cause the taxes fast because at age 65 a person can only make about 13k before taxes kick in on non qualified dividends. Since the person has no other income other than SS.
It is the non-qualified dividends that trigger the tax. As a matter of fact the person can only make $11,500 in non-qualified income 2013 before taxes kick in. (That would equal the standard deduction + personal exemption)
Also for this person once total income of any kind (including tax exempt income) is greater than $17,000 then SS starts getting put into the mix.
BruceM wrote:So with an AGI (I assume there are no above-the-line deductions and no muni bond interest) of X and 1/2 SS = $8,000, the above formula would mean X= 25,000 - 8,000 = 17,000 from VTXVX. For 2012, VTXVX distributed $.316/share of 'dividends', which I assume would all be taxable (whether they are qualifying or made up of capital gains would not matter). So 17,000/.316 = 53,800 (rounded) shares. At today's price of about $14.09, that would represent about $758,000 of VTXVX.
If we assume none of the distributions is qualified then taxes begin to kick in at $11,500 not $17,000. So if the goal is no taxes then we need to assume 11,500/.316 = 36,392 (rounded) shares. Which represents $512,763 of VTXVX.
If some of the distribution is qualified then it is easier to run a simulation such as Taxcaster because the interplay of SS and qualified dividends.
Grabiner has hit the nail on the head.
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Re: Tax Question [Social Security income and fund distributi
by rec7 » Fri Jun 14, 2013 9:25 pm
This one was over my head. Thanks everybody great work.
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