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Open Social Security Update: Child Benefits, Retroactive Applications

A few days ago I rolled out an update for the Open Social Security calculator that includes a few new pieces of functionality:

  • Child benefits (now for married couples as well as single people),
  • Child-in-care spousal benefits, and
  • Retroactive applications.

This update took about three months of work, mostly because the “combined family maximum” rules and child-in-care spousal benefit rules are pretty complicated. (And the calculator has to be prepared to deal with any combination of uncommon complicating factors.)

If you are using the child benefit-related functionality, please be aware that the calculator will take somewhat longer to run. When minor children or disabled children are in the picture, your computer has to do a lot more math in each month of the simulations.

With regard to child-in-care spousal benefits, I expect to do a more thorough writeup of how they work in the not-so-distant future. But for now, a simplified explanation is that they’re like regular spousal benefits, with a few major differences:

  • You don’t have to be age 62 to receive them,
  • There is no reduction for entitlement prior to full retirement age, and
  • Filing for (and entitlement to) child-in-care spousal benefits does not trigger a deemed filing for retirement benefits.

As far as retroactive applications, the calculator now recommends them when a person is eligible for such and when such would be helpful. A simplified explanation of the retroactive application rules is that a person beyond FRA can backdate their application up to 6 months (or 12 months in some disability-related cases) — but no earlier than the month in which they reached full retirement age.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: How Important is Sequence of Returns Risk?

I recently encountered an article from the Early Retirement Now blog, discussing just how much sequence of returns risk matters in retirement. The article isn’t new (May 2017). And it’s pretty math-heavy. But it’s worth a read.

One noteworthy finding: over a 30-year retirement, only 31% of the variation in safe withdrawal rates is explained by the average return earned by the portfolio over that 30-year period. 64%, however, is explained by the sequence of those returns.

If the math intimidates you, I would still encourage you to at least click over to the article and find the second table — the one with a column of green-highlighted cells. What these cells are showing you is how important each 5-year window of returns is in determining safe withdrawal rate.

It’s quite striking how much less important each 5-year window of returns is, relative to the prior 5-year window. For example, years 0-5 explain more than 28% of the variation in safe withdrawal rate. Years 5-10 explain another 19%. Years 10-15 explain another 13%. And so on.

Key takeaway being: the returns that your portfolio earns in the first several years of retirement matter a lot.

Other Recommended Reading

Thanks for reading, and Happy New Year!

How Do Tax Inflation-Adjustments Work?

A reader writes in, asking:

“Could you please discuss how the inflation adjustments in the tax code work? I know that they now rely on chained CPI rather than regular CPI, but when I try the math on my own I do not get the same results as the official numbers.”

The general approach is to:

  1. Multiply the dollar amount specified in the relevant Code provision by a percentage (which is essentially the inflation that has occurred in the years since the provision went into effect), then
  2. Round to a multiple of a given dollar amount.

As the reader noted in his email, such calculations now use the Chained Consumer Price Index For All Urban Consumers (C-CPI-U) rather than the regular CPI-U, with the result generally being smaller inflation adjustments than we would have seen otherwise.

Let’s look at an example.

For the tax brackets that apply from 2018-2025, the inflation adjustment for any year beginning in 2019 is the percentage by which:

  • the C-CPI-U for the preceding calendar year, exceeds
  • the C-CPI-U for calendar year 2017.

Of note: when we refer to the C-CPI-U “for a given year,” we’re talking about the average such figure for the 12-month period ending in August of that year. For example, the C-CPI-U for 2018 would be the average of the C-CPI-U figures from September 2017-August 2018.

So if we want to calculate the inflation adjusted tax brackets for 2019, we first find the average C-CPI-U from September 2016 – August 2017. That figure was 138.237. And the average Chained CPI-U for September 2017 – August 2018 was 141.078. Then we divide 141.078 by 138.237 to get 1.02055. This tells us that our tax bracket thresholds will each be increased by 2.055%, before rounding.

Rounding

After the above math is performed, the applicable figure is then rounded. The rounding rules vary from one provision to another. For instance, IRA contribution limits are rounded down to the next lower multiple of $500, whereas the income limits for Roth IRA contributions are rounded (up or down) to the nearest multiple of $1,000.

With some tax provisions, it’s common for the rounding rules to prevent us from seeing any change in many years. For instance, the IRA contribution limit was stuck at $5,500 from 2013-2018. Even though we had inflation over that period, it wasn’t enough to push the contribution limit over the next $500 threshold — until this year. (The limit will be $6,000 for 2019.)

Some Things Get No Inflation Adjustments

Finally, it’s worth noting that there are also an assortment of figures that don’t get an inflation adjustment at all (e.g., catch-up contribution limit for IRAs, or the thresholds for Social Security taxability).

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Investing Blog Roundup: Checking in on Oregon’s Auto-IRA

In July 2017 Oregon began rolling out their OregonSaves program — essentially an auto-enrollment Roth IRA for employees who are not covered by employer-sponsored retirement plans.

The plan has a 5% default contribution rate, which by default increases by 1% per year until it reaches 10%. Employees can choose to change that rate or opt out of the plan entirely. The first $1,000 of contributions is essentially kept in cash, while further contributions go into a target-date fund.

Anek Belbase and Geoffrey Sanzenbacher at the Center for Retirement Research at Boston College recently took a look at how the plan is doing (e.g., how many potential participants actually participated, how many decided to increase or decrease the default contribute rate, etc.). It’s interesting reading about what might end up being a prototype for similar programs in other states.

Other Recommended Reading

Thanks for reading!

2019 Tax Brackets, Standard Deduction, and Other Changes

I had been waiting to do this article, because I didn’t want to have to rewrite it if Republicans decided to pass another significant piece of tax legislation while they still have control of both chambers of Congress. But it’s now pretty clear that that won’t be happening.

While 2018 was a major overhaul relative to 2017, the differences between 2019 and 2018 will be pretty modest. The overwhelming majority of the changes are simply inflation adjustments from 2018’s figures. One point of interest is that this is the first year for which the inflation adjustments are based on chained CPI-U rather than regular CPI-U.

If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements: Rev. Proc. 2018-57 (which contains most inflation adjustment figures) and Notice 2018-83 (for figures relating to retirement accounts).

Single 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$9,700 10%
$9,700-$39,475 12%
$39,475-$84,200 22%
$84,200-$160,725 24%
$160,725-$204,100 32%
$204,100-$510,300 35%
$510,300+ 37%

 

Married Filing Jointly 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$19,400 10%
$19,400-$78,950 12%
$78,950-$168,400 22%
$168,400-$321,450 24%
$321,450-$408,200 32%
$408,200-$612,350 35%
$612,350+ 37%

 

Head of Household 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$13,850 10%
$13,850-$52,850 12%
$52,850-$84,200 22%
$84,200-$160,700 24%
$160,700-$204,100 32%
$204,100-$510,300 35%
$510,300+ 37%

 

Married Filing Separately 2019 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$9,700 10%
$9,700-$39,475 12%
$39,475-$84,200 22%
$84,200-$160,725 24%
$160,725-$204,100 32%
$204,100-$306,175 35%
$306,175+ 37%

 

Standard Deduction Amounts

The 2019 standard deduction amounts are as follows:

  • Single or married filing separately: $12,200
  • Married filing jointly: $24,400
  • Head of household: $18,350

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts has increased to $6,000.

The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans has increased to $19,000.

The catch-up contribution limit for 401(k) and other similar plans is unchanged, at $6,000.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $56,000.

Child Tax Credit

The child tax credit ($2,000 per child) and the related phaseout threshold ($200,000 of modified adjusted gross income, $400,000 if married filing jointly) do not get inflation adjustments. The portion of the credit that can be refundable (up to $1,400 per child) does receive inflation adjustments, but it is still $1,400 for 2019.

Capital Gains and Qualified Dividends

For 2019, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $78,750 of taxable income if married filing jointly, $52,750 if head of household, or $39,375 if filing as single or married filing separately.
  • 15% tax rate if they fall above the 0% threshold but below $488,850 if married filing jointly, $461,700 if head of household, $434,550 if single, or $244,425 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $71,700 for single people and people filing as head of household,
  • $111,700 for married people filing jointly, and
  • $55,850 for married people filing separately.

Estate Tax

The estate tax exclusion is increased to $11.4 million per decedent.

Individual Mandate

Beginning in 2019, the individual mandate (i.e., the penalty for not having health insurance) has disappeared.

Alimony Payments

For divorces that become finalized in 2019 or later, alimony payments are no longer deductible to the payor, nor includable as income to the payee.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2019, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $321,400 for married taxpayers filing jointly, $160,725 for married taxpayers filing separately, and $160,700 for single taxpayers or people filing as head of household.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Investing Blog Roundup: Sitting In on a Steak Dinner Annuity Pitch

Salespeople of financial products (especially but not exclusively insurance) are known for hosting free meals as a way to attract prospective clients. Ron Lieber of The New York Times recently accompanied his aunt to such a meal and wrote about the experience. If you’ve been curious about accepting such an invitation before, hopefully Lieber’s article will satisfy your curiosity — without you having to actually sit through the sales pitch.

Other Recommended Reading

Thanks for reading!

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My new Social Security calculator (beta): Open Social Security