The Hump

This website was created to make suggestions on how the government might fix the problems with the current Social Security system, but we all know what chance we have of the government doing something logical that might be good for the country. Re-election is their primary goal. So, since we have to live with the current system, for a while at least, these pages were created to help us avoid one of the biggest problem that some of us will face, retirees paying the highest taxation levels of any American citizen, something we call The Hump.

The Wall

As if the hump's effective tax rate of 46.25% wasn't bad enough;
the wall has an effective federal tax rate over 98% !

OK; if I read that statement somewhere else, I’d never believe it. It would have to be made by someone who just hated the government. So, before you read the content of this page, take a look at our TurboTax TaxCaster example. We will supply you with a link to the TurboTax website so you can fill in the numbers and see for yourself that 98% is actually a low estimate.

The primary difference between the wall and the hump is how earned income is treated during early retirement. Basically, until you reach your normal retirement age, your Social Security benefit is reduced $1 for every $2 you earn over $14,160.

The effective tax rate in the chart below is calculated by comparing your after tax income at $100 increments. When you are on top of the wall, your after federal tax income increases by only $1.41 for every additional $100 you earn at your part time job. When you include state and local taxes you are literally paying the government for the privilege of working!

Married 65K
Single, earning $75,000 pre-retirement, $60,000 after retirement.
Retire early at age 64 with a part time job for extra income.

As is normal with the way the government writes tax laws, you need a PhD in Math to fully understand how it works, but I’m going to try to put this in as simple English as possible.

Line Earned
Income		 SS
Benefit		 85% of
Benefit		 Taxability
Basis		 Taxable
SS		 Taxable
Income		 Taxes
Due		 After
Tax		 -FICA
-Medi		 Effective
Tax Rate
1 $100.00 $0.00 $0.00 $100.00 $85.00 $185.00 $27.7500 $72.2500 $64.6000 35.4000%
2 $100.00 -$50.00 -$42.50 $75.00 $63.75 $163.75 $24.5625 $25.4375 $17.7875 82.2125%
3 $100.00 -$50.00 -$42.50 $75.00 $63.75 $163.75 $40.9375 $9.0625 $1.4125 98.5875%
4 $100.00 -$50.00 -$42.50 $75.00 -$42.50 $57.50 $14.3750 $35.6250 $27.9750 72.0250%

Line 1 represents the situation where your earned income is less than $14,160. It assumes that you are in the 85% surcharge bracket and the 15% tax bracket. Your taxes due are $27.75 on each $100 of earning. When you also include FICA and Medicare, your after tax income is $64.60.

Line 2, your earned income crosses over the $14,160 limit. Your benefit is now reduced by $50 for each $100 you earn. Since this also reduces your taxability basis, your taxes due are also reduced to $24.56. But, since your income was also reduced by $50 your after tax, after FICA and Medicare income is only $17.79.

Line 3 crosses into the 25% federal tax bracket. You've hit the wall! Your taxes due jumps to $40.94, so when you include the reduction in Social Security, FICA and Medicare, your income is only $1.41 for each $100 of additional earnings. As mentioned before, if you include state and local taxes, your total tax rate is over 100% and you are literally paying the government for the privilege of working!

Line 4, you have now scaled the wall; you have reached the maximum taxation of your Social Security Benefit. In fact, since your Benefit is being reduced $50 for each $100 you earn, your maximum taxable social security is also being reduced by $42.50. This greatly reduces your taxes due, but you are still paying the $50 benefit reduction plus FICA and Medicare, so your after tax earning is only $27.98 for each $100 of earnings.