The Phantom Couple’s Tax Rate Zone

by Joe on October 3, 2012

Last week’s Phantom Tax Zone Article was well received. It showed how the phasing in of Social Security taxation can create a phantom 46.25% for a single retiree with $34K in pension income or 401(k) / Traditional IRA withdrawals. Crazy stuff, but knowledge is power, and some planning is in order. Today, let’s look at the same phenomenon as it impacts a married couple filing a joint return. For this chart, we assume a Social Security benefit of $40K combined, as compared to the $20K benefit used for the single. They have their standard deduction of $11,600 and two exemptions of $3,700 each. (Please note, this chart was created using 2011 tax rates, its shape and impact are similar for 2012.) Then, to create the chart, I simply enter a $1000 Traditional IRA (or 401(k)) withdrawal, and note the tax, increasing $1000 each time, and observing how much the tax due rises for that $1000 increased withdrawal. While the couple is still subject to the standard marginal rates, 10%, 15%, 25%, you see here that impact as social security is pulled in to the equation.

Let’s recap the rules for Social Security Taxation;

  • file a federal tax return as an “individual” and your combined income*is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return, and you and your spouse have a combined income*that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.

*Note – Your adjusted gross income+ Nontaxable interest+ ½ of your Social Security benefits= Your “combined income

You can see from these rules that there’s a huge marriage penalty in that the phase in for marrieds is not twice that of singles. The result is that while at first glance you might observe that the shape of the curve for the single’s taxation looks far worse, especially with that 46.25% rate applying to a full $5,000 of income, yet the couple’s rate only hits 45% for $1,000. The thing to look at closely is the income levels across the chart’s bottom. For the couple, the 27.75% rate you see is the result of the 85% taxation of their social security while they are still in the 15% bracket. While they would otherwise expect to see their 15% last until $69,000 of taxable income, they actually exceed the 15% bracket once they pass $19,000 in gross (not net of deductions/exemptions) income. Ouch.

In an upcoming article, some ideas on how to mitigate the impact of this tax.


{ 6 comments… read them below or add one }

Dave October 3, 2012 at 9:05 am

Joe, what are the SS benefits and other income you used for this chart?


joe October 3, 2012 at 9:30 am

The wrong revision loaded. I wrote this over a few writing sessions, and a draft copy printed. It’s fixed now.

The original article as published was incomplete.

Much thanks, Dave.


Harry October 4, 2012 at 12:27 am

Joe – I think it’s more helpful to show the effective tax rate as a function of income including Social Security. Even at seemingly high marginal rates, the effective rate is still very low. At the tail end of your chart we are looking at a retired couple with $100k income. That’s pretty high considering the average family with two people working full time doesn’t have that kind of income.


joe October 4, 2012 at 7:39 am

The income for this chart is $40K of Social Security benefit, which is about what two individuals, each making $50K, would receive. I then add taxable income and show the results. Since they can withdraw $17K and still pay zero tax, I start the chart at $10K just to clearly show the zero starting point. I then continue the chart right until all their benefit is taxed, to show them returning to a normal 25% rate.

If by “effective tax rate” you mean their average rate, (total tax)/(total income), that might be interesting, but not what I try to illustrate here. Absent Social Security, a couple would not hit 25% until $69K (again, I was using 2011 software), plus $18,700 in std deduction and exemptions for $87,700 total. Yet, the chart shows their 15% bracket to end pretty fast, $25K, and it’s gone.

Let me know if this helps explain my reasoning.


Ron September 24, 2017 at 10:30 am

Why the spike at 57K? Also, except for that one spike, the marginal tax rate seems to flatline at 27.5% at $30K, and then drop down to 25% after the spike. What am I missing?


Joe September 24, 2017 at 9:23 pm

It’s when your “natural” rate hits 25% (from 15% prior) and also draws in SS income for taxation. You drop back to 25% once 85% of SS benefit is taxed.
I’d highly suggest you get tax software, on your computer or online, and tinker with the number to see how this works.


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