In retirement

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Topic Author
Mr. Digweed
Posts: 131
Joined: Fri Apr 04, 2014 11:22 am

In retirement

Post by Mr. Digweed » Tue Oct 02, 2018 12:32 pm

I'm not doing something right.
I'm 70% bonds, 20% stocks,10% cash/cd's.
My investments generate close to 60 grand a year. Which is taxed (about 4500 annually).
To take social security (when turning 66 in January) would only add to the amount I'm taxed.

How do I reduce my annual federal tax?

livesoft
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Re: In retirement

Post by livesoft » Tue Oct 02, 2018 12:34 pm

Get married. Have kids.

But I would need more information such as what kinds of accounts you have (taxable, tax-deferred, Roth), their values, and what you have in them right now.

I have only equity funds in my taxable accounts and keep my realized long-term capital gains and dividends below the threshold where they would be taxed. Return of capital is tax-free which means I can spend big and still pay no Federal income taxes.
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Watty
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Re: In retirement

Post by Watty » Tue Oct 02, 2018 12:43 pm

Mr. Digweed wrote:
Tue Oct 02, 2018 12:32 pm
My investments generate close to 60 grand a year. Which is taxed (about 4500 annually).
To take social security (when turning 66 in January) would only add to the amount I'm taxed.

How do I reduce my annual federal tax?
There is not a lot of information in your post but a generic answer would be to delay Social Security until you are 70 so that you could spend down your other savings some and also do Roth conversions.

You are only paying an effective tax rate of 7.5% so muni bonds likely do not make sense.

You can also make sure that you have your funds in the most efficient account type.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

hreimers
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Re: In retirement

Post by hreimers » Tue Oct 02, 2018 12:57 pm

You do not state your age but being 70% in bonds sounds a bit scary to me, more than paying taxes. We have been in a historically low interest rate environment for many years but that is now changing. This year has seen rise in interest rates on a couple occasions and the predicted direction is up. I have seen many people do stupid things in order to get a tax break. Years ago businesses buying Hummer's when they were allowed to depreciate the whole thing immediately. And they wonder where their money went. Proper tax considerations are important but having an age appropriate balanced portfolio should come first. I am not a financial guru, just trying to get by. Paying taxes means you are making some money. Many would love to have your problem :)

Dantes
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Re: In retirement

Post by Dantes » Tue Oct 02, 2018 4:40 pm

Your numbers don't add up nicely. I have to assume all the income you mentioned is in after tax accounts. If I make estimates on the returns for bonds, stocks and cash (2%, 3.5%, 1.5%) I can use high school algebra to guess you have something like 2.6 million total and 18,666 of your income from the stock portion. But I can't see how to turn 41,333 interest income and 18,666 qualified dividends into 4.5 K taxes - thats too much tax for that income if married filing jointly , and too little if you are single.

However, if you are married, you are wasting space that could be filled with tax-free qualified dividends.

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celia
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Location: SoCal

Re: In retirement

Post by celia » Tue Oct 02, 2018 5:59 pm

Are you still working? Are you filing as Married or Single?

Taxes are not calculated on just your RMDs or dividends for the year. Everything on the front of the tax return contributes to your tax calculation so we would need to know more about your overall situation and current tax bracket and age 71 tax bracket (after you are taking SS and RMDs and anything else you have at that time)..

Dottie57
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Re: In retirement

Post by Dottie57 » Tue Oct 02, 2018 6:32 pm

When you have income, you pay taxes. As others have stated we need to know more about what type of account the income is being generated from.

TravelforFun
Posts: 1938
Joined: Tue Dec 04, 2012 11:05 pm

Re: In retirement

Post by TravelforFun » Tue Oct 02, 2018 6:56 pm

celia wrote:
Tue Oct 02, 2018 5:59 pm
Are you still working? Are you filing as Married or Single?

Taxes are not calculated on just your RMDs or dividends for the year. Everything on the front of the tax return contributes to your tax calculation so we would need to know more about your overall situation and current tax bracket and age 71 tax bracket (after you are taking SS and RMDs and anything else you have at that time)..
The OP is not facing RMD yet. S/He'll 66 next year.

I'm agreeing there is not enough info to analyze his/her situation.

TravelforFun

Topic Author
Mr. Digweed
Posts: 131
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Re: In retirement

Post by Mr. Digweed » Tue Oct 02, 2018 7:51 pm

Okay. I have adjusted gross income of 66 grand.

As per IRS form 1040 (from 2017)

Married (no kids). Wife 69 and I (65) are not yet collecting social security.

11 grand - Taxable Interest (schedule B)
37 grand - Ordinary dividends (of which 12 grand are Qualified dividends)
14 grand - Pension
7 grand - Supplemental income (schedule E)
-3 grand - Capital loss (schedule D)

66 grand - adjusted gross income
4 grand - tax

How do I reduce my tax?

abner kravitz
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Re: In retirement

Post by abner kravitz » Tue Oct 02, 2018 8:10 pm

Mr. Digweed wrote:
Tue Oct 02, 2018 7:51 pm
Okay. I have adjusted gross income of 66 grand.

As per IRS form 1040 (from 2017)

Married (no kids). Wife 69 and I (65) are not yet collecting social security.

11 grand - Taxable Interest (schedule B)
37 grand - Ordinary dividends (of which 12 grand are Qualified dividends)
14 grand - Pension
7 grand - Supplemental income (schedule E)
-3 grand - Capital loss (schedule D)

66 grand - adjusted gross income
4 grand - tax

How do I reduce my tax?
That's a fairly low percentage of qualified vs total dividends. Mine is over 80%. That is one problem with a 70% bond allocation I guess.
Last edited by abner kravitz on Tue Oct 02, 2018 8:28 pm, edited 1 time in total.

The Wizard
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Location: Reading, MA

Re: In retirement

Post by The Wizard » Tue Oct 02, 2018 8:21 pm

My Federal income tax is quite a bit larger, retired age 68.
Don't hold any bonds or savings account in taxable since those get taxed as ordinary income.
Just hold large cap index funds in taxable account.
That's what I do.

Beyond that, focus on increasing income, not reducing taxes.
Enjoy...
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delamer
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Re: In retirement

Post by delamer » Tue Oct 02, 2018 8:44 pm

Mr. Digweed wrote:
Tue Oct 02, 2018 7:51 pm
Okay. I have adjusted gross income of 66 grand.

As per IRS form 1040 (from 2017)

Married (no kids). Wife 69 and I (65) are not yet collecting social security.

11 grand - Taxable Interest (schedule B)
37 grand - Ordinary dividends (of which 12 grand are Qualified dividends)
14 grand - Pension
7 grand - Supplemental income (schedule E)
-3 grand - Capital loss (schedule D)

66 grand - adjusted gross income
4 grand - tax

How do I reduce my tax?
Reduce your income.

But your goal is wrong.

Your goal should be to maximize your after-tax income, not to reduce your taxes.

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dwickenh
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Location: Illinois

Re: In retirement

Post by dwickenh » Tue Oct 02, 2018 10:05 pm

Mr. Digweed wrote:
Tue Oct 02, 2018 7:51 pm
Okay. I have adjusted gross income of 66 grand.

As per IRS form 1040 (from 2017)

Married (no kids). Wife 69 and I (65) are not yet collecting social security.

11 grand - Taxable Interest (schedule B)
37 grand - Ordinary dividends (of which 12 grand are Qualified dividends)
14 grand - Pension
7 grand - Supplemental income (schedule E)
-3 grand - Capital loss (schedule D)

66 grand - adjusted gross income
4 grand - tax

How do I reduce my tax?
The obvious way would be to invest in Stock funds that have qualified dividends. If your dividends were qualified,

your Federal taxes would just about disappear. You only have 28,000 in ordinary income(after the 3000 capital loss adjustment)

with a 26,600 standard deduction for 2018. Non -qualified dividends are making the difference.
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RickBoglehead
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Re: In retirement

Post by RickBoglehead » Wed Oct 03, 2018 5:53 am

Paying 7.5% tax on $60,000 is great. Any reduction in taxes owed that did not involve a reduction in net income would be great, but perhaps not easily done.
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Admiral
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Re: In retirement

Post by Admiral » Wed Oct 03, 2018 6:16 am

It would be helpful to see your holdings, so we can see what is generating such large dividends (25k). That is a large contributing factor.

But...if you're paying $4k on $66k AGI that does not strike me as excessive tax. That's...um...6%.

Jack FFR1846
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Re: In retirement

Post by Jack FFR1846 » Wed Oct 03, 2018 6:17 am

It's the tail wagging the dog, but to answer your question, invest in tax exempt bonds and/or non-dividend paying stocks. BRK/B is probably the most known non-dividend paying stock out there. I am not saying to do this....it's a strategy to reduce taxes paid.
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livesoft
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Re: In retirement

Post by livesoft » Wed Oct 03, 2018 6:27 am

That's a huge needless tax bill. Don't let anyone tell you that it is normal.

The amounts of interest and dividend income suggest a rather large taxable portfolio as well. The capital loss of $-3,000 hints at a nice taxable portfolio, too. We have no way of knowing if the OP is spending $100,000 or $200,000 or $300,000 or more a year.

I think the OP can rearrange their investments and end up paying virtually no income tax or perhaps the same income tax, but with Roth conversions.

Don't forget that AGI is NOT taxable income. In 2018, an AGI of $66K would get the $24K standard deduction.
Last edited by livesoft on Wed Oct 03, 2018 6:34 am, edited 1 time in total.
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Admiral
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Re: In retirement

Post by Admiral » Wed Oct 03, 2018 6:31 am

livesoft wrote:
Wed Oct 03, 2018 6:27 am
That's a huge needless tax bill. Don't let anyone tell you that it is normal.

The amounts of interest and dividend income suggest a rather large taxable portfolio as well. The capital loss of $-3,000 hints at a nice taxable portfolio, too. We have no way of knowing if the OP is spending $100,000 or $200,000 or $300,000 or more a year.

I think the OP can rearrange their investments and end up paying virtually no income tax or perhaps the same income tax, but with Roth conversions.
livesoft: it may be "needless" (and I agree) but characterizing it as "huge" seems like a stretch.

livesoft
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Re: In retirement

Post by livesoft » Wed Oct 03, 2018 6:35 am

Admiral wrote:
Wed Oct 03, 2018 6:31 am
livesoft: it may be "needless" (and I agree) but characterizing it as "huge" seems like a stretch.
I have to disagree. $4,000 is huge compared to $0. I don't have $4,000 to flush down the toilet.
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MikeG62
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Location: New Jersey

Re: In retirement

Post by MikeG62 » Wed Oct 03, 2018 6:36 am

dwickenh wrote:
Tue Oct 02, 2018 10:05 pm
Mr. Digweed wrote:
Tue Oct 02, 2018 7:51 pm
Okay. I have adjusted gross income of 66 grand.

As per IRS form 1040 (from 2017)

Married (no kids). Wife 69 and I (65) are not yet collecting social security.

11 grand - Taxable Interest (schedule B)
37 grand - Ordinary dividends (of which 12 grand are Qualified dividends)
14 grand - Pension
7 grand - Supplemental income (schedule E)
-3 grand - Capital loss (schedule D)

66 grand - adjusted gross income
4 grand - tax

How do I reduce my tax?
The obvious way would be to invest in Stock funds that have qualified dividends. If your dividends were qualified,

your Federal taxes would just about disappear. You only have 28,000 in ordinary income(after the 3000 capital loss adjustment)

with a 26,600 standard deduction for 2018. Non -qualified dividends are making the difference.
^This is your problem. Why is such a large % of your dividends ordinary (vs. qualified)?
Real Knowledge Comes Only From Experience

Admiral
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Re: In retirement

Post by Admiral » Wed Oct 03, 2018 6:49 am

livesoft wrote:
Wed Oct 03, 2018 6:35 am
Admiral wrote:
Wed Oct 03, 2018 6:31 am
livesoft: it may be "needless" (and I agree) but characterizing it as "huge" seems like a stretch.
I have to disagree. $4,000 is huge compared to $0. I don't have $4,000 to flush down the toilet.
Well most things are big compared to zero! The OP may face large tax consequences in altering the portfolio to make it more Bogleheadish (we don't know since OP has not posted it.) I was simply pointing out that if OP likes this portfolio, paying 6% tax is not the end of the world.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: In retirement

Post by livesoft » Wed Oct 03, 2018 7:10 am

We might be able to infer some things about the OP's portfolio.

With 10% of portfolio in cash/CDs and $11,000 in interest. One might figure out that the portfolio is at least $4 million if all the cash/CDs were in the taxable account.

With such a large fraction of the portfolio in cash and bonds, I doubt there would be much in the way of tax consequences to make the portfolio more tax efficient.
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NightFall
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Re: In retirement

Post by NightFall » Wed Oct 03, 2018 7:13 am

You could always pay taxes in 2018 to reduce your bill. There was a tax break over last year.

66K of income - 24K standard deduction - 3.2K over 65 deduction = 38.8K income

12K is qualified dividends that should be taxed at 0% at these tax levels.

So 26.8K of taxed income. That's $2,835 of tax with my simplistic spreadsheet. This is a simplification but probably a decent approximation.

To reduce your tax bill... you have 25K of non-qualified dividends and 11K of taxable interest. Make 27K qualified dividends. This may be possible by buying stocks in taxable and selling bonds in taxable. You could maintain your asset allocation if you had tax sheltered accounts (like an IRA) where you do the opposite (sell stocks and buy bonds).

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