Estimating taxes in retirement

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6teen
Posts: 18
Joined: Mon Aug 20, 2018 6:37 pm

Estimating taxes in retirement

Post by 6teen »

Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Estimating taxes in retirement

Post by cas »

Many people find this Tax Visualizer useful for the type of questions you are asking: https://engaging-data.com/tax-brackets/

Put everything that is taxed as ordinary income in the "Regular Wage Income" slot. (even if it isn't wages. Pension, RMD, taxable part of social security, interest, non-qualified dividends, short term capital gains, etc. Pretty much everything except qualified dividends and long term capital gains)

Put qualified dividends and long term capital gains in the "Capital Gain Income" slot. (Qualified dividends are taxed Long Term Capital Gains.)
jebmke
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Re: Estimating taxes in retirement

Post by jebmke »

6teen wrote: Thu Jun 17, 2021 9:12 am Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
The tax law doesn't change when you retire. How do you calculate your taxes now?
When you discover that you are riding a dead horse, the best strategy is to dismount.
Topic Author
6teen
Posts: 18
Joined: Mon Aug 20, 2018 6:37 pm

Re: Estimating taxes in retirement

Post by 6teen »

Oh man... I'm pretty sure that's exactly what I needed, I just don't understand most of it :? I don't know what non-qualified or qualified dividends, short term capital gains, etc. are.

I've only just begun to really think specifically about retirement and I'm not even sure how or which money to withdraw... I have a taxable account with total US stock index funds, tax exempt bond funds and international index funds. I have a lot of cash. I'm not sure which accounts to withdraw from, how often or how the tax rate is determined based on my withdrawals.

Maybe I need to figure that stuff out before I try figuring out tax rates. I really appreciate your reply and it looks like what I need, I just need to do some more homework, I think.
Topic Author
6teen
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Joined: Mon Aug 20, 2018 6:37 pm

Re: Estimating taxes in retirement

Post by 6teen »

jebmke wrote: Thu Jun 17, 2021 9:27 am
6teen wrote: Thu Jun 17, 2021 9:12 am Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
The tax law doesn't change when you retire. How do you calculate your taxes now?
I really don't calculate my taxes.... I have this really nice, trustworthy accountant who tells me how much to pay and I pay.
jebmke
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Location: Delmarva Peninsula

Re: Estimating taxes in retirement

Post by jebmke »

One thing to keep in mind is that your marginal tax rate and your tax bracket are not always the same.

One should use a tax software or something like Taxcaster that simulates an actual return to understand how changes in income affect the tax liability. This can be critical when looking at "discretionary" income like a Roth conversion from a Traditional IRA.
When you discover that you are riding a dead horse, the best strategy is to dismount.
smitcat
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Re: Estimating taxes in retirement

Post by smitcat »

6teen wrote: Thu Jun 17, 2021 9:34 am
jebmke wrote: Thu Jun 17, 2021 9:27 am
6teen wrote: Thu Jun 17, 2021 9:12 am Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
The tax law doesn't change when you retire. How do you calculate your taxes now?
I really don't calculate my taxes.... I have this really nice, trustworthy accountant who tells me how much to pay and I pay.
I really hope he/she is guiding you on how to draw on your accounts before the tax year and not just calculating the taxes when the year is over.
Asyouwish
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Re: Estimating taxes in retirement

Post by Asyouwish »

https://www.aarp.org/money/taxes/1040_t ... lator.html

This tax calculator on the AARP website is really good. You can play with the input and see the result. Add more retirement, or add more qualified dividends, etc.

Whether retired or working, the tax laws work the same. You have gross income, you subtract your standard deduction and compute your taxable income.
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MrBobcat
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Re: Estimating taxes in retirement

Post by MrBobcat »

Asyouwish wrote: Thu Jun 17, 2021 9:43 am https://www.aarp.org/money/taxes/1040_t ... lator.html

This tax calculator on the AARP website is really good. You can play with the input and see the result. Add more retirement, or add more qualified dividends, etc.

Whether retired or working, the tax laws work the same. You have gross income, you subtract your standard deduction and compute your taxable income.
That is a really good calculator, thanks for the link.
hamhocs
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Re: Estimating taxes in retirement

Post by hamhocs »

I just use Turbo Tax. Deleted my kids, assumed my wife hasn't left me, and put in estimates using 1099-R's instead of W2s. Plus other stuff as necessary.
Shallowpockets
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Re: Estimating taxes in retirement

Post by Shallowpockets »

OP, if you don’t know short term and long term capital gains, then you need to look them up. That is pretty basic if you have investments and ever want to realize any gains.
You are at square 1.
If you do not know terminology, then you will not even understand some replies to your post.
You don’t say how old you are and when you want to retire.
You have a tax guy. Maybe you could ask him some of your questions. He is privy to your actual tax situation now. How would you ever know about your taxes in retirement until you know your present situation?
Chuckles960
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Re: Estimating taxes in retirement

Post by Chuckles960 »

jebmke wrote: Thu Jun 17, 2021 9:27 am The tax law doesn't change when you retire. How do you calculate your taxes now?
Tax law might change after retirement. In some states (such as IL, whose income tax rate happens to be exactly what the OP quotes) retirement funds (pensions, IRA withdrawals...) are not taxed.
Mike Scott
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Re: Estimating taxes in retirement

Post by Mike Scott »

Make an appointment with your tax person to talk through thissince they have your specific data to consider. It would also be good to learn to do more of this on your own. No one will ever care about your money as much as you do.
rgs92
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Re: Estimating taxes in retirement

Post by rgs92 »

jebmke
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Re: Estimating taxes in retirement

Post by jebmke »

Chuckles960 wrote: Thu Jun 17, 2021 11:13 am
jebmke wrote: Thu Jun 17, 2021 9:27 am The tax law doesn't change when you retire. How do you calculate your taxes now?
Tax law might change after retirement. In some states (such as IL, whose income tax rate happens to be exactly what the OP quotes) retirement funds (pensions, IRA withdrawals...) are not taxed.
Maryland exempts pension income once you turn 65 but it doesn't require you to be retired. I've done taxes for many older pension recipients who were still fully employed. One in particular was simply rolling an old 401(k) to a Roth IRA. The distribution qualified for the pension exemption.
When you discover that you are riding a dead horse, the best strategy is to dismount.
02nz
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Re: Estimating taxes in retirement

Post by 02nz »

6teen wrote: Thu Jun 17, 2021 9:34 am
jebmke wrote: Thu Jun 17, 2021 9:27 am
6teen wrote: Thu Jun 17, 2021 9:12 am Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
The tax law doesn't change when you retire. How do you calculate your taxes now?
I really don't calculate my taxes.... I have this really nice, trustworthy accountant who tells me how much to pay and I pay.
Understanding how taxes work - and specifically YOUR taxes - is, after living below your means and using low-cost investments, probably the single most important thing you can do for your finances. Your accountant isn't your tax advisor, their job isn't to optimize your taxes, because by the time you send them all your docs, it's already too late to anything about any of them (with very few exceptions). Completing a tax return is a backward-looking activity, while tax planning and optimization is a forward-looking one.

Do some reading. At least one year, do your own taxes on paper using the 1040 form (it's really not that hard), and compare your work with your accountant's. You'll learn a lot. Then you may find you can get rid of the accountant and just pay $30-50 a year for TurboTax or the like.
MathWizard
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Re: Estimating taxes in retirement

Post by MathWizard »

Use the standard deduction of 25,100 for MFJ for 2021,
so the top of the 12% federal bracket for MFJ is
$25,100 + $81,050 so you could have a total income
of $106,150 before the Standard Deduction
before you are taxed above 12% (for 2021)

You also will get another $2,600 in SD when
you both turn 65.

The 12% rate will snap back to 15% in 2026
under current tax law.

The top of the 10% bracket is $19,900
jebmke
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Re: Estimating taxes in retirement

Post by jebmke »

02nz wrote: Thu Jun 17, 2021 11:32 am Understanding how taxes work - and specifically YOUR taxes - is, after living below your means and using low-cost investments, probably the single most important thing you can do for your finances.
For many, even in retirement, income taxes are the single largest expense item.
When you discover that you are riding a dead horse, the best strategy is to dismount.
02nz
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Re: Estimating taxes in retirement

Post by 02nz »

smitcat wrote: Thu Jun 17, 2021 9:40 am I really hope he/she is guiding you on how to draw on your accounts before the tax year and not just calculating the taxes when the year is over.
To expand on my earlier post - I think a lot of people assume that accountants are also tax advisors. They are not. I don't think it's reasonable to assume/expect that OP's accountant is also guiding OP on optimal asset location (i.e. Roth vs traditional), much less withdrawal strategies for the distant future. For one, the accountant only sees what you give them that's relevant to one year's tax return. They have no idea about much of what you HAVE, e.g., whether you have $10K or $1M in a IRA, for example. A good accountant will certainly notice things and may advise you if they see something that's clearly suboptimal, but that's not their main job. (And keep in mind, too, that they are insanely busy during tax season and so you shouldn't expect them to go out of their way to do something that's not their primary job.)

As an example: I recently helped a relative save tens of thousands of dollars on state taxes, because this person was out of the state for a certain number of days out of the year. The year before, the person could also have saved tens of thousands had he stayed out of the state for just several more days, but he didn't know about the provision in the tax law and the accountant didn't tell him. When I told him about it, his reaction was "why didn't my accountant tell me about this?" I replied it wasn't the accountant's job, and by tax season it was already too late.

Bottom line: get smart on taxes on your own, get specialized advice if needed, and don't confuse hiring an accountant to do your taxes with tax planning.
miket29
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Re: Estimating taxes in retirement

Post by miket29 »

I just don't understand most of it :? I don't know what non-qualified or qualified dividends, short term capital gains, etc. are.
Nobody is born knowing this stuff, and few schools do any financial education. So you're in the same boat everyone else started in. What's good is you're now willing to learn more.

You can start by watching the videos and reading the info on the links at https://www.bogleheads.org/wiki/Getting_started and at the top of the page at https://www.bogleheads.org/wiki/Main_Page

some recommended books are at https://www.bogleheads.org/wiki/Books:_ ... nd_reviews Don't feel overwhelmed by the list or that you need to read all of them!
jebmke
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Re: Estimating taxes in retirement

Post by jebmke »

02nz wrote: Thu Jun 17, 2021 11:49 am To expand on my earlier post - I think a lot of people assume that accountants are also tax advisors. They are not. I don't think it's reasonable to assume/expect that OP's accountant is also guiding OP on optimal asset location (i.e. Roth vs traditional), much less withdrawal strategies for the distant future. For one, the accountant only sees what you give them that's relevant to one year's tax return. They have no idea about much of what you HAVE, e.g., whether you have $10K or $1M in a IRA, for example. A good accountant will certainly notice things and may advise you if they see something that's clearly suboptimal, but that's not their main job. (And keep in mind, too, that they are insanely busy during tax season and so you shouldn't expect them to go out of their way to do something that's not their primary job.)
I agree. I have worked with some very experience tax preparers (many with CPAs and deep tax training). When I described my tax loss harvesting strategy to them in 2009 they looked at me like I was speaking in Martian.

As an aside, I used to work closely with PWC on corporate tax matters and their tax advisory group was a separate division of their tax practice from the compliance group (preparing and defending corporate returns). In fact, outside the US we used completely different firms for compliance.
When you discover that you are riding a dead horse, the best strategy is to dismount.
IMO
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Re: Estimating taxes in retirement

Post by IMO »

6teen wrote: Thu Jun 17, 2021 9:12 am Greetings,

I am trying to estimate what my taxes would be during retirement. I looked at the Federal tax rates and saw that the tax rate for income between $80,251 and $171,050 is $9,235 plus 22% of the amount over $80,250.

If I live off of $90,000, then I subtract $9,250 ($80,765) and then subtract another $2,145 ($78,605). My state income tax is 4.95%, so I pay another $4,455, leaving me with a net of $74,150.

However, aren't there standard deductions we can take as a married couple filing jointly? Also, how is the source of my income considered? I would be taking dividends and selling assets from index funds- I also have a lot of cash I could draw from a little bit at a time to lower how much I have to sell.

I really have no tax experience and so don't know how to make such an estimate. Can anyone provide some guidance?
A big thing you are overlooking is FICA taxes (7.65%) on earned income. If you have a salary of $90K then you will pay the full FICA on that earned income. You don't pay FICA tax on 401k/IRA's or pension income. Social Security is treated differently in different states, for example California exempts Social Security from it's state tax rate. Some investment income can be from capital gains (or losses). When you do tax estimate scenario's make sure your accounting for the above.

You'll obviously have other taxes that must be considered, the biggest concern is property taxes. Those who have something like Prop 13 in California have the advantage that property taxes will only increase a set percentage per year, despite if one's home appreciates more than the corresponding property tax expected increase. How much one has to pay relatively in sales tax is somewhat tied to one's retirement income and one's spending on taxable goods in retirement vs. pre-retirement.

What you'll never know is future tax rates until the time comes for your retirement and that will likely change in retirement. (For example the Trump tax changes helped me in retirement currently, but that is set to expire in the near future). That's all speculation. Some people like Clark Howard predict that tax rates in the future will have to increase to pay for the governments current deficits. Even then, one has to speculate on individual tax brackets and capital gains tax rates.

Bottom line, just do your best to guestimate your taxes in the future. I advise spending more time understanding one's spending/expenses currently and guestimating what those will be in retirement.
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FiveK
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Re: Estimating taxes in retirement

Post by FiveK »

02nz wrote: Thu Jun 17, 2021 11:32 amAt least one year, do your own taxes on paper using the 1040 form (it's really not that hard), and compare your work with your accountant's. You'll learn a lot. Then you may find you can get rid of the accountant and just pay $30-50 a year for TurboTax or the like.
+1

6teen, this may be the best way for you to learn. E.g., you could start with your 2018 return. Look at the form 1040 and other forms and schedules the accountant filled out. Then look at the various forms you gave the accountant (e.g., W-2, various 1099 forms, etc.) to see if you can determine where the numbers came from.

Then go to your 2019 file and start with the various forms you gave the accountant. Try filling form 1040 and other forms and schedules. Use the accountant's return to check your work.

Then go to your 2020 file and start with the various forms you gave the accountant, etc. With any luck, by this point all the buzzwords will be making sense.

If you try that, and run into questions such as "the accountant entered $X on line ___ of form ____. I can't find that number on any of my W-2, 1099, etc. forms - where should I look?" you will likely get help if you ask here.
MathWizard
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Re: Estimating taxes in retirement

Post by MathWizard »

Taxcaster (available as an app on your phone) is a great resource for federal taxes

https://smartasset.com/taxes/income-taxes

is a great resource which includes both federal/state/ and local taxes.
You will want to subtract out FICA if this is all retirement (not earned) income.

The latter also allows you tp compare taxes if you moved to a state without
state & local taxes. I'll likely not move , but I could save about $50K in
state/local taxes over my retirement if I moved to a location which does not have them.
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Eagle33
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Re: Estimating taxes in retirement

Post by Eagle33 »

FiveK wrote: Thu Jun 17, 2021 1:40 pm
02nz wrote: Thu Jun 17, 2021 11:32 amAt least one year, do your own taxes on paper using the 1040 form (it's really not that hard), and compare your work with your accountant's. You'll learn a lot. Then you may find you can get rid of the accountant and just pay $30-50 a year for TurboTax or the like.
+1

6teen, this may be the best way for you to learn. E.g., you could start with your 2018 return. Look at the form 1040 and other forms and schedules the accountant filled out. Then look at the various forms you gave the accountant (e.g., W-2, various 1099 forms, etc.) to see if you can determine where the numbers came from.

Then go to your 2019 file and start with the various forms you gave the accountant. Try filling form 1040 and other forms and schedules. Use the accountant's return to check your work.

Then go to your 2020 file and start with the various forms you gave the accountant, etc. With any luck, by this point all the buzzwords will be making sense.

If you try that, and run into questions such as "the accountant entered $X on line ___ of form ____. I can't find that number on any of my W-2, 1099, etc. forms - where should I look?" you will likely get help if you ask here.
I found filling in the Excel1040 spreadsheet for the last couple of year based on my actual tax returns helped me to understand my taxes. Items I did not understand I looked up to educate myself. Trying to learn using TurboTax or other such software hide the forms from you until you answer all the input questions - this was not compatible to my learning style of wanting to see the end result as I entered info.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
sycamore
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Re: Estimating taxes in retirement

Post by sycamore »

MrBobcat wrote: Thu Jun 17, 2021 9:50 am
Asyouwish wrote: Thu Jun 17, 2021 9:43 am https://www.aarp.org/money/taxes/1040_t ... lator.html

This tax calculator on the AARP website is really good. You can play with the input and see the result. Add more retirement, or add more qualified dividends, etc.

Whether retired or working, the tax laws work the same. You have gross income, you subtract your standard deduction and compute your taxable income.
That is a really good calculator, thanks for the link.
+1, I'll give this one a try.

Another good one often mentioned on Bogleheads is https://www.mortgagecalculator.org/calc ... ulator.php
Jablean
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Re: Estimating taxes in retirement

Post by Jablean »

6teen wrote: Thu Jun 17, 2021 9:33 am Oh man... I'm pretty sure that's exactly what I needed, I just don't understand most of it :? I don't know what non-qualified or qualified dividends, short term capital gains, etc. are.

I've only just begun to really think specifically about retirement and I'm not even sure how or which money to withdraw... I have a taxable account with total US stock index funds, tax exempt bond funds and international index funds. I have a lot of cash. I'm not sure which accounts to withdraw from, how often or how the tax rate is determined based on my withdrawals.

Maybe I need to figure that stuff out before I try figuring out tax rates. I really appreciate your reply and it looks like what I need, I just need to do some more homework, I think.
Based on what you've said I'm going to assume you have no retirement accounts like a 401k, IRA, SEP, or Roth. So...

Cash is taxed on what it earns from the bank and is taxed whether you take it out and spend it or leave it in the bank. How much you take out doesn't matter. Again it's only taxed on what it earns on interest. Same thing for CDs.

Let's treat your US and International Funds the same, you may get some discount on the foreign taxes but you won't know until the next year and it's not likely to be highly significant for planning purposes. So when you withdraw money from a fund (ie sell it and the pull out the cash) you are taxed not on the full amount you pull out but on the amount that is the difference between what you sell it for and what you bought it for. So you bought a 100 shares of a fund at $10 ($1000) and sold it for $15 a share ($1500) the tax is on $500 of income ($1500-$1000=$500 also known as Capital Gains) Knowing what you paid originally can be a problem but most brokers do help track it by each purchase transaction or they do an average.

The tax-exempt funds should be just that - tax exempt, at least on any interest they earned. There might be differences if some are federally tax exempt and others are just state tax exempt.
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