How are taxes different after retirement?

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duffer
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How are taxes different after retirement?

Post by duffer » Wed Aug 03, 2016 11:57 pm

In trying to work out exactly what my income would likely be post-retirement, I have been trying to figure how my taxes would change.

As I understand it, there are four reasons why federal and state income taxes are likely to be lower in retirement, and one reason that might tend to increase them. Those reasons are listed below. In addition, there is a significant factor (#6 below) that is somewhat like a large tax disappearing. Are there any additions to my list or corrections of errors?

1.Some significant portion of income might come from withdrawals from a taxable account, which would be tax free except for the capital gains portion of the withdrawals. All income that comes from withdrawals from a Roth account would be tax free.

2. Some significant portion of income might come from social security. At a maximum, only 85% of social security income is taxable. In addition, some states with income taxes do not tax social security income (for example, New York does not). Also, some states exclude a portion of pension income or retirement income from state taxes (e.g., New York does both).

3. For a variety of reasons (e.g., taxable or Roth account withdrawals or less income), one might be in a lower tax bracket with a lower marginal and effective tax rate. [EDITED ON 8/4/2016, based on plannerman's comments below] See this chart: http://taxfoundation.org/blog/chart-day-effective-tax-rates-income-category For example, in 2010, the average effective federal tax rate on the bracket with AGI of $100k to $250k was 13%, while the effective rate on the AGI bracket of $250k to $1MM was 22%. Changes in the marginal tax rate are much less, however: for example, in 2016, the marginal rate on married joint filers moves from 28% beginning at $152k to 33% beginning at $231k. See this chart: http://taxfoundation.org/article/2016-tax-brackets.

4. One no longer has to pay FICA (payroll) taxes--no more social security or medicare taxes or medicare surcharge. This eliminates a 6.2% social security tax on the first $118,500 of income, and also eliminates medicare taxes on all income by from 1.45-2.35% (the higher medicare percentage includes a .9% surcharge on income over $250,000). Thus, approximately 7.65% to 8.55% of payroll taxes go away.

5. A factor that might increase one's taxes is that deductions for work-related expenses go away. Of course, those expenses also largely go away.

6. The other major change that makes post-retirement net income a higher proportion of gross income than in pre-retirement is that one ceases to contribute to retirement savings. This could be a significant portion of gross income that becomes available as net income--the same effect as lower taxes.

Have I missed anything? Am I wrong about anything?
Last edited by duffer on Thu Aug 04, 2016 8:39 am, edited 2 times in total.

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Re: How are taxes different after retirement?

Post by prudent » Thu Aug 04, 2016 5:11 am

Topic moved to Personal Finance.

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Re: How are taxes different after retirement?

Post by samsoes » Thu Aug 04, 2016 5:32 am

Required Minimum Distributions (RMD's) at age 70.5 from your Traditional IRA, 401(k), 403(b), etc., would cause your taxes, both Federal and State to increase.

In addition, the size of the RMD, combined with SS, may cause your marginal rate to forever exceed 15% in which case your post-tax qualified gains would no longer be tax-free.
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Re: How are taxes different after retirement?

Post by BeBH65 » Thu Aug 04, 2016 5:42 am

Hello,

Have you seen the wiki page Social_Security_tax_impact_calculator
Social Security tax impact calculator is a spreadsheet which graphically shows how the taxation of your Social Security (SS) benefits will affect your retirement tax rates.


I don't claim to understand it.

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BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: How are taxes different after retirement?

Post by jebmke » Thu Aug 04, 2016 6:49 am

In my state, Maryland. When you reach age 65 you become eligible for a retirement income exclusion (from state income taxes) for part of your retirement income.
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Re: How are taxes different after retirement?

Post by Swansea » Thu Aug 04, 2016 6:54 am

Some states exempt federal retirement income, such as N.C. and Pa.

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Re: How are taxes different after retirement?

Post by tbradnc » Thu Aug 04, 2016 7:15 am

Tennessee Hall Tax, which disportionately affects seniors:

How much is it?: 6 percent

Who must pay it?: Anyone who earns more than $1,250 from investment income, or couples who earn more than $2,500 from investment income

Who's exempt right now?: Anyone 65 years old or older who earns less than $33,000 in total income, or $59,000 for couples.

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Re: How are taxes different after retirement?

Post by plannerman » Thu Aug 04, 2016 7:22 am

duffer wrote:3. For a variety of reasons (e.g., taxable or Roth account withdrawals or less income), one might be in a lower tax bracket with a lower marginal and effective tax rate. For example, if one moves from over $250k to under $250k, for example, the average effective federal tax rate appears to drop from 22% to 13%.


I'm not sure what you are trying say here, but if your AGI drops from say $251k to $249k you are not going to see a significant drop in your overall tax rate.

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Re: How are taxes different after retirement?

Post by duffer » Thu Aug 04, 2016 7:44 am

samsoes wrote:Required Minimum Distributions (RMD's) at age 70.5 from your Traditional IRA, 401(k), 403(b), etc., would cause your taxes, both Federal and State to increase.

In addition, the size of the RMD, combined with SS, may cause your marginal rate to forever exceed 15% in which case your post-tax qualified gains would no longer be tax-free.


I'm not sure I follow you.

As I understand it, RMDs are taxed as ordinary income. So, your marginal tax rate on ordinary income would depend on the size of your RMD. But this would not affect the rate on withdrawals from a Roth; nor would it affect your tax rate (15%) on the capital gains portion of withdrawals from your taxable account -- except that the rate on the capital gains portion of withdrawals from a taxable account would go up to 20% if RMDs pushed your ordinary income into the 39.6% federal tax bracket (which kicks in at about $415k or $466k for single or married filing jointly).

Am I wrong about this?

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Re: How are taxes different after retirement?

Post by dm200 » Thu Aug 04, 2016 7:54 am

Some kinds of retirement income in some states and jurisdictions receive favorable state or other tax treatment.

On taxable accounts, if there are capital gains to be incurred, you may have some flexibility in the taking of such capital gain taxation.

More exemptions on federal and, probably, state income tax.

For some seniors, based on assets and income, in some jurisdictions, there are deferral or exemptions for real estate tax on home.

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Re: How are taxes different after retirement?

Post by vtMaps » Thu Aug 04, 2016 7:55 am

Personal exemption increases at age 65. --vtMaps
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Re: How are taxes different after retirement?

Post by samsoes » Thu Aug 04, 2016 7:57 am

duffer wrote:
samsoes wrote:Required Minimum Distributions (RMD's) at age 70.5 from your Traditional IRA, 401(k), 403(b), etc., would cause your taxes, both Federal and State to increase.

In addition, the size of the RMD, combined with SS, may cause your marginal rate to forever exceed 15% in which case your post-tax qualified gains would no longer be tax-free.


I'm not sure I follow you.

As I understand it, RMDs are taxed as ordinary income. So, your marginal tax rate on ordinary income would depend on the size of your RMD. But this would not affect the rate on withdrawals from a Roth; nor would it affect your tax rate (15%) on the capital gains portion of withdrawals from your taxable account -- except that the rate on the capital gains portion of withdrawals from a taxable account would go up to 20% if RMDs pushed your ordinary income into the 39.6% federal tax bracket (which kicks in at about $415k or $466k for single or married filing jointly).

Am I wrong about this?


Nope.

I was referring to the fact that (qualified) taxable account earnings are taxed at 0% if you are in the 15% bracket. If RMD's pushed you out of the 15% bracket, your taxable account earnings will no longer be taxed at 0%, rather they would be taxed at 15%.
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Re: How are taxes different after retirement?

Post by duffer » Thu Aug 04, 2016 8:00 am

plannerman wrote:
duffer wrote:3. For a variety of reasons (e.g., taxable or Roth account withdrawals or less income), one might be in a lower tax bracket with a lower marginal and effective tax rate. For example, if one moves from over $250k to under $250k, for example, the average effective federal tax rate appears to drop from 22% to 13%.


I'm not sure what you are trying say here, but if your AGI drops from say $251k to $249k you are not going to see a significant drop in your overall tax rate.

plannerman



Thanks--of course you are right. I was looking at a chart of effective tax rates for federal income tax. At $250k, the effective rate moved from 13% to 22%. See this link, from the Tax Foundation web site and sourced by them from the IRS: http://taxfoundation.org/blog/chart-day-effective-tax-rates-income-category

But that is the effect on the entire category and for planning purposes for individuals your point is obviously the important one.

I am going to edit my original post to clarify your point about marginal tax rates.
Last edited by duffer on Thu Aug 04, 2016 8:25 am, edited 1 time in total.

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Re: How are taxes different after retirement?

Post by livesoft » Thu Aug 04, 2016 8:04 am

Effective tax rates are highly dependent on a number of factors.

Here is a thread discussing some of this with the Effective Average Adjusted Livesoft Income tax rate poll:
viewtopic.php?t=163748

One can see that most people hardly pay any income taxes at all. This is also shown in theZERO taxes in retirement thread.
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Re: How are taxes different after retirement?

Post by jimb_fromATL » Thu Aug 04, 2016 8:10 am

samsoes wrote: ...
... So, your marginal tax rate on ordinary income would depend on the size of your RMD. But this would not affect the rate on withdrawals from a Roth; nor would it affect your tax rate (15%) on the capital gains portion of withdrawals from your taxable account...

...Am I wrong about this?


If your marginal tax rate is no more than 15%, you pay no capital gains tax ... as the law now stands.

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Re: How are taxes different after retirement?

Post by CAsage » Thu Aug 04, 2016 8:16 am

Hmm. I think your comments on effective tax rate are somewhat confusing. If you look at the link, it's an average of 13% for a range of incomes from $100k to $250k, and an average of 22% for a range of $250k to 1 million, There is nothing magical about tripping over the exact point at $250k. I'm pretty sure the marginal taxes work within those ranges just like they always have - gradually increasing dollar by dollar....
I found it a good thing to model my drawdown from cash and IRA and (future) Social security to estimate my future income & taxes, and the last dollars I ever spend will be from my Roth!
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Re: How are taxes different after retirement?

Post by Sheepdog » Thu Aug 04, 2016 8:23 am

How are taxes different after retirement? How much did you have at retirement? How much taxable investments and income will you have after retirement? If you can reduce taxable investments, increase tax deferred and tax free investments significantly, you can pay much less.

Just before retiring, the upper part of my earnings was in the 39% tax bracket. In retirement I was to decrease that significantly. I had a modest amount saved plus I was going to have a modest pension. When I retired in 1998 at 65 years of age, I set as one of my goals to reduce taxable income as much as possible. The result has been that in the last 13-14 years on up to $960,000 invested plus Social Security my federal tax bill has been very low or zero in each of those years.

1. I took Social Security beginning at age 65. I converted my pension lump sum to an IRA when I retired, so it became tax deferred and it could grow until RMDs would be required at 70.5.
2. I had the advantage of purchasing I Bonds in larger quantities than you can today. That increased my tax deferred accounts and, thereby, reduced my taxable investments. (Note: I have not had to use these I Bonds for expenses so they continue to grow in value)
3. In those first 5 years in retirement through age 70 I converted about 22% of my IRAs to Roth IRAs (4.5% a year) in this period when my tax rates would be much lower after retirement. The tax bill was not huge for the future benefit of no Roth taxation for years to come.
4. Beyond my SS income, I lived off of my taxable accounts in those first 5+ years so that taxable investments were reduced and tax deferred accounts could grow.

By the time RMDs started at 70.5 (2004), my taxable investments were low. To meet spending needs, I would need more than RMDs and SS in some years to meet my $60,000 to $77,000 annual spending. I would take from the IRAs until taxes would be due, then I would take from the tax free Roths, if needed. (I have used my previous year's income tax software to estimate the next year's tax bite on occasion.)

From age 65 to 70, I paid some taxes during the Roth conversion, with reduced amounts due each year from 66 to 70. At age 70, my taxes was near zero. The result has been that I have paid very little federal income tax since age 70 (13 years) and some years it has been zero.

My TOTAL federal income taxes paid in the last 13 years, was less than $2700. For 2015. on $940,000 invested and $70,000 spending covered, I, again, did not owe any federal tax. I did owe a low amount of state tax, however.

How are taxes different after retirement? What can you do to lower yours?
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Re: How are taxes different after retirement?

Post by duffer » Thu Aug 04, 2016 8:31 am

CAsage wrote:Hmm. I think your comments on effective tax rate are somewhat confusing. If you look at the link, it's an average of 13% for a range of incomes from $100k to $250k, and an average of 22% for a range of $250k to 1 million, There is nothing magical about tripping over the exact point at $250k. I'm pretty sure the marginal taxes work within those ranges just like they always have - gradually increasing dollar by dollar....
I found it a good thing to model my drawdown from cash and IRA and (future) Social security to estimate my future income & taxes, and the last dollars I ever spend will be from my Roth!



Yes. Plannerman made the same correct point above. I have edited my original post to try to clarify this. But kicking down a bracket can sometimes affect more than just the marginal rate. There are some aspects of the effective rate that do kick in with noticeable effect as one changes brackets--for example limitations on deductions or exemptions may change or the alternative minimum tax may change as one moves from bracket to bracket. For people with earned income, the .9% medicare tax surcharge kicks in at $250k (though this would not affect most retirees).

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Re: How are taxes different after retirement?

Post by The Wizard » Thu Aug 04, 2016 8:52 am

vtMaps wrote:Personal exemption increases at age 65. --vtMaps

That only increases your standard deduction a bit.
If you itemize your deductions, you get no benefit from being >65...
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Re: How are taxes different after retirement?

Post by The Wizard » Thu Aug 04, 2016 9:02 am

That chart on average effective tax rates is pretty much useless for practical purposes.

1. If I convert an additional $10,000 from tIRA to Roth IRA, how much additional tax will I owe?

2. If I sell a chunk of funds in my taxable account with LTCGs to buy a new car, how much additional tax will I owe and thus, how much will I net?
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Re: How are taxes different after retirement?

Post by vtMaps » Thu Aug 04, 2016 9:14 am

The Wizard wrote:
vtMaps wrote:Personal exemption increases at age 65. --vtMaps

That only increases your standard deduction a bit.
If you itemize your deductions, you get no benefit from being >65...

I think one of us is confusing exemptions with deductions. --vtMaps
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Re: How are taxes different after retirement?

Post by pshonore » Thu Aug 04, 2016 9:24 am

vtMaps wrote:
The Wizard wrote:
vtMaps wrote:Personal exemption increases at age 65. --vtMaps

That only increases your standard deduction a bit.
If you itemize your deductions, you get no benefit from being >65...

I think one of us is confusing exemptions with deductions. --vtMaps

I believe The Wizard is correct. There is no difference in PE for those over 65. There is for Standard Deduction

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Re: How are taxes different after retirement?

Post by jimb_fromATL » Thu Aug 04, 2016 9:25 am

The Wizard wrote:
vtMaps wrote:Personal exemption increases at age 65. --vtMaps

That only increases your standard deduction a bit.
If you itemize your deductions, you get no benefit from being >65...


The exemption did in the past. Not now. The standard deduction does increase slightly if you're over age 65.

Only about one in every three or four taxpayers exceeds the standard deduction to get any benefit from itemizing. But I'd guess most retired folks have fewer things to itemize --typically no mortgage, no business related expenses, and possibly reduced or no state income tax -- so it probably helps a big percentage of retirees. It's not a lot, since it only shields an extra $1,250 for married taxpayers or $1,550 for unmarried. That would reduce taxes by about $313 or $388 annually in the 25% bracket, which will buy a few more groceries.

A much bigger perk for being old for us is that our county exempts older homeowners from the school tax portion of their property taxes. That saves us about $1600 per year over our younger neighbors in comparable value homes.

jimb

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Re: How are taxes different after retirement?

Post by SuzBanyan » Thu Aug 04, 2016 9:29 am

One factor that I didn't see discussed is the different tax rates paid by singles and married filling jointly. Many couples will need to plan for the time when the widow(er) has to pay based on the relatively higher single tax rates.

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Re: How are taxes different after retirement?

Post by rguina » Thu Aug 04, 2016 9:35 am

tbradnc wrote:Tennessee Hall Tax, which disportionately affects seniors:

How much is it?: 6 percent

Who must pay it?: Anyone who earns more than $1,250 from investment income, or couples who earn more than $2,500 from investment income

Who's exempt right now?: Anyone 65 years old or older who earns less than $33,000 in total income, or $59,000 for couples.


The Hall Tax is going away soon:

Gov. Bill Haslam signs Hall income tax cut, repeal into law - http://www.tennessean.com/story/news/po ... /84044810/

A quick Google search can bring up lists of states that are favorable to retirees. Some don't tax any retirement income (pensions, military retirement pay, state or federal pensions, social security, etc). This will get you started; adjust the search parameters as necessary: https://www.google.com/search?q=states+ ... 8&oe=utf-8

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Re: How are taxes different after retirement?

Post by vtMaps » Thu Aug 04, 2016 9:42 am

vtMaps wrote:I think one of us is confusing exemptions with deductions. --vtMaps


OK, I was confused... thanks for the corrections. --vtMaps
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Re: How are taxes different after retirement?

Post by heyyou » Thu Aug 04, 2016 10:03 am

Duffer,
If you are interested in your own case, consider the size and locations of your assets. When you mention SS as being significant income in one paragraph, then retirement income in the top tax brackets in the following paragraph, those describe different retirees with different solutions to taxes in retirement. Consider using a free tax program to compare your spending from different income sources, but be aware of not letting taxes determine all of your spending.

Prior to age 70.5, I'm paying some extra tax each year to reduce future taxation on my tIRA (401k rollover) by converting portions of it into the Roth IRA each year, since I have some space remaining in my current tax bracket. Similar to retirement saving, each year's transfer seems inconsequential but ten of them have made a difference.

Note that your cap gains from your taxable accounts are added last onto your income from other sources. Cap gains(CG) in the 15% bracket are not taxed. Only those CG that spill into the next bracket (25%) are taxed, but then only at 15%. If you are on the cusp of the 25% bracket ($96K for married couples filing jointly), try to leave room for your CGs in the lower bracket. Some retirees pay two years of property taxes in alternating years in order to bunch their deductions.

The top of each tax bracket grows with annual inflation. After a decade of retirement, those brackets are larger than when you started retirement. Good news for those facing RMDs on their tIRA accounts.

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Re: How are taxes different after retirement?

Post by Sinbad » Thu Aug 04, 2016 4:02 pm

heyyou wrote:Duffer,
If you are interested in your own case, consider the size and locations of your assets. When you mention SS as being significant income in one paragraph, then retirement income in the top tax brackets in the following paragraph, those describe different retirees with different solutions to taxes in retirement. Consider using a free tax program to compare your spending from different income sources, but be aware of not letting taxes determine all of your spending.

Prior to age 70.5, I'm paying some extra tax each year to reduce future taxation on my tIRA (401k rollover) by converting portions of it into the Roth IRA each year, since I have some space remaining in my current tax bracket. Similar to retirement saving, each year's transfer seems inconsequential but ten of them have made a difference.

Note that your cap gains from your taxable accounts are added last onto your income from other sources. Cap gains(CG) in the 15% bracket are not taxed. Only those CG that spill into the next bracket (25%) are taxed, but then only at 15%. If you are on the cusp of the 25% bracket ($96K for married couples filing jointly), try to leave room for your CGs in the lower bracket. Some retirees pay two years of property taxes in alternating years in order to bunch their deductions.

The top of each tax bracket grows with annual inflation. After a decade of retirement, those brackets are larger than when you started retirement. Good news for those facing RMDs on their tIRA accounts.


Thank you very much for your comments, but I think you have misinterpreted my situation from reading a bit inaccurately into my comments. Social Security can be a significant part of a retirement income in the top brackets. For example, if you are a married couple in good health and both of your social security PIAs are based on substantial lifetime earnings, then at 70 your combined social security would likely exceed $80k. That is 20% of a $400k income--a significant part of a VERY high retirement income.

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Re: How are taxes different after retirement?

Post by Dottie57 » Thu Aug 04, 2016 6:27 pm

My parents are able to deduct medical premiums for medigap insurance. Since they get about $50000 income this does affect their taxes.

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Re: How are taxes different after retirement?

Post by celia » Thu Aug 04, 2016 10:27 pm

duffer wrote:4. One no longer has to pay FICA (payroll) taxes--no more social security or medicare taxes or medicare surcharge. This eliminates a 6.2% social security tax on the first $118,500 of income, and also eliminates medicare taxes on all income by from 1.45-2.35% (the higher medicare percentage includes a .9% surcharge on income over $250,000). Thus, approximately 7.65% to 8.55% of payroll taxes go away.

Well, you don't have to pay Medicare tax on wages any more, but when you start Medicare, there are monthly premiums. Maybe you don't consider them a "tax", but they have the same effect. And those with very high taxable income (over $170,000 for married couples) also have Medicare surcharges.

Besides paying taxes on RMDs, if you do any Roth conversions, there is also tax involved.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: How are taxes different after retirement?

Post by grabiner » Thu Aug 04, 2016 10:33 pm

duffer wrote:
CAsage wrote:Hmm. I think your comments on effective tax rate are somewhat confusing. If you look at the link, it's an average of 13% for a range of incomes from $100k to $250k, and an average of 22% for a range of $250k to 1 million, There is nothing magical about tripping over the exact point at $250k. I'm pretty sure the marginal taxes work within those ranges just like they always have - gradually increasing dollar by dollar....
I found it a good thing to model my drawdown from cash and IRA and (future) Social security to estimate my future income & taxes, and the last dollars I ever spend will be from my Roth!



Yes. Plannerman made the same correct point above. I have edited my original post to try to clarify this. But kicking down a bracket can sometimes affect more than just the marginal rate. There are some aspects of the effective rate that do kick in with noticeable effect as one changes brackets--for example limitations on deductions or exemptions may change or the alternative minimum tax may change as one moves from bracket to bracket. For people with earned income, the .9% medicare tax surcharge kicks in at $250k (though this would not affect most retirees).


It's still rare for the bracket boundary to affect more than the marginal rate. If you go from $250K to $251K, you pay the 3.8% ACA surtax on net investment income, but only on the last $1K, so your marginal tax rate on qualified dividends is now 18.8% rather than 15%.

There are a few hard limits in the tax code in which you lose the entire tax benefit for going $1 over the limit (for example, the maximum investment income for the earned income tax credit), but most benefits phase out gradually.
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Re: How are taxes different after retirement?

Post by Peter Foley » Thu Aug 04, 2016 11:38 pm

A different take on the question . . .

For many people taxes are different after retirement in that they can exercise control over the amount of tax they pay.

Many people have retirement savings in taxable accounts, tax deferred accounts (IRAs), and Roth IRAs. The mix of the three used to fund one's retirement in a given year will determine the amount of income tax they pay.

Note - there is more flexibility early in retirement and less after one starts taking RMDs.

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Re: How are taxes different after retirement?

Post by HIinvestor » Thu Aug 04, 2016 11:53 pm

Some states (HI and others) exclude pensions from state income taxes. While that law remains effective, it can make a difference for folks who receive pensions.

Agree that RMDs, SS and other sums revived can affect income and also taxes.

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Re: How are taxes different after retirement?

Post by FreeAtLast » Fri Aug 05, 2016 12:00 am

duffer wrote:In trying to work out exactly what my income would likely be post-retirement, I have been trying to figure how my taxes would change.

As I understand it, there are four reasons why federal and state income taxes are likely to be lower in retirement, and one reason that might tend to increase them. Those reasons are listed below. In addition, there is a significant factor (#6 below) that is somewhat like a large tax disappearing. Are there any additions to my list or corrections of errors?

1.Some significant portion of income might come from withdrawals from a taxable account, which would be tax free except for the capital gains portion of the withdrawals. All income that comes from withdrawals from a Roth account would be tax free.

2. Some significant portion of income might come from social security. At a maximum, only 85% of social security income is taxable. In addition, some states with income taxes do not tax social security income (for example, New York does not). Also, some states exclude a portion of pension income or retirement income from state taxes (e.g., New York does both).

3. For a variety of reasons (e.g., taxable or Roth account withdrawals or less income), one might be in a lower tax bracket with a lower marginal and effective tax rate. [EDITED ON 8/4/2016, based on plannerman's comments below] See this chart: http://taxfoundation.org/blog/chart-day-effective-tax-rates-income-category For example, in 2010, the average effective federal tax rate on the bracket with AGI of $100k to $250k was 13%, while the effective rate on the AGI bracket of $250k to $1MM was 22%. Changes in the marginal tax rate are much less, however: for example, in 2016, the marginal rate on married joint filers moves from 28% beginning at $152k to 33% beginning at $231k. See this chart: http://taxfoundation.org/article/2016-tax-brackets.

4. One no longer has to pay FICA (payroll) taxes--no more social security or medicare taxes or medicare surcharge. This eliminates a 6.2% social security tax on the first $118,500 of income, and also eliminates medicare taxes on all income by from 1.45-2.35% (the higher medicare percentage includes a .9% surcharge on income over $250,000). Thus, approximately 7.65% to 8.55% of payroll taxes go away.

5. A factor that might increase one's taxes is that deductions for work-related expenses go away. Of course, those expenses also largely go away.

6. The other major change that makes post-retirement net income a higher proportion of gross income than in pre-retirement is that one ceases to contribute to retirement savings. This could be a significant portion of gross income that becomes available as net income--the same effect as lower taxes.

Have I missed anything? Am I wrong about anything?


About a year before I planned to retire, I went to my CPA and we ran a couple of scenarios as to what my new tax situation(s) could be, both state and federal. I believe she charged me about $75 for an hour session. The information was well worth the fee. I highly recommend this option to you.
Illegitimi non carborundum.

duffer
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Re: How are taxes different after retirement?

Post by duffer » Fri Aug 05, 2016 8:15 am

Peter Foley wrote:A different take on the question . . .

For many people taxes are different after retirement in that they can exercise control over the amount of tax they pay.

Many people have retirement savings in taxable accounts, tax deferred accounts (IRAs), and Roth IRAs. The mix of the three used to fund one's retirement in a given year will determine the amount of income tax they pay.

Note - there is more flexibility early in retirement and less after one starts taking RMDs.


Yes, I agree with you that this is a key difference for many people. It may well be possible to move oneself more than one bracket by the way in which income is taken, or to take major deductions in years when taxes will be high.

duffer
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Re: How are taxes different after retirement?

Post by duffer » Fri Aug 05, 2016 8:23 am

grabiner wrote:
duffer wrote:
CAsage wrote:Hmm. I think your comments on effective tax rate are somewhat confusing. If you look at the link, it's an average of 13% for a range of incomes from $100k to $250k, and an average of 22% for a range of $250k to 1 million, There is nothing magical about tripping over the exact point at $250k. I'm pretty sure the marginal taxes work within those ranges just like they always have - gradually increasing dollar by dollar....
I found it a good thing to model my drawdown from cash and IRA and (future) Social security to estimate my future income & taxes, and the last dollars I ever spend will be from my Roth!



Yes. Plannerman made the same correct point above. I have edited my original post to try to clarify this. But kicking down a bracket can sometimes affect more than just the marginal rate. There are some aspects of the effective rate that do kick in with noticeable effect as one changes brackets--for example limitations on deductions or exemptions may change or the alternative minimum tax may change as one moves from bracket to bracket. For people with earned income, the .9% medicare tax surcharge kicks in at $250k (though this would not affect most retirees).


It's still rare for the bracket boundary to affect more than the marginal rate. If you go from $250K to $251K, you pay the 3.8% ACA surtax on net investment income, but only on the last $1K, so your marginal tax rate on qualified dividends is now 18.8% rather than 15%.

There are a few hard limits in the tax code in which you lose the entire tax benefit for going $1 over the limit (for example, the maximum investment income for the earned income tax credit), but most benefits phase out gradually.


Sure, but the situation of changing brackets is very unlikely to be by one dollar. That is a bit of a straw man. Income changes by more than that. So, the gradual change in benefits as brackets change will apply to a lot more income than a dollar. The gradual change in benefits accrues to real differences as the amount of change in income increases. For many people in retirement, their taxable income will fall by 25%-50%. That can make a major difference in the tax treatment of their money.

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Re: How are taxes different after retirement?

Post by Spewin » Fri Aug 05, 2016 10:31 am

One big change in taxes is that because you are no longer saving and because of your other reasons lowering your tax bill, you need less money each year to live the same lifestyle (or better since work expenses could be converted to leisure expenses). Because of this, you can pull less money from taxable sources and lower your tax bill.

duffer
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Re: How are taxes different after retirement?

Post by duffer » Fri Aug 05, 2016 11:01 am

duffer wrote:
grabiner wrote:
duffer wrote:
CAsage wrote:Hmm. I think your comments on effective tax rate are somewhat confusing. If you look at the link, it's an average of 13% for a range of incomes from $100k to $250k, and an average of 22% for a range of $250k to 1 million, There is nothing magical about tripping over the exact point at $250k. I'm pretty sure the marginal taxes work within those ranges just like they always have - gradually increasing dollar by dollar....
I found it a good thing to model my drawdown from cash and IRA and (future) Social security to estimate my future income & taxes, and the last dollars I ever spend will be from my Roth!



Yes. Plannerman made the same correct point above. I have edited my original post to try to clarify this. But kicking down a bracket can sometimes affect more than just the marginal rate. There are some aspects of the effective rate that do kick in with noticeable effect as one changes brackets--for example limitations on deductions or exemptions may change or the alternative minimum tax may change as one moves from bracket to bracket. For people with earned income, the .9% medicare tax surcharge kicks in at $250k (though this would not affect most retirees).


It's still rare for the bracket boundary to affect more than the marginal rate. If you go from $250K to $251K, you pay the 3.8% ACA surtax on net investment income, but only on the last $1K, so your marginal tax rate on qualified dividends is now 18.8% rather than 15%.

There are a few hard limits in the tax code in which you lose the entire tax benefit for going $1 over the limit (for example, the maximum investment income for the earned income tax credit), but most benefits phase out gradually.


Sure, but the situation of changing brackets is very unlikely to be by one dollar. That is a bit of a straw man. Income in retirement changes by more than that, and often by quite a bit. So, the gradual change in benefits and tax rate as brackets change will apply to a lot more income than a dollar. The gradual change in benefits accrues to real differences as the amount of change in income increases. For many people in retirement, their taxable income will fall by 25%-50%. That can make a major difference in the tax treatment of their money.

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artthomp
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Re: How are taxes different after retirement?

Post by artthomp » Fri Aug 05, 2016 3:40 pm

I retired in 2006.

Our incremental tax federal rate in 2006 was 15% (I was 66 years old) and (Capital gains and Dividend income rate was 0).

When I reached age 70.5 and had to start taking IRS Required Minimum Distributions (2010), our incremental federal tax rate increased to 25% (Capital gains and Dividend income 15%). 85% of our Social Security checks were taxed at our normal rate.

Our effective federal tax rate in 2015 was 13% and our effective state tax rate (Missouri) was 4.891%.
Art

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Re: How are taxes different after retirement?

Post by Sandi_k » Sat Aug 06, 2016 12:34 pm

HIinvestor wrote:Some states (HI and others) exclude pensions from state income taxes.


Are you sure? Because my research is showing that HI doesn't tax SS income, but distributions from pensions are only "partially exempt."

https://www.cchgroup.com/news-and-insig ... ment-taxes

http://files.hawaii.gov/tax/legal/tir/1 ... ir96-5.pdf

"If an employee invests his or her money in a tax-deferred annuity or an individual retirement account (IRA), a distribution from the annuity or from the IRA is considered to be a return from an individual investment and is not considered to be an excluded pension."

They do note that employER contributions would be exempt - but not an individual's contributions.

AND

"Sections 18-235-7-02(e) and 18-235-7-03(c), HAR, clarified that if an employee has made contributions under an elective right to a plan (sometimes known as a “deferred compensation plan”), distributions from the plan are considered to be returns from an individual investment and do not qualify as an excluded pension."

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