Federal taxes in retirement

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4nursebee
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Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 7:25 am

I would like to hear from others about taxes in retirement so I can better plan and execute.

Tax table here: https://www.bankrate.com/finance/taxes/ ... ckets.aspx

Things that I would expect could count as income:
401K withdrawals
Pension
A portion of an annuity
A growing portion of collected rents

Not income:
Social security
Roths

So it seems the trick for a married couple after the standard deduction of 24,000 and subtracting out social security is to keep ones tax rate as low as possible.

Are my assumptions above correct? If so, it seems we have a chance of being in the 12% tax bracket. I think our current marginal rate is 25%. What do you do to minimize taxes? What rate are you paying in retirement? If willing please share the taxed and untaxed portions of budget.
4nursebee

DIFAR31
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Re: Federal taxes in retirement

Post by DIFAR31 » Mon Oct 22, 2018 7:30 am

Social Security benefits may be taxable, depending on your specific income situation.

Retiredron
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Re: Federal taxes in retirement

Post by Retiredron » Mon Oct 22, 2018 7:39 am

Don't forget any interest, dividend and capital gain income from taxable accounts.

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4nursebee
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Re: Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 7:44 am

SS as taxable, ouch. So, one of us retires at 62.5, the other keeps working and earning. I had not thought that the other spouse working would affect the taxability of the SS income. So expecting provisional income >50K/yr means 85% of SS will be taxed, which would greatly impact our bottom line tax rate, perhaps bump us from 12% to 22%.

Our situation in 1yr, monthly
SS 1700+ @ 62.5yrs
Pension 2000+
Rents 1000+
Annuity 50% taxed +/- 10% 1500
2M+ in retirement assets @3%=5,000 but not at RMD ages. Have thought to annuitize for guarantee 8k/mo
One of could keep working gross 5800

What a game this is to figure everything out...how do I do it?
4nursebee

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4nursebee
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Re: Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 7:45 am

Retiredron wrote:
Mon Oct 22, 2018 7:39 am
Don't forget any interest, dividend and capital gain income from taxable accounts.
Not an issue yet but trying to save 2 yrs expenses before retiring.
4nursebee

Chip
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Re: Federal taxes in retirement

Post by Chip » Mon Oct 22, 2018 7:46 am

We now have mostly tax-efficient investments in taxable.
We are delaying social security on the high earner until age 70. 85% of that benefit will be taxed as ordinary income.
We tax loss harvested enough in the past few years that we get to offset 3k per year of ordinary income with those losses.
We looked ahead at what our tax return will look like once RMDs and full social security are online. We have used the relatively low income and low tax years to convert tIRA to Roth at favorable tax rates (compared to what they will be). Over more than a decade that has added up.
We bunched itemized deductions every other year to get an additional tax benefit. That strategy isn't as easy to do with the new tax law.
Our tIRAs are all bonds, which will reduce the potential size of RMDs.
Once we are receiving RMDs and full social security we will used qualified charitable distributions (QCDs) to fulfill our charitable obligations. We will withdraw from the Roth as necessary to fund "lumpy" spending after age 70.5.

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dwickenh
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Re: Federal taxes in retirement

Post by dwickenh » Mon Oct 22, 2018 7:54 am

The best way to control taxes is on the expense side of the equation. If you require 12,000 per month to live, it is harder to keep your taxes under the 22% brkt. It is much easier if you can live on 5,000 per month. Contributions to income from pension, deferred investment withdrawals, and 1/2 of SS income will determine how much of SS is taxable. Taxable withdrawals with minimum capital gains will help keep you in the 12%. Multiple streams of income to control taxable income is the best way to reduce retirement income taxes for me.

Good luck,

Dan

I paid 0 federal taxes last year on withdrawals of 53,000.
Withdrawals from pension and taxable account.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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oldcomputerguy
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Re: Federal taxes in retirement

Post by oldcomputerguy » Mon Oct 22, 2018 8:03 am

4nursebee wrote:
Mon Oct 22, 2018 7:44 am
SS as taxable, ouch. So, one of us retires at 62.5, the other keeps working and earning. I had not thought that the other spouse working would affect the taxability of the SS income.
It's not just the fact that the other of you is working. It depends on a factor called "combined income", which is the sum of:
  • one-half your Social Security benefits
  • all your other income (including income that normally would not be taxable such as municipal bond interest)
Check page 6 of IRS Publication 915 for a discussion of the calculation.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

RickBoglehead
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Re: Federal taxes in retirement

Post by RickBoglehead » Mon Oct 22, 2018 8:11 am

Make sure you carefully evaluate when you take Social Security. Many times it's beneficial to delay the benefit, sometimes all the way to age 70.

And yes, it's much harder to figure all this out then it should be. Same as with the taxes in general. We should be able to clearly see, not have to calculate "what ifs", when we should file for Social Security, what will be taxable, etc.

Agree on the points about converting as much as makes sense to ROTH. If Congress ever goes back on the ROTH rules and tries to tax ROTH accounts in the future, there will be rioting in the streets.
Last edited by RickBoglehead on Mon Oct 22, 2018 8:18 am, edited 1 time in total.

Beehave
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Re: Federal taxes in retirement

Post by Beehave » Mon Oct 22, 2018 8:15 am

Every assumption you make now about future taxes and income could end up needing revision. Therefore, I'd suggest doing all you can to maximize income and savings rather than focus on current tax policies. Retirement can be long. Stability of policies and promises can be short. The one tax-oriented action I'd say is definitely worth taking before reaching RMD age would be some conversion of pre-tax 401k/IRA into Roth IRA. But even there, I'd say remain diversified - - keep some pre-tax and some post-tax IRA funds.

My opinion --- best wishes!

bklyn96
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Re: Federal taxes in retirement

Post by bklyn96 » Mon Oct 22, 2018 8:18 am

Estimating upcoming federal taxes? We use TurboTax Deluxe and the built-in "what if" worksheet to estimate future taxes.

Tax history? Here's some data from our federal returns.

Year => Tax Bracket => Effective Tax Rate

For married, filing joint, 1 retired, 1 working
2010 => 15% => 6.57%
2011 => 25% => 10.13%

For married, filing joint, both retired
2012 => 15% => 4.15%
2013 => 15% => 5.15%
2014 => 15% => 6.53%
2016 => 15% => 7.53%
2017 => 10% => 1.13%

Comments
One-time extremely high medical expenses in 2017

Definitions
Tax bracket % is based on taxable income
Effective tax rate = tax / adjusted gross income

Lynette
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Re: Federal taxes in retirement

Post by Lynette » Mon Oct 22, 2018 8:38 am

With pensions, SS and RMDs at 70.5, you will likely pay extra Medicare B and D premiums - called IRMAA.

retiredjg
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Re: Federal taxes in retirement

Post by retiredjg » Mon Oct 22, 2018 8:39 am

4nursebee wrote:
Mon Oct 22, 2018 7:44 am
Our situation in 1yr, monthly
SS 1700+ @ 62.5yrs
Pension 2000+
Rents 1000+
Annuity 50% taxed +/- 10% 1500
2M+ in retirement assets @3%=5,000 but not at RMD ages. Have thought to annuitize for guarantee 8k/mo
One of could keep working gross 5800

What a game this is to figure everything out...how do I do it?
With a pension, rent, an annuity and $2M in the bank, I'm not sure either of you need to keep working at all. Are your expenses high?

With all that taxable income, 85% of your SS will be taxed. No way around it. You might consider delaying SS until later and using the years between 60 and 70 to do Roth conversions on that $2M so it won't be so high when RMDs hit. Then take SS at 70.

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4nursebee
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Re: Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 10:16 am

With a pension, rent, an annuity and $2M in the bank, I'm not sure either of you need to keep working at all. Are your expenses high?

With all that taxable income, 85% of your SS will be taxed. No way around it. You might consider delaying SS until later and using the years between 60 and 70 to do Roth conversions on that $2M so it won't be so high when RMDs hit. Then take SS at 70.
[/quote]

Ages are 50, 61.

Base expenses are now 2,000 a month for food, fuel, utilities, taxes, insurance, plus some xtra.
Would need to pay for insurance, that is a big concern.
Perhaps I just need to post a big portfolio question
4nursebee

retiredjg
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Re: Federal taxes in retirement

Post by retiredjg » Mon Oct 22, 2018 10:24 am

If your pension will cover your base expenses, you still have annuity income and rental income to pay health insurance with without even tapping the savings.

And yes, health insurance is a big issue. But I'm not sure either of you need to work any more if you expect your base expenses to remain reasonably close to $24k a year + health care.

That's an off the cuff assessment. You may have reasons you think you need to work more.

MnD
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Re: Federal taxes in retirement

Post by MnD » Mon Oct 22, 2018 10:29 am

If I was in this boat we'd both retire, defer the higher income-earner SS to 70, take the lower earner SS at 62 and up the % withdrawal rate on the portfolio to 4-5% with a variable (percentage of annual portfolio) approach which will mitigate a runaway portfolio balance to the upside situation. You will likely be in the marginal 22% bracket but a lot of these income streams will fill up the 0% and 12% space. There are no "tricks" to avoiding taxes in retirement, only trade-offs. Ultra-low or no tax situations in retirement means the very common situations of monthly incomes around or below $5K a month. You are fortunate to be in a much better situation income-wise than that so don't get all wrapped up about paying some taxes in retirement. It will be much lower than working which is the whole idea about deferred comp.

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Artful Dodger
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Re: Federal taxes in retirement

Post by Artful Dodger » Mon Oct 22, 2018 10:34 am

Is your estimated rent income net of expenses and depreciation?

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4nursebee
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Re: Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 10:39 am

Artful Dodger wrote:
Mon Oct 22, 2018 10:34 am
Is your estimated rent income net of expenses and depreciation?
Yes net of expenses, not sure how depreciation works into it. I expect it works in our favor?
Rent income is likely higher by a couple hundred at least, I've just used that figure for a while, have since bought another house that is +300/month.
4nursebee

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Re: Federal taxes in retirement

Post by #Cruncher » Mon Oct 22, 2018 11:36 am

4nursebee wrote:
Mon Oct 22, 2018 7:44 am
So expecting provisional income >50K/yr means 85% of SS will be taxed, which would greatly impact our bottom line tax rate, perhaps bump us from 12% to 22%. Our situation in 1yr, monthly
SS 1700+ @ 62.5yrs
Pension 2000+
Rents 1000+
Annuity 50% taxed +/- 10% 1500
...
One of could keep working gross 5800
With $20,400 / year of Social Security ($1,700 / month) the maximum 85% will be taxed when your other income reaches $47,141. [*] Additional ordinary income (e.g., wages) from there to $84,060 would be subject to a marginal tax rate of only 12%. So if your pension, rent, & taxable portion of annuity total $54,000 / year, you could earn up to $30,000 in wages before hitting the 22% tax bracket.

Code: Select all

-- Non SS Ord Income ---   Marginal
 From      To     Extent   Tax Rate
------   ------   ------   --------
     0   23,267   23,267      0.00%  no taxable income
23,267   47,141   23,874     18.75%  10% & 12% brackets with SS increasingly taxed
47,141   84,060   36,919     12.00%  max 85% SS already taxed
84,060                       22.00%  start 22% bracket
Here are the details prepared with the Compare sheet of my Marginal Tax Rates spreadsheet -- for a 2018 Joint return with a $24,000 standard deduction.

Code: Select all

Social Security 50% threshhold     32,000    --------------->
Social Security 85% threshhold     44,000    --------------->
Floor: ord income 10% bracket           0    ---------------> 
Floor: ord income 12% bracket      19,050    --------------->
Floor: ord income 22% bracket      77,400    --------------->
Floor: ord income 24% bracket     165,000    --------------->

Non-SS Ordinary Income             23,267    47,141    84,060
Social Security Benefit            20,400    20,400    20,400
SS Relevant Income                 33,467    57,341    94,260
50% SS taxable                        733     6,000     6,000
85% SS taxable                        -      11,340    11,340
Total SS taxable                      733    17,340    17,340

Code: Select all

Adjusted gross income              24,000    64,481   101,400
Standard deduction                 24,000    24,000    24,000
Taxable Income                          0    40,481    77,400
Taxable: ord income 12% bracket         0    21,431    58,350
Taxable: ord income 10% bracket         0    19,050    19,050
Tax: ord income 12% bracket             0     2,572     7,002
Tax: ord income 10% bracket             0     1,905     1,905
Total tax                               0     4,477     8,907

Increased income                         23,874    36,919
Increased taxable SS                     16,607         0
Increased tax                             4,477     4,430
Marginal tax rate                        18.75%    12.00%
* See Taxation of Social Security benefits in the wiki for an explanation of how the taxable portion of SS is determined.

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Artful Dodger
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Re: Federal taxes in retirement

Post by Artful Dodger » Mon Oct 22, 2018 2:58 pm

4nursebee wrote:
Mon Oct 22, 2018 10:39 am
Artful Dodger wrote:
Mon Oct 22, 2018 10:34 am
Is your estimated rent income net of expenses and depreciation?
Yes net of expenses, not sure how depreciation works into it. I expect it works in our favor?
Rent income is likely higher by a couple hundred at least, I've just used that figure for a while, have since bought another house that is +300/month.
It certainly does. I would spend some money, and get professional tax advice on the rental property at least, even if you do your own personal taxes. I don't own rental property any more, and the depreciation discount isn't as generous as it used to be, but it is a significant offset. I think you now have to use the MACRS 27.5 depreciation. This means the cost of the property (less land value) is divided by 27.5, and that amount is deducted from any income received. So, if the house was purchased for $350K, and land value was $50K, the capital investment was $300K. The depreciation would then be $300K / 27.5, or $10,909. This amount is reported on your taxes, and added to any interest expense, as well as other costs you incur to rent the house (upkeep, marketing, etc.). This is overly simplified, and you will likely want to sell a house in the future, which will entail taxes on gains, unless you do an exchange to like property to delay the capital gains tax.

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4nursebee
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Re: Federal taxes in retirement

Post by 4nursebee » Mon Oct 22, 2018 3:40 pm

Artful Dodger wrote:
Mon Oct 22, 2018 2:58 pm
4nursebee wrote:
Mon Oct 22, 2018 10:39 am
Artful Dodger wrote:
Mon Oct 22, 2018 10:34 am
Is your estimated rent income net of expenses and depreciation?
Yes net of expenses, not sure how depreciation works into it. I expect it works in our favor?
Rent income is likely higher by a couple hundred at least, I've just used that figure for a while, have since bought another house that is +300/month.
It certainly does. I would spend some money, and get professional tax advice on the rental property at least, even if you do your own personal taxes. I don't own rental property any more, and the depreciation discount isn't as generous as it used to be, but it is a significant offset. I think you now have to use the MACRS 27.5 depreciation. This means the cost of the property (less land value) is divided by 27.5, and that amount is deducted from any income received. So, if the house was purchased for $350K, and land value was $50K, the capital investment was $300K. The depreciation would then be $300K / 27.5, or $10,909. This amount is reported on your taxes, and added to any interest expense, as well as other costs you incur to rent the house (upkeep, marketing, etc.). This is overly simplified, and you will likely want to sell a house in the future, which will entail taxes on gains, unless you do an exchange to like property to delay the capital gains tax.
Thank you. We do have a CPA that does all of that, I just did not know those things.
4nursebee

Nowizard
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Re: Federal taxes in retirement

Post by Nowizard » Mon Oct 22, 2018 4:33 pm

Depending on income, up to 85% of your SS income is taxed. A potential issue for the future, particularly if you have SS and a pension, is for higher tax burden in retirement than when you were working. That can occur if you have substantial retirement, non-Roth, savings when you begin taking Minimum Required Distributions.

Tim

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Re: Federal taxes in retirement

Post by The Wizard » Mon Oct 22, 2018 4:52 pm

If you do your own taxes, or at least review them carefully, then you are familiar with Adjusted Gross Income (AGI). This was the dollar amount at the bottom of page one of form 1040 for the longest time. Its location may be changing this year.

Anyhow, you need to estimate your AGI for your retirement years, since your eventual taxes owed derive from that number.

Your SS contribution to AGI may be tricky to compute or not. In my case 85% of SS gets included in AGI.

First year of retirement may see a hiccup in your taxes, which could then be more predictable.

But don't forget about doing Roth conversions...
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ralph124cf
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Re: Federal taxes in retirement

Post by ralph124cf » Mon Oct 22, 2018 7:24 pm

You mentioned that 50% of your annuity was tax free. This is an unusually high percentage of tax free from an annuity, are you sure? Also, how long will that tax free portion continue? Generally the tax free portion only continues until the insurance company has paid you back (tax free) all of the taxable money that you used to buy the annuity.

Ralph

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FiveK
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Re: Federal taxes in retirement

Post by FiveK » Mon Oct 22, 2018 10:00 pm

4nursebee wrote:
Mon Oct 22, 2018 7:25 am
What do you do to minimize taxes?
The strategy is "understand them." Tactics used depend on individual situations.

As bklyn96 noted, for estimating 2018 taxes, the "what if?" worksheets of TurboTax, TaxAct, etc. may be the most accurate if one has an extremely complex situation.

If one has merely a "somewhat complex" situation, various web-based and spreadsheet programs are available. To date, the personal finance toolbox spreadsheet has been the most accurate (i.e., using 2018 instead of 2017 tables, including more credits, phaseouts, etc.).

Also note ralph124cf's comment on annuities. For folks at your age to have annuities is a red flag, perhaps indicating you have been sold these annuities by a financial advisor who did not have your best interests in mind. All may be well with the annuities, but there is a good chance it isn't.

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Peter Foley
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Re: Federal taxes in retirement

Post by Peter Foley » Mon Oct 22, 2018 11:02 pm

You might find this helpful. It is one column of a spreadsheet I use to estimate taxes in future years. The basis for the column is the two year comparison sheet generated by Turbo tax.

Estimated Taxes
Income
Wages, Salaries
Regular Interest & short term gains
State Tax Refund
Business/Self Employment income
Annuities
IRA Distributions/Roth conversion
Pensions
Rents
Long Term Capital Gains
Qualified Dividends
Taxable Social Security Benefits
Income subtotal
Adjustments to Income (-)
Self employment Tax
SIMPLE, SEP, 401k etc
Self Employed Health Insurance
Adjusted Gross Income

Itemized Deductions
Medical
Income Tax
Real Estate Taxes
Personal Property
Interest paid
Gifts to Charity
Casualty losses
Miscellaneous
Phaseout of deductions
Total Itemized Deductions
Standard or Itemized Deduction
Exemption Amount

Taxable Income

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