How to pay ZERO taxes in retirement with 6-figure expenses

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#Cruncher
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by #Cruncher » Sun Feb 18, 2018 11:03 am

Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
You can imagine that if you retired into a 0% bracket, but needed $100,000 -- do some guesses as to the future bracket schedule & see how much money you would pay in taxes -- and remember that you need the entire $100,000, so you would be withdrawing more to cover the taxes. Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
No calculus is required. After guessing the marginal tax bracket, only algebra is needed. For example, assuming 2018 brackets and standard deduction, let "w" be the withdrawal amount:

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Single
  14,089.50 Tax on 82,500 [top of 22% bracket] = 10% * 9525 + 12% * (38700 - 9525) + 22% * (82500 - 38700)
  w - (w -  12,000 - 82,500) * 0.24 - 14,089.50 = 100,000
   0.76w +  22,680                  - 14,089.50 = 100,000
   0.76w =  91,409.50
       w = 120,275.66
Joint
  8,907 = tax on 77,400 [top of 12% bracket] =  10% * 19050 + 12% * (77400 - 19050)
  w - (w -  24,000 - 77,400) * 0.22 - 8,907 = 100,000
   0.78w +  22,308                  - 8,907 = 100,000
   0.78w =  86,599
       w = 111,024.36
Alternatively you could amend the Compare sheet of my Marginal Tax Rates spreadsheet to calculate after tax income and then use Excel's Goal Seek tool to find the ordinary income such that after tax income will be $100,000.

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                                   Single     Joint
                                   ------     -----
Rate: ord income bracket 1            10%       10%
Rate: ord income bracket 2            12%       12%
Rate: ord income bracket 3            22%       22%
Rate: ord income bracket 4            24%       24%
Floor: ord income bracket 2         9,525    19,050
Floor: ord income bracket 3        38,700    77,400
Floor: ord income bracket 4        82,500   165,000
Non-SS Ordinary Income            120,276   111,024 <-- found with Goal Seek
Adjusted gross income             120,276   111,024

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Deductions plus Exemptions         12,000    24,000
Taxable Income                    108,276    87,024
Taxable: ord income bracket 4      25,776       -  
Taxable: ord income bracket 3      43,800     9,624
Taxable: ord income bracket 2      29,175    58,350
Taxable: ord income bracket 1       9,525    19,050
Tax: ord income bracket 4           6,186       -  
Tax: ord income bracket 3           9,636     2,117
Tax: ord income bracket 2           3,501     7,002
Tax: ord income bracket 1             953     1,905
Total tax                          20,276    11,024
After tax income                  100,000   100,000

ivk5
Posts: 274
Joined: Thu Sep 22, 2016 9:05 am

Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by ivk5 » Sun Feb 18, 2018 3:03 pm

Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
Off topic but tax gross-up requires only basic algebra...

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