Peering into the future: tax brackets

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Church Lady
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Peering into the future: tax brackets

Post by Church Lady » Thu Oct 05, 2017 3:08 am

Hi, All,

I want to know what federal tax brackets, exemptions, and the standard
deduction will be when I turn 70 1/2 and have to start RMDs. For me, this
is about ten years or so into the future.

Of course the law can change at any time, but currently tax brackets,
the personal exemption, and the standard deduction increase with
inflation. According to this article from the Tax Foundation, the IRS
uses the CPI-U to make the adjustment:

The IRS uses the Consumer Price Index (CPI) to adjust the value of the
parameters. It does this by taking the tax parameter’s base value and
multiplying it by the current year’s CPI and dividing it by the base
year’s CPI. For example, the base value for the top of the 10 percent
income tax bracket is $7,000 with a base year of 2002. This is multiplied
by 2014’s CPI-U of 235.69 and divided by 2002’s value of 178.68. The
result is $9,225 (after rounding).


I haven't the foggiest notion how to predict the CPI-U, but I think
I can fake the adjustments with the Excel FV() (future value) function.


Suppose:
y is the year I turn 70 1/2. Then y - 2017 must be the number of years
to inflate the tax brackets, standard deduction, and personal exemption.
2% is annual inflation from now to y. (Two percent is the fed's inflation
target).
37,950 is the upper bound of the 15% tax bracket in 2017

The calculation is:
inflation adjusted 15% bracket upper bound = FV(2%, y - 2017, 0, 37,950)


Example:
So if y - 2017 is 10, and annual inflation is 2% over that period, the top of the 15% tax bracket in 2027 is 46,260.84.

But bracket boundaries seem always to be multiples of 50. That far in the future, I'm
not sure it pays to put too fine a point on whether to round up or down.
it. I let Excel pick the nearest multiple of 50 with MROUND().

Continuing the example above, the new bracket boundary is MROUND(46,260.84,50)
or 46,300. Thus the upper bound of the 2027 15% tax bracket for single filers is 46,300.

Doing the same for the personal exemption and standard deduction,
2027 personal exemption for single filers: 4900
2027 standard deduction for single filers: 7700

Bracket boundaries for 2027 for single filers:
10% ends at 11400
15% ends at 46300
25% ends at 112050
28% ends at 229550

Remember you heard it here first. :D


1) Is there a better method to estimate future tax brackets, or a conventional method to do so? Planners
must have to do this all the time.

2) My estimate depends heavily on correctly predicting inflation. I used 2% because that is the Fed's target inflation rate. However,
according to this web site of historical inflation rates
http://www.inflation.eu/inflation-rates ... tates.aspx

annual inflation over the last ten years has ranged from .09% to 4.08%:

CPI United States 2016 2.07 %
CPI United States 2015 0.73 %
CPI United States 2014 0.76 %
CPI United States 2013 1.50 %
CPI United States 2012 1.74 %
CPI United States 2011 2.96 %
CPI United States 2010 1.50 %
CPI United States 2009 2.72 %
CPI United States 2008 0.09 %
CPI United States 2007 4.08 %

so maybe using 2% isn't sound. I'm not sure what I could do about it.


3) Don't forget we are not allowed to speculate about future legislation. I am aware
of certain tax reform proposals that could turn my estimate on its head. I'm keen
to map out my Roth conversions for the next ten years. If the facts change, I'll change
my plan.


Thanks!
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

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celia
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Re: Peering into the future: tax brackets

Post by celia » Thu Oct 05, 2017 3:24 am

Church Lady wrote:
Thu Oct 05, 2017 3:08 am
I'm keen to map out my Roth conversions for the next ten years. If the facts change, I'll change my plan.
I'm "lazy" so I just used the latest version of tax software to run my estimated numbers. I figure inflation, the growth of my funds, and IRS adjustments in their parameters will move similarly. After I had my "ten year" plan, I updated everything each year with then-current numbers.

Don't forget that not every dollar of income is taxed the same each year. Qualified dividends and Long Term Capital Gains may be taxed differently than your wages. And a different amount of SS may be taxed each year, depending on what your other incomes are and how much they are.

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oldcomputerguy
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Re: Peering into the future: tax brackets

Post by oldcomputerguy » Thu Oct 05, 2017 5:29 am

I have a spreadsheet built to plan my budget in retirement going forward to 2050. I included in this spreadsheet essentially what you're describing. But since none of us can predict the future, I just used a rough rule of thumb of tying the increases in tax brackets each year to a predicted inflation of 2%. (In fact everything on each page of the sheet is tied to a predicted inflation figure for that year. By changing the inflation figure for a year, everything in that year changes.)

In short, I just assume an adjustable 2% increase for each year, and adjust brackets based on that. Of course, my assumptions likely will differ from reality, and as time goes by I intend to adjust the assumed figures to match reality each year. But as the Boglehead Philosophy says, any plan is better than no plan.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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FiveK
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Re: Peering into the future: tax brackets

Post by FiveK » Thu Oct 05, 2017 5:33 am

celia wrote:
Thu Oct 05, 2017 3:24 am
Church Lady wrote:
Thu Oct 05, 2017 3:08 am
I'm keen to map out my Roth conversions for the next ten years. If the facts change, I'll change my plan.
I'm "lazy" so I just used the latest version of tax software to run my estimated numbers. I figure inflation, the growth of my funds, and IRS adjustments in their parameters will move similarly.
+1

It is much simpler to do these estimates using real returns and ignoring inflation. Seems as good a use of Occam's razor as any.

carolinaman
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Location: North Carolina

Re: Peering into the future: tax brackets

Post by carolinaman » Thu Oct 05, 2017 6:21 am

Church Lady wrote:
Thu Oct 05, 2017 3:08 am

1) Is there a better method to estimate future tax brackets, or a conventional method to do so? Planners
must have to do this all the time.
I use an Excel spreadsheet to adjust bracket ranges relative to me based upon inflation and project this until age 95. I can change one inflation cell number and everything updates. Great for what-if analysis.

2) My estimate depends heavily on correctly predicting inflation. I used 2% because that is the Fed's target inflation rate. However,
according to this web site of historical inflation rates
http://www.inflation.eu/inflation-rates ... tates.aspx

annual inflation over the last ten years has ranged from .09% to 4.08%:

Again, if you setup spreadsheet properly, you can quickly analyze impact of different inflation levels.


3) Don't forget we are not allowed to speculate about future legislation. I am aware
of certain tax reform proposals that could turn my estimate on its head. I'm keen
to map out my Roth conversions for the next ten years. If the facts change, I'll change
my plan.
Agreed. I think everyone should be prepared to analyze their retirement plans if and when tax law changes are made. It may create new opportunities. For me, one potential is to take advantage of higher tax bracket and increase TIRA to Rothe conversions.


Thanks!

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#Cruncher
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Re: Peering into the future: tax brackets

Post by #Cruncher » Thu Oct 05, 2017 9:54 am

FiveK wrote:
Thu Oct 05, 2017 5:33 am
It is much simpler to do these estimates using real returns and ignoring inflation.
I agree. Just use the 2017 brackets, deductions [1], and exemptions and then project your income in 2017 constant dollars. There is one adjustment I would make, however. The two Social Security "thresholds" are not indexed to the CPI. [2] So I would reduce them in accordance with your inflation estimate. For example, if it is 2%:

Code: Select all

    SS
Threshold   Single    Joint
---------   ------   ------
    50%     25,000   32,000  Nominal
    85%     34,000   44,000     "

    50%     20,500   26,250  Real in 10 years
    85%     27,900   36,100        "
Where, for example:
20,500 = MROUND(25000 / 1.02 ^ 10, 50)
  1. But the standard deduction increases (in 2017 dollars) at age 65: $1,550 on a single return and $1,250 for a joint return if only one person is 65+ and $2,500 if both are.
  2. See Taxation of SS benefits in the Wiki for how the "thresholds" are used in determining the portion of Social Security that is taxed.

Cyclesafe
Posts: 327
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Location: San Diego

Re: Peering into the future: tax brackets

Post by Cyclesafe » Thu Oct 05, 2017 9:59 am

+1 on the idea of using the most current tax software and thinking in terms of nominal values.

When tax laws change, the analysis needs to be repeated. And to some degree future returns will (over time) ameliorate the future effects of inflation. Adding assumption upon assumption does not add to the usefulness of a forecast. We live in uncertain times.

The Wizard
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Location: Reading, MA

Re: Peering into the future: tax brackets

Post by The Wizard » Thu Oct 05, 2017 11:03 am

oldcomputerguy wrote:
Thu Oct 05, 2017 5:29 am
I have a spreadsheet built to plan my budget in retirement going forward to 2050. I included in this spreadsheet essentially what you're describing. But since none of us can predict the future, I just used a rough rule of thumb of tying the increases in tax brackets each year to a predicted inflation of 2%. (In fact everything on each page of the sheet is tied to a predicted inflation figure for that year. By changing the inflation figure for a year, everything in that year changes.)

In short, I just assume an adjustable 2% increase for each year, and adjust brackets based on that. Of course, my assumptions likely will differ from reality, and as time goes by I intend to adjust the assumed figures to match reality each year. But as the Boglehead Philosophy says, any plan is better than no plan.
2050 is rather impressive.
I'm 67 and my spreadsheet, which I began five years ago, just goes to age 75.
My thinking is that the bulk of actionable changes that one can make are in your 60s up to early 70s.

And for simplicity, I model neither inflation nor tax brackets.
I simply project my AGI for each calendar year and try adjust it upward a bit each year via Roth conversion and/or part-time work so that the jump in my age 70.5 year isn't too much.

My options after starting full SS and RMDs are quite less, so I'm not sure of the utility of my spreadsheet after that...
Attempted new signature...

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oldcomputerguy
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Re: Peering into the future: tax brackets

Post by oldcomputerguy » Thu Oct 05, 2017 11:56 am

The Wizard wrote:
Thu Oct 05, 2017 11:03 am
oldcomputerguy wrote:
Thu Oct 05, 2017 5:29 am
I have a spreadsheet built to plan my budget in retirement going forward to 2050. I included in this spreadsheet essentially what you're describing. But since none of us can predict the future, I just used a rough rule of thumb of tying the increases in tax brackets each year to a predicted inflation of 2%. (In fact everything on each page of the sheet is tied to a predicted inflation figure for that year. By changing the inflation figure for a year, everything in that year changes.)

In short, I just assume an adjustable 2% increase for each year, and adjust brackets based on that. Of course, my assumptions likely will differ from reality, and as time goes by I intend to adjust the assumed figures to match reality each year. But as the Boglehead Philosophy says, any plan is better than no plan.
2050 is rather impressive.
I'm 67 and my spreadsheet, which I began five years ago, just goes to age 75.
My thinking is that the bulk of actionable changes that one can make are in your 60s up to early 70s.

And for simplicity, I model neither inflation nor tax brackets.
I simply project my AGI for each calendar year and try adjust it upward a bit each year via Roth conversion and/or part-time work so that the jump in my age 70.5 year isn't too much.

My options after starting full SS and RMDs are quite less, so I'm not sure of the utility of my spreadsheet after that...
Well, obviously 2050 is way too far into the future to be worth anything more than a skeleton. But as I have progressed from planning retirement into actual retirement it has progressed from a plan template into an operational budget, so I feel that the time spent building it was time well spent.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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