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1.6% tax in retirement
Old 04-05-2012, 01:16 PM   #1
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1.6% tax in retirement

I just realized that if you keep your annual income in the 15% tax bracket you pay 0% tax on qualified dividends. I plan to live of $14k rental income and $14k of dividends. Assuming those dividends are all qualifying and I just take the standard deduction and one exemption I end up paying $450 tax.
I take $9500 off my regular income for my standard deduction and one exemption leaving $4500 to be taxed at the 10% level which is $450. There is no tax due on the $14k of qualified dividends as I'm in the 15% tax bracket. Combine this with a ROTH and you can almost say goodbye to taxation.
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Old 04-05-2012, 01:24 PM   #2
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No traditional IRA with the obligatory distributions?
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Old 04-05-2012, 01:34 PM   #3
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Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.

Am I missing something here ?
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Old 04-05-2012, 01:35 PM   #4
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Not for quite a few years.
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Old 04-05-2012, 01:36 PM   #5
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Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.

Am I missing something here ?
Yes, the ROTH withdrawals
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Old 04-05-2012, 01:42 PM   #6
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Yes, the ROTH withdrawals
Oh, that explains it! I didn't visualize you as someone who would be happy on such a tight budget. The Roth withdrawals will provide a nice supplement.
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Old 04-05-2012, 01:47 PM   #7
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The latter usually involves some w*rk!

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Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.

Am I missing something here ?
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Old 04-05-2012, 01:50 PM   #8
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Depends on how much one has in the Roth, I suppose. Otherwise, it seems pretty silly to avoid building wealth in order to lessen the tax burden.

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Yes, the ROTH withdrawals
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Old 04-05-2012, 01:53 PM   #9
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Oh, that explains it! I didn't visualize you as someone who would be happy on such a tight budget. The Roth withdrawals will provide a nice supplement.
Actually the 0% dividend rate applies up to the top of the 15% tax bracket so you could make it work with up to $35k. My budgeting shows that I'll be comfortable on $28k, but I can always make ROTH withdrawals and just spend some cash if needed. If I move back to the UK the $28k goes even farther as there's no medical insurance to pay. The UK also has a 0% tax rate on dividends if income is less than $56k.
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Old 04-05-2012, 01:59 PM   #10
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Enjoy it while you can since, unless the law is changed, that tax break for qualified dividends goes away in about 9 months.
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Old 04-05-2012, 02:07 PM   #11
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Yes, the ROTH withdrawals
But then again, you did "prepay" tax on those funds.

Pay now / pay later. You still have to pay the piper ...
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Old 04-05-2012, 02:19 PM   #12
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But then again, you did "prepay" tax on those funds.

Pay now / pay later. You still have to pay the piper ...
Yes that's true, but as I maxed out my deferal to 457, 403b and 401a my tax rate right now is at 15%. I do as much as I can to reduce that tax on my ROTH contributions.
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Old 04-05-2012, 02:23 PM   #13
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Our tax code is in love with passive income. So much so, it is quite possible for a retiree living off of a large portfolio to pay almost nothing in taxes. Consider the case of a married couple with a $10MM portfolio, split evenly between muni bonds and individual stocks yielding 3% a piece. That portfolio will generate $300,000 in annual income and a tax payment of just $8,970 . . . for an effective tax rate of 2.9%.
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Old 04-05-2012, 02:30 PM   #14
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Depending on the size of your pre-tax accounts, you may want to take withdrawals from these to lower the balances before RMD time hits even if you have to pay taxes into the 25% range. It's a "fun with your tax software" adventure.

Personally, I believe that the favorable long term capital gains and dividend tax treatment will either get extended or reinstated soon after they expire. I suspect that they will be in place before we do our 2013 taxes. They have been around too long to just get flushed IMHO. Please, no debate here on tax law changes. I am just stating a belief that they really won't disappear this year.
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Old 04-05-2012, 02:31 PM   #15
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$5m at 3% generates $150,000 in dividends. If they are qualified divs they'll be taxed at 15%, which is $22,500 tax. What did I miss?
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Old 04-05-2012, 02:31 PM   #16
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Enjoy it while you can since, unless the law is changed, that tax break for qualified dividends goes away in about 9 months.
Yep it might go up to 15%, but who can tell. Just best to keep up on this stuff and adjust your finances appropriately
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Old 04-05-2012, 02:32 PM   #17
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Our tax code is in love with passive income. So much so, it is quite possible for a retiree living off of a large portfolio to pay almost nothing in taxes. Consider the case of a married couple with a $10MM portfolio, split evenly between muni bonds and individual stocks yielding 3% a piece. That portfolio will generate $300,000 in annual income and a tax payment of just $8,970 . . . for an effective tax rate of 2.9%.
Did you include the AMT in your calculations? Of course, the AMT gets mushed about every year so you never know what it will really be.
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Old 04-05-2012, 02:37 PM   #18
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$5m at 3% generates $150,000 in dividends. If they are qualified divs they'll be taxed at 15%, which is $22,500 tax. What did I miss?
For this married couple the first ~$90K of qualified dividend income is taxed at zero (0% rate up to $69K, plus standard deduction and personal exemption).
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Old 04-05-2012, 02:38 PM   #19
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Did you include the AMT in your calculations? Of course, the AMT gets mushed about every year so you never know what it will really be.
I ran a similar scenario (I think with 2% dividends and 3% muni interest) through Turbo Tax and it said the AMT didn't apply.
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Old 04-05-2012, 02:43 PM   #20
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For this married couple the first ~$90K of qualified dividend income is taxed at zero (0% rate up to $69K, plus standard deduction and personal exemption).
aha, OK, guess that works provided the couple has no other income, such as from tIRA or SS
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