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estimated taxes in early retirement
Old 03-16-2010, 09:38 PM   #1
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estimated taxes in early retirement

Just curious. My wife and I are calculating our expenses to figure how much we would need in funds to support an early retirement. One important item - besides healthcare expenses- is federal and state taxes. We have determined our expenses (net of taxes) to be approx. 75,000. How much should we add on for taxes ? We live in Illinois. Ages 54 (soon to be 55) and 52. We should have enough in taxable investments to get thru the next 5 years so hopefully we will not need to touch our 401k and IRAs until then.

Of the $75,000, we will be able to draw a small pension ($8,000 annual) and part time work bringing in $30,000 - so our total draw from taxable investments would be $37,000.

Any insights here would be helpful.

Thanks,
Golfnut.
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Old 03-16-2010, 09:54 PM   #2
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Assuming all your income (p/t work, pension, and investment withdrawal) is taxable, I would expect you would have to pay approximately 10% of your total income to the IRS. That would mean you'd need a gross income of approximately $83K to net $75K after taxes. Not sure what you'd need to add for any state taxes.

The only way to be sure of the numbers is to run some "what if" tax scenarios using TurboTax or one of the online estimators. This should give you a very good idea of what your Federal taxes might be.
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Old 03-16-2010, 10:09 PM   #3
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I am not certain, and not a resident, but I think Illinois does not tax at least some retirement income.

If you have a tax person, you may want to consult them on your question.
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Old 03-16-2010, 10:19 PM   #4
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You have to pay taxes on dividends and any cap gains within mutual funds, as you are today. I'm counting on my dividends to pay for much of my expenses.

If you're selling some of the nest egg, it depends on your basis on those investments. I took a beating on some of my investments, so there's a lot I can sell without paying any taxes. You have to know what your basis is to estimate that part of the taxes.
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Old 03-16-2010, 11:28 PM   #5
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Exactly what RunningBum said. You will have to pay taxes on the gains, divvies, and interest, not on the principle that you withdraw.

We have invested heavily enough in munis that the taxable income from dividends will be pretty low. (We are at about 55/45 as of today, most of the 45% being muni bonds). That said, if you have muni bonds from outside of your state, you will not pay fed tax on them but you may have to pay state tax.

By the way, even though we all have a variety of perspectives, I hope you will let us know what your conclusion is. That will help us, me especially, to add to our knowledge base.

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Old 03-17-2010, 07:11 AM   #6
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Others have listed the considerations. What I did to estimate was run a few what ifs through Turbo Tax (I get it free from Vanguard but previously used a free Tax Act) to see what would happen under the current tax year's rules. For taxable withdrawals see what your gains look like now and make a best guess for next year. For long term planning, take a look at what next year's tax would be if you were already done burning taxable (with lower capital gains) and were running solely on fully taxable IRA withdrawals. That will give you an idea of how things will change down the road -- then figure in a somewhat higher tax rate to deal with the debt
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Old 03-17-2010, 08:33 AM   #7
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I have had to do this since I retired in 2008. One tip I can offer, and this is something I have done even while I was still working, was to pay as much of my (estimated) state income taxes prior to 12/31/xx so I can deduct them on that year's federal income tax return the following April. Otherwise, I have to wait a whole year before I can deduct them on a federal return.

I created my own skeleton, would-be tax return(s) spreadsheet to do the number crunching as part of my checking account spreadsheet. But that was something I was good at.
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Old 03-17-2010, 08:45 AM   #8
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This link will give you tax rates and taxability of retirement income:

Taxes by State

I retired three years ago. My DW still wor*s. Regardless, I was quite surprised how our total taxes dropped.

I was having 15% taken on withdrawls from my TIRA (the main source of income for me in ER).

Even with my DW working, our actual federal tax on 2009 income was at 10%. I had to skip my monthly tax payment (done when I do a withdrawl) in December, since I overestimated my tax due (by running our projected year income/taxes through TurboTax)...

We pay no state/local tax on retirement income. That's includes IRA distributions, pensions, and SS income....
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Old 03-17-2010, 09:01 AM   #9
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You absolutely MUST run your taxes through some kind of tax software. No rule of thumb will tell you what you need to know. A single person taking $75K in IRA distributions will pay $11,850 in taxes, whereas a married person earning $75K in dividend income will pay zero (that's right $0) in federal taxes. The taxes you owe on your $75K in earnings can fall anywhere in between.

The tax calculator over at Dinkytown is easy to use and is pretty comprehensive to get a ballpark number.
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Old 03-17-2010, 10:43 AM   #10
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Quote:
Originally Posted by Gone4Good View Post
A single person taking $75K in IRA distributions will pay $11,850 in taxes, whereas a married person earning $75K in dividend income will pay zero (that's right $0) in federal taxes.
After the Bush tax cuts expire this year, the 0% tax on dividends and capital gains which fall into the two lowest brackets (10% and 15%) go back to 2000 levels, unless Congress extends them for those in these brackets. Obama has said that the taxes would go up only for singles with income over 200K or marrieds over 250K, but these are not the defaults (nor for that matter is the 10% bracket which is also scheduled to disappear next year).
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Old 03-17-2010, 11:48 AM   #11
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Quote:
Originally Posted by REWahoo View Post
Assuming all your income (p/t work, pension, and investment withdrawal) is taxable, I would expect you would have to pay approximately 10% of your total income to the IRS.
2010 will be my first full year of retirement and right now I am living on a very small pension, equal monthly payments from the TSP, and dividends from my taxable portfolio. No SS yet. I estimated my 2010 taxes using the official IRS and State of Louisiana worksheets for estimating taxes. These worksheets are short and very easy to fill out for estimation purposes (go to the relevant websites, search on "estimated taxes", and find the relevant publications containing the worksheets). I will be making quarterly estimated tax payments.

REWahoo's rule of thumb is very close to what I found out after doing this - - my estimates came to about 11% federal, 14% fed+state.

But yes, we don't yet know what the future will bring for federal income taxes.
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Old 03-17-2010, 11:53 AM   #12
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Quote:
Originally Posted by FIRE'd@51 View Post
After the Bush tax cuts expire this year, the 0% tax on dividends and capital gains which fall into the two lowest brackets (10% and 15%) go back to 2000 levels, unless Congress extends them for those in these brackets. Obama has said that the taxes would go up only for singles with income over 200K or marrieds over 250K, but these are not the defaults (nor for that matter is the 10% bracket which is also scheduled to disappear next year).
When the law changes, I'll change my calculation.
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Old 03-18-2010, 08:59 PM   #13
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Thanks to everyone who responded. Got to work some of those tax calculators!
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