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Estimating taxes in ER
Old 05-23-2011, 10:56 AM   #1
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Estimating taxes in ER

How do or did you folks estimate income taxes in retirement?

IF I never got another paycheck, we would have some regular income, some partially sheltered income and some completely sheltered income. I can figure out those amounts. I can figure out about what our deductions/exemptions will be under current tax law. And I can figure out what our tax would be under current tax law.

How do you conservatively estimate how much of it Uncle Sam will take going forward?

The only thing that made sense to me was to estimate the best I can based on current tax laws and assume that the taxes on my earned income would go away when I quit earning income, but that the other taxes will likely be a bit more than they are now. Fortunately, the tax free portion of our retirement income will be significant, unless they change the rules on us.

Or am I trying to estimate this stuff too close?
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Old 05-23-2011, 10:59 AM   #2
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I don't think you can do this unless you make assumptions about changes in tax policy, tax rates, SS and health care policy. Frankly I just assume the current scenario and then add a "fudge factor" for added safety -- figuring my tax rate may be (say) 3% higher than now (at least within the same current income bracket) and that my SS and Medicare will be more means tested. To some degree these are things that are out of our control so I try not to sweat them. If the numbers worked now, and would work with a slightly worse future scenario, then I'd go for it. Otherwise we could be falling into another form of "one more year" syndrome based on what the government *might* do to us in the future.

Having said that, using today's tax structure I'm currently in the 25% tax bracket and our plan would have us down in the 15% bracket in retirement. I expect to pay more than 15% when I get there, but again that's why I build a fudge factor into my calculations.
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Old 05-23-2011, 11:00 AM   #3
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- Good luck with predicting the future tax rates.

My Magic 8-Ball says that income taxes will rise by around 33%. It also suggests that Social Security will drop in real terms by 25% and Medicare Co-payments will be around $5k. High Income people will pay their own Medicare.
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Old 05-23-2011, 11:04 AM   #4
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I looked at my income sources and filled out a tax return based on my reduced income. That seemed pretty straightforward.

For later years, I did the same thing. I'm not trying to predict changes in tax rates. I have a "cushion" in my plan for all types of contingencies, which would include higher taxes.
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Old 05-23-2011, 11:49 AM   #5
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Quote:
Originally Posted by Independent View Post
I looked at my income sources and filled out a tax return based on my reduced income. That seemed pretty straightforward.

For later years, I did the same thing. I'm not trying to predict changes in tax rates. I have a "cushion" in my plan for all types of contingencies, which would include higher taxes.
This is what I used to do.
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Old 05-23-2011, 12:05 PM   #6
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Quote:
Originally Posted by Independent View Post
I looked at my income sources and filled out a tax return based on my reduced income. That seemed pretty straightforward.

For later years, I did the same thing. I'm not trying to predict changes in tax rates. I have a "cushion" in my plan for all types of contingencies, which would include higher taxes.
In my ER Budget spreadsheet, I do this, too. One sheet includes a skeleton version of an income tax form (for state and federal) which is linked to the budget part so deductions such as property taxes and medical expenses are figured in, along with the different types of income I have.

On a broader scale, I have my income taxes included in the part of my budget called, "non-medical expenses" to which I have attached a separate (and lower) inflation rate from the "medical expenses" category. My income taxes are a relatively small part of my budget (about 10%) so unless I have a spike in my investment (ordinary) income (which did happen in 2010 but not 2009) it won't change a whole lot. A spike in such income doesn't faze me much because I will always have the money to pay the taxes from said income spike.

I, too, keep a "cushion" in my ER budget to cover these things.
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Old 05-23-2011, 12:23 PM   #7
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I agree with the cushion for uncontrollable influences like taxes and health care. It all comes down to not retiring until you feel REALLY comfortable with the numbers. As far as tax assumptions, I can't make any. What I can do, however, is put in a few hours each month keeping up on the actual and potential changes that are being made, and finding the loopholes most positive responses to them. Paying as few taxes as is legally possible can be a hobby as well as a financial investment. If you are living off pensions/SS/IRA distributions your choices are probably pretty limited. However, if most of your assets are in after-tax investments or Roth's, you've got a little more control of your yearly income and can manage your investments in ways to decrease your tax hits.
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Old 05-23-2011, 01:08 PM   #8
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Saw this in the Bogleheads forum: A retired couple both age 66, drawing SS of $40K and getting $50K of qualified stock dividends with a carryover capital loss of $3K and $600 foreign tax credit ....

So with about $90,000 of income to spend for the year, guess how much tax they would pay?



No tax, they actually get a check back for over $400 from the IRS.
Bogleheads :: View topic - Capital Loss Carry Forward
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Old 05-23-2011, 01:21 PM   #9
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Quote:
Originally Posted by 67walkon View Post
How do or did you folks estimate income taxes in retirement?

IF I never got another paycheck, we would have some regular income, some partially sheltered income and some completely sheltered income. I can figure out those amounts. I can figure out about what our deductions/exemptions will be under current tax law. And I can figure out what our tax would be under current tax law.

How do you conservatively estimate how much of it Uncle Sam will take going forward?

The only thing that made sense to me was to estimate the best I can based on current tax laws and assume that the taxes on my earned income would go away when I quit earning income, but that the other taxes will likely be a bit more than they are now. Fortunately, the tax free portion of our retirement income will be significant, unless they change the rules on us.

Or am I trying to estimate this stuff too close?
Here you go:

http://www.irs.gov/pub/irs-pdf/p505.pdf

Now, the worksheet in that publication for estimating your taxes is based on current tax law. Assume that taxes never go down and so for that reason you must allow a little leeway, and you should be fine.
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Old 05-23-2011, 03:37 PM   #10
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I ERed in 2007 and me and DW use about $36k to live off of.
Not only are we not required to pay any federal taxes, we also are leaving quite a bit of our standard deduction unused.

One way to use it up in a beneficial way is to roll over some money from the traditional IRA to a Roth each year. That way, it is like a tax deduction for us in the future, sort of.

Most are already wise to this but I missed out on a couple of years because I did not know.
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Old 05-23-2011, 03:49 PM   #11
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Quote:
Originally Posted by W2R View Post
Here you go:

http://www.irs.gov/pub/irs-pdf/p505.pdf

Now, the worksheet in that publication for estimating your taxes is based on current tax law. Assume that taxes never go down and so for that reason you must allow a little leeway, and you should be fine.
here's a little online calculator that does a great job for estimating tax rates under a variety of scenario(s)

1040 Tax Calculator - Financial Calculators from Dinkytown.net
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Old 05-23-2011, 07:51 PM   #12
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Good Web Site!

Quote:
Originally Posted by MasterBlaster View Post
here's a little online calculator that does a great job for estimating tax rates under a variety of scenario(s)

1040 Tax Calculator - Financial Calculators from Dinkytown.net
The web site above has a number of useful calculators... don't know the validity of calculations yet... but there are lots of useful tools on the web site.
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