First year of FIRE: did your taxes from the year before shock you?

[BBQ-Nut]

So, for that first year of transition into FIRE from w*rking, folks need to plan/pay for the taxes owed for that last year of working from retirement income sources.

Did that last year of working taxes shock you as having to be paid from retirement income?

Did you plan for those taxes and stashed away extra to pay for them?

Seems like once you are in FIRE and expenses vs income streams are 'stable' it is easier to plan, but that actual transition year requires some careful planning.

[RockyMtn]

First year is a bit tricky. If you use a tax planner such as Quicken or TurboTax you can estimate fairly closely. Taxes are included as expenses just like any other bill. I think you will find that your taxes are somewhat lower in retirement. At least I have.

[kaneohe]

Perhaps time has dimmed the pain.........but it seems like if you had been withholding as you should have, perhaps 95% or so of the pain would already have been paid, so you would only need to deal with 5% or so remaining in April.
If you paid an average tax rate of 20%, then maybe only 1% of wages would be due. Whether that was significant or not might depend on whether you anticipated that or not.

[48Fire]

I modeled my taxes in TurboTax the year before I retired, so no big surprise.

[Midpack]

No surprise at all. What was a surprise was how low my taxes were my first full year without work income, embarrassingly low...

[BBQ-Nut]

Quote:

Originally Posted by Midpack No surprise at all. What was a surprise was how low my taxes were my first full year without work income, embarrassingly low...

That is what I am looking forward to - well, not w*rking is first, but lower taxes will make my smile all the bigger!

[martyb]

I'm glad this came up for discussion. I just retired in July, and am now receiving retirement only (pension) income. My wife is still working & has fed & state tax witheld. My retirement income won't be taxed by the state but of course, continues to be taxed by the feds. My work income up until the 1st of July this year was subject to both state & fed tax.
I'm having taxes withheld monthly from my check, but I need to try to calculate the overall picture for this year. I'd hate to get a nasty surprise come tax time.

[scrabbler1]

I had a strange tax situation when I retired in late 2008. I was cashing out my large amount of company stock (using NUA to get most of it taxed at LTCG rates, not as ordinary income) so I had a huge federal and state tax bill for 2008 when I filed my income tax returns in early 2009. I paid just enough in estimated federal taxes for the 4th quarter of 2008 to make sure I was in a "safe harbor" to avoid any underpayment penalties, then paid the rest the following April. I wanted to have nearly the entire company stock proceeds invested at very low prices (YAY!) in November and earning monthly dividends to pay my expenses until the tax bill came due the following April.

But with the State income taxes I had some choices. I figured out that if I waited until April of 2009 to pay most of my state income taxes (after making sure I was in a "safe harbor"), I would be able to deduct that on my 2009 federal income tax return. The only problem with that plan was that I would have such a small state tax liability (less than the state income taxes owed) that there would be basically get wiped out from such a huge itemized tax deduction. Instead, I paid most of it in 2008 where it could be put to use against my large income from the stock sale. There was the AMT to contend with, as it and other rules which limited Schedule A deductions due to my large income. But I had set up some what-if spreadsheets which compared the 2008 tax savings to my 2009 savings and it turned out that paying those estimated state taxes in 2008 worked more in my favor. So I made that crucial estimated state IT payment in late December instead of early January. It seemed weird but I am glad I worked it out beforehand to avoid costing myself any needless extra taxes due.

[kramer]

I had planned for it so I was expecting a tax bill of zero. In fact, I think my income was less than the annual taxes I had been paying.

But, I think I was surprised that I actually got a four figure refund on taxes my first full retired year, even though my tax bill was zero and I had not paid in any estimated taxes. (got your attention? ;-)

That is because I could look back to the prior year (when I was still working) and deduct all my foreign taxes paid by my ETFs and mutual funds in my first full year of retirement. I think some retirees with large taxable accounts forget to do this.

[pb4uski]

Quote:

Originally Posted by Midpack No surprise at all. What was a surprise was how low my taxes were my first full year without work income, embarrassingly low...

+1 since in that first year I decided to do capital gains harvesting but stayed in the 15% tax bracket so I had over $100k of income ($80 of it LTCG) and my federal tax bill was zero.

Since then I have been doing Roth conversions to the top pf the 15% tax bracket so I do have a federal tax bill. But even then it is low. In 2013 my effective federal tax rate was 4.8% vs 17.4% the last year that I worked.

[donheff]

No, I modeled it in TT like others and didn't get a surprise. But in 2012 my tax was low because of large medical expense deductions due to dental work. I had become complacent and thoughtlessly set up 2013 withholding based on the 2012 totals. I ended up having to pay a sizable chunk last April 15 because I didn't have that medical deduction in 2013.

[Dd852]

This is a very sore subject. Because of various issues of timing, and ex post facto negotiations and how I was paid, the good news is I got some lump sums out of mega corp long after I stopped working but the bad news was these weren't tax planned or provided for and I got a shellacking . Happy to get the money, unhappy I wasn't able to mitigate the taxes. Two years later I've seen the last of this I think.


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[MichaelB]

Seems I am in the minority here, I had an unexpectedly large tax hit. Working overseas, I participated in a sort of local 401(k) type company sponsored savings plan. When it was first announced the boys over at PWC (who helped design it) told me it would "probably" be eligible for a rollover into an IRA should I ever leave my employment.

When I left, the US PWC folks doing my taxes said no way, no how, not ever. The plan did not meet US guidelines for pension or retirement tax deferral, it was a withdrawal, pure and simple, and taxes were due. They did argue successfully that it could be treated as a capital gain and that no state tax was due, which was some consolation. I also convinced them to use black market exchange rates for the conversion, otherwise it could have put me under.

[jebmke]

Quote:

Originally Posted by BBQ-Nut So, for that first year of transition into FIRE from w*rking, folks need to plan/pay for the taxes owed for that last year of working from retirement income sources. Did that last year of working taxes shock you as having to be paid from retirement income? Did you plan for those taxes and stashed away extra to pay for them? Seems like once you are in FIRE and expenses vs income streams are 'stable' it is easier to plan, but that actual transition year requires some careful planning.

My tax liability is always within a couple hundred bucks of my year-end estimates. With the tools available today there really aren't many good reasons for being surprised.

That reminds me, I have only two more weeks to finish my 2013 return and get it filed.

[W2R]

I retired in November, 2009. My taxes for 2009 were covered by withholding, and I got refunds from both the IRS and Louisiana.

Like others, I found my biggest tax surprise was how low my taxes are in retirement. Wow! I had read about that here, but was skeptical until I experienced it myself.

[Meadbh]

I had to pay extra taxes on Y1 during Y2, due to an unexpected bonus in Y1 that was counted as income. This also meant that my estimated taxes for Y2 went up, causing a double whammy in Y2. I don't wish to get into a vicious cycle of increasing withdrawals to equal extra taxes, leading to higher taxes, etc, so I have tried to restrain spending (and withdrawals) this year (Y2). Hopefully I will return to a lower baseline in Y3 and maybe even get a refund.

[Dd852]

@michaelB - that was my issue too. Being overseas and on a "tax equalized" contract caused a lot of headaches when it was unwound. And of course the big 4 accounting firm's ultimate client wasn't me, but mega corp. Anyway, net net, my years overseas made a big positive difference in net worth so I won't complain too much, but boy did it hurt.


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[shortstop14]

Quote:

Originally Posted by pb4uski +1 since in that first year I decided to do capital gains harvesting but stayed in the 15% tax bracket so I had over $100k of income ($80 of it LTCG) and my federal tax bill was zero. Since then I have been doing Roth conversions to the top pf the 15% tax bracket so I do have a federal tax bill. But even then it is low. In 2013 my effective federal tax rate was 4.8% vs 17.4% the last year that I worked.

Exactly the same for me ... Witholdings covered the last working year almost perfectly, ended up with a small refund. And our first full retired year has been the year for harvesting capital gains while staying in the 15% bracket, so federal taxes should be zero. Next year will flush out the remainder of the large capital gains, and then I'll have a few years of doing Roth conversions before starting SS. Helps to live in a state without income tax.

[Animorph]

We kind of phased into retirement, and I was Roth converting as income decreased. So we never really saw a big change in taxes, and much of our tax bill was self inflicted. Withholding and estimated tax payments were carefully managed to avoid any tax problems. I don't mind where the money comes from to pay taxes, as long as it's in the plan.

[athena53]

We're anticipating a fat refund for 2014; I stopped working in early May so was way overwithheld.

I'm keeping an eye on it with tax software but we've got a lot of after-tax mutual funds, so the final tax bill is always a crapshoot till those distributions are made. That will be true going forward, too.