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Formula for Tax on Withdrawals
Old 12-11-2019, 09:50 PM   #1
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Formula for Tax on Withdrawals

I thought I saw a previous post on this topic but I can't find it now. I am wondering if there is an easier way to do something other than trial and error. I seem to recall someone posting a formula.

Here is the situation for this year:

I am in the 22% tax bracket. Our income is enough this year that 85% of SS is already being taxed. So, as I withdraw from the IRA the only amount our taxes go up is by the 22%.

Let's say I want to withdraw $1000 from an IRA and want $250 to go taxes and then for the other $750 to be distributed to me. Let's also say that if I do that the $250 will cover my tax liability for the year that existed before I withdrew the $1000. I wouldn't be getting a refund and wouldn't be paying anything. (These are made up number for illustration purposes).

But as soon as I withdraw the $1000, I have an additional $220 in tax liability and so the $250 I was putting to tax withholding is no longer enough. I need to withdraw another $220 to cover the taxes on $1000.

So instead I withdraw $1220 and put $470 to taxes. Fine. But -- now I need to consider the taxes on the extra $220 which is $48.

So instead I withdraw $1268 and I put $518 to taxes. And I now I have to withdraw $48 to pay the taxes on the $48.

Now eventually I get to a point where this balances. I am withdrawing enough to put $750 in my checking account and the rest of the money goes to taxes and I am in balance.

The way I have been doing this is trial and error. But this is tedious? Is there a formula for this? I would like to withdraw enough to cover the taxes on what I am withdrawing but I don't want to over withhold either.
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Old 12-11-2019, 10:08 PM   #2
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1,000/(1-t) = 1,000/(1-22%) = 1,000/78% = 1,282.05

1,282.05 * 22% = 282.05 in tax, leaving $1,000 to spend
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Old 12-11-2019, 10:32 PM   #3
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Quote:
Originally Posted by pb4uski View Post
1,000/(1-t) = 1,000/(1-22%) = 1,000/78% = 1,282.05

1,282.05 * 22% = 282.05 in tax, leaving $1,000 to spend
I think that will work. In the actual situation, of the $1000 let's say I actually want about $250 to go to Tax withholding already (for taxes owed on prior income).

So I could withdraw $1282.05, send $532.05 to taxes and keep $750 to spend.

Thanks.
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Old 12-11-2019, 10:38 PM   #4
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Yes, the same as post #2 but with an additional step of paying $250 of the net $1,000 received for a pending bill (in this case taxes) so after that your net to spend is $750... with a twist that you are doing it in the form of additional withholding.
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Old 12-12-2019, 02:24 AM   #5
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I am going to bookmark this, as I have to calculate my DH's monthly withdrawals from his annuity and will use this formula for the taxes.
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Old 12-12-2019, 08:33 AM   #6
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Quote:
Originally Posted by pb4uski View Post
1,000/(1-t) = 1,000/(1-22%) = 1,000/78% = 1,282.05

1,282.05 * 22% = 282.05 in tax, leaving $1,000 to spend

So simple, yet I have to search it out every time I need to figure it out.

Thanks for the post.
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Old 12-12-2019, 08:48 AM   #7
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Perhaps an easy way to remember it is that for each $1 withdrawn, 22c goes to pay taxes so you only end up with 78c left in your pocket... so in order to calculate your gross withdrawal you need to divide the amount of cash you want in your pocket by the 78c that you have after paying taxes.

And obviously, if the tax rate changes, then the divisor changes as well.
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Old 12-12-2019, 08:49 AM   #8
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N = G - T
T = G x t

N = G - Gt
N = G(1-t)
G=N/(1-t)

G = Gross amount
t = tax rate
T = tax amount
N = Net amount

I remember equations I can derive better than those I can't. Maybe this will help some.
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Old 12-12-2019, 09:15 AM   #9
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Quote:
Originally Posted by pb4uski View Post
Perhaps an easy way to remember it is that for each $1 withdrawn, 22c goes to pay taxes so you only end up with 78c left in your pocket... so in order to calculate your gross withdrawal you need to divide the amount of cash you want in your pocket by the 78c that you have after paying taxes.

And obviously, if the tax rate changes, then the divisor changes as well.
Thanks for simplifying for those out of brain cells for formulas.
This makes it much more simple.

VW
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