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Help estimating taxes in retirement
Old 06-08-2016, 05:12 PM   #1
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Help estimating taxes in retirement

My sources of income are changing as I have moved from working for megacorp to being FIREd

I've never enjoyed doing taxes let alone paying them.

I'm looking for a tool to help estimate my annual tax liability

Clearly a dollar earned is not always a dollar. Taxes take their toll depending how that money was earned.

Like many here, we have both tax sheltered and taxable accounts with some cap gains. Most of the dividends in taxable account are taking in cash and of course we pay taxes on the dividends most is as qualified div's. We take no WD from sheltered accounts for another decade + as we are in mid 40s

DW and I also have part time hobby jobs mostly to earn income which allows funding an HSA and a 401K and to for DW earn the required SS credits.

For me, it's a way to stay busy and trade a little work and a small cash stipend that goes with it in exchange for grad school tuition.

We get health insurance through the jobs. So no need to manage MAGI income for ACA.

We also have a small rental duplex - bringing in rental income ( rental properties are fully depreciated).

For the next 4 years I'm required to take distributions from a deferred compensation plan which is taxed at ordinary income and the withholdings are at a set rate of about 28% federal and state combined.

It seems that my taxes are very high right now because of the earned income despite shielding much of the income by way of 401(k) or HSA we still seem to cross the threshold to a fairly high tax rate.

I think the real solution is that once the deferred comp payout ends, we should be in a lower earned income bracket and that implies even the dividends and other non-earned income will be taxed at a lower rate.

I think we may even be impacted by AMT in the current scenario -- but not sure --- hopefully if that's the case it ends once deferred comp ends.

I'm just trying to figure out a tool to use in order to model the situation over the next four years and then beyond those 4 years to figure out what I actually need long term in my budget for taxes.

Suggestions ? Approach ?
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Old 06-08-2016, 05:18 PM   #2
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https://turbotax.intuit.com/tax-tool...ster/index.jsp
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Old 06-08-2016, 05:18 PM   #3
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I'd just do runs of each year in the tax software you used for 2015 returns. Start with the return you filed (including deductions, etc.) and modify the income and anything else that changes for 2016, 2017, 2018, etc. Save each as its own year/name. Modify to the extent you have control over income each year and see what happens.

Probably not the most sophisticated way to do it, but should give you a good handle. (Tax laws may change, but nothing else will let you predict that either.)

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E.T.A. Agree that Taxcaster is a good tool. but if you have software already (or buy it cheap this late in the year!), you'll have more flexibility and can save results for each year.
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Old 06-08-2016, 05:31 PM   #4
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I use turbo tax (installed on computer) and I agree, it's easy to "modify" an existing return to see the effect of additional income from various sources. I plan to use this to determine my Roth conversion amount this year and also account for my HSA contribution and the solar install credit.

I also used it to determine my estimated taxes this year as this year I will get the full 12 months of SS benes, not just 6 like last year.
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Old 06-08-2016, 07:27 PM   #5
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Quote:
Originally Posted by papadad111 View Post
DW and I also have part time hobby jobs mostly to earn income which allows funding an HSA ...
Side note: one does not need earned income to be eligible to contribute to an HSA.
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Old 06-08-2016, 08:42 PM   #6
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If you do your own taxes using software, just make a copy of your return and then adjust the numbers to reflect your future situation(s). If not then Intuit's Taxcaster is a good tool... or if you need to do state income taxes as well try Income Tax Calculator - Tax-Rates.org
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Old 06-08-2016, 09:33 PM   #7
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Thanks

My taxes previously were complex due to FEIE and foreign tax credits and carry forwards as I was global in my career.

At some point I'll get to more normal status.. Looking like 2016 tax year will still be really messy with AMT etc. 2017 should get a bit simpler.

I know ... First world problem.

Thanks for the tips. Been playing with the taxcaster free iPhone app. Is the paid version any better or different ?
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Old 06-08-2016, 11:15 PM   #8
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Simple method I use. Example. If 2015 tax due is $5000. I just pay estimated taxes $5000 for 2016. (4 installments or 1 time payment).

If during 2016 I receive unusual income/dividend/capital gains, I expect I
will pay additional tax.

For me this is simple approach. No tax penalty if you pay estimated tax
which is equal to previous year's taxes due.
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Old 06-08-2016, 11:35 PM   #9
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Your hobby jobs could also allow you to contribute to self 401K IRA to reduce taxes or a self 401K ROTH to stash income for future tax free earnings. (income limit does not apply)

Or at least just contribute to regular ROTH (assuming your income in below the limit).
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Old 06-08-2016, 11:41 PM   #10
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Taxcaster correctly calculates AMT. It will be at this year's rates. Should be good enough for modeling.
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Old 06-09-2016, 06:00 AM   #11
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Originally Posted by Sunset View Post
Your hobby jobs could also allow you to contribute to self 401K IRA to reduce taxes or a self 401K ROTH to stash income for future tax free earnings. (income limit does not apply)

Or at least just contribute to regular ROTH (assuming your income in below the limit).

is this an advantage over an IRA why ? No income limit ?

For decades we phased out of Roth eligibility.

Now I'm wondering if the deferred compensation tax burden could have been reduced / avoided by simply making a huge individual 401K contribution instead and thus further shielding that money. Crap. That might have been a big miss on my part for 2015- need to check for 2016.
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Old 06-09-2016, 09:53 AM   #12
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I play with this tax calculator:
Income Tax Calculator | Bankrate.com

jmho
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Old 06-09-2016, 10:46 AM   #13
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The solo 401K is based on your self employed earnings,
It needs to be set up couple of months before the end of the year to use it (although contributions can be as late as April next yr).

By (income limit does not apply), what I meant is suppose your hobby earned you $500,000 you could contribute vs normal ROTH contribution is limited ?
The solo 401K allows you to deduct even when income is high, vs ordinary IRA phases out the deductibility.

You can get lots of details here: https://investor.vanguard.com/what-w...ndividual-401k

when you read it, remember as self employed you are the employer + employee, and max contribution is 59K for 2016
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Old 06-09-2016, 10:52 AM   #14
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Quote:
Originally Posted by wolf View Post
... No tax penalty if you pay estimated tax
which is equal to previous year's taxes due.
With complicated taxes in past, and AMT issues--OP may be relegated to the 110% safeharbor (if AGI > 150k). https://www.irs.gov/publications/p17...blink100032429
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Old 06-09-2016, 11:07 AM   #15
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I just use Turbo Tax to "project" what my taxes might be.
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Old 06-09-2016, 02:42 PM   #16
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I use a combination of Turbo Tax and Excel. I just copy the prior year tax return to a new file in Turbo Tax and start updating for whatever I know will be different. With Excel, I can update certain things like tax rates, exemptions, and standard deduction, before the new TT release. I also use the Excel file for longer-term planning and analysis, in conjunction with our withdrawal plan and associated decisions. The Excel file also has tabs that help me accumulate and project certain items, like rental expenses, distributions, etc. I then just enter totals into TT. I do this before each quarterly payment and then a more thorough analysis in late December, in conjunction with other actions like Roth conversions, tax-loss harvesting, HSA contribution, etc.
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Old 06-09-2016, 03:09 PM   #17
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Quote:
Originally Posted by wolf View Post
Simple method I use. Example. If 2015 tax due is $5000. I just pay estimated taxes $5000 for 2016. (4 installments or 1 time payment).

If during 2016 I receive unusual income/dividend/capital gains, I expect I
will pay additional tax.

For me this is simple approach. No tax penalty if you pay estimated tax
which is equal to previous year's taxes due.
It's not the taxes due, it's paying a sum equal to or greater than the total tax liability as shown on line 63, 2015 Form 1040 that will keep you from paying any underpayment penalty for 2015. I'm sure that is what you meant.
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Old 06-09-2016, 10:41 PM   #18
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Quote:
Originally Posted by Sunset View Post
The solo 401K is based on your self employed earnings,
It needs to be set up couple of months before the end of the year to use it (although contributions can be as late as April next yr).

By (income limit does not apply), what I meant is suppose your hobby earned you $500,000 you could contribute vs normal ROTH contribution is limited ?
The solo 401K allows you to deduct even when income is high, vs ordinary IRA phases out the deductibility.

You can get lots of details here: https://investor.vanguard.com/what-w...ndividual-401k

when you read it, remember as self employed you are the employer + employee, and max contribution is 59K for 2016

Ah. Ok. I dont think we are eligible unless we each do some consulting.

Currently the Hobby jobs are not self employed. They are through a large university & a physicians network for DW (she has a 401K offered through her employer and works 15-20 hrs per week).
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Old 06-09-2016, 11:19 PM   #19
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You might want to look into what the penalty would be if you didn't make any estimated tax payments. I found out years ago that the penalty for not making estimated tax payments is actually very low (something like 1%-3%, I believe depending on how much taxes you owe).

So I don't bother trying to figure out what payments I'll have to make, I don't bother sending in quarterly payments, I don't bother worrying about what penalties I will be burdened with. And each year when I do taxes, I usually pay between 1%-2% of my taxes due for the year as a penalty, which is, on average, less than what I can earn through simple index investing. Not only is it easier, it's more cost effective as well!

One disclaimer - I don't know if the penalty calculations go up steeply if the amount owed is significant, but for most of us here, I would imagine it wouldn't be a problem...
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