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Is my effective tax rate in retirement estimate appropriate?
Old 01-26-2014, 08:18 AM   #1
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Is my effective tax rate in retirement estimate appropriate?

Hi. I used Turbo Tax TaxCaster calculator in order to estimate my effective tax rate in retirement. I am 43 and I plan to have a 60 % bond and 40% stock allocation. So I used 60 % of my total retirement income as interest, based on the bond allocation, and I used 40 % of my retirement income as dividend and long term capital gain, based on the stock allocation. Of the 40 % I used about 12% as dividends and 88% as long term capital gain.

I used about 5,000 as mortgage interest and 5,500 as property tax as deductions because I will continue the mortgage into my retirement and I do not intend to relocate to an area with lower property taxes in the near future.

So I ended with approximately 5.5% as my effective tax rate as my estimate. Based on my situation, does this sound about right? What is your effective tax rate in retirement?
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Old 01-26-2014, 08:34 AM   #2
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Does it sound right? I have no idea ...

FWIW, our effective tax rate is just over 12%. However, we're retired and in the 25% tax bracket filing jointly; we have no deductions that affect our tax rate and the majority of our retirement investment holdings are in tax-deferred products (due to our age and products available during our accumulation years).

Since we have no taxable securities, LTG and gain/loss computations don't enter into our tax picture.

Our taxable income will be reduced a smidge due to SS income, starting in a few months and increasing SS benefits over the next four years. We'll get a 15% break (unless the tax law changes) on that income.
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Old 01-26-2014, 08:48 AM   #3
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Old 01-26-2014, 08:53 AM   #4
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A lot depends on what you count. Sales tax, real estate tax?

If just federal and state tax, our effective tax rate is estimated at 0%, and you might calculate it at some negative percentage if we manage a little bit of earned income to qualify for the saver's credit on Roth contributions. If you count ACA subsidy and cost sharing, it becomes very negative.
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Old 01-26-2014, 08:57 AM   #5
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Keep in mind that if you have substantial balances in tax-deferred accounts, these normally come out as ordinary income. That can have a significant impact on your taxable income inasmuch as it might drive more social security into the taxable category and dividends from zero tax to 15%.
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Old 01-26-2014, 09:04 AM   #6
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Hi:

I will try to avoid taking money from the tax advantaged accounts for as long as possible.
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Old 01-26-2014, 09:09 AM   #7
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If you are 43 now, when does retirement start? in 15 to 20 years from now? Who knows what tax law will be by then.
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Old 01-26-2014, 09:09 AM   #8
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I did not even consider the ACA subsidy in my analysis.

I guess I am just trying to get an estimate as to my annual expenses in early retirement. I have a pretty good hold on all of my expenses except for how much federal/state income tax (for interest, dividends, short and long term capital gains) I will need to pay in early retirement.
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Old 01-26-2014, 09:10 AM   #9
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hopefully retirement will start within next 1 to 3 years.
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Old 01-26-2014, 10:15 AM   #10
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Quote:
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Hi:

I will try to avoid taking money from the tax advantaged accounts for as long as possible.
Same here but at some point, they force your hand. Unless you are dead.
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Old 01-26-2014, 10:23 AM   #11
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I think you are probably in the right ballpark, nico. I have done some modeling of our income tax picture for 2014, the first year of ER/ESR. Our situation is a bit different since I have 2 tax deductions kids and DW continues her part time self employment. That said, our taxable assets don't throw off a lot of income and we are planning to delay taking money out of tax deferred accounts for as long as possible. I am targeting a specific MAGI to maximize Ocare subsidies for this year and when I look at what that means for income tax, I come out with an income tax number that is pretty close to zero on the federal level and a pittance to the state.

Hard to believe, but it appears to be true. ERs and ESRs seem to treated like the working poor by the tax code.
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Old 01-26-2014, 10:29 AM   #12
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Originally Posted by brewer12345 View Post
I think you are probably in the right ballpark, nico. I have done some modeling of our income tax picture for 2014, the first year of ER/ESR. Our situation is a bit different since I have 2 tax deductions kids and DW continues her part time self employment. That said, our taxable assets don't throw off a lot of income and we are planning to delay taking money out of tax deferred accounts for as long as possible. I am targeting a specific MAGI to maximize Ocare subsidies for this year and when I look at what that means for income tax, I come out with an income tax number that is pretty close to zero on the federal level and a pittance to the state. Hard to believe, but it appears to be true. ERs and ESRs seem to treated like the working poor by the tax code.
Unless you are a dinosaur pensioner like myself, then it's payback time. My federal effective rate this year was 16% and that was with itemizing, HSA deduction, and an energy credit for a metal roof installation.
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Old 01-26-2014, 10:47 AM   #13
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FWIW our is 9%. Simple return (Taxable Interest, Taxable Pension, Taxable RMD's, 85% Taxable SS but we have some Tax Free Income VA Disability, ROTH Interest, 15% of SS not taxed). Very clear on Medical (Medicare & TFL). Safe to say most everyone's will be different based on their particular circumstances.
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Old 01-26-2014, 10:53 AM   #14
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My federal effective rate this year was 16% and that was with itemizing, HSA deduction, and an energy credit for a metal roof installation.
Thank goodness somebody was higher than us ...

The only break we really received was credit for non-deductable IRA's to which we contributed the max from 1987 until 1997 ($2k/year max, x 2 people giving a $44k "basis"). That removed just over $5k from our taxable income for 2013. Heck, that's still a savings of just over $1k in taxes; yes I know we paid them in the past, but that long ago is just forgotten ...

And like OAG, I have income from the VA as a DV, but that's not considered in our FIT calculation.
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Old 01-26-2014, 11:33 AM   #15
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I assume you are talking about only the federal tax rate.

I am 50 and ERed 5 years ago, using only dividends, interest, and cap gains from my taxable accounts to fund my ER, so our situations are fairly similar on a big-picture basis. My AA for the taxable accounts is similar to yours, too, bond-majority.

I have less itemized deductions than you do, some years itemizing and others taking the standard deduction (it depended on my medical expense deductions dirven by health insurance premiums). Except for one year when I had a huge income spike due to a large short-term cap gains distribution, my effective (i.e. average) federal tax rate has varied between 4.0% and 5.5%. So your 5.5% rate does not seem outrageous to me.
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