Primer on Federal taxes for the retired

[Chuckanut]

Now that I am officially retired () and starting to live on my savings and investments, I am thinking more seriously about how taxes will affect my future spendable income.

I am looking for some type of Primer that explains the tax laws and terms in layman's language, give examples, and can be used to develop a strategy to minimize future tax obligation. I would appreciate any suggestions for a book, magazine, website, etc.

I fully realize that tax laws change and will probably change again in 2013. This year my taxable income will be driven mostly by my salary for the first 9 months of the year. But, next year, I will have control over a much greater percentage of my taxable income, since about 2/3rds of my income will come from from already taxed savings, regular IRA's and a Roth IRA. The other 1/3rd will be my pension.

I don't expect miracles, but I don't want to give away the farm due to ignorance.

[Alan]

Turbotax, or similar, is your friend. You can do lots of what-if scenarios.

I'm sure others will be along shortly with much better advice and recommendations

[73ss454]

This will put you in the area although it is for 2011, 2012 may be a little different but close.

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

[frayne]

For more detailed information as well as examples the IRS Pub 17 is a good resource. It has a table of contents and is fairly easy to follow.

http://www.irs.gov/pub/irs-pdf/p17.pdf

[rescueme]

Another Q&D calculator 4 U:

1040 Tax Calculator - Dinkytown.net Financial Calculators

Be sure to enter on the "income" tab the types of income you are projecting.

[MichaelB]

The tax code is very complex and way bigger than what you need. You first might want to narrow your focus to just a couple of areas related to investing. One would be asset allocation and withdrawal strategies between taxable and tax deferred accounts. The other would be tax efficient investing. There are many threads that cover these two areas and a couple of online tools, including ORP http://www.early-retirement.org/foru...rmd-62759.html Also a fair amount of forum space at Bogleheads is dedicated to these two topic areas.

Quote:

Originally Posted by Alan Turbotax, or similar, is your friend. You can do lots of what-if scenarios.

+1 The single best friend you have to do your tax planning.

As for the future, the tax code changes less than most people believe, and this is not likely to be any different going forward. Most of the change we fear never come about. More importantly for you, basic aspects, such as tax exempt investment income, capital gains, and taxation of dividends, change very little, so the effort you put into learning here will most likely be well spent and last a long while.

[kaneohe]

You might be able to find a book in the Dummies or Idiots series on income taxes at your local library or on Amazon. I haven't looked at that particular one but all the ones I've seen in those series are very good.

You will want to learn about taxation of SS which can range from 0% being included in income to 85% being included. Also you will want to learn about RMDs from traditional IRAs.....if you don't take them when required, there is a 50% penalty. Also taxation of qualified dividends/LTCG (long term capital gains) which currently have significant tax advantages tho the law may change next yr. If you've made contributions to your pension plan, you will want to learn about how pensions are taxed so that you don't pay taxes on your own contributions (perhaps the "simplified" method). A similar thing applies if you've ever made non-deductible TIRA contributions...........

Note that state laws may have changed over the yrs regarding whether TIRA contributions are deductible or not and even vary state to state so , unfortunately,although you signed up for learning about fed laws, there may be an additional homework assignment for your state regarding whether they tax distributions from IRAs, pensions, SS, etc.

You will want to think about your stategy for when to take SS and when/if to do Roth conversions.

For more detail/reference
Pub 17 http://www.irs.gov/pub/irs-pdf/p17.pdf forgot that frayne
already gave you this one.

[Nords]

Quote:

Originally Posted by kaneohe You will want to think about your stategy for when to take SS and when/if to do Roth conversions.

Yeah, we've had one or two threads on that subject here...
http://www.early-retirement.org/foru...not-30664.html

And, if it applies, here's an AMT thread:
http://www.early-retirement.org/foru...amt-30653.html

[kaneohe]

you don't have to read them all at once .......
Google

[Khufu]

Instead of studying up on the federal and state tax codes, I suggest the OP buy a copy of Esplanner from esplanner.com and get up to speed with it to model his retirement. Esplanner knows the federal and 50 state tax codes as well as the Social Security benefit rules, the RMD rules for IRA's and a lot more. You enter your judgments for items such as life span, relocation plans, inflation, rates of return on taxable, tax-deferred, and tax-exempt assets, future earnings, if any, etc. Then it calculates the future of your federal and state tax payments, housing costs, life insurance, and much more, all consistently in today's dollars. The most important output is the maximum amount of discretionary income available to you under your assumptions. You can even model policy changes to SS, taxes, etc.

The point is that you can see the actual impact of things like taxes on your whole lifetime standard of living. It was when I started running Esplanner scenarios five or six years ago that I suddenly saw the big bump in taxes that I would face at age 70 when both my SS benefits would start and the RMDs would kick in. That focused my attention on the benefits of Roth conversions between my retirement age of 62 and 70. Although I was aware of this tax issue prior to using Esplanner, seeing the projected numbers made it much clearer.

Esplanner has a free, stripped down version. The full version costs $150. Some people seem to think this is expensive. Seems cheap to me.

[kaneohe]

A New Rule of Thumb for Tapping Savings - Yahoo! Finance

general discussion of when to tap taxable, tax-deferred, tax-exempt streams of income

[BOBOT]

Quote:

Originally Posted by kaneohe A New Rule of Thumb for Tapping Savings - Yahoo! Finance general discussion of when to tap taxable, tax-deferred, tax-exempt streams of income

Thanks, kaneohe, very interesting article, & dovetails with my earlier post on the subject.

[Chuckanut]

Quote:

Originally Posted by Khufu Instead of studying up on the federal and state tax codes, I suggest the OP buy a copy of Esplanner from esplanner.com and get up to speed with it to model his retirement. Esplanner knows the federal and 50 state tax codes as well as the Social Security benefit rules, the RMD rules for IRA's and a lot more.

In your experience with Esplanner do you find that they update the software on a timely basis to reflect changes in tax law, etc.? Do they charge for the updates?

[LOL!]

Presumably, you have been doing your own income tax returns for many years now, so you only need to read the newspaper or web to keep up with tax law changes.

See also this discusson on how to pay no income taxes in retirement:
Bogleheads • View topic - How to pay ZERO taxes in retirement with 6-figure expenses

[Khufu]

Quote:

Originally Posted by Chuckanut In your experience with Esplanner do you find that they update the software on a timely basis to reflect changes in tax law, etc.? Do they charge for the updates?

Yes, they have updates throughout the year and keep up with tax code, SS, Medicare and other changes. The annual maintenance fee is $50. Feels reasonable to me. I quoted an out-of-date price for the software, though. Current price is $199. The maintenance fee has not gone up since I bought the software in 2006.

I should mention that Esplanner is for long-term planning, i.e. the rest of your life at least, and its tax calculations have sufficient granularity for that purpose. For estimating my current year tax liability, I use a spread sheet that has more detail.

Esplanner has a free online, limited-function version here:
Home | ESPlannerBasic

Since I haven't ever used the basic version, I don't know how much functionality it offers.

[Chuckanut]

Quote:

Originally Posted by Khufu Yes, they have updates throughout the year and keep up with tax code, SS, Medicare and other changes. The annual maintenance fee is $50. Feels reasonable to me. I quoted an out-of-date price for the software, though. Current price is $199. The maintenance fee has not gone up since I bought the software in 2006.

Thank you for that information.