Retirement year tax joy!

[YeahNo]

On behalf of my children (your future SS funders), I'd like to extend my gratitude to the masses in the five digit tax club. And for you, Mr. Six Digit Taxes, I'd like to mail you a hand scribbled (in premium Crayon!) thank you note.

I'll be waiting!

As much as it does suck, it makes it much less painful when reading how much taxes the above posters are paying once you get to that totally FI phase.

I think it is just hard has a business owner because you get taxed so high compared to the amount we pay ourselves. For example, our company made around 1 ml in net profits this year, we pay ~500k in taxes, another ~300k or so in extra inventory purchases/capital expenses to help grow the business for future years and you're not left with a ton left. Yes I understand my basis in the business goes up, but still.

This country is mostly comprised of small businesses and we get the shaft. It just doesn't make sense to me why a small business, who is creating jobs and creating products that help its customers, gets taxed the same as ordinary individuals. You'd think there would be some sort of incentive.

</rant>

 

[papadad111]

It almost seems like there are some people who would rather make $90K and pay 0% taxes than make $1M and pay 90% taxes. I don't get it.

Your ranges are not realistic but the directionality of discussion is spot on -

Depends how hard one has to work. One needs to compute the marginal cost and benefit of the differences in income and in taxes.

It's the proverbial promo at work discussion. A promo brings bit more money, but the higher income brings a higher marginal tax rate so a bit more tax to pay, and usually the promo brings more hours/responsibility and possibly much bigger headaches

So yes, income-max and tax-max is not always the best situation..

When my effective income tax rate hit 52 percent ...and I was working January to July for "the man". I decided I had made enough contributions to society by way of taxes and FIREd...especially since I don't like how the powers that be choose to spend/waste it !

 

[Corporateburnout]

Yes big difference in income and taxes. 2015 was my first full year of retirement and I will be getting a refund. When I e filed my taxes in the past and was owed a refund I would get it in a week or so. This year I e filed on the 9th of February and I received my refund from the state in a couple of days but I'm yet to receive it from the feds. I'll bet the IRS computer was baffled by the big drop in income that it pushed it aside for examination especially when the low income allowed for a big deduction in medical expenses that in years past would not exceed the 7.5% income threshold.

 

[pb4uski]

I e-filed on Feb 8 and my returns were accepted the same day and my federal refund hit my bank on Feb 17... so 9 days. Still waiting on state refund.

 

[MichaelB]

Yes big difference in income and taxes. 2015 was my first full year of retirement and I will be getting a refund. When I e filed my taxes in the past and was owed a refund I would get it in a week or so. This year I e filed on the 9th of February and I received my refund from the state in a couple of days but I'm yet to receive it from the feds. I'll bet the IRS computer was baffled by the big drop in income that it pushed it aside for examination especially when the low income allowed for a big deduction in medical expenses that in years past would not exceed the 7.5% income threshold.

Did you get an e-file notification that your federal return was accepted?

 

[catotx]

I have been paying 6-digit taxes for many years. When I ER in a few more years, my plan is to do enough Roth conversion to just hit the low 4-digit in taxes.

 

[2017ish]

I have been paying 6-digit taxes for many years. When I ER in a few more years, my plan is to do enough Roth conversion to just hit the low 4-digit in taxes.

I'm probably not telling you anything new, but are you sure that is likely to be the best approach? (recognizing that future taxes/returns are inherently uncertain)

For us, we tentatively plan to convert up to top of 28% bracket for first few years of retirement, then recalibrate/reguestimate based on what we then think our RMDs will lead to ... But, YMMV; we are likely far more lopsided than most in our allocation between deferred and "regular" accounts.

 

[sengsational]

The federal treasury has been cutting me a check for the last couple of years, and that's with zero withholding. Thanks .....! I've got only smallish Roth conversions, smallish dividend/interest totals, plus a kid in college (that spells credit$). The check would even be bigger if I didn't take the advance PTC, and instead waited until after the fact to collect the PTC. But the RMD tax torpedo awaits, so this will all come to an end at some point. A bird in the hand though.

 

[Corporateburnout]

Did you get an e-file notification that your federal return was accepted?

Yes. I got it via Turbotax and an email from the IRS.

 

[catotx]

I'm probably not telling you anything new, but are you sure that is likely to be the best approach? (recognizing that future taxes/returns are inherently uncertain)

For us, we tentatively plan to convert up to top of 28% bracket for first few years of retirement, then recalibrate/reguestimate based on what we then think our RMDs will lead to ... But, YMMV; we are likely far more lopsided than most in our allocation between deferred and "regular" accounts.

If I read your message correctly, you are suggesting I should convert more aggressively?

The reason I am taking it "easy" on the conversion is that after I ER, I have about 20 years to do the conversions before RMD. So I don't need to convert so much as to reach the top of the 28% bracket. I only plan to reach the top of the 15% bracket.

 

[2017ish]

If I read your message correctly, you are suggesting I should convert more aggressively?

The reason I am taking it "easy" on the conversion is that I have about 20 years to do the conversion after I ER. So I don't need to convert so much as to reach the top of the 28% bracket. I only planned to reach the top of the 15% bracket.

Oh no, not that you necessarily should--just that it sometimes may be more prudent to do so, while at other times, your approach is best. As is being discussed on another thread, this is an area with very few certainties, a wide range of possible "best/prudent/safe" approaches among people, and in many cases it doesn't make much difference which way one approaches it.

 

[pb4uski]

Here's the way I look at it. The real benefit of doing Roth conversion is arbitrage between the 15% and 25% tax brackets... so if you take your SS, pension, taxable account investment income and RMDs based on your current tax-deferred balances (at 60 in my case) and are in the 25% bracket (or higher) then it is likely that you will be in the 25% bracket when you are 70 (assuming you have a normal WR). So if you are currently in the 15% bracket then Roth conversions are saving you at least 10% and quite often more depending on your situation. YMMV.

If you are now in the 25% tax bracket and will later be in the 28% tax bracket then there is much less benefit.

If you're in the 28% tax bracket and expect to be in a higher bracket you can afford to go hire a PFS CPA to advise you.


If your taxable income is between... your tax bracket is:

0 and 18,550 10%
18,550 and 75,300 15%
75,300 and 151,900 25%
151,900 and 231,450 28%
231,450 and 413,350 33%

 

[hnzw_rui]

If your taxable income is between... your tax bracket is:

0 and 18,550 10%
18,550 and 75,300 15%
75,300 and 151,900 25%
151,900 and 231,450 28%
231,450 and 413,350 33%

Note, that's for married filing jointly.

Single is as follows:

0 and 9,275 10%
9,725 and 37,650 15%
37,650 and 91,150 25%
91,150 and 190,150 28%
190,150 and 413,350 33%

Definitely one thing to keep in mind in case one spouse passes away first.

 

[pb4uski]

Good point... in that case early Roth conversions are even more valuable because without them the widow is more likely to get kicked into even higher tax brackets so the ultimate tax savings are even greater.

 

[2017ish]

Note, that's for married filing jointly.

Single is as follows:

0 and 9,275 10%
9,725 and 37,650 15%
37,650 and 91,150 25%
91,150 and 190,150 28%
190,150 and 413,350 33%

Definitely one thing to keep in mind in case one spouse passes away first.

Yes. This is what is really driving my analysis. If I could safely assume my living to 90, it would be easier--overall stats are good, but my family history is a black box because all males died before 70 due to smoking related diseases.... Thus, DW could have quite a few years drawing her RMDs without me there to minimize the tax hit.

 

[RenoJay]

Feeling jealous...I'm expecting a total tax bill ~$120k for 2015, and I didn't even keep a lot of the income! (I have to pay tax on a land sale profit even though that profit was reinvested in improving other land and also some some tax deferral techniques from 2014 for another business are coming home to roost in 2015.). I guess one of life's certainties is making itself clear. I'll have to be careful crossing the street to avoid life's other certainty!!


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[hnzw_rui]

Yes. This is what is really driving my analysis. If I could safely assume my living to 90, it would be easier--overall stats are good, but my family history is a black box because all males died before 70 due to smoking related diseases.... Thus, DW could have quite a few years drawing her RMDs without me there to minimize the tax hit.

Yup. It's a potential double-whammy, too as it's possible there might be a significant reduction in income (e.g. SS, pension) at the same time the taxes increase. Isn't there a saying 2 can live for the price of 1.5? So expenses are reduced by 33% but then the taxes double and there's a possible loss of additional income sources.

 

[meleana]

Do you add the tax free dividends that were reinvested into an 2015 AMT-Tax free Muni Bond ETF (ISHARES) into the purchase price for the cost basis when it liquidates? I got a 1099 Div form from the Brokerage, but not a 1099B and I think I still have to report the distribution as a gain/loss even though I didn't get a 1099B for it- just the 1099 DiIV.

I swear I can't take these tax returns. Please let the next President get rid of the IRS and institute a flat tax!

This one thing is holding up my whole return!

 

[audreyh1]

Do you add the tax free dividends that were reinvested into an 2015 AMT-Tax free Muni Bond ETF (ISHARES) into the purchase price for the cost basis when it liquidates? I got a 1099 Div form from the Brokerage, but not a 1099B and I think I still have to report the distribution as a gain/loss even though I didn't get a 1099B for it- just the 1099 DiIV.

I swear I can't take these tax returns. Please let the next President get rid of the IRS and institute a flat tax!

This one thing is holding up my whole return!

Did you sell any shares in 2015? Otherwise no gains or loss to report.

Any reinvested distributions raise your cost basis.

 

[pb4uski]

Feeling jealous...I'm expecting a total tax bill ~$120k for 2015, and I didn't even keep a lot of the income! (I have to pay tax on a land sale profit even though that profit was reinvested in improving other land ......

Sorry, I'm having trouble finding my violin. Who made the decision to reinvest the profit? Off with their heads!!!

 

[scrabbler1]

Do you add the tax free dividends that were reinvested into an 2015 AMT-Tax free Muni Bond ETF (ISHARES) into the purchase price for the cost basis when it liquidates? I got a 1099 Div form from the Brokerage, but not a 1099B and I think I still have to report the distribution as a gain/loss even though I didn't get a 1099B for it- just the 1099 DiIV.

The shares you buy with reinvested dividends, be they tax-free or taxable, will have a cost basis which will be compared to the sale price of those shares when you sell them later. If you sell those shares at a gain, you will pay a tax on them. If you sell those shares at a loss, your tax bill will decrease.

 

[DrRoy]

Just finished my second to last full working year taxes. Never got this close before. $117 federal refund and $98 state payment. I expect in RE the income taxes will fall about $20K.

 

[ExFlyBoy5]

+1

We paid over the $50k mark per year on federal taxes for at least the past 5 or 6 years, and above $20k for probably 20 years. (That is what you get for not having kids or a big fancy home with huge mortgage).

I am guessing we have paid in around $500k or more in federal taxes...maybe closer to $750k.

That is a lot of $800 toilet seats.

Or...you paid for about 50 hours of flight time for me to fly the gigantic C-5 airplane. In my heyday, that would be about 12 training sorties.

Sent via mobile device. Please excuse any grammatical errors.