Retirement year tax joy!

[Fermion]

I just finished up our 2015 taxes (we early retired in early 2015) and boy what a tax surprise!

Normally we pay about $60,000 in federal tax but we only worked three months in 2015. We loaded up the 401K during those three months and completely filled it out to 18,500, along with maxing the HSA. Instead of doing a non deductible IRA and back door it into a Roth, we were able to each make $5500 contributions to a deductible IRA.

We paid full premium on a ACA exchange policy for May to December even though we were eligible technically for about $250 a month credit.

Tax software just spit out our refund of $12 grand and change!

I should retire more often.

(yeah I know this means they kept our money but some things were unavoidable like forgoing the ACA premium credit. I was not expecting things like getting a savers credit of $400. A savers credit!)

 

[braumeister]

Wow, very cool!
Probably the nicest surprise of your life in terms of taxes. You are hereby entitled to go buy a toy to celebrate.

 

[Big_Hitter]

I met with my CPA yesterday - 2015 will not be a good tax year

 

[RetireAge50]

$60k in taxes wow. Glad it is better in retirement. I can't complain though, in 2015 we broke $200k in income for the first time yet only paid $12k in federal taxes.

 

[Midpack]

Yeah, I remember. My first year tax return after retiring, I was shocked at how low our total taxes were, after decades of paying a lot. I wrote about it here. I actually felt guilty, but I got over it...

 

[pb4uski]

+1 We went from a tax bill that was close to the median family income for our last year of work to zero in the first year of retirement since we did capital gains trading and were careful to stay in the 15% tax bracket.

 

[FreeBear]

I should retire more often.

(yeah I know this means they kept our money but some things were unavoidable like forgoing the ACA premium credit. I was not expecting things like getting a savers credit of $400. A savers credit!)

Hello from another ER Class of 2015 graduate! Yep, a very pleasant tax surprise here too.

We also missed the ACA subsidy due to my last w*rk bonus and cap gains resulting from adjusting the AA to retirement target. Still, I'm glad I sold equities before the start of the 2015 equities slide

Just loving ER!

 

[stepford]

I've had exactly the opposite of Fermion's pleasant tax surprise. I retired at the very end of 2015 (to ensure retiree medical benefits that would change if I stayed any longer). As a result all my accumulated vacation and sick leave arrived in a whopping end of year check - all of it unavoidably in the 28% bracket. At least I didn't have to pay FICA on any of it.

 

[Texas Proud]

WOW... I agree that $60K in income tax is pretty high....

I think the most I paid was in the $25K range when I was single... (well, not counting the expat years, but I did not pay that tax)...

For last year I will get back my ACA subsidy which is pretty good for me...

 

[Souschef]

I met with my CPA yesterday - 2015 will not be a good tax year

Same here! I sold my rental at a loss last year, and paid no taxes. This year is will be 18K!

 

[Senator]

Nice!

I know TurboTax said for 2014 I will pay $25K less if I did not have a job. I am definitely looking forward to not pulling the tax wagon as hard.

 

[FUEGO]

Nice. We had another successful year of negative federal income tax in spite of DW working the whole year in 2015 (since retired). Unless you count self employment tax. My little side hustle is making enough to stick me with thousands in SE tax, so if the revenue continues in ER, we'll owe $500-1000 per year in retirement, which is much more than we've paid in the past five years while we typically earned six figures.

Retire, reduce income, pay more tax? I think I'm doing this wrong...

The $909 monthly ACA subsidy with $125 monthly premiums for a $0 deductible policy is certainly nice though.

 

[Souschef]

With both me and DW over 70 and a half, the RMD is where we are getting hit. All you ER's keep that in mind. At our age right now, it is over 4% of our IRA balance.

 

[pb4uski]

So if you retire at 60 with a $1 million IRA and can do $70k of Roth conversions each year you can reduce your RMDs to less than half of what they would be without Roth conversions. The 4% still applies, but to a much lower balance.

 

[Souschef]

So if you retire at 60 with a $1 million IRA and can do $70k of Roth conversions each year you can reduce your RMDs to less than half of what they would be without Roth conversions. The 4% still applies, but to a much lower balance.

True, BUT you owe taxes on that 70 K! And that would be on 7% of a $1 million IRA.

 

[pb4uski]

Yes, but it is better to pay 10% on that 70k each year in your 60s than 25% in your 70s (when SS, pensions and RMDs kick your income into a higher tax bracket).

 

[scrabbler1]

I've had exactly the opposite of Fermion's pleasant tax surprise. I retired at the very end of 2015 (to ensure retiree medical benefits that would change if I stayed any longer). As a result all my accumulated vacation and sick leave arrived in a whopping end of year check - all of it unavoidably in the 28% bracket. At least I didn't have to pay FICA on any of it.

I got hit with a huge but expected tax bill when I ERed at the end of 2008. I had cashed out nearly $300k in company stock which not only greatly boosted my otherwise low wage and other investment income, but also triggered the AMT on the rest of my income as well as limiting my itemized deduction and personal exemption. At least I was able to use NUA (Net Unrealized Appreciation) to cap the federal taxes on most of the $300k to 15% (LTCG rate).

My tax bill in 2009 was much smaller. No FICA taxes, either (yay!). The ACA subsidy has further reduced my federal tax bill, too.

 

[Souschef]

Yes, but it is better to pay 10% on that 70k each year in your 60s than 25% in your 70s (when SS, pensions and RMDs kick your income into a higher tax bracket).

Except MFJ tax rate on the 70 K is 15%

 

[iac1003]

2015 will be my last big tax bill (owed $54K in 2014). I retired on 12/15/2015.

Since I am going to use cash and probably a small amount of tax-exempt bond income to make up the shortfall this year between DH's SS & RMD for 2016, it may be the first year we owe very little in taxes. I wish I could convert some of my rollover IRA to Roths but the taxes would be prohibitive.


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[papadad111]

I'm sitting down to fill out the tax organizer later today.

I fired in early 2015 , loaded up the 401k contribution to 18500...but had a large deferred compensation auto-payout in June 2015 and taxes are auto withheld at 28 percent. Ouch.

I had a little bit of part time income from teaching, and i think I can deduct some moving costs since we moved more than 50 miles for this part time job. A big chunk of my part time compensation is "in kind" by way of free grad school tuition, and I'm not sure how that tuition component is taxed. I know I got a tax form ... Anyone know?

We paid full freight on ACA from middle of the year, and I'm suspecting the deferred compensation will max out the MAGI, so no subsidies.

I drove uber for about a month for fun and got a tax form for that too.

I didnt pay any quarterly taxes for dividend income with other taxes being paid from pre FIRE job and then with small part time teaching gig, Hope that's not a surprise cotchya lurking.

I think In 2016 I may need to start the quarterly filing.

Doing taxes ... sucks. It's way too complicated ..

 

[RunningBum]

Originally Posted by pb4uski
Yes, but it is better to pay 10% on that 70k each year in your 60s than 25% in your 70s (when SS, pensions and RMDs kick your income into a higher tax bracket).

Except MFJ tax rate on the 70 K is 15%

And 70K likely pushes some of your cap gains and dividends from 0% to 15% taxable, making that portion an effective 30% rate. It's impossible to accurately advise someone how much to convert without knowing their deductions and CGs+Divs + any other income.

Also, that IRA is presumably growing. But I think pb's message is that anything you can convert at 15% or less helps.

 

[pb4uski]

Except MFJ tax rate on the 70 K is 15%

15% is the marginal tax rate but not the effective tax rate. The effective tax rate is ~10%.

For example, MFJ with standard deductions and $30k of qualified dividend income or LTCG.... tax = $0. Leave all else the same and add in $70k of Roth conversions and tax is $7,166 or 10.2% of the $70k roth conversion. Check it out with Taxcaster. It is substantially less than 15% because ~$21k is 0% tax because it is covered by deductions and exemptions, ~$18k is at 10% rate and only $31k is at 15% rate. The $30k of qualified dividends is added on after the ordinary tax is calculated and is 0% since total taxable income is less than $74,900 (even though total income is $100k).

But RunningBum had a good point in that you don't want to exceed the top of the 15% tax bracket of $74,900 in 2015 since any little excess is taxed at 30%....but that is easy to manage by just doing a recharacterization of a portion of the Roth conversions once your tax return is complete. For 2015 and 2016 my taxable income was exactly the top of the 15% bracket because I recharacterized the excess.... no way I'm paying 30%!

 

[nun]

$0 in Federal income tax for me this year, but I did still have to pay a little self-employment tax. I kept my MAGI below the Federal poverty level so that I get a health insurance premium subsidy of $430/month and qualify for winter fuel assistance.

 

[Fermion]

$0 in Federal income tax for me this year, but I did still have to pay a little self-employment tax. I kept my MAGI below the Federal poverty level so that I get a health insurance premium subsidy of $430/month and qualify for winter fuel assistance.

I assume you mean above the Federal poverty level, as you would not get a subsidy if you were below poverty.

 

[Fedup]

I've been paying very little tax but looking forward to this year. But in retirement, I'm hoping it will be below $2000 for federal, $0 on state, according to Taxcaster. Kudos for people who are still working and paying tax. I'm enjoying my moocher's phase, I think this is one reason why I decide working is not worth it.


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