Taxable Income in Retirement?

[blanston]

Question....

I am reading the book many have suggested here, Work Less/Live More. Great book. But, I have always just rounded off taxes at about 20% in my projections. But, I believe Bob Clatt, the author, is suggesting an estimate of only 3% for state and federal income tax! If gross income from interest, rents, pension, etc, is say, 100,0000, is he saying put aside 3,000 to cover income tax? I'm sure i read this wrong. How could it be?

Blanston

 

[brewer12345]

The short answer is that taxable income willl be diferent for everyone. If you want a really good idea of what your taxes will be, fill out a pro forma tax return using your best guess at inputs during retirement. If you use turbotax, it is somewhat less painful to do.

When I go through the above exercise, the tax bill I am presented with is peanuts.

 

[blanston]

Thanks Brewer,

But, I still think the minimum tax rate is something like, 25% federal.  And, capital gains is about 15%....

It would be great if I end up being one of those who gets taxed at 3%, but I think i will stick with my estimate of approx 20% of gross goes to income tax.

Blanston

 

[cute fuzzy bunny]

We're seeing about 6-7%. The minimum rate is 0% if you're below a certain level of earned income+taxable interest/dividends that arent capital gains. Capital gains can be 5% at a low earned/taxable income level. I keep the income low by using dividend paying stocks (taxed at the capital gains rates) and by stuffing as much income as possible into a 403b.

If you're getting by on just capital gains and dividends taxed at capital gains rates, after your exclusions, deductions and limitations you might actually be able to get down to 3% of your total income.

 

[LOL!]

A few months ago, I ran a scenario with Turbotax with $100K income which showed for us that we would pay about $5K in taxes. I was really surprised, but the advantages of the 0% tax bracket for the first ~$16K of income, the lower tax rate for qualified dividends and capital gains, our itemized deductions, the kids, and contributions to 401(k) all helped to reduce the tax hit.

You mentioned "interest" which is fully taxable, so try to have "dividends" instead of "interest".

 

[blanston]

OK, thanks.

I understand I can turn interest income into dividend income relatively easily, and this would be taxed at a lower rate. What about rental income? Pension and SSI? And there will always be some interest income. I feel I may have estimated high at 20% off the top for my income tax liability. And I am glad to hear from yu that this is high. As Brewster stated, everyone is taxed different. I just feel it is a little misleading for the author of Work Less/Live More, to estimate such a low 3% income tax liability in general. Again, I think it is a great book and I just started chapter three.

It appears the average income in ER for many on this board is around 40 to 60 thousand. I think the 3% tax liability figure is a little low for most. Especially if income exceeds 60k.

Thanks guys.

 

[LOL!]

BTW, even when making more than $200K a year, we never paid more than about 18% of it in income taxes. So I've got to think that your 20% is probably too high an estimate. You must be paying out the wha-zoo now for you to entertain the 20% number.

 

[blanston]

LOL----better be carefull. Those tax guys might be monitoring this site!

You did pay more that 3%?

I think your 18% is closer to my estimate than Bob Clyatt's!

 

[Martha]

Unless you get hit by AMT, taxes for married filing jointly on ordinary income for 2006 are:

10% on the taxable income between $0 and $15,100
15% on the taxable income between $15,100 and $61,300; plus $1,510.00
25% on the taxable income between $61,300 and $123,700; plus $8,440.00
28% on the taxable income between $123,700 and $188,450; plus $24,040.00
33% on the taxable income between $188,450 and $336,550; plus $42,170.00
35% on the taxable income over $336,550; plus $91,043.00

The standard deduction for married filing jointly is $10,300 for 2006. Personal exemptions at $3300 each. So this automatically reduces your taxable income. For example, if you and your spouse had income of $10,600, you would pay no taxes because your deductions would wipe out the taxes. If you itemize you may have substantially less taxable income.


Long term gain tax brackets for 2006:

5% for taxpayers in the 10% and 15% tax brackets
15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets

Here is a calculator for determining your tax bracket.
http://www.moneychimp.com/features/tax_brackets.htm

Edited to clarify as per CFBs and LOLs comments, sorry guys, rushed through this post.

 

[cute fuzzy bunny]

5% for taxpayers in the 5% and 10% tax brackets

Did you mean 10 and 15%?

 

[LOL!]

Unless you get hit by AMT, tax brackets for married filing jointly on ordinary income for 2006 are:

10% on the income between $0 and $15,100

What about the 0% tax bracket? Your list is based on "taxable income" and not AGI.

 

[Martha]

Sorry guys, in too much of a hurry. I corrected my post.

 

[cute fuzzy bunny]

Hey, now you know what I feel like

 

[MJ]

Now I know why some of you are paying so little in taxes, you're married.

For singles
10% on the taxable income between $0 and $7,550
15% on the taxable income between $7,550 and $30,650; plus $755
25% on the taxable income between $30,650 and $74,200; plus $4,220
28% on the taxable income between $74,200 and $154,800; plus $15,108
33% on the taxable income between $154,800 and $336,550; plus

It hurts to go any further.

 

[cute fuzzy bunny]

You think that married thing is great, you should try throwing in a couple of kids...

 

[Nords]

You think that married thing is great, you should try throwing in a couple of kids...

If they're married too, would they be moving out?

 

[MJ]

You think that married thing is great, you should try throwing in a couple of kids...

Never said marriage was great just that a lot of this talk about low% or 0% tax bracket appears to be due to that status. I would be happy to lower the bulk of my tax to 15% without the enjoy of marriage and kids. Having 75% of my portfolio in CDs and MM makes it difficult to lower my tax bracket.
I guess I can't complain too much about making enough money that puts me in a 25% (Fed/State) bracket.

 

[LOL!]

...
Having 75% of my portfolio in CDs and MM makes it difficult to lower my tax bracket.
I guess I can't complain too much about making enough money that puts me in a 25% (Fed/State) bracket. 

OK, what interest rate do your CDs and money market funds pay? 

Let do a fer-instance.  Suppose you invest in the Vanguard Prime MM fund.  It pays a taxable 4.96%.  You pay 25% of that in tax.  That leaves you with an effective after-tax rate of 0.75 * 4.96 = 3.72%.  But look, you can invest in the Vanguard TaxExempt MM Fund.  It pays 3.69%. Close, but no cigar.  But if you pay any state income tax or if that interest caused your social security benefits to be taxed, then it's a no brainer to use some tax-exempt investments.

Or increase your income to get you into the 28% tax bracket. Then tax-exempt wins handily.

 

[cute fuzzy bunny]

just that a lot of this talk about low% or 0% tax bracket appears to be due to that status.

Sure is nice to be ER'd, get married, have your wife cut her schedule in half (because YOU'RE RICH!) and then put most of her taxable income into 40x's and Roths...and then get the nice tax rates on top.

I would be happy to lower the bulk of my tax to 15% without the enjoy of marriage and kids.

Sorry pal...no free lunch! Get on board the sufferin' train with the rest of us!

Having 75% of my portfolio in CDs and MM makes it difficult to lower my tax bracket.

Then cut that stuff out.

 

[MJ]

I guess I can't complain too much about making enough money that puts me in a 25% (Fed/State) bracket.

Ain't complaining too much Mr. Fuzzy Wabbit, except that the deck is stacked somewhat against us lonely singles.

 

[2B]

So not only can two live as cheaply as one, their tax bracket is lower! 

Now when people mention their tax rate is that before or after tax deductible savings (401k/403b) and deductions?

I get almost all of my income the hard way so my tax rate either 12 or 18% of income.  Since my assets are about 80% in an IRA, I won't get much relief during retirement.

 

[Gone4Good]

It appears the average income in ER for many on this  board is around 40 to 60 thousand. I think the 3% tax liability figure is a little low for most.  Especially if income exceeds 60k.

As others have pointed out, you should make your own assumptions based on your own expected income level and sources.  I've built the tax tables into my projections so my tax assumptions change based on changes in other assumptions.  Based on the current plan my tax rate would be about 8% assuming retirement in 2009.  If I were to quit next year  my assumed tax rate would be ~6% and if I wait until 2011    it would move up to ~10%. 

 

[cute fuzzy bunny]

Ain't complaining too much Mr. Fuzzy Wabbit, except that the deck is stacked somewhat against us lonely singles.

You just need to find another lonely single.

You get to sell one house for cash, bonus baby if it was paid off, and combine your assets to knock out a baby or two.

Then just one of you has to work just barely enough to get health care and let you fund your roths and other vehicles. Heck, you can even switch off! When my wife stops loving her job so much that she cant quit...maybe 5 or 10 years from now, maybe I'll take a part timer with benefits for a while.

Oh ick, that felt wrong to even type that!

 

[2B]

Then just one of you has to work just barely enough to get health care and let you fund your roths and other vehicles.  Heck, you can even switch off!  When my wife stops loving her job so much that she cant quit...maybe 5 or 10 years from now, maybe I'll take a part timer with benefits for a while.

Oh ick, that felt wrong to even type that!

You've hit on my plan but in reverse. DW is "between jobs" since we just moved to be closer to mine. She could be reemployed in a matter of a few days (with benefits). She's dragging it out. I keep telling her she's delaying "our" retirement an extra year by taking hers early.

 

[mickeyd]

you should try throwing in a couple of kids.

You might want to rephrase that comment. Child Protective Services may be listening.