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taxes in retirement
Old 08-03-2013, 06:32 AM   #1
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taxes in retirement

Are there any "rules" that generally apply to taxation of retirees? I live in Pennsylvania which is a generous state as far as not taxing retirement distributions. However, does this also apply at the Local level as well? Living in Chester County I now pay the following:
1.25% earned income tax
Occupation Tax
PASD school tax (largest)
County tax
Township tax

I'm thinking the first two will go away. The school tax will stay (reduced?). Not sure about the last two.
What are other people's experiences?
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Old 08-03-2013, 07:07 AM   #2
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Still a couple years away from retirement, but I have given the issue some thought. The only tax I'm certain will be eliminated is Social Security and Medicare. Property based tax and income tax will never go away, although I'm aware that in some states people over 65 may get their real property taxes frozen at the level they are. My occupational taxes could be affected, but probably won't. To keep my law license, I have to pay various fees to the bars of the states where I am admitted to practice, as well as a $450 yearly occupational tax to the state. The occupational tax goes away if I don't make any money as an attorney, but the fees do not, unless I resign from the bar, although they can be reduced in a formal "retired status". I think I will remain in active status and just pay the full fees, so that I can go back into practice if my finances should dictate.
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Old 08-03-2013, 07:22 AM   #3
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Quote:
Originally Posted by engr View Post
Are there any "rules" that generally apply to taxation of retirees? I live in Pennsylvania which is a generous state as far as not taxing retirement distributions. However, does this also apply at the Local level as well? Living in Chester County I now pay the following:
1.25% earned income tax
Occupation Tax
PASD school tax (largest)
County tax
Township tax

I'm thinking the first two will go away. The school tax will stay (reduced?). Not sure about the last two.
What are other people's experiences?
You may not care but there is the final death tax (IIRC Pa is 4.5%)
TJ
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Old 08-03-2013, 08:54 AM   #4
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Every location is different.
Also, some of these breaks seem to be going away. Where I live (a southern Ohio county) there is a property tax break if you're over 65. However, another county nearby recently dropped that break for those about to turn 65 (older homeowners are grandfathered, but only until they move).
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Old 08-03-2013, 09:03 AM   #5
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Income taxes are generally much higher than taxes on capital gains and dividends, so if in retirement you stop earning income and begin to live on capital gains and dividends, your tax rates should drop significantly. I believe the first $36K of income from CG&D are exempt from taxes. So if you can limit your distributions to $36K, you should be able to completely avoid federal taxes. If you have deductions, like property taxes, you may be able to have even higher distributions and still avoid federal taxes completely.

State taxes vary. In California CG&D are taxed the same as ordinary income, so no break for CA residents. Other states may be more favorable.
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Old 08-03-2013, 09:27 AM   #6
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I I believe the first $36K of income from CG&D are exempt from taxes. So if you can limit your distributions to $36K, you should be able to completely avoid federal taxes. If you have deductions, like property taxes, you may be able to have even higher distributions and still avoid federal taxes completely.

.
actually the 36K is taxable income so you could (as single) have 10K more
(exemption/std deduction) for AGI of 46K and still pay 0 federal taxes if all
income were LTCG and QDIV .
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Old 08-03-2013, 09:39 AM   #7
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I believe the first $36K of income from CG&D are exempt from taxes.
Not exactly. CG are taxed at different rates based on your income tax bracket. Also rate depends on long term vs short term gains. If you are in the 15% bracket LTCG tax is 0%.

Dividends are also divided into ordinary or qualified. Qualified are taxed at LTCG rates.
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Old 08-03-2013, 12:01 PM   #8
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Engr, I developed projected income tax returns as part of my ER plan back in 2008 when ER was fast becoming a likely reality. Compared to my taxes when I was working, I first knew the FICA taxes would disappear completely. Next, I saw that my income tax bill would drop somewhat due to having my Qualified Dividends and LTCGs taxed at 0% federally. And finally, I saw that I would be deducting my individual health insurance premiums (above 7.5% of AGI; rising to 10%). This deduction has varied quite a bit in my 4+ years of ER because I have changed the HI company and my AGI has spiked one year, greatly raising the AGI to subtract from the premiums paid. I took the Standard Deduction in 2012 and will do so again in 2013.

In my years of ER, I reduced my holdings in muni bond funds because the gap between yield and tax-equivalent yield was shrinking. It is now preferable to go for the higher gross yield and pay the (lower) taxes.

Also, here in New York, they tax all investment income (i.e. Qualified Dividends and LTCG) at the same rate as ordinary income, so even though I am in the 6.645% bracket (starts at $20k for singles) I pay nearly as much in state income taxes as I do in federal income taxes, something which never happened when I was working. For 2012, only 62% of my income was subject to federal income taxes.

One last thing - I split my income taxes into two parts. One are the "basic" taxes on my more predictable income, mainly the monthly and quarterly dividends from my stock and bond funds. The second part are the "excess" taxes on my less predicable and more erratic income, mainly the cap gains distributions which may be large one year, small another year, and non-existent in a third year. I reason that if my income tax bill spikes one year, it will be due to the latter types of income, and I will always have the money to pay them from said erratic distributions.
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Old 08-03-2013, 12:55 PM   #9
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Quote:
Are there any "rules" that generally apply to taxation of retirees?
Keep it simple. Taxes of all kinds (income, property, sales etc) are just another expense that makes demands on your retirement income stream just as food, utilities, home upkeep/repair, healthcare, travel etc do.

You know they will be payable in the future and you can not avoid them. The best you can do is to take advantage of as many legal tax exemptions/avoidance schemes as possible.
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Old 08-03-2013, 04:08 PM   #10
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Originally Posted by engr View Post
Are there any "rules" that generally apply to taxation of retirees? I live in Pennsylvania which is a generous state as far as not taxing retirement distributions. However, does this also apply at the Local level as well? Living in Chester County I now pay the following:
1.25% earned income tax
Occupation Tax
PASD school tax (largest)
County tax
Township tax

I'm thinking the first two will go away. The school tax will stay (reduced?). Not sure about the last two.
What are other people's experiences?
In PA:
1. No local earned income tax if you have no earned income (wages & profit from a sole proprietor business).
2. Occupation tax: (officially known as local services tax (LST)). Max $52 per year collected from wages. Exempt if you individually earn less than $12K per year and rate is over $10. Must ask for exemption or refund.
3. Property taxes stay same. You may be eligible for property tax rebate if your income is below certain levels and over 65. Google "PA1000" for forms and instructions.
4. PA income tax of 3.07% applies to all interest, dividends, cap gains, etc but does not apply to SS, work related pensions, or withdrawals from IRAs and 401(k). Annuities can be taxable if not from a work-related retirement plan. Again, may be eligible for tax forgiveness if income is below certain thresholds.
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