upcoming retirement tax question

[Watertree]

Wife is retiring at age 62 in June 2012. I am considering retirement in summer of 2012 at age 62.

My question is IRS 15% tax bracket based on adjusted gross income, line 37 on 1040 or line 43 taxable income?

Projected retirement income for wife and I will be $72,000 annually. This would include social security, $33,600, pension income $36,150 and $2500 ordinary dividends in taxable Schwab account.

We have $350,000 in tax deferred accounts that we are not planning to draw from until age 70.

Wife and I will be paying $18,000 per year medical insurance premiums until January 2015 when we will both be 65. Can I deduct the $18,000 medical insurance premiums at 100% or will have to use 7.5% deduction on line 3 in itemized deductions?

We also have $3,000 deduction from rental real estate.

2011 total itemized deductions on form 1040 was $17,200.

Tax advice and opinions please

 

[Midpack]

Line 43...and as you know not all income would be taxed at 15%.

http://www.irs.gov/pub/irs-pdf/i1040sca.pdf

 

[RunningBum]

Are you asking for tax estimate planning, Roth conversion, or what?

Considering you have dividends, most likely you calculated taxes using the Qualified Divs and Cap Gains worksheet. Basically the 15% is based on line 43 less divs and LTCG. You separately calculate the divs and LTCG tax, which is 0% is you kept line 43 below the 15% line. This is important if you are converting a 401K or TIRA to a Roth IRA. You probably only want to convert until line 43 hits the 15% line. If you go over, every $1 converted is taxed at 15%, and you've pushed $1 of divs to be taxed at 15%, until you push income into the 25% bracket. At that point all of your divs are taxed at 15%. Run that worksheet to see how that happens.

I don't know anything about rental real estate but I wouldn't expect that to change in retirement if the real estate situation is unchanged.

Google the social security tax. Depending on your income, some or most of it may be taxable, and you can look it up as easily as I can.

Medical insurance premiums are not deductible at all.

 

[Watertree]

Are you asking for tax estimate planning, Roth conversion, or what?

Considering you have dividends, most likely you calculated taxes using the Qualified Divs and Cap Gains worksheet. Basically the 15% is based on line 43 less divs and LTCG. You separately calculate the divs and LTCG tax, which is 0% is you kept line 43 below the 15% line. This is important if you are converting a 401K or TIRA to a Roth IRA. You probably only want to convert until line 43 hits the 15% line. If you go over, every $1 converted is taxed at 15%, and you've pushed $1 of divs to be taxed at 15%, until you push income into the 25% bracket. At that point all of your divs are taxed at 15%. Run that worksheet to see how that happens.

I don't know anything about rental real estate but I wouldn't expect that to change in retirement if the real estate situation is unchanged.

Google the social security tax. Depending on your income, some or most of it may be taxable, and you can look it up as easily as I can.

Medical insurance premiums are not deductible at all.

Asking for tax estimate planning. I have been advised I should try to be in 15% income tax bracket for retirement years.

 

[Brett_Cameron]

You can plug your numbers into TurboTax or you can use this : Federal Income Tax Form 1040 (Excel 5.0 Spreadsheet) Income Tax Calculator - Free! (www.excel1040.com)

This is an Excel Spreadsheet formatted to make the calculations for a tax return.

 

[M Paquette]

Medical insurance premiums are not deductible at all.

Eh?

http://www.irs.gov/publications/p502/ar02.html#en_US_publink1000178947

It sounds like the OP is buying individual medical coverage for himself and his wife. That coverage is deductible as part of his medical expenses on Schedule A, and total medical expenses over the threshold amount, that is, more than 7.5% of his AGI (Form 1040, line 38 ).

Employer paid premiums, and pretax premium copays by employees aren't deductible.

 

[73ss454]

This may also help you.

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

 

[RunningBum]

Eh?

Publication 502 (2011), Medical and Dental Expenses

It sounds like the OP is buying individual medical coverage for himself and his wife. That coverage is deductible as part of his medical expenses on Schedule A, and total medical expenses over the threshold amount, that is, more than 7.5% of his AGI (Form 1040, line 38 ).

Employer paid premiums, and pretax premium copays by employees aren't deductible.

My mistake. I looked at that doc and saw "Insurance Premiums" under Not Includible and didn't bother to read the note pointing to the same heading under the Includible items.

 

[rothlev]

The 15% bracket does not end until taxable income is over 69k. That means you subract your two exemptions and your itemized or standard deduction from your income before you figure out your tax. You are no where close to going over 15%. You are going to get hit with taxable social security given your pension income, more likely than not 85% taxable.

 

[frayne]

Quick and dirty way to calculate your taxable income is to subtract $19000 from your adjusted gross income to determine taxable income, if you're married filing a joint return. If you are single use $9500.

 

[Independent]

Like you, my wife and I were paying $18,000 per year for medical insurance after retirement. I found that very painful.

Yes, you can only deduct the amount over 7.5%. But, note that you can include almost all medical expenses, even "eyeglasses or contact lenses, hearing aids ...". See the list at: Tax Topics - Topic 502 Medical and Dental Expenses


Unless you're really math-phobic, I'd suggest writing out your own worksheet so you can play whatever what-if's you like. Just follow the 1040 lines, skipping those that you know you won't use.
For 2012, the 15% bracket ends at $70,700 of taxable income.
http://www.irs.gov/pub/irs-drop/rp-11-52.pdf

I think you'll find that you are comfortably within the 15% bracket until RMDs start. Probably your only issue is whether you want to do some traditional-to-Roth conversions today. The worksheet will help with that.

 

[Mulligan]

Eh?

http://www.irs.gov/publications/p502/ar02.html#en_US_publink1000178947

It sounds like the OP is buying individual medical coverage for himself and his wife. That coverage is deductible as part of his medical expenses on Schedule A, and total medical expenses over the threshold amount, that is, more than 7.5% of his AGI (Form 1040, line 38 ).

Employer paid premiums, and pretax premium copays by employees aren't deductible.

Some people are not aware that the medical deduction moves from 7.5% to 10% after 2012. This was part of the healthcare act legislation. This will hurt people like OP who meet this deduction. I wonder if this will be repealed if the Act itself is overturned by Supreme Court.

 

[M Paquette]

Some people are not aware that the medical deduction moves from 7.5% to 10% after 2012. This was part of the healthcare act legislation. This will hurt people like OP who meet this deduction. I wonder if this will be repealed if the Act itself is overturned by Supreme Court.

Through the clever expedient of getting older and so paying even more for insurance and medical care, combined with minimizing my Line 38 AGI by avoiding work, I expect the threshold change to have little impact.

The medical expenses applied toward the deduction are by far our largest expense in retirement, and we're in good health and quite active. The insurance premiums for our high deductible individual coverage are about 25% of that AGI.

 

[Mulligan]

Through the clever expedient of getting older and so paying even more for insurance and medical care, combined with minimizing my Line 38 AGI by avoiding work, I expect the threshold change to have little impact.

The medical expenses applied toward the deduction are by far our largest expense in retirement, and we're in good health and quite active. The insurance premiums for our high deductible individual coverage are about 25% of that AGI.

The premium itself represents 25% of AGI alone? That is outrageous! I have an individual high deductible and it is less than 2% of my AGI. If I had to pay 25% of my AGI to premiums alone, I would have to wait for early retirement in my second life.

 

[M Paquette]

The premium itself represents 25% of AGI alone? That is outrageous! I have an individual high deductible and it is less than 2% of my AGI. If I had to pay 25% of my AGI to premiums alone, I would have to wait for early retirement in my second life.

Well, there are three of us.
Oh, and there is income that doesn't make to the AGI line. Capital gains offset by losses, tax exempt income from government bonds, etc. We don't have a retirement pension or other retirement benefits. It does make for a highly entertaining tax return, though. Tax efficiency in a portfolio can make for a very inefficient tax return. As filed, we paid the gummint about five bucks a page this year...

 

[packrat44]

As filed, we paid the gummint about five bucks a page this year...

Only in my dreams do I get off that light.

 

[clifp]

Some people are not aware that the medical deduction moves from 7.5% to 10% after 2012. This was part of the healthcare act legislation. This will hurt people like OP who meet this deduction. I wonder if this will be repealed if the Act itself is overturned by Supreme Court.

I wasn't aware of that change. My insurance premium plus my dental implants put me over the 7.5% this year. I think the 10% threshold would have made the deduction almost worthless. I am not planning on having any more expense dental work done so guess the change won't effect me.

 

[Independent]

Some people are not aware that the medical deduction moves from 7.5% to 10% after 2012. This was part of the healthcare act legislation. This will hurt people like OP who meet this deduction. I wonder if this will be repealed if the Act itself is overturned by Supreme Court.

Good catch, I wasn't aware of that. Since since we turn 65 in 2012 and 2013, I'm looking forward to getting away from the expensive private insurance soon.