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Old 10-31-2009, 07:33 PM   #41
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Originally Posted by smjsl View Post
(c) itemized deductions - not much you can do without morgage, huge business expenses over 2% of your 100k salary, large medical expenses, or just giving it all to charity. Maybe there are some other well known ones I am not taking advantage of?

Thanks for any suggestions!
If you are drawing a salary, it's hard to pay low taxes. And as LOL points out, you are not, in fact, retired.

We are talking about taxes on income from investments for retirees, not people drawing salaries. That makes the huge difference.

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Old 10-31-2009, 08:03 PM   #42
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You are not retired if you have $16K in 401(k) contributions, so you pay taxes.

If you do not have W2 or earned income, that would be helpful. Taxes on qualified dividends are 0% to 15%. Taxes on net realized long-term cap gains are 0% to 15%. SS benefits are not taxed unless you exceed an income threshold. Unrealized cap gains are not taxed at all. Tax-exempt bond income is not taxed. Withdrawals from your Roth IRA are not taxed.

Anyways, you cannot avoid the taxes on your W2 earned income after maxing out deductible contributions to retirement plans, getting the standard deduction and exemptions. So to increase your exemptions just get married and have lots of kids. You can also purchase a huge house with a huge mortgage and property tax bill. If you donate most of your salary to charity, that will also help.

You can avoid taxes on your sizable taxable portfolio by tax-loss harvesting and by using tax-efficient index funds of equities that pay only qualified dividends. Put all your bond funds in tax-sheltered accounts if possible. Etc.
LOL!, in another message you said you try to invest for best overall after-tax income, but I don't think your suggestions above reflect that.

Since I was talking about your 200K AGI example (and in fact 100k example), I will assume this is referring to W2 situation. So, in your response, I will eliminate 0% on long-term cap gains and qualified dividends. The rest of your suggestions do not seem to improve overall after-tax situation, even though yes, they may be reducing taxes.

(BTW, I assume you did not mean AGI but all income before deductions but either way...)

(all kidding aside...) "Strategy" of getting married with lots of kids will not increase your after-tax income generally speaking. Yes, it may reduce you taxes by spending a lot in "qualifying" ways to reduce your taxes, but you are spending what you could have been saving. So on after-tax basis you'd come out behind with this strategy.

In many cases large mortgage strategy has the same flaw. Say you get 5% interest mortgage for $X to write off ~1/3 of that interest in taxable income over the course of that mortgage (for 33% bracket). Effectively you are taking a loan for $X amount at 5%*0.67=3.35%. While it may appear on the surface that you are reducing your taxes, to break even on this strategy you need to invest $X at 1.33*3.35%~4.5% return (for same 33% bracket). If you include extra property bill, extra repair costs, extra utility costs, extra time/energy costs to maintain the property, you'll now have to generate much more just to break even on this strategy.

Yes, donating most of your money will give you lower bracket but again, you come out behind on overall after-tax stream.

Your other strategies of tax-efficient investing are very true. However, they do not help with W2 deduction and even they produce extra 15% income unless you have too many losses to harvest, which again, are still limited to only 3k max per year against your other income as I understand it.
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Old 10-31-2009, 08:04 PM   #43
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We are talking about taxes on income from investments for retirees, not people drawing salaries. That makes the huge difference.
Audrey, I was responding to 200K AGI example from LOL! where he said he never paid anything 20-25% rates. He was not talking about retirees I assume...
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Old 10-31-2009, 08:48 PM   #44
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[edited] You made me look at my tax return.

Yes, I was writing about a $200K+ AGI. Not all of AGI was wages; we had dividends and cap gains back then. Actual income was higher since my spouse works, we are over 50, and we can put $40+K into deductible 401(k)s. If one were self-employed, one could put even more in a retirement plan. We have kids and itemized deductions.

The 20-25% rates are not marginal rates, but the effective tax rate. TurboTax says we paid under a 16% effective tax rate when we were in the 33% marginal income tax bracket (even after 401(k) deductions). Our kids and itemized deductions reduced taxable income. We reduced AGI income by moving all bond funds into tax-sheltered accounts, ditching balanced funds, doing tax-loss harvesting (selling ALL losing positions in taxable accounts), and using only tax-efficient index funds in taxable accounts and by not having any CDs, money market funds in a taxable account.

We are still working. My wife earns more, while I am semi-retired and earn less. TurboTax projections show we will pay taxes at about the 7% effective rate in 2009. We have become eligible for some tax credits that we couldn't get when our income is higher. Our taxes will about one-third of what they were a couple years ago while our income is about two-thirds of what it was.
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Old 10-31-2009, 09:43 PM   #45
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you are welcome



well actually i just applied the tax rate at the time when the 100% return was obtained. granted you would only have to pay said tax if you withdrew it at that time.



lets see, using the same assumptions as before except the current tax rate is 25% and the future tax rate is 24%

converting a $20k TIRA to a roth will cost the same $5k in taxes from somewhere else in the portfolio and after the 100% return you have $40k after tax.

not converting said TIRS means the TIRA grows to $40k pre tax and the $5k grows to $10k pretax. now at the 24% tax rate the TIRA becomes $30,400 and the $10k becomes $8,800 totaling $39,200 after tax.

thus your asertion is incorrect. there are even cases where when the future tax rate is 1% less than the current tax rate it still pays to convert
Here's the spreadsheet I created to come to my conclusion.
Attached Files
File Type: xls ROTH transfer.xls (43.5 KB, 7 views)
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Old 10-31-2009, 10:07 PM   #46
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Here's the spreadsheet I created to come to my conclusion.
i opened your spreadsheet and what i noticed right off the bat was that you werent paying any taxes on your taxable account and that aint right. you still have to pay taxes on the gain in the taxable account.
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Old 10-31-2009, 11:04 PM   #47
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[edited] You made me look at my tax return.

Yes, I was writing about a $200K+ AGI.
[...]
TurboTax says we paid under a 16% effective tax rate when we were in the 33% marginal income tax bracket (even after 401(k) deductions). Our kids and itemized deductions reduced taxable income.
I am looking at 2008 tax tables/forms. For "married filing jointly", with 33% bracket, you at least have 200300 AGI * 0.33 - 21271 = $44828 on line 44 of your 1040. That's already 44828/200300=22.3% effective tax rate for federal taxes. Based on your earlier posts, only child credit can follow this line to bring it down (i.e. you did not mention elderly care / education expenses). So, to get you down to 16%, I assume you (a) do NOT fall into AMT, and (b) have at least 12800 in child credits? Did I get this right? I did not realize you can get so much in child credits but I guess I never bothered to check.
Now, are you paying 0% in state / local taxes?
Also, are your largest itemized deductions mortgage and prop taxes?
I am surprised you did not get hit with AMT by the way, especially with large itemized deductions.

In any case, thanks for clarifications...
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Old 11-01-2009, 06:21 AM   #48
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We did pay some AMT in 2006 and 2007. I think the financial media overstates the pain of AMT. If you paid $20 in AMT, would that bother you?

When your AGI is above a threshold, you are not eligible for child tax credit, so we got none. We had no dependent care tax credits either.

Our itemized deductions are not particularly large. TurboTax says they are about or below average for our income level. Prop taxes, then charity, then mortgage interest. We do not pay state income tax, but the IRS lets us deduct sales tax.

Remember the 0% tax bracket. You get something called "exemptions" -- one for every person in your family which drops your taxable income.

You get credit for foreign taxes paid by your mutual funds that you hold in your taxable accounts. Your international funds pay those taxes even if you hold them in an IRA, but you only can take the credit if you hold the int'l funds in a taxable account.

Also do not forget that if some of your AGI is qualified dividends and LT cap gains, then you do not use the tax tables to figure the tax. You use a special worksheet.

Suppose you and your spouse made $50,000 in wages and put $44,000 of that into 401(k)s for $6K net of wages. And from your taxable investments you had $50,000 in qualified dividends and $150K in LT cap gains. I'm not sure what the taxes would be because of the effect of AMT, but I hope you get the idea.

Contrast that with a similar scenario: $50,000 in bond dividend (not qualified) and $150K in short-term cap gains. Can you imagine the big difference in taxes? Be tax efficient with your taxable investments.
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Old 11-01-2009, 09:10 AM   #49
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Thanks LOL!, I think I saw a post from firedreamer yesterday (it's gone now for some reason) saying the difference is you count 16% probably based on your gross income, not based on your AGI. Unless your foreign tax deductions were ~12800, I don't see any other explanation. Since I figure my deductions like 401(k) will be taxed later, I usually look at my effective tax rate relative to AGI, not gross income... (and then if I really want to get depressed, I add in other taxes I pay like SS and medicare.. lol)

I understand those tax efficiencies you mention related to positioning of your funds. And yes, I know about the 15% (I think soon to be 20%) tax on LT gains / qualified dividends vs marginal tax on ST gains. Thank you for listing them anyway.

One practical issue I personally run into is I can't hold CDs in my 401k (well, actually I might but they would be at lower interest - maybe still something to look at). And I would rather have CDs than bond fund which will go down as soon as rates start creeping up. As a result I do have CD interest on which I have to pay taxes every year. From time to time I look for non-callable general obligations municipal bonds maturing within 5 years or so (I don't lock up CDs longer than that normally in this environment), but they always seem to pay less than CDs, even after taxes (and I am in high tax bracket because of AMT even though my pre-AMT bracket is only 28%).

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Originally Posted by LOL! View Post
We did pay some AMT in 2006 and 2007. I think the financial media overstates the pain of AMT. If you paid $20 in AMT, would that bother you?
It would not bother me too much if it were only $20. Also please note that as soon as you start paying AMT, you are now in larger tax bracket. To be more precise, if you were at 33% before AMT, with AMT you are now at least in 41.25% bracket (33*1.25) for federal taxes.


I guess to summarize this tax discussion, it inspires me once again to review tax-efficiency of my investments. Even though I do pay a lot in taxes, unfortunately, I did not hear any glaring issues as to what I might be doing wrong.

Also, I hope you now understand LOL! how some of us here get to quote those high tax rates... In my case, I cannot put 40k into 401k, but only ~16k. I do not have dependents and do not believe getting huge mortgage / property taxes will benefit me from financial standpoint. (Not to mention I live in a state where I end up paying ~7% in effective tax rate for state and local taxes relative to AGI.) Income from portfolio DOES need to be reevaluated but it's small relative to W2 income and so its further efficiencies will only go so far given the W2 income still needs to get taxed.
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Old 11-01-2009, 09:46 AM   #50
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My taxes were less than 16% of AGI, not of total or gross income. That is, my effective tax rate would be even lower if I included the 401(k) contributions.

You can hold CDs in IRAs rather easily. If you don't have an IRA, then get one.

As for AMT, maybe I was in the 28% bracket and AMT pushed me into the 33% marginal rate? I dunno. I determine my marginal rate by adding $100 to my W2 income in TurboTax and seeing that my taxes go up by $33. I do not use charts or tables.

I also realize that most of the tax-savings tips amount to giving away your money to someone besides the IRS. Either way that leaves you with less to spend on yourself.

As some point, your portfolio income should exceed your W2 income. This is why you want to be set up tax-efficiently now, so that you don't have to move things around in the future with the associated tax costs.

I do realize that not everyone can use some of the things I use, but many people put bonds in taxable and stocks in 401(k)s. That's bass-ackwards and costs them in extra taxes.
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Old 11-01-2009, 09:58 AM   #51
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i opened your spreadsheet and what i noticed right off the bat was that you werent paying any taxes on your taxable account and that aint right. you still have to pay taxes on the gain in the taxable account.
Thanks. I forgot to account for that.
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Old 11-01-2009, 10:26 AM   #52
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My taxes were less than 16% of AGI, not of total or gross income. That is, my effective tax rate would be even lower if I included the 401(k) contributions.
In that case, can you clarify how you reduced your at least $44828 on line 44 of your 1040 (to be in 33% bracket) + whatever AMT tax you have on next line by at least 12800 on lines that follow. You said you did not have child credits. This only leaves foreign tax credit deductions - is that it? You had ~13k in foreign credit deductions? (which by the way means you actually paid at least that much in foreign taxes via your foreign funds / companies)

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Originally Posted by LOL!
You can hold CDs in IRAs rather easily. If you don't have an IRA, then get one.
My IRA is very small. I did not qualify for deductible IRAs due to my income. Couple of years ago I started putting 5k max into non-deductible ones to convert them to Roth, but honestly, 5k/year is not going to make much difference for a long while... sure 10 years from now I will have 50k (and with 4% CD interest, ~62k.) - but it's nothing to write home about...

Quote:
Originally Posted by LOL!
I also realize that most of the tax-savings tips amount to giving away your money to someone besides the IRS. Either way that leaves you with less to spend on yourself.
Exactly... I am actually trying to maximize my after-tax savings, not minimize them

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Originally Posted by LOL!
As some point, your portfolio income should exceed your W2 income. This is why you want to be set up tax-efficiently now, so that you don't have to move things around in the future with the associated tax costs.

I do realize that not everyone can use some of the things I use, but many people put bonds in taxable and stocks in 401(k)s. That's bass-ackwards and costs them in extra taxes.
Good points
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Old 11-01-2009, 06:11 PM   #53
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and just what were your AGI and deductions? if you dont make that kind of income then you wont be paying that kind of taxes. i am not saying it is common for retired people on this board to pay that kind of taxes but then they arent making that kind of money either (and of course it makes a difference how you get that income, whether it is tax favored (like LTCG and dividends) or not favored (like interest or STCG)). just becauase you arent making that kind of income doesnt mean someone else isnt. remember the high interest rates of the early '80s? if someone investing a million back then was concerned about investing in the stock market so s/he invested in bonds (and other loan type instruments) s/he could have been pulling down 16% interest on the million and thus been paying that amount in taxes (especially since tax rates were higher). and just because you dont get that kind of a taxable return on your money now doesnt mean nobody does.

yes i picked an extreme example (16% taxable income) to make my point but that doesnt mean it is invalid, instead it just shows off my point. what if you were getting 12% instead of 16%?.
Ok, I went back and looked at some returns after my transitions years (99-2000) my AGI ranged from 80K-125K and the tax ranged from $5,400 to 12,400. So roughly 7-10% and of course this year with my AGI dropping to 50K my tax dropped to $116 so I actually paid negative taxes. I didn't get the $200 ($300?) stimulus check but Turbo Tax says I now qualify. Deductions ranged from the standard deduction to around 15K. (mortgage interest, property taxes, contributions)

Of course most of my income is qualified dividends, MLPs, some tax exempt bonds, and capital gains. But it isn't by accident that my IRA consists mostly of bonds, REITs, and a couple of non-dividend stocks like Berkshire.
Where as my taxable account has only a GNMA fund and smattering of money markets/CDs that is taxed at regular income rates and most everything else is index funds, dividend paying stocks which are taxed lightly

My point is that retirees often overestimate the amount of taxes they owe in retirement. I know I did. I found I have far more control over the taxes I pay as retiree than I ever did while I was working. If want to lower my AGI to take advantage of special tax breaks of using saving bonds to pay for educational expense, I just hold off realizing capital gains that year.

So while your examples are possible I just don't think they are very likely, if you do even a 1/2 way decent job of asset location with your portfolio. You just wouldn't owe $36,000 in taxes on a million dollar portfolio and thus be left with only $4,000 to spend from your 4% SWR. It just ain't going to happen. Even those 16% 30-year bonds from the 70s have matured LOL.

Now as to your other point that preparing your portfolio for retirement can involve a great deal of taxes. I completely agree, in fact during my transition years I paid hundreds of thousand in taxes, due exercising stock options, selling my portfolio of high-tech stocks and buying bonds, and truly hellish experience with the byzantine world of AMT. I would certainly recommend that you base you SWR on your assets after you pay your taxes.
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Old 11-01-2009, 10:27 PM   #54
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So while your examples are possible I just don't think they are very likely, if you do even a 1/2 way decent job of asset location with your portfolio. You just wouldn't owe $36,000 in taxes on a million dollar portfolio and thus be left with only $4,000 to spend from your 4% SWR. It just ain't going to happen. Even those 16% 30-year bonds from the 70s have matured LOL.
i grant you that if you think all retirees have portfolios like is most often talked about on this forum you would be correct, but i can think of 2 other asset allocations that would lead to the problem i brought up.

1) a retiree with a large amount of rental property that is both F&C and completely depreciated. if operated correctly this will throw alot of rental income which is taxed at earned income rates. now granted there will be write offs but since there is no more depreciation you had to actually pay out that money (assuming you arent cheating on your taxes) and it was a real expense of making that rental income. this will leave alot of free income that you will have to pay taxes on and if you bought the property at a great cap rate that income would present the problem i discussed earlier.

2) a retiree who gets most of his income from the interest paid to him from hard money loans. these loans can be very high interest rate loans and the expenses are minimal. so this too leaves alot of income that is taxed at earned income rates.

now not everyone would invest like this (either of the 2 examples) but the people who have, if they are successful at it, can retire early doing it. and what i was talking about could be very applicable to them
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Old 11-02-2009, 06:23 AM   #55
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1) You wouldn't be retired: you would be working as a landlord.

2) You wouldn't be retired: you would be working as a cash-advance-store manager.

Perhaps that leads to a another definition of retired: Your income is taxed at a lower rate than it was while you were working.
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Old 11-02-2009, 10:29 AM   #56
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1) You wouldn't be retired: you would be working as a landlord.

2) You wouldn't be retired: you would be working as a cash-advance-store manager.

Perhaps that leads to a another definition of retired: Your income is taxed at a lower rate than it was while you were working.
[MODERATOR EDIT]

1) you could have hired a manager to do the work. if there are no loans against the property and the cap rates are high there would be plenty of income to do such and still throw the retiree a good income. there is at least one poster on this forum who is looking to retire off of income from his rental property and has written about his training a manager.

2) no you wouldnt be a manager, managers arent loaning their own money. if you want to be a hard money lender there are companies that look for investors to supply said money for the loans. the investors can get a very high yield and the work involved can be minimal. there have been discussion on this forum about doing this too.

and with your new definition people with large pensions or annuities or WDs from 401ks and who are highly invested in income producing investments would no longer be called retired? wow, to you they dont just have to have stopped working but instead they have to have the same investment profile as you to be considerd "retired". why dont you challenge whether the people who retire with a large portfolio of stocks and bonds using an AA model that may include slice and dice are really retired? couldnt some one say that they arent retired, they are working as a fund manager? [MODERATOR EDIT]
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Old 11-02-2009, 11:41 AM   #57
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Well, I enjoyed my little jokes even if some others did not.

[MODERATOR EDIT]
Really?
[MODERATOR EDIT]
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