Federal taxes, and moving them around a bit

[KimmK451]

So, I'm sure this has probably always been obvious to everyone else who does their own taxes, but ok, I'm slow. I was checking next year's tax brackets, and the site I checked phrased it a little differently.

Instead of the usual "22% - $xxx - $xxx" they put it as:
$44,726 to $95,375 $5,147 plus 22% of amount over $44,725
$95,376 to $182,100 $16,290 plus 24% of amount over $95,375
which actually made me stop to consider the base amount I'm paying here.

So, if I take extra money out this year (to spend next year) and pay the taxes on it now, I'll stay in the lower tax bracket in 2023 and save $11,143 on the base amount of my taxes next year. Costs me 24% tax this year on that extra withdrawal but it would if I took it out next year anyway.

What if I leapfrogged years? Take extra out every other year and stayed in the lower tax bracket every other year, and use the ROTH for emergency spending/unexpected expenses. Would this work?

It's just the Federal I'm concerned about; I don't find my state taxes to be all that onerous.

 

[pb4uski]

I don't think it works. An example... a single person needs $200k to live on over the next 3 years and has more than that in a tIRA.

Draws $50k/$100k/$50k and federal tax is $4,240, $14,768, $4,240 for total of $23,348.

Draws $66.67k annually for 3 years and federal tax is $7,435 a year or $22,308 for the 3 years.

https://www.irscalculators.com/tax-calculator

 

[KimmK451]

Good example! Thanks. It just irks me that I lose so much of my retirement funds to taxes.

 

[RunningBum]

That's the "deferred" part in "tax deferred". You have to pay taxes on them sometime.

 

[CardsFan]

Good example! Thanks. It just irks me that I lose so much of my retirement funds to taxes.

That's the "deferred" part in "tax deferred". You have to pay taxes on them sometime.

Yep. That's the way it works. I don't LIKE paying taxes, but since I avoided a 22%-27% tax when I contributed I really can't complain.

 

[RobbieB]

One should consider one's self very well off compared to those who pay no taxes.

 

[HI Bill]

Well, you escaped paying taxes on the tax-deferred contributions, as well as all gains. You can play the game better by having a mix of taxable and tax-deferred accounts, and if you're MFJ, can skip paying taxes on the first $25.9K [standard deduction for a couple], and up to the first $83K in LTCGs. Then roll in the tax-deferred sales. In the years before I hid RMD age, I'm planning to sell tax-deferred up to the MFJ standard deduction, then LTCGs in taxable accounts up to the $83K limit, and finally topping off with additional tax-deferred as needed.

At some point, I'll run out of tax-deferred, and will be stuck paying a lot of taxes on tax-deferred contributions, and eventually, 85% of the SS benefits. My spending plan has me paying about $9K in mostly State of Hawaii taxes for the first few years, with virtually no Federal taxes, then paying about $20K annually in state and federal.

 

[pb4uski]

Good example! Thanks. It just irks me that I lose so much of my retirement funds to taxes.

Don't get me started. Your retirement fund is money that you earned and have NEVER paid tax on... what makes you think you should get a free pass now? It's silly to even think that.

When you saved that money you did it thinking that you would be in a lower tax bracket in retirement and save on taxes. So if you avoided paying 28% back then and instead are paying 12% or even 22% now, what the heck are you complaining for? It turned out just like you planned and you are saving on taxes just as you planned. Most retirees are in this category.

Now if on the other hand you are paying more in taxes than you saved in taxes when you deferred that income it means that you have been much more financially successful than you expected to be, so count your blessings and stop complaining.

 

[PERSonalTime]

Well, you escaped paying taxes on the tax-deferred contributions, as well as all gains. You can play the game better by having a mix of taxable and tax-deferred accounts, and if you're MFJ, can skip paying taxes on the first $25.9K [standard deduction for a couple], and up to the first $83K in LTCGs. Then roll in the tax-deferred sales. In the years before I hid RMD age, I'm planning to sell tax-deferred up to the MFJ standard deduction, then LTCGs in taxable accounts up to the $83K limit, and finally topping off with additional tax-deferred as needed.

At some point, I'll run out of tax-deferred, and will be stuck paying a lot of taxes on tax-deferred contributions, and eventually, 85% of the SS benefits. My spending plan has me paying about $9K in mostly State of Hawaii taxes for the first few years, with virtually no Federal taxes, then paying about $20K annually in state and federal.

Interesting. Do you have a pension?

 

[ncbill]

One should consider one's self very well off compared to those who pay no taxes.

Yep, I'm always amused by the people complaining about having to pay IRMAA.

 

[Rianne]

Don't get me started. Your retirement fund is money that you earned and have NEVER paid tax on... what makes you think you should get a free pass now? It's silly to even think that.

When you saved that money you did it thinking that you would be in a lower tax bracket in retirement and save on taxes. So if you avoided paying 28% back then and instead are paying 12% or even 22% now, what the heck are you complaining for? It turned out just like you planned and you are saving on taxes just as you planned. Most retirees are in this category.

Now if on the other hand you are paying more in taxes than you saved in taxes when you deferred that income it means that you have been much more financially successful than you expected to be, so count your blessings and stop complaining.

KimmK451, pb4usk is a seasoned accountant with many years of experience. He's put me in my place more than once. I see you're a newer poster. I always look for pb4usk advice even if it stings a little.

 

[Exchme]

So, I'm sure this has probably always been obvious to everyone else who does their own taxes, but ok, I'm slow. I was checking next year's tax brackets, and the site I checked phrased it a little differently.

Instead of the usual "22% - $xxx - $xxx" they put it as:
$44,726 to $95,375 $5,147 plus 22% of amount over $44,725
$95,376 to $182,100 $16,290 plus 24% of amount over $95,375
which actually made me stop to consider the base amount I'm paying here.

So, if I take extra money out this year (to spend next year) and pay the taxes on it now, I'll stay in the lower tax bracket in 2023 and save $11,143 on the base amount of my taxes next year. Costs me 24% tax this year on that extra withdrawal but it would if I took it out next year anyway.

What if I leapfrogged years? Take extra out every other year and stayed in the lower tax bracket every other year, and use the ROTH for emergency spending/unexpected expenses. Would this work?

It's just the Federal I'm concerned about; I don't find my state taxes to be all that onerous.

The only time I can think of that yo-yoing up and down on income could be helpful is for ACA premium credits or other income based subsidy, where you could get the government to subsidize you in low income years. Otherwise, the nature of the tax code is high incomes pay higher rates. That means that the best you can do is keep income level over your lifetime.

 

[lem1955]

My boss, who was raking in profits of millions each year, complained about the taxes she paid. I had a pretty close relationship with her at the time, and repeatedly told her, "it is unseemly for a person with so much wealth to complain about taxes." What bothers me more are those who do not understand that taxes support public education, libraries, roads, bridges, and lots of other public goods that we would not enjoy (especially in rural areas) if all was left to the private sector. I'm proud to do my part and grateful for the help I've had to get where I've gotten. That said, there's no need to pay more in taxes than you are obligated to pay.

 

[KimmK451]

KimmK451, pb4usk is a seasoned accountant with many years of experience. He's put me in my place more than once. I see you're a newer poster. I always look for pb4usk advice even if it stings a little.

Thanks Rianne! Yes, I know I have a high income. Problem is that I live in a very HCOL location and may have to move to find one that will make my $ last, especially considering any long term care will have to be paid for since I don't have family. My bad for not having kids & spouse(s) so I'd have the deductions! lol

 

[pb4uski]

KimmK451, pb4usk is a seasoned accountant with many years of experience. He's put me in my place more than once. I see you're a newer poster. I always look for pb4usk advice even if it stings a little.

Fair point.. I was a bit stern to a new poster... I'm sorry.

 

[pb4uski]

My boss, who was raking in profits of millions each year, complained about the taxes she paid. I had a pretty close relationship with her at the time, and repeatedly told her, "it is unseemly for a person with so much wealth to complain about taxes." What bothers me more are those who do not understand that taxes support public education, libraries, roads, bridges, and lots of other public goods that we would not enjoy (especially in rural areas) if all was left to the private sector. I'm proud to do my part and grateful for the help I've had to get where I've gotten. That said, there's no need to pay more in taxes than you are obligated to pay.

+1 I think taxes are pretty reasonable.

Take a hypothetical married couple over 65 with $60k of SS and $80k of tIRA withdrawals (4% WR on $2m all tax-deferred).. they have $140k of income and pay $13,740 in federal income tax (9.81%).

Make that a single with $40k of SS and $40k of tIRA withdrawals (4% WR on $1m all tax-deferred)... on $80k of income the tax is $7,035 (8.79%)

 

[ncbill]

Whenever I want to complain about taxes I consider my grandparents, born prior to WWI, who paid 20% federal taxes from the first dollar they earned over more than half their working career until JFK's tax cut (20% in 1963 -> 14% in 1965)

And no federal 'zero tax' bracket until the early 1970s.

Plus another 6-7% via a progressive state income tax (currently 5% flat, dropping to 4% by 2027)

 

[gauss]

Maybe look at it as a loan (tax-deferred accounts) , but with all the interest permanently forgiven.

-gauss
Happiness is often based in how things are framed.

 

[Gumby]

Being a lawyer, I'll go with this one:

"Taxes are what we pay for civilized society"

Justice Oliver Wendell Holmes Jr., dissenting in Compania General de Tabacos v. Collector, 275 U.S. 87, 100 (1927)

 

[misanman]

Being a lawyer, I'll go with this one:

"Taxes are what we pay for civilized society"

I'm hoping we get what we paid for!

 

[pb4uski]

Being a lawyer, I'll go with this one:

"Taxes are what we pay for civilized society"

Justice Oliver Wendell Holmes Jr., dissenting in Compania General de Tabacos v. Collector, 275 U.S. 87, 100 (1927)

I'm hoping we get what we paid for!

We're getting gypped.

 

[Fermion]

I'm hoping we get what we paid for!

I think we do actually.

I can walk outside and around my house without a great fear of getting jumped or kidnapped. For the most part, I can go to the store and not be mobbed by 100 starving children looking for a handout. Yes there might be a person or two on the street corner with a sign stating how they will work for food (and usually have a gas can or snow shovel next to them) but then the store I am going into has a big sign "now hiring, $18/hr to start" so I am unsure of the motivation of said person.

I can go to the library and sit in air conditioning and read many books and articles that disparage the current government, while not greatly worrying I will be arrested and sent to a labor camp.

 

[pb4uski]

^^^ DS recently moved and ended up going to an Amazon job fair. Basically, if you are sober, don't have 5 heads and can pass a drug test then they offer you employment. They never asked anything about experience, prior employment or anything from what he relayed to me.

I think what they do is have loads of people lined up to work, a lot never show up, a lot wash out within a week and the rest are potential keepers for them to offer full time with benefits.

 

[sakowitzm]

On the subject of tax rates, I always enjoy informing young people that the top federal tax rate in 1963 was 91%. They stare at me blankly for a moment, taking that in, and then say "that's impossible; you're wrong." To which I reply "google is your friend" and walk away.

 

[Time2]

My minor addition: if I had known how much money I would have now, I would have maximized Roths and minimized tax deferred during accumulation.


We were in a lower tax bracket all our life, looks like that bracket will be higher when we have SS, Dividends and interest, and RMDs.


pb4uski, where were you in 1997 when I needed to understand the tax arbitrage nature of Roth vs Tax deferred?



Yep, Roth Converting as fast as I can.