Estimating future federal income taxes

[Slowgowing]

Hi -

I am constructing an Excel spreadsheet in order to estimate/guestimate future federal income taxes based on my estimated income.

As a starting point, I could use tax year 2022 brackets and the standard deduction amounts since they are known, and then adjust them by some amount or proportion for each year in the future. However, it’s not clear to me by what amount to adjust/increase them.

Clearly, this exercise is more guesswork than science because no one knows this information with certainty, but I’d like to implement something that’s seemingly reasonable.

I do understand that the current tax brackets are scheduled to revert in 2026 unless Congress makes a change – which of course, is certainly possible. Perhaps this is a foolhardy endeavor, but that’s never stopped me in the past.

So….I am seeking your guidance or suggestions. What have you done?

Thanks in advance for your thoughts and Happy New Year!

 

[COcheesehead]

Dinkytown.net has a great, free 1040 calculator. I use that and it takes out a lot of the guess work. Though estimating taxes beyond a year or two is a scientific wild a*s guess at best.

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[RunningBum]

What is the point of doing this beyond next year, that a rough estimate couldn't handle? Your income is only an estimate anyway. I'd just look at past increases in the brackets and extrapolate.

 

[pb4uski]

In my long term model I increase brackets and the standard deduction by 2% annually... the Fed's stated inflation target.

 

[Cobra9777]

In my long term model I increase brackets and the standard deduction by 2% annually... the Fed's stated inflation target.

Same here. I use 2%. If you dig around online, you can find a table of all the historical percentage increases for the brackets and standard deductions. IIRC, it was right around 2% average, and not particularly volatile. So seemed like a good number for long-range modeling.

 

[sheldon cornped]

I use my most current year's H & R Block tax program and create a separate file called "2022 Mock Tax Return". Then I carry over all the most recent data and tweak it according to what I expect to change. Then I play with how much stock to sell and from where etc.... It usually is reasonably accurate for my purposes. Plus it's cheap!

 

[brett]

Finger in the air and an quick educated guess will probably be as valid as some spreadsheet that you spend hours agonizing over.

Don't sweat the small stuff. Trust your judgement. Not everything has to be spreadsheet driven to be moderately accurate.

 

[COcheesehead]

Finger in the air and an quick educated guess will probably be as valid as some spreadsheet that you spend hours agonizing over.

Don't sweat the small stuff. Trust your judgement. Not everything has to be spreadsheet driven to be moderately accurate.

+1 Looking backward, there was no way I could predict the last couple of years, tax wise.

Plan for the year ahead. Beyond that, good luck.

 

[OverThinkMuch]

I am constructing an Excel spreadsheet in order to estimate/guestimate future federal income taxes based on my estimated income.

A lot of my money is in taxable, so for this exercise I'd also have to estimate future returns of the stock market! And inflation rates to estimate dividends.

In the past tax rates have been higher, and debt lower. My naive guess would be higher tax rates in the future, to pay down debt. But while the U.S. has the most national debt, it's also the highest GDP. Divide them, and the U.S. isn't even in the top 20. (Sort by the "% of GDP" column)
https://en.wikipedia.org/wiki/List_of_countries_by_external_debt

So you could look at how Europe is handling increasing debt. You might have heard about Greece (298% GDP) in the news, but did you know the UK is worse off, with debt 3.45x it's GDP? The strongest economy in Europe, Germany, has debt equal to 165% of it's GDP. If you keep scrolling, you'll find the U.S. at 102% of GDP. So that's where I'd look to predict future taxes - other countries with worse debt / GDP ratios than the U.S.

 

[Slowgowing]

Thanks for your thoughts/responses.

Completely agree that estimating future taxes beyond a year or two is guesswork, and I'm perfectly happy with a ballpark, WAG, or whatever beyond 2022.

I like pb4uski's and Cobra9777's idea of just applying a 2% increase -- I'm moving forward with that. Thank you.

 

[Brett_Cameron]

If you build your own federal tax estimator as I did, use https://fred.stlouisfed.org/series/SUUR0000SA0 to inflate the tax brackets. The actual inflator for 2022 would be the average of the index values from Sept 2020 to August 2021 divided by the average of the index values from Sept 2019 to Aug. 2020. The tax bracket values are rounded down to $50.

Make your best guess for future values of SUUR0000SA0, which is Chained Consumer Price Index for All Urban Consumers: All Items in U.S. City Average. In the past, I used the average of the previous 10 years. With the current inflation spike, who knows.

 

[GrayHare]

Since its already known that current rates are set to expire in 2026, you might incorporate that info.

 

[ERD50]

Maybe I'm missing something, but why inflate the tax brackets? Why not just do everything in today's $?

I did a gut-check spreadsheet a while back, kept everything in today's $, and deflated SS by 3% a year. Assume investments just keep up with inflation for simplicity and a 'bad case' outlook.

Of course, as mentioned, the actual brackets and rates may change beyond what is known about the sunset numbers, so that's uncharted territory. Probably safe to assume increases for most of us though.

-ERD50

 

[oldtimer]

I agree with ERD50. But if you must, maybe Retiree Portfolio Model spreadsheet may give you some guidance as an example of handling future taxes.

 

[TheWizard]

I have a spreadsheet, updated annually, that projects my AGI for the next several years.
But I don't try to project income taxes at all...

 

[RetiredHappy]

I do have several Excel spreadsheets/books including one for income tax projections for the next few years. I set up each sheet as a year, using published irs brackets and estimated future increases at 2%. This exercise is for figuring out tax withholding for SS, RMD, Annuities as well as making pre-payment of taxes. For instance, from my estimates, we owe $3K with our upcoming returns. For tax year 2022, I will need to make a $10K pre-payment when one investment instrument matures next year. This is in addition to withholding 20 percent from RMD etc..

 

[teejayevans]

When I use calculators or do my own modeling, I ignore inflation adjustments and just lower expected returns so everything is in current dollars.

 

[Cobra9777]

...why inflate the tax brackets? Why not just do everything in today's $?...

I live in a world of nominal dollars... past, present, and future. So that's the world I model in my spreadsheets. Your world may vary.

 

[brett]

I have had a number of years where I had to pay considerably more income tax than I estimated.

Those were GREAT income years. I was very pleased that my estimate was out to lunch....as was my income f'cast.

 

[brett]

I have had a number of years where I had to pay considerably more income tax than I estimated.

Those were GREAT income years. I was very pleased that my estimate was out to lunch....as was my income f'cast.

I do not mind paying income tax....it means I am realizing income.

 

[chassis]

Hi -

I am constructing an Excel spreadsheet in order to estimate/guestimate future federal income taxes based on my estimated income.

As a starting point, I could use tax year 2022 brackets and the standard deduction amounts since they are known, and then adjust them by some amount or proportion for each year in the future. However, it’s not clear to me by what amount to adjust/increase them.

Clearly, this exercise is more guesswork than science because no one knows this information with certainty, but I’d like to implement something that’s seemingly reasonable.

I do understand that the current tax brackets are scheduled to revert in 2026 unless Congress makes a change – which of course, is certainly possible. Perhaps this is a foolhardy endeavor, but that’s never stopped me in the past.

So….I am seeking your guidance or suggestions. What have you done?

Thanks in advance for your thoughts and Happy New Year!

Use the RPM spreadsheet. It does exactly what you are looking for.

I coded my own version of tax brackets into my home grown retirement spreadsheet and I grow the standard deduction over time. It works well.

Income taxes are entirely forecastable using current rates. When/if rates change, change your model. You need to build sufficient fidelity into your model to account for your personal situation: types of income, deductions, etc. If TurboTax can do it so can you.

 

[Slowgowing]

Thanks for the responses.

I was hoping to build my Excel model to have a bit more fidelity than horse shoes and handgrenades, but given all of the other estimates/forecasts that are involved (investment performance, anticipated spending, etc.), I fully expect any model will need on-going updates.

I will certainly look into RPM as Chassis suggested.

Chassis - Out of curiosity, did you code your tax brackets using a simple 2% increase as others suggested...or...perhaps you took a more sophisticated approach?

 

[pjigar]

Historically brackets have increased by about 1% a year which is what I use in my RMD estimate worksheet.

 

[chassis]

Thanks for the responses.

I was hoping to build my Excel model to have a bit more fidelity than horse shoes and handgrenades, but given all of the other estimates/forecasts that are involved (investment performance, anticipated spending, etc.), I fully expect any model will need on-going updates.

I will certainly look into RPM as Chassis suggested.

Chassis - Out of curiosity, did you code your tax brackets using a simple 2% increase as others suggested...or...perhaps you took a more sophisticated approach?

Current model has standard deduction escalation at the rate of inflation. I plan to add similar parameterization to the brackets as a next step. These adjustments/parameters are changeable and can be corrected/tuned over time.

Regarding source of income, if one assumes all income is ordinary, this would be a conservative assumption and avoids the complexity of estimating capital gains and dividend income as a fraction of total income. Or you could estimate these income sources based on your history, and tune that aspect of your model over time.