How to calculate income tax in retirement?

[tominboise]

2021 will be our first full year of retirement. We will be Married filing jointly with one dependent and about $45000 in income (interest, capital gains and qualified dividends). I believe I need to submit quarterly tax payments but I don't want to use last years income as a Safe Harbor estimate, since my tax liability was $50k.

When I run various calculators on the internet, I get answers basically ranging from $0 to $7k. I don't want to wing it, really.

Any thoughts on how to proceed? After this year, I will be able to safe harbor as the income will be way closer going forward.

 

[Gumby]

If you have a tax software package, they usually have an estimator for the coming year. You could also just rerun your 2020 taxes using 2021 numbers and see what comes out. It will be close, but a little conservative because the tax brackets and standard deduction are indexed to inflation. Just remember to account for the COVID stimulus money properly.

 

[pacergal]

I guess I would practice run Turbo Tax or Tax Caster and go from there.
If it were me and I got between 0-7K, I would maybe go half. But I am not a tax person.

 

[RunningBum]

Did you input the same thing into each calculator? Which ones were off? I'd try to understand a $7K difference first. If you can't figure it out, then I'd use the worst case to avoid an underpayment penalty.

You've already missed the 1st quarter payment, which was due on 4/15. I don't think that has been deferred like the 2020 tax deadline was. I'm not sure what the ramifications are if you were to make a payment a week late.

 

[tominboise]

Did you input the same thing into each calculator? Which ones were off? I'd try to understand a $7K difference first. If you can't figure it out, then I'd use the worst case to avoid an underpayment penalty.

You've already missed the 1st quarter payment, which was due on 4/15. I don't think that has been deferred like the 2020 tax deadline was. I'm not sure what the ramifications are if you were to make a payment a week late.

Thanks for the info. I just logged on to the EFTPS site and made an estimated payment. Also scheduled for the remaining three. I will have to look into any penalty for missing the April 15 date.

 

[SecondCor521]

2021 will be our first full year of retirement. We will be Married filing jointly with one dependent and about $45000 in income (interest, capital gains and qualified dividends). I believe I need to submit quarterly tax payments but I don't want to use last years income as a Safe Harbor estimate, since my tax liability was $50k.

When I run various calculators on the internet, I get answers basically ranging from $0 to $7k. I don't want to wing it, really.

Any thoughts on how to proceed? After this year, I will be able to safe harbor as the income will be way closer going forward.

There are multiple safe harbors at the federal level. One is if you owe less than $1,000 when you file next year, so you will probably avoid underpayment penalties on that basis as long as you make estimated payments that get you within that $1,000 range.

Worst case: with MFJ and $45,000 in taxable income, you would be able to subtract your standard deduction of $25,100, which would leave you with a taxable income of $19,900. The first $9,950 of that would be taxed at 10%, so $995 there. The remaining $9,950 would be taxed at 12% for $1,194. $2,189 total. Depending on the age of the dependent, you'll qualify for at least a $500 "other dependent" tax credit, so that would drop you to $1,689.

The previous paragraph gets better if you or your spouse are over 65, if either of you are blind, if you can itemize, if you give to charities (up to $600 for MFJ for 2021 is subtracted as an adjustment), if you contribute to HSAs, how much of your dividends are qualified, if the dependent is under 17 at the end of this year, and probably some other things I didn't think of.

So you can send in an estimated payment of $690 and that would get you under the $1K safe harbor limit. You can do that once now, or split it up over the remaining three estimated payment periods. You'd probably want to do more than that rather than rely on my back of the envelope calculations (although I do volunteer tax prep and I'm fairly good at it).

Since I know you're in Idaho and I've researched this before, Idaho has no underpayment penalties and so there is no need to make estimated payments to the state. Just pay whatever you owe by 4/15/2022 and you'll be fine (although it may be a large check depending on your tax situation).

But for Idaho, a safe estimate of your tax liability would be 6.925% of your AGI, which would be that $19,900 number or less, or $1378. It'll probably be significantly less than that because there are some small brackets at lower rates, and also you probably qualify for donations to the IYR and maybe deductions for OOP medical premiums, and maybe even interest from government obligations. Your retirement income may be a subtraction as well, and any Idaho 529 contributions will help also.

HTH, good luck.

 

[tominboise]

There are multiple safe harbors at the federal level. One is if you owe less than $1,000 when you file next year, so you will probably avoid underpayment penalties on that basis as long as you make estimated payments that get you within that $1,000 range.

Worst case: with MFJ and $45,000 in taxable income, you would be able to subtract your standard deduction of $25,100, which would leave you with a taxable income of $19,900. The first $9,950 of that would be taxed at 10%, so $995 there. The remaining $9,950 would be taxed at 12% for $1,194. $2,189 total. Depending on the age of the dependent, you'll qualify for at least a $500 "other dependent" tax credit, so that would drop you to $1,689.

The previous paragraph gets better if you or your spouse are over 65, if either of you are blind, if you can itemize, if you give to charities (up to $600 for MFJ for 2021 is subtracted as an adjustment), if you contribute to HSAs, how much of your dividends are qualified, if the dependent is under 17 at the end of this year, and probably some other things I didn't think of.

So you can send in an estimated payment of $690 and that would get you under the $1K safe harbor limit. You can do that once now, or split it up over the remaining three estimated payment periods. You'd probably want to do more than that rather than rely on my back of the envelope calculations (although I do volunteer tax prep and I'm fairly good at it).

Since I know you're in Idaho and I've researched this before, Idaho has no underpayment penalties and so there is no need to make estimated payments to the state. Just pay whatever you owe by 4/15/2022 and you'll be fine (although it may be a large check depending on your tax situation).

But for Idaho, a safe estimate of your tax liability would be 6.925% of your AGI, which would be that $19,900 number or less, or $1378. It'll probably be significantly less than that because there are some small brackets at lower rates, and also you probably qualify for donations to the IYR and maybe deductions for OOP medical premiums, and maybe even interest from government obligations. Your retirement income may be a subtraction as well, and any Idaho 529 contributions will help also.

HTH, good luck.

This is great information - thanks very much!

 

[pb4uski]

2021 will be our first full year of retirement. We will be Married filing jointly with one dependent and about $45000 in income (interest, capital gains and qualified dividends). I believe I need to submit quarterly tax payments but I don't want to use last years income as a Safe Harbor estimate, since my tax liability was $50k.

When I run various calculators on the internet, I get answers basically ranging from $0 to $7k. I don't want to wing it, really.

Any thoughts on how to proceed? After this year, I will be able to safe harbor as the income will be way closer going forward.

I would use the Turbo Tax What-If worksheet for 2021 or this calculator... https://www.irscalculators.com/tax-calculator to get an idea of your total tax liability for 2021.

Then reduce by estimated withholdings for 2021 to get an estimate of what you will owe.

Then make estimated payments or withholdings as needed.

$0-7k isn't a hugely wide range.

 

[N02L84ER]

Worst case: with MFJ and $45,000 in taxable income, you would be able to subtract your standard deduction of $25,100, which would leave you with a taxable income of $19,900. The first $9,950 of that would be taxed at 10%, so $995 there. The remaining $9,950 would be taxed at 12% for $1,194. $2,189 total. Depending on the age of the dependent, you'll qualify for at least a $500 "other dependent" tax credit, so that would drop you to $1,689.



HTH, good luck.

I believe with MFJ, the first 19,900 of taxable income is taxed at 10%, so the total tax would be $1,990 in this example.

 

[Time2]

Have you used Dinkytown? I've been very happy with it for tax planning.
I'm not sure you will owe anything. MFJ gets you a $25,100 deduction, That leaves $19,900, much of which is Qualified Dividends and LTCGs, they are probably taxed at 0%. That leaves you interest.
Pop your numbers in DinkyTown and see what you get.
https://www.dinkytown.net/java/1040-tax-calculator.html
It's very easy to use.

 

[Surewhitey]

We had a similar problem with my self employment last year. We estimated $7-8k, paid the amount in November and December (DW's withholdings bump) and ended up getting half of it back. We wanted to be cautious but pay later in the year (advice from the smart people here). "Lost" out of 4-5 months of $4k, but was worth the peace of mind.

I'll know for this year...

 

[sengsational]

I just put estimates for next year's taxes into this year's tax software. It's close enough.


Also, if you do tIRA or 401k withdrawals, you can dial-in withholding such that estimated taxes are not required.

 

[SecondCor521]

I believe with MFJ, the first 19,900 of taxable income is taxed at 10%, so the total tax would be $1,990 in this example.

@tominboise, @N02L84ER is correct on the above point. For some reason I looked at the MFS brackets, not the MFJ brackets.

 

[Lcountz]

Please note....

You don't subtract your standard deduction from your "taxable income", it's subtracted from your Adjusted Gross Income.

Your TAXABLE income is the income you will pay tax on....it's not clear in the OP's note if that figure is indeed his TAXABLE income...

If his "Taxable Income" for 2021 is 45,000, MFJ income tax (federal) will be 5002.00... (according to the Tax Tables, which are not out yet for THIS year 2021, got it from a calculator).

Tax Brackets (Federal Income Tax Rates) 2000 through 2020 and 2021


Quarterly Tax would be 1250 per quarter. April 15, June 15, Sep 15 and Jan 15,2022.

Hope this helps.

 

[pb4uski]

2021 will be our first full year of retirement. We will be Married filing jointly with one dependent and about $45000 in income (interest, capital gains and qualified dividends). I believe I need to submit quarterly tax payments but I don't want to use last years income as a Safe Harbor estimate, since my tax liability was $50k.

When I run various calculators on the internet, I get answers basically ranging from $0 to $7k. I don't want to wing it, really.

Any thoughts on how to proceed? After this year, I will be able to safe harbor as the income will be way closer going forward.

If your 2021 total income will $45k and you are MFJ, the most you would owe would be $1,990 in federal tax... and less since some of your income will be capital gains and qualified dividends but you don't say how much and its unclear if one or both of you are 65 or older... for that amount I wouldn't sweat it.

And if $19,900 or more of your $45k of income is qualified dividends or LTCG then your tax would be $0.

 

[tominboise]

Our income will be qualified dividends and LTCG, totaling to $45k. Neither of us are 65 and we have one 19 yo dependent student. Anyway, running the calculators mentioned above, reveals a tax of $0. So what happens if I make estimated payments this year?

I presume that I would get a refund in 2022?

 

[N02L84ER]

Yes, you would get a refund when you file your taxes in 2022. If your income truly is qualified dividends and LTCG, you may want to do some Roth conversions because they will be tax free conversions up to your standard deduction amount.

 

[pb4uski]

Our income will be qualified dividends and LTCG, totaling to $45k. Neither of us are 65 and we have one 19 yo dependent student. Anyway, running the calculators mentioned above, reveals a tax of $0. ...

If your $45k of income is all qualified dividends and LTCG and if you have tax-deferred money, then it is a no brainer to do Roth conversions at least equal to the standard deduction since those Roth conversions will bear $0 tax... that would be $25,100 for 2021.

Alternatively, you could do Roth conversions to the top of the 0% preferenced income bracket (on qualified dividends and LTCG) and would only pay $3,898 in federal income taxes on a total of $60,900 of Roth conversions... a very reasonable 6.4%. That will probably be a lot less that if you withdraw from tax-deferred accounts later after any pensions or SS push you into a higher tax bracket.

Check out various scenarios at https://www.irscalculators.com/tax-calculator

Note... federal income tax only, there may be state income taxes.

 

[SevenUp]

Alternatively, you could do Roth conversions to the top of the 0% preferenced income bracket (on qualified dividends and LTCG) and would only pay $3,898 in federal income taxes on a total of $60,900 of Roth conversions... a very reasonable 6.4%. That will probably be a lot less that if you withdraw from tax-deferred accounts later after any pensions or SS push you into a higher tax bracket.

tominboise, do consider this. If you have $45K in QD+LTCG, your SS benefits are likely significant. Once you start taking SS, withdrawals from traditional accounts may be much more heavily taxed than they will be now.

If you had no ordinary income in 1Q, you didn't owe any estimated tax. Going forward, if you pay the appropriate estimated tax in the same quarter you do Roth conversions you will be all set.

If you'd like to see your marginal rates for Roth conversions in chart form and you have Excel, the case study spreadsheet will show you those. It is very easy to add your expected SS benefits and see how things might look when those start. The federal tax calculations are excellent. It will also do Idaho state taxes, but I don't know how accurately.

 

[tominboise]

Thanks - at this moment my plan is to do Roth conversions. We are managing our income to accommodate an ACA subsidy, but with the recent American Rescue plan changes, that will increase the amount of conversions that I will do this year and next.

I will look at the calculators and spreadsheet to get a feel for the tax liability.

 

[FANOFJESUS]

If your $45k of income is all qualified dividends and LTCG and if you have tax-deferred money, then it is a no brainer to do Roth conversions at least equal to the standard deduction since those Roth conversions will bear $0 tax... that would be $25,100 for 2021.

Alternatively, you could do Roth conversions to the top of the 0% preferenced income bracket (on qualified dividends and LTCG) and would only pay $3,898 in federal income taxes on a total of $60,900 of Roth conversions... a very reasonable 6.4%. That will probably be a lot less that if you withdraw from tax-deferred accounts later after any pensions or SS push you into a higher tax bracket.

Check out various scenarios at https://www.irscalculators.com/tax-calculator

Note... federal income tax only, there may be state income taxes.

Thanks for the link. I like that one easy to use.