Poll: What tax bracket are you?

[M Paquette]

Oh boy. Meaningless number time! If we go by what federal income tax bracket our last dollar earned nominally places us in, we are in the 15% bracket. If we go by our effective federal tax rate, or what percentage of our adjusted gross income is sent to the federal government as income tax, we have a rate of -2%. Negative two percent.

Some early retirees are placed in an unusual position by the existing tax laws and income tax code. I don't write the laws. I just follow them, with this odd result.

 

[hnzw_rui]

I'll never be below the 25% bracket. Pensions are wonderful things, so I certainly won't complain about paying the taxes.

I'm still far from retirement but yes, I'd rather pay taxes and get a guaranteed pension with annual COLA than be reliant on just my 401k (or 457b in my case). I'm hopeful I won't need the IRA and 457b account apart from discretionary spending. That said, since it's early days for me, I'm trying to hedge my bets in minimizing the tax hit from now until retirement.

 

[CRLLS]

So if I make 10,000 more than planned in 2015, I lose ~7500 in ACA premium credits. Doesn't that put me effectively in the 75% marginal tax bracket? That isn't even figuring the actual income taxes and self-employment taxes on that extra 10,000

 

[Andre1969]

I answered 25% as well, because that's the top rate my wage income is taxed at. But my total AGI, which included a lot of dividends, capital gains, etc, came out to a number that, if it was all wage income, would have landed me well into the 28% bracket.

 

[jebmke]

I manage income through Roth conversions to consume the 28% bracket and avoid the hidden 30% bracket.

 

[pb4uski]

So if I make 10,000 more than planned in 2015, I lose ~7500 in ACA premium credits. Doesn't that put me effectively in the 75% marginal tax bracket? That isn't even figuring the actual income taxes and self-employment taxes on that extra 10,000

Welcome to the infamous Obamacare cliff.

After ACA credits, FICA and OADI, federal tax and state taxes are considered your taxes on that extra $10,000 of earnings might be close to 100%.

 

[audreyh1]

Thanks Audreyh1 - I can now see that if a single taxpayer with $150,000 in qualified dividends earns $10,000 in additional income, regardless of the source, the additional tax due will be 15%. Therefore his/her marginal tax rate is 15%.

This is counterintuitive in that his taxable income puts him squarely in the 28% tax bracket of the standard IRS rate schedules (for income that does not contain LTCGs or qualified dividends.)

It would take a significant amount of additional non-qualified income to displace all the qualified dividends before a marginal rate other than 15% shows up, and by that time he may be in yet another standard tax bracket.

I guess the moral of the story is that the preferred tax effects on qualified dividends/LTCGs go way beyond the actual dividend/cg income.

-gauss

What it means is that the "tax brackets" applies only to ordinary income such as wages or interest. Long-term cap gains and qualified dividends are taxed in a different way, although even they have brackets that are influenced by the total taxable income.

AMT introduces yet a third set of brackets on ordinary income once your total income minus AMT exemption crosses a certain threshold. Essentially overriding the "normal" tax brackets for ordinary income.

Quite a few retirees with most of their investments in taxable accounts receive more income in long-term cap gains and qualified dividends than they do in ordinary income. Sometimes far more. That has been our situation ever since we retired.

Anyway - ordinary income "tax brackets" kind of lose their meaning.

 

[Disappointed]

Year BRCK EFR
2010 35 27.72
2011 35 27.85
2012 35 27.78
2013 39.6 31.01 (last year - retired EOY)
2014 28 15.46 (some consulting work)

Add state of CA tax and other taxes to that and net income was drastically reduced.

 

[kaneohe]

Thanks Audreyh1 - I can now see that if a single taxpayer with $150,000 in qualified dividends earns $10,000 in additional income, regardless of the source, the additional tax due will be 15%. Therefore his/her marginal tax rate is 15%.

This is counterintuitive in that his taxable income puts him squarely in the 28% tax bracket of the standard IRS rate schedules (for income that does not contain LTCGs or qualified dividends.)

It would take a significant amount of additional non-qualified income to displace all the qualified dividends before a marginal rate other than 15% shows up, and by that time he may be in yet another standard tax bracket.

I guess the moral of the story is that the preferred tax effects on qualified dividends/LTCGs go way beyond the actual dividend/cg income.

-gauss

This is an interesting example of how intuitions have to be trained before something becomes intuitive. Your example of a 15% marginal rate for a 10K addition of any kind of income works only because the 10K addition is less than the std deduction/exemption by just a bit. That means that if the 10K you added was ordinary income and you add just a bit more ordinary income , you will encounter a 25% marginal bracket and then if you add still more ordinary income, you will find the 30% marginal bracket. Thanks for the training.

 

[mathjak107]

i just looked at our numbers for last year since they were one of the worst tax wise for us in a few years and about as bad as it can get for us since we had a very large capital gain sale..

after subtracting out maxing out 401k's, and pretax medical , agi was 461,136.00 with 424,659 being taxable income . that included a 307,000.00 long term capital gain on the lease rights we sold, about 60k in distributions from fidelity in long term capital gain items and us working part time.

federal taxes were 72,384.00 PLUS the AMT penalty of 17,003.00 for a total federal bill of 89,387.00

that is 21% from dollar one . overall not to bad

new york state and nyc taxes were 42,027.00

total federal and local taxes on 424,659.00 were 131,414.00


that is a 31% effective rate .


i don't think an effective rate of 31% is to bad on that kind of income at all. and we are one of the highest tax states and cities in the country .

but keep in mind most of that did get special tax treatment as a long term capital gain t . if it was earned income it would have been taxed a bit higher.

what i found interesting is that the state and local taxes were almost 1/2 the federal amount and that is because state taxes do not reflect the fact the federal taxes have a special long term capital gains rate while states do not.


boy , if i could have an income like that every year instead of these sales being once in a while i would gladly pay those taxes,

this year taxable income in retirement will likely be in the 15% bracket , perhaps with just a touch extending in to 25% but that is marginal rate not effective rate like the above.

 

[gauss]

This is an interesting example of how intuitions have to be trained before something becomes intuitive. Your example of a 15% marginal rate for a 10K addition of any kind of income works only because the 10K addition is less than the std deduction/exemption by just a bit. That means that if the 10K you added was ordinary income and you add just a bit more ordinary income , you will encounter a 25% marginal bracket and then if you add still more ordinary income, you will find the 30% marginal bracket. Thanks for the training.

And double thanks to you! This was how I thought it should work originally -- ie that extra qualified dividend income should NOT be the same as extra ordinary income. So basically in my example the standard deduction was consuming all my added income and the effect was masked. I will need to try to get my post #44 on the previous page corrected.

Revised moral of the story: I can't do these qualified dividend/LTCG calculations in my head yet. I will at least need to draw a picture (ie stacked bar graph style) showing income against tax brackets to aid my analysis and understanding.

-gauss

 

[kaneohe]

Revised moral of the story: I can't do these qualified dividend/LTCG calculations in my head yet. I will at least need to draw a picture (ie stacked bar graph style) showing income against tax brackets to aid my analysis and understanding.

-gauss

same here........well, I can do the calculations in my head .........at the risk of being wrong. In this case, I forgot about the 0% bracket since that's foreign to my normal experience. The other moral is perhaps: always double check against tax software/calculator. Yes, that stacked bar chart is very useful in helping make this intuitive.

 

[Accidental Retiree]

Federal 15% bracket, effective rate 10%; California effective tax rate, 1.75%.

 

[Jackanory]

I'm glad you ran this poll; I hadn't pay much attention to page 2 of my 1040, besides looking at the refund amount. Apparently I managed to pay $0 last year for federal -- does that put me in a 0% bracket?


(I voted 10%)

 

[trirod]

I'm in the 28% AMT bracket but also subject to the AMT exemption phaseout which gives me an effective bracket of 35% (I lose $1 of exemption for every $4 of income so that's an effective additional tax of one-quarter of 28%, so 7% + 28% = 35%).

Most people in AMT think they are in a 26% or 28% bracket, whereas in reality they are in a 32.5% or 35% bracket with the impact of the phaseout. Something you need to plan around.

 

[Meadbh]

As a non-USian, I can't answer the poll. FWIW, in 2014, my overall tax rate was 5%.

As a Canadian, I am VERY pleased with this week's budget, which is a great deal for retirees. As of 2015, Canadians can now sock away $10,000 per year in a TFSA (tax free savings account; like a Roth, but you can withdraw anytime and recontribute the next year) and RRIF (registered retirement income fund) withdrawal rules have been relaxed. This will enable many people to avoid bumping up to the highest marginal tax rates following age 71.

http://www.scotiabank.com/ca/common/pdf/FederalBudget2015_SB_EN.pdf

 

[FIREd]

We - or I should say DW- had an excellent year income-wise in 2014 and our marginal tax rate was 39.6%. This year we are expecting our income to be cut by 2/3, so we should go down a bracket or two or three.