Simple Tax question

[Camas Lilly]

I am just wanting to make sure I am figuring this correctly.
The retirement budget I would like to set is $81,500.

Taxable Gains: If my taxable income goes over $80,000, is the amount over this threshold the only part that is taxed at 15%?

Income Taxes: Same here, if my taxable income goes over $82,500, is the amount over this threshold the only part that is taxed at 22%?

Thanks

[kaneohe]

If MFJ, the thresholds are as you say.

Create a stacked bar chart as follows:
Stack your qualified dividends/LTCG on top of your ordinary income. Subtract your deduction from the bottom of the stack of ordinary income . Standard deduction is 24800 (more if >65). The result is your taxable income (more complex if you have SS).

If any amount of QDIV/LTCG is over 80000 in your stacked bar chart, that amount is taxed at 15%.(rates can be higher if your income is very high).

If your ordinary income in the stack exceeds 80250, that amount is taxed at 22% (rates can be higher if your income is very high). The amount below 80250 is taxed at lower rates of 10 & 12%.

You can check if you are doing this correctly by using this calculator:
https://www.mortgagecalculator.org/c...calculator.php
The rate table is shown below the chart.

[Camas Lilly]

Thank you, I will check it out.

[pb4uski]

Quote:

Originally Posted by klucich I am just wanting to make sure I am figuring this correctly. The retirement budget I would like to set is $81,500. Taxable Gains: If my taxable income goes over $80,000, is the amount over this threshold the only part that is taxed at 15%? Income Taxes: Same here, if my taxable income goes over $82,500, is the amount over this threshold the only part that is taxed at 22%? Thanks

The $80,000 for MFJ in 2020 and the 15% rate only apply to qualified dividends and LTCG, but presumably you have some ordinary income and qualified income that pokes up over $80,000.

If your ordinary income exceeds the $24,800 standard deduction (or your itemized deductions) then that income would be subject to ordinary tax at 10% and/or 12%. If your ordinary income is less than $24,800 standard deduction (or your itemized deductions) then your ordinary tax is zero.

Also, you could have as much as $104,800 of total income and pay zero tax as long as your ordianry income ls less than your deductions. Qualified income above that would be at 15%.

So when thinking about taxes, it is important to consider deductions and bifurcate taxable income between qualified income and preferenced income.

[ERD50]

Quote:

The retirement budget I would like to set is $81,500. Taxable Gains: If my taxable income goes over $80,000

But remember, your budget may not be, and probably isn't, all made up of taxable income. In fact, there's really no direct connection at all.

For example, let's say you sell $81,500 of stock to fund your budget. Only the gain (if any) is taxable. You may have zero taxes on that $81,500 that you spend. Or you might be drawing from cash reserves, which is not a taxable event.

Conversely, if your investments are kicking of lots of dividends, interest, and capital gains (like some Mutual funds do, even if you don't sell anything), you could have taxable income far in excess of $81,500.

-ERD50

[youbet]

Quote:

Originally Posted by ERD50 But remember, your budget may not be, and probably isn't, all made up of taxable income. In fact, there's really no direct connection at all. For example, let's say you sell $81,500 of stock to fund your budget. Only the gain (if any) is taxable. You may have zero taxes on that $81,500 that you spend. Or you might be drawing from cash reserves, which is not a taxable event. Conversely, if your investments are kicking of lots of dividends, interest, and capital gains (like some Mutual funds do, even if you don't sell anything), you could have taxable income far in excess of $81,500. -ERD50

+1 ERD50 has hit the nail on the head.

OP, you sound as though you are confusing taxable income with budget (or spending). Two completely different things. You're doing the right thing to be considering tax planning and also to be considering your spending. But understand the differences. ERD50 gives great examples above.

At our house, taxable income exceeds spending ever since RMD's started. This means that as long as spending is below SS + pension + RMD, varying spending has no effect on fed income taxes that I can see.

[Camas Lilly]

Quote:

Originally Posted by ERD50 But remember, your budget may not be, and probably isn't, all made up of taxable income. In fact, there's really no direct connection at all. For example, let's say you sell $81,500 of stock to fund your budget. Only the gain (if any) is taxable. You may have zero taxes on that $81,500 that you spend. Or you might be drawing from cash reserves, which is not a taxable event. Conversely, if your investments are kicking of lots of dividends, interest, and capital gains (like some Mutual funds do, even if you don't sell anything), you could have taxable income far in excess of $81,500. -ERD50

Ok, I got that, but I am figuring most of my income will be from tax deferred accounts.

[Camas Lilly]

Quote:

Originally Posted by pb4uski The $80,000 for MFJ in 2020 and the 15% rate only apply to qualified dividends and LTCG, but presumably you have some ordinary income and qualified income that pokes up over $80,000. If your ordinary income exceeds the $24,800 standard deduction (or your itemized deductions) then that income would be subject to ordinary tax at 10% and/or 12%. If your ordinary income is less than $24,800 standard deduction (or your itemized deductions) then your ordinary tax is zero. Also, you could have as much as $104,800 of total income and pay zero tax as long as your ordianry income ls less than your deductions. Qualified income above that would be at 15%. So when thinking about taxes, it is important to consider deductions and bifurcate taxable income between qualified income and preferenced income.

Makes sense. I'll make sure I am figuring that correctly. I think I knew that, but just haven't figured it that way.

[kaneohe]

Sometimes words alone are not clear. A few numerical examples that hopefully might clarify :

1)You have 84.8K ordinary income and 30K QDIV/LTCG income. Your total income is 114.8K which is also your adjusted gross income (AGI) if no adjustments. Your taxable income is AGI less deduction = 114.8K-24.8K =90K if using std deduction. Your stacked bar chart consists of 60K ordinary income at the bottom (84.8K ordinary income less 24.8K deduction) and 30K QDIV/LTCG at the top for a total of 90K. 10K of that
QDIV/LTCG exceeds the 80K threshold so that 10K is taxed at 15%.
Drawing the stacked bar chart will make things clearer. None of the ordinary income is above 80.25K so none is taxed at 22%.

2)Change things so ordinary income is 115.05K with the same
30K QDIV/LTCG . Total income is 145.05K. Taxable income is 120.25K after subtracting the 24.8K deduction. This taxable income consists of a
90.25K bar of taxable income on the bottom and a 30K QDIV/LTCG on top.
The ordinary income bar exceeds the 80.25K threshold by 10K so 10K of ordinary income is taxed at 22%. Note that the increase in ordinary income of 30.25K has now pushed all of the QDIV/LTCG bar above the 80K
threshold so all of the 30K QDIV/LTCG is now taxed at 15%. Again drawing the stacked bar chart will help and you can find any math errors I made.

[Camas Lilly]

Quote:

Originally Posted by youbet +1 ERD50 has hit the nail on the head. OP, you sound as though you are confusing taxable income with budget (or spending). Two completely different things. You're doing the right thing to be considering tax planning and also to be considering your spending. But understand the differences. ERD50 gives great examples above. At our house, taxable income exceeds spending ever since RMD's started. This means that as long as spending is below SS + pension + RMD, varying spending has no effect on fed income taxes that I can see.

Got it! Thanks.

[pb4uski]

Quote:

Originally Posted by klucich Ok, I got that, but I am figuring most of my income will be from tax deferred accounts.

Quote:

Originally Posted by klucich Makes sense. I'll make sure I am figuring that correctly. I think I knew that, but just haven't figured it that way.

Any withdrawals from tax-deferred accounts would be ordinary income (assuming no basis... that all contributions were pre-tax or deductible). So if you are MFJ and had $81,500 of tax-deferred withdrawals in 2020 then your tax would be:

Income.................$81,500
Std Dedn...............(24,800)

Taxable income......$56,700

10% tax bracket.....$19,750..... $1,975
12% tax bracket.......36,950........4,434
Total......................$56,700......$6,409.... 7.8% effective tax rate

and if you want to you have room for $23,550 of Roth conversions at a 12% marginal tax rate.

[Camas Lilly]

Quote:

Originally Posted by pb4uski Any withdrawals from tax-deferred accounts would be ordinary income (assuming no basis... that all contributions were pre-tax or deductible). So if you are MFJ and had $81,500 of tax-deferred withdrawals in 2020 then your tax would be: Income.................$81,500 Std Dedn...............(24,800) Taxable income......$56,700 10% tax bracket.....$19,750..... $1,975 12% tax bracket.......36,950........4,434 Total......................$56,700......$6,409.... 7.8% effective tax rate and if you want to you have room for $23,550 of Roth conversions at a 12% marginal tax rate.

Seems to me I knew that, just didn't write it out like that. Is there an easy on-line calculator to figure this? Like the suggestion on the Roth.

[kaneohe]

Quote:

Originally Posted by klucich ................ Is there an easy on-line calculator to figure this? ....................................

see post 2

[pb4uski]

I use this one: https://www.dinkytown.net/java/1040-tax-calculator.html

[Camas Lilly]

Quote:

Originally Posted by kaneohe Sometimes words alone are not clear. A few numerical examples that hopefully might clarify : 1)You have 84.8K ordinary income and 30K QDIV/LTCG income. Your total income is 114.8K which is also your adjusted gross income (AGI) if no adjustments. Your taxable income is AGI less deduction = 114.8K-24.8K =90K if using std deduction. Your stacked bar chart consists of 60K ordinary income at the bottom (84.8K ordinary income less 24.8K deduction) and 30K QDIV/LTCG at the top for a total of 90K. 10K of that QDIV/LTCG exceeds the 80K threshold so that 10K is taxed at 15%. Drawing the stacked bar chart will make things clearer. None of the ordinary income is above 80.25K so none is taxed at 22%. 2)Change things so ordinary income is 115.05K with the same 30K QDIV/LTCG . Total income is 145.05K. Taxable income is 120.25K after subtracting the 24.8K deduction. This taxable income consists of a 90.25K bar of taxable income on the bottom and a 30K QDIV/LTCG on top. The ordinary income bar exceeds the 80.25K threshold by 10K so 10K of ordinary income is taxed at 22%. Note that the increase in ordinary income of 30.25K has now pushed all of the QDIV/LTCG bar above the 80K threshold so all of the 30K QDIV/LTCG is now taxed at 15%. Again drawing the stacked bar chart will help and you can find any math errors I made.

OK, going back to get my crayons out now.

[Camas Lilly]

Quote:

Originally Posted by pb4uski I use this one: https://www.dinkytown.net/java/1040-tax-calculator.html

Thank you. Will have to do some re-figuring.

[walkinwood]

I saw your other post. Since you have SS income, I'd suggest buying a version of Turbo Tax and entering your information there - or use their online version. These taxes are so damn complicated that using software is the best way to minimize your chances of error.

[Camas Lilly]

Quote:

Originally Posted by walkinwood I saw your other post. Since you have SS income, I'd suggest buying a version of Turbo Tax and entering your information there - or use their online version. These taxes are so damn complicated that using software is the best way to minimize your chances of error.

Actually Turbo Tax got too expensive to I started using e-File. Complicated isn't the word for it. LOL.

[SevenUp]

Quote:

Originally Posted by klucich Seems to me I knew that, just didn't write it out like that. Is there an easy on-line calculator to figure this? Like the suggestion on the Roth.

The web pages given by kaneohe and pb4uski use the same tool. That seems the best of the web-based ones.

For spreadsheets, Excel1040 and the Case Study Spreadsheet seem best.

Which will be best for you is a combination of your specific tax situation and a matter of taste.

[Camas Lilly]

Quote:

Originally Posted by SevenUp The web pages given by kaneohe and pb4uski use the same tool. That seems the best of the web-based ones. For spreadsheets, Excel1040 and the Case Study Spreadsheet seem best. Which will be best for you is a combination of your specific tax situation and a matter of taste.

Thanks SevenUp!