Tax on your final dollar

[RetireAge50]

What is the tax on your last dollar earned for a year?

I was planning to do Roth conversions to the top of the 15% bracket so I thought the answer was easy: 15 cents. However, several recent threads on the ACA had me recalculate this and it is actually almost 30 cents.

Hmmm. Maybe I don't want to do those conversions after all. What about you, does this change your withdrawal strategy?

 

[jonat]

Isn't this just your marginal rate for taxable income?

 

[meierlde]

Isn't this just your marginal rate for taxable income?

Actually with the various phase outs of subsidies as well as for example itemized deductions and exemptions it can be higherin cases with strict cliffs in some cases if you have the right amount it can be greater than 100%

 

[ziggy29]

Isn't this just your marginal rate for taxable income?

It can be a LOT worse than that if you are receiving ACA subsidies and you are very close to a "cliff". I once calculated that the effective tax rate on an incremental dollar of income could be over 20,000% if one extra dollar results in a loss of $200 in tax credits.

 

[RetireAge50]

Isn't this just your marginal rate for taxable income?

I used to think so but maybe not now due to the additional tax (loss of tax credit) for ACA.

 

[bingybear]

much of this depends on your circumstances. The last $ could be at 0%, 15% or higher.
take a married couple both on ACA plans with income about 64k (just below the cliff... 1 more dollar and no subsidy. The marginal rate at that point is huge... I have not worked that out. my local that last dollar will cost about $6000 on my taxes. However, if your "last dollar" is just below the top of the 15% bracket, it will likely cost about 15%. The PTC is long gone.. the last dollar has no effect on it. It could cost you 0% or 10% depending how much of you have in Q divys and LTCG.

You are right to consider if you should do conversions. But just looking at the last dollar may be misleading. A short lasting blip in marginal rate may not make a conversion not worth it. The PTC could in many cases. If you have too much income to get the PTC, then it should be discounted in the analysis as you have no choice.

The make up of the income dollars will be important. Also, you may have cases where the ordering of income may make local marginal rates different. If you count income first .. then Q divys instead of Q-divys then income... the marginal tax on each $ will be different as you place them in the pot. Income dollars get taxed early that Q-divys.

 

[Toocold]

I'd be almost at 50% marginal tax rates between federal and state, if I didn't defer my compensation. As such, recent tax hikes have certainly accelerated the timeframe for early retirement. ACA doesn't impact my situation at all, except that I keep an eye on it for when I decide to finally pull the trigger.

 

[W2R]

Oh my, this thread is distressing! And in my case, I don't have to deal with ACA subsidies.

Another distressing reality is that depending on your income, your Medicare Plan B expenses can go up.

Also my property tax assessment is no longer frozen due to old age and low income, because my income was too high. Oh well. I just bought my house last year and therefore the assessment is the purchase price. So it isn't especially low this year anyway (sour grapes).

Oh, and in answer to the original question, none of this affects my withdrawal strategy. It just makes me want to:​

~~~>>>> <<<<~~~~​

 

[bingybear]

Isn't this just your marginal rate for taxable income?

no... and not just the ACA effects with the PTC.

Simple case. you are full up to the top of the 15% bracket. Much of this is normal income, but has some Q divys. The normal income is well into the 15% bracket. So you add one more $. It is taxed at 15%. However this pushes 1 $ of Q divys into the 25% bracket where (being a Q divy) only gets taxed at 15%. the $ the case this (as noted was taxed at 15% and so was the divy... so the marginal rate on the last $ was 30%.

Focusing on the last dollar can be a trap. There can be places where you jump to a high marginal rate that is short lived. take the above example where there is only 1 $ of Q divy. The next dollar (normal income) will be at 25% instead of 30%... a 5% drop in marginal tax rate.

or take the first example above and add and add 1 $ of Q divy and the marginal rate is 15% (example of how you order you income.

I think one should really count the $ in the order they are taxed. you can get different rates by counting you income in different orders.

If you have you base taxes done and see what a change does... like a little more roth conversion, you will see a marginal rate, but may not understand where the addition tax is really derived.

 

[gauss]

Anyone currently taking Social Security can have very high incremental rates (ie Tax Torpedo) for a portion of their income due to the way that the taxable portion of Social Security is calculated.

-gauss

 

[scrabbler1]

As others have written here, a lot depends on what type of extra dollar of income is in question. A dollar of ordinary income will be taxed at one's marginal rate of ordinary income. If the dollar of income is QD or LTCG, then it will be taxed at a lower rate, maybe zero. And that doesn't take into account tax credits and tax deductions which are tied to one's income.


I remember several years ago, before the ACA and its subsidies, working with my income tax spreadsheet and increasing my QD/LTCG income by a small amount and discovering that my federal income tax bill rose slightly even though I was that zero percent bracket. It was because I had that year a medical expense deduction and the excluded amount rose slightly and lowered the deduction and raised my taxable income.


And don't forget the impact of state income taxes. Adding that same dollar of income to one's state income tax will increase that tax bill and possibly increase the state income tax deduction on the federal return. And if you have muni bond income from a national bond fund, it will be tax-exempt on the federal return and partially taxable on the state return.

 

[audreyh1]

26%

 

[Clone]

The last $100 from selling grain off the farm would generate a 15.3% self employment tax. So $15.30 in SE tax. You can deduct half of that, and then pay 28% on the $92.35 left, or 25.86 in fed tax. The state wants about $7.84 for it's share, so that leaves me about $51.00. So the effective incremental tax rate- about 49%.

That is one of the reasons why having repair work done by a shop is not as expensive as it looks. Paying $50 labor to repair something takes $25.50 out of my pocket, and $24.50 out of the assorted taxing bodies.

 

[pb4uski]

15%. No subsidies and Roth convert to the top of the 15% tax bracket by recharacterizing any excess over the top of the 15% tax bracket as i finalize my return.

In our case we have access to decent catastrophic HI at an affordable cost so ACA subsidies are not worthwhile.. the tax savings on Roth conversions are better for us, but I suspect that our situation is unique as we live one of three states where premiums are not age rated.

 

[RetireAge50]

I was planning out our retirement budget and it seems there is no longer a 15% bracket.

First $20,800: 0% tax
Next $18,650: 10% tax
Next $75,900 30% tax

 

[meierlde]

I was planning out our retirement budget and it seems there is no longer a 15% bracket.

First $20,800: 0% tax
Next $18,650: 10% tax
Next $75,900 30% tax

that must combine federal and state and possibly other taxes as there are both the 15 15 and 28% rates in the federal area, even for single the 28$ rate goes to 186K.

 

[RetireAge50]

The 30% shown is the normal 15% bracket plus an additional 15% for ACA. No state taxes married filing jointly.

 

[RunningBum]

The 30% shown is the normal 15% bracket plus an additional 15% for ACA. No state taxes married filing jointly.

So for some $38K you pay nothing for health insurance, and then suddenly you start paying a flat 15%? I find that very hard to believe. The numbers may happen to work out that way for you in the end, but that's a very misleading way to look at it. Certainly calling it a "bracket" is flat out wrong. Surprising, coming from you as the OP who seems to have an understanding for taxes on incremental income.

 

[RetireAge50]

So for some $38K you pay nothing for health insurance, and then suddenly you start paying a flat 15%? I find that very hard to believe. The numbers may happen to work out that way for you in the end, but that's a very misleading way to look at it. Certainly calling it a "bracket" is flat out wrong. Surprising, coming from you as the OP who seems to have an understanding for taxes on incremental income.

Let me try again, I had it slightly wrong and I'll use rough numbers:

Standard deduction + 2 personal exemptions about $20,000 tax free and free health insurance.

Next $8,000 or so is taxed at 10% and free health insurance.

Next $10,000 or so is taxed at 10% plus 15% health insurance.

Finally remaining income is taxed at 15% plus 15% health insurance.

 

[Senator]

Minnesota has a 7.85% income tax after ~$84K. The feds take 25%, and not long after take $28%. Even with my $70K of depreciation, I am paying ~33%+.

Once I buy a new company truck, it should drop the tax rates a bit.

 

[ducky911]

It seems that with the current tax laws we have diminished the intensive to make more money. The limits for tax payer to get assistance from ACA are way to high.

For myself a brief look at my taxes would be that I am in the 15% tax bracket. But a detailed study of just the fed tax makes it 30%. I do not get assistance from ACA but I am at a tipping point where my qualified dividends changes from 0 tax (i like that) to 15% tax for every dollar earned.

For these two reasons ACA or qualified dividends tax. The decision to do a Roth conversion, take SS early, sell an asset for a profit or get a part time job less fun.

 

[Danmar]

48% for my pension and about 32% for dividends. If I generate any cap gains these would be at 24%. The vast majority of my income streams are taxed at these rates. In Canada the biggest "clawback" amount is a pension type item called Old Age Security. I make well over the max clawback amount so haven't even applied for it. Health insurance generally not an issue in Canada.

 

[RunningBum]

Let me try again, I had it slightly wrong and I'll use rough numbers:

Standard deduction + 2 personal exemptions about $20,000 tax free and free health insurance.

Next $8,000 or so is taxed at 10% and free health insurance.

Next $10,000 or so is taxed at 10% plus 15% health insurance.

Finally remaining income is taxed at 15% plus 15% health insurance.

So if you make $100K, you pay $10,800 in health insurance. If you make $90K, you pay $9300? And if you make $50K, you pay $3300? What kind of policy is this? My ACA policy is quite a bit different. I pay a sliding scale, taking subsidies into account, until I go over the cliff, at which point it becomes fixed.

 

[bingybear]

Let me try again, I had it slightly wrong and I'll use rough numbers:

Standard deduction + 2 personal exemptions about $20,000 tax free and free health insurance.

Next $8,000 or so is taxed at 10% and free health insurance.

Next $10,000 or so is taxed at 10% plus 15% health insurance.

Finally remaining income is taxed at 15% plus 15% health insurance.

what's your filing status?

for me and DW for 2017, after $64000 (maybe + a little), the PTC is gone. I also believe from 300% FPL to 400% is just under 10% PTC loss. As you cross the 400% is the cliff, for me a big jump. Where is 15% health insurance coming from above the cliff?

 

[pb4uski]

I was planning out our retirement budget and it seems there is no longer a 15% bracket.

First $20,800: 0% tax
Next $18,650: 10% tax
Next $75,900 30% tax

Huh?

Tax Brackets (Federal Income Tax Rates) 2000 through 2016