What tax rate to use in estimating needs for FIRE?

[urn2bfree]

As I recall. Obgyn65 is getting $$$ from Cd and other interest vehicles which would tax the Gains at higher ordinary income rates, but still much of the money from a CD for example is return of principle and not subject to taxation.
I am torn between overestimating the tax rate and counting on a pleasant surprise, vs accurately determining as best I can what it would be. I made a best guess estimate using the Turbo Taxcaster--based on our dividends from last year and then adding some cap gains minus the many many capital losses we have to offset those gains, plus another $3000 from the trad IRA which could also be offset by cap losses from the past and came to pay ZERO...ZIP...!! Nothing really ? It seems correct. now eventually I will not have the cap losses but for the first few years I will have cap losses enough to Eliminate any income above our dividends from cap gains

 

[RunningBum]

Don't forget about state taxes, depending on where you live. But yeah, your fed could surely be 0.

You might also look at converting part of your tIRA to a Roth to push your income up to the 10 or 15% top (include dividends if going up to 15%), if you think that once you hit RMDs, social security, and possibly a pension if you think that you'll be paying more tax later.

 

[sengsational]

Don't forget about state taxes, depending on where you live. But yeah, your fed could surely be 0.

Good point on considering state taxes. When I was running simulations for Roth conversions, my spreadsheet had an error (hehe) where I had left out state taxes. What I discovered from my error, though, was all the finagling with traditional to Roth conversion was a drop in the bucket compared with getting the heck into a state that doesn't hit me so hard on the income tax side of things.

 

[Midpack]

Don't forget about state taxes, depending on where you live. But yeah, your fed could surely be 0.

+2. In 2012 for the first time in my life, our state income taxes were more than our federal income taxes, makes no sense to me.

 

[martyb]

Pretty much all of our retirement income will be taxed as ordinary income, since it's from pensions & TSP withdrawals. We have small Roth IRA's but not enough to factor, since we won't be withdrawing regularly. We're firmly in 15% territory, I think. Not sure about Louisiana state tax. Neither of my pensions are subject to state taxes, but the TSP withdrawals will be. [-]90[/-] 80% of income will be from pensions.

 

[Fishingmn]

I use this calculator to estimate my future fed/state taxes (I'm still working) - Income Tax Calculator - Tax-Rates.org

 

[scrabbler1]

+2. In 2012 for the first time in my life, our state income taxes were more than our federal income taxes, makes no sense to me.

Since I ERed in late 2008, my (New York) state income taxes have been pretty close to my federal income taxes. In 2011 the state income taxes were only $129 lower than the federal income taxes. In 2012 that gap widened a little because NY cut its income tax rates slightly.

I have wondered why the gap is so small. One reason is that I am in the 0% federal bracket for Qualified Dividends and LT Cap Gains while they are taxed as ordinary income in NY. I also have some investments in national muni bund funds which are tax-free at the federal level but mostly taxable at the state level.

The federal personal exemption and standard deduction (if I don't itemize) rise a little bit each year due to indexing. But they are not indexed at the state level. The combined PE and SD are higher at the federal level than they are at the state level (and in NY, you can't include yourself as a PE).

On the flip side, the relatively small NYS school tax rebate is taxable at the federal level if I itemize although it appears my days of itemizing on the federal level may be over for a while.

 

[foxfirev5]

I plan to use Roth and savings to manage my income within the 15% marginal tax rate. That will give me an approx fed tax rate of <5%. I am amazed at how many people confuse marginal tax rate with what they actually pay.

 

[sengsational]

I use this calculator to estimate my future fed/state taxes (I'm still working) - Income Tax Calculator - Tax-Rates.org

Nice find from Frostbite Falls! I dropped $10 into their PayPal without even trying to use the site.

--Dale--

 

[haha]

I plan to use Roth and savings to manage my income within the 15% marginal tax rate. That will give me an approx fed tax rate of <5%. I am amazed at how many people confuse marginal tax rate with what they actually pay.

You have noticed this in posts on this board? People seem very sophisticated about taxes here. Most of my friends fall into one of four categories- they have low incomes and no financial sophistication, they have good pensions and not much other money and they have very simple taxes, or they have investments and they are are clever about taxes, or if they are making a lot of money they use a CPA and do what he advises them to do. I don't know anyone who would talk about taxes who does not understand the marginal rate is not the overall rate.

It does sometimes serve demagogues to try to obscure these differences.

Ha

 

[Mulligan]

You have noticed this in posts on this board? People seem very sophisticated about taxes here. Most of my friends fall into one of four categories- they have low incomes and no financial sophistication, they have good pensions and not much other money and they have very simple taxes, or they have investments and they are are clever about taxes, or if they are making a lot of money they use a CPA and do what he advises them to do. I don't know anyone who would talk about taxes who does not understand the marginal rate is not the overall rate.

It does sometimes serve demagogues to try to obscure these differences.

Ha

The media demagogues this all the time. The latest victim was President Obama (no politics in this statement) whose effective rate was about 18% on somewhere around 600k. But he also gave around a fourth or fifth of his gross to charity, which obviously will draw the effective rate down. If you asked my friends the difference between marginal tax rate and effective tax rate, their first spoken words would be "what do the words mean." I would imagine the public in general is about at that level, so they can be confused by it easily.

 

[pb4uski]

+2. In 2012 for the first time in my life, our state income taxes were more than our federal income taxes, makes no sense to me.

+1 because LTCG were zero for Fed but not for state

 

[seraphim]

OP - I checked the 2012 tax tables for federal, state and local, to determine the base tax for my anticipated taxable income: then worked out the percentage ( tax amount divided by taxable income). Came out to about 17.8% . Rounded up to 20% for budgeting purposes.

 

[KingB]

+1 because LTCG were zero for Fed but not for state

+2. Because deductibles are counted on the federal but not the states. Same ting for 401(K) and IRA distributions - included on federal but not the states (Illinois).

 

[foxfirev5]

You have noticed this in posts on this board? People seem very sophisticated about taxes here. Most of my friends fall into one of four categories- they have low incomes and no financial sophistication, they have good pensions and not much other money and they have very simple taxes, or they have investments and they are are clever about taxes, or if they are making a lot of money they use a CPA and do what he advises them to do. I don't know anyone who would talk about taxes who does not understand the marginal rate is not the overall rate.

It does sometimes serve demagogues to try to obscure these differences.

Ha

Not so much on this forum. Of course the posters here represent a minority in many different respects.

 

[fritz]

I find Turbo Tax's quickie estimator good for questions like this. See:

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

It is much less cumbersome than using the full tax prep software. You can plug in your rough numbers according to source and get a tax calculation in a minute. You can quickly change a number and see how it impacts the bottom line. This is the way to get a quick read on your personal circumstances.

+1 Easy to use software for estimating taxes. With multiple sources of available income (SS, taxable/deferred investments, part-time work) it allows you to manipulate the numbers (real time) to determine tax consequences. FYI - 2012 version treats "dividends income" bucket as qualified (click on ? button to see this). You have to put ordinary dividends in "miscellaneous income" bucket. Also have to put all federal tax withholding in regular income area.

 

[Meadbh]

I use the calculators at TaxTips.ca - The Facts on Tax for Canadians to estimate my personal income taxes. I do work with a CPA as I also have a corporation. The good news is that my tax rate for 2012 was <10%. The bad news is that my nominal income (the denominator) was higher than expected due to high dividends and investment income. (No net capital gains as I had previous capital losses). I suppose that high portfolio returns are a good problem to have! But as last year's taxes are used to estimate this year's taxes, I am now forced to pony up higher installments for 2013. The lesson for me is that taxation is not correlated with my expenses unless I am cashing out all dividends and investment income.

 

[martyb]

Nice find from Frostbite Falls! I dropped $10 into their PayPal without even trying to use the site.

--Dale--

This calculator shows that if I stick to the plan I've just about settled on, next year's tax rate should be in the 8.85% range. Acutally, it will be less than that since my pension also includes my own contributions over my 36 yr career, which will be paid back to me over time as a percentage of my monthly receipts, so this will lower my tax rate even more. I'm not sure how to actually calculate this so I'll just plan for the 8.85% My federal pension won't be taxed by the state, and apparently the TSP withdrawals and wife's taxable income (after she contribuites 2/3 to her 401k) won't be enough to trigger any taxes by Louisiana either.

After she retires, she will have no pension, and her 401k will only be taxed if we withdraw it. Still thinking about that idea. When my military pension kicks in in 2018, it won't be state-taxed either. Even when wife's SS begins at 62, we'll still be in the low range tax-wise.

edit: after checking on the Louisiana income tax rates posted elsewhere on line, it seems that the calculator missed something in the state tax calculation. Looks like we'll actually owe around $360 in state tax on TSP withdrawals + wife's taxable income next year. Not much, but still something.

 

[lemming]

I use this calculator to estimate my future fed/state taxes (I'm still working) - Income Tax Calculator - Tax-Rates.org

I tried it out-didn't like it because it gave me an answer I didn't want
Ok it also asked you to put in the taxable ss amount. No one really knows that until you calculate everything you have.
It doesn't have a slot for dividends. LT capital gains might give the same treatment but I think -not always. It calculated a 18% tax rate which seems high. Gross income at 46,000
On the other hand it covered almost all the same ground as Turbotax in a very smooth interface,
maybe they have a shot at being the next big thing.

 

[sengsational]

... it seems that the calculator missed something in the state tax calculation. Looks like we'll actually owe around $360 in state tax on TSP withdrawals + wife's taxable income next year. Not much, but still something.

I tried it out-didn't like it because it gave me an answer I didn't want
...
maybe they have a shot at being the next big thing.

I would urge everyone to give the site feedback. They do keep saying it's an estimate; they're probably weighing simplicity of input with accuracy of output.

The reason I think it's awesome is because, if it gets popular, people, especially college students and retirees, will use it to help determine what state they'll move to. Spendthrift states will find themselves needing to "compete". Competition in this arena would be a good thing!

 

[Suppertime]

According to the Turbo tax online calculator, there is no tax on a typical combination of interest, dividends and long term capital gains up to almost $100,000! (If you file jointly w/ two kids.)

With passive income around $50 -75k (which is where I'll likely end up), I could even get earned income tax credit if I have a modest earned income, e.g., from a part time job. Might also qualify for health insurance premium subsidy.

As pointed out by others, many states tax investment income the same as earned income. According to the California tax calculator, you'd pay a little over $4,000 on $95,000 of investment income, for which you'd owe no federal income tax.

 

[Brett_Cameron]

I use the calculators at TaxTips.ca - The Facts on Tax for Canadians to estimate my personal income taxes. I do work with a CPA as I also have a corporation. The good news is that my tax rate for 2012 was <10%. The bad news is that my nominal income (the denominator) was higher than expected due to high dividends and investment income. (No net capital gains as I had previous capital losses). I suppose that high portfolio returns are a good problem to have! But as last year's taxes are used to estimate this year's taxes, I am now forced to pony up higher installments for 2013. The lesson for me is that taxation is not correlated with my expenses unless I am cashing out all dividends and investment income.

What forces you to make higher estimated tax payments than are necessary? I do not understand.

Edit: Nevermind, Canadian rules!