First Tax Return Since Retiring--OUCH!

[SoReadyToRetire]

Despite my username, I retired on 2/7/2020. Today I completed our first post-retirement tax return. Holy moly--writing that check to the gubmint is gonna HURT!

I had time to do some daytrading this year, which was more successful than I realized, AND I did a backdoor Roth conversion in Dec 2020. AND I took a part time job 7 weeks after retiring. And here I was, hoping we might get a refund for the first time in ages this year without my old salary. HA.

This is kind of a pointless post. Just wanted to share my pain.

 

[Markola]

We got a 2020 refund but I really had no idea what to expect, with 5 income sources during my first half year of retirement, each with different state and federal withholdings: Former j*b, DW’s part time j*b, unemployment insurance, Rule of 55 withdrawals from two retirement plans. One surprise was that we did not itemize for the first time since we started professional careers, due to the higher standard deduction.

 

[SoReadyToRetire]

We got a 2020 refund but I really had no idea what to expect, with 5 income sources during my first half year of retirement, each with different state and federal withholdings: Former j*b, DW’s part time j*b, unemployment insurance, Rule of 55 withdrawals from two retirement plans. One surprise was that we did not itemize for the first time since we started professional careers, due to the higher standard deduction.

Markola, really? That's similar to our situation, except that I had a (what I thought was small) Roth conversion of $30K. Besides, that my hubby made $38K from his j*b and $12K in UE ($10.5K of which isn't taxable, due to the recent legislation); I made $16K from my j*bs; and my daytrading profit was $44K. And we're writing a checks for Federal and State combined of $10,500.

Standard deduction was best for us too.

Do those numbers make sense to people? Or did I goof something up?

 

[scrabbler1]

Despite my username, I retired on 2/7/2020. Today I completed our first post-retirement tax return. Holy moly--writing that check to the gubmint is gonna HURT!

I had time to do some daytrading this year, which was more successful than I realized, AND I did a backdoor Roth conversion in Dec 2020. AND I took a part time job 7 weeks after retiring. And here I was, hoping we might get a refund for the first time in ages this year without my old salary. HA.

This is kind of a pointless post. Just wanted to share my pain.

While my first full-year tax-return after retiring was a pretty bland one, the tax return I filed in early 2009 following my October, 2008, ER was a doozy! I had taken a huge lump-sum payout from cashing out my company stock and owed a lot in taxes. The check I wrote in April of 2009 would represent more than my total 2009 income. Thankfully, I had used NUA which saved me a bundle in taxes and later discovered that the 10% early withdrawal penalty did not apply to NUA gains, lowering my tax bill further compared to what I thought it would be.

 

[Bamaman]

Megacorp paid an insurance company to take my defined pension 2/2020, and I assume now it's some kind of annuity. So I got one tax statement for 2 months and another tax statement for 10 months.

I had no idea that the insurance company didn't withhold income taxes for the 10 months, and I'm afraid to complete my income taxes. That'll teach me to not pay close attention to my personal business that's essentially on cruise control.

This could be painful.

 

[pb4uski]

Markola, really? That's similar to our situation, except that I had a (what I thought was small) Roth conversion of $30K. Besides, that my hubby made $38K from his j*b and $12K in UE ($10.5K of which isn't taxable, due to the recent legislation); I made $16K from my j*bs; and my daytrading profit was $44K. And we're writing a checks for Federal and State combined of $10,500.

Standard deduction was best for us too.

Do those numbers make sense to people? Or did I goof something up?

I put your numbers into the dinkytown tax calculator... $1,500 for UE since I suspect that the calculator hasn't been updated for what happened last week... and I get total income of $129,500, std dedn of $24,800 (assumes that you are both under 65), TI of $104,700 and federal tax of $14,614. No idea what your withholdings one W-2 income was, but a $10k check seems plausible.

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[pb4uski]

Megacorp paid an insurance company to take my defined pension 2/2020, and I assume now it's some kind of annuity. So I got one tax statement for 2 months and another tax statement for 10 months.

I had no idea that the insurance company didn't withhold income taxes for the 10 months, and I'm afraid to complete my income taxes. That'll teach me to not pay close attention to my personal business that's essentially on cruise control.

This could be painful.

You didn't notice that what you were receiving for your pension increased?

 

[Out of Steam]

I just completed our returns for my first full year of retirement and did fine on the federal return, about a $100 refund, but owe about $1100 on our state taxes.

Missed that with the lack of state deductions and low income amount for the top rate, the highest marginal rate is essentially the tax rate on all income.

 

[Splash]

We pay a lot less in taxes now that we are retired and managing income for ACA. But it still pains me whenever we have to pay the IRS and WI when we file our taxes and when we make estimated tax payments each quarter. I think it's a psychological thing.

 

[tsoispf]

First full year of retirement here. Came out golden on the Federal side. But this was largely due to having been short changed on the two stimulus checks (based on my pre-retirement salary) and recouping the difference on the tax return.

Got dinged a little on state. Didn't realize they too penalize early traditional IRA withdrawals. Never dawned on me to check. Oh well.

 

[Dash man]

This was an unusually painful year for us. Early in the year we dumped our Boeing stock which turned out to be a good move, but resulted in large capital gains. DW, though being retired for five years, had a restricted stock distribution and options that exercised bringing a large tax bill. When the market took its March dive, we converted a substantial amount of tIRA to Roth IRA.
So tax wise, 2020 was a rough year, but we’re definitely blessed and know it. We did some tax loss harvesting and large charitable contributions to offset the tax bill. The end result was still a just over six figure payment coming from our checking account soon. We had paid quarterly up to our safe haven amount, which was about 8% of our total tax bill.
This year’s tax bill will be more reasonable with no surprises, I hope.

 

[skyking1]

I got 2020 done last night. I am still working and was on disability for a shoulder surgery until June 1. My union paid out ~7K in disability and took out nothing, and I got medical leave on the new state program too.
In July I was back to work long term and asked that employer to take out an extra 100 a week, just a Wild Ass Guess (WAG).
I ended up owing only 900 or so, a new record. We usually send them painful checks, this was the least in years. I can't recall a refund, ever.

 

[HarveyS]

...my daytrading profit was $44K. And we're writing a checks for Federal and State combined of $10,500.

10.5/44k is 23.8%. Seems reasonable to me assuming there was no tax withheld on the day trades.

Sarcasm on: You rich folk need to pay your fair share. Sarcasm off.

 

[Gumby]

Unless there is a mid-year change in the tax laws, I have usually been able to tell in January what my income tax will be for the year ahead, and have adjusted my withholding accordingly. I try to shoot for a payment of less than $1k. Actually, I can get even closer in retirement because I can fine tune my income using Roth conversions in December. 2020 was an aberration, due to the COVID stimulus credits. So we're getting a refund.

In any event, I look at it like this: If I'm paying big income tax, it's because I had big income. That's a good thing.

 

[VanWinkle]

I got a 600 refund due to never receiving the second stimulus check. But I also paid in 3000 in quarterly tax payments due to a roth conversion I completed in 2020. This is the first time I have paid any federal taxes since retirement. I do not pay state taxes due to Illinois not taxing retirement fund withdrawals or pensions.

 

[ncbill]

Planning to convert a small traditional IRA to Roth over the next 2-3 years...with a flat state income tax of 5.25% will probably end up paying a combined effective tax rate of near 25% on AGI every year of conversion, even MFJ.

 

[SoReadyToRetire]

10.5/44k is 23.8%. Seems reasonable to me assuming there was no tax withheld on the day trades.

Sarcasm on: You rich folk need to pay your fair share. Sarcasm off.

Ha ha, HarveyS--I'm trying hard to think of it that way!

 

[SoReadyToRetire]

Planning to convert a small traditional IRA to Roth over the next 2-3 years...with a flat state income tax of 5.25% will probably end up paying a combined effective tax rate of near 25% on AGI every year of conversion, even MFJ.

What's MFJ?

 

[EastWest Gal]

Welcome to the world of no W-2 withholding and quarterly tax payments. In retirement, you can't really autopilot until March and wonder what happened last year. I found out the hard way long enough ago I don't even remember. I decided to start a Roth late last year to do Roth conversions. Took $100K into the Roth, sold a bunch of equities in taxable to replenish our cash a bit. My taxes were going to be very low last year until we made that decision. We wanted to stay under the ACA cliff this year.

Thanks to this forum, I learned about the dinkytown calculator. I overestimated my tax by $3K, and made a $17K quarterly payment in January. This year I'm going to overpay early, then look again at the calculator in a couple of quarters.

In PA, IRA withdrawals are state tax free if you are over 59.5. I don't know how long that will last though. The state needs more money. They'll get theirs when we die though. We have an inheritance tax.

BTW, It is painful writing those large tax checks. My income careened up and down since 2014. I w****d part time from 2014-2019, a couple of years nearly full time and one 12 month period not at all. In 2018, we put in solar on our roof, after replacing the roof, using our HELOC. $18K refund in 2019.

But after a couple of years of retirement and time to run the numbers monthly, one realizes that the difference is one is paying LESS taxes but feeling it more, simply because it isn't coming out of a W-2.

 

[C-man23]

What's MFJ?

Married Filing Jointly

 

[TheWizard]

Welcome to the world of no W-2 withholding and quarterly tax payments. In retirement, you can't really autopilot until March and wonder what happened last year. I found out the hard way long enough ago I don't even remember. I decided to start a Roth late last year to do Roth conversions. Took $100K into the Roth, sold a bunch of equities in taxable to replenish our cash a bit. My taxes were going to be very low last year until we made that decision. We wanted to stay under the ACA cliff this year.

Thanks to this forum, I learned about the dinkytown calculator. I overestimated my tax by $3K, and made a $17K quarterly payment in January. This year I'm going to overpay early, then look again at the calculator in a couple of quarters.

In PA, IRA withdrawals are state tax free if you are over 59.5. I don't know how long that will last though. The state needs more money. They'll get theirs when we die though. We have an inheritance tax.

BTW, It is painful writing those large tax checks. My income careened up and down since 2014. I w****d part time from 2014-2019, a couple of years nearly full time and one 12 month period not at all. In 2018, we put in solar on our roof, after replacing the roof, using our HELOC. $18K refund in 2019.

But after a couple of years of retirement and time to run the numbers monthly, one realizes that the difference is one is paying LESS taxes but feeling it more, simply because it isn't coming out of a W-2.

I haven't had W-2 income for quite a few years either.
But I set up.monthly withholding from my 1099-Rs and my SS.
So the bottom line effect is pretty much the same.

If my withholding total is too high or low compared to my actual tax liability when I do my taxes in February, I can usually tweak just one stream's w/h amount and get a lot closer the following year...

 

[Midpack]

Despite my username, I retired on 2/7/2020. Today I completed our first post-retirement tax return. Holy moly--writing that check to the gubmint is gonna HURT!

I had time to do some daytrading this year, which was more successful than I realized, AND I did a backdoor Roth conversion in Dec 2020. AND I took a part time job 7 weeks after retiring. And here I was, hoping we might get a refund for the first time in ages this year without my old salary. HA.

This is kind of a pointless post. Just wanted to share my pain.

All depends on your activity.

When I retired my taxes went down so much I actually felt guilty, and triple checked the return because I thought ‘this can’t be right.’ Since then I started doing massive Roth conversions in 2019 - don’t feel guilty at all anymore, as you say “ouch.”

 

[Cobra9777]

I just glanced at my tax spreadsheet. There's a summary tab with a multi-year trend on key lines.

Without Roth conversions, our total tax in retirement is less than 5% of what it was the last year we were both working. Even WITH conversions to the top of the 22% bracket, it's still less than 25%.

There were a few complicated years when we sold some rental properties. And the first 2 years after retirement, I was still exercising vested options and RSUs, which not only generated federal tax but also payroll tax.

We have no withholding of any kind. I used to make quarterly estimated payments. But since turning 59.5, I now do a tIRA withdrawal each December in the amount of our safe-harbor, with 100% withholding. The IRS deems withholding to be equally spread throughout the year. So we don't do quarterlies any more. And by December, I have a pretty good handle on the tax situation.

I even learned on this forum to replace the tIRA withdrawal from savings within 60 days so it's a non-taxable rollover. Result is: I get the safe-harbor amount in the form of withholding but still use taxable funds to pay tax, which has some well-documented advantages when most of our tax is from Roth conversions.

 

[SoReadyToRetire]

Thanks, c-man23

 

[bada bing]

2020 is my highest tax year ever by more than double, but at least I had withholding work out close, so no big check due. I broke into 6 figures on fed income tax alone payed for 2020. I earned more than double my next highest year due to severance, "completion bonus" and working massive overtime early in the year due to covid lock downs. I even paid the FICA cap twice (which helps keep my tax due down) by virtue of being transferred from former mega-corp employer to secondee status under a 3rd party contract for the last 6 months. It was a good year to make sure I'm sick of work forever and also for a nice paycheck going out the door. My tax return is amazing to me though, never before and never again. Glad that's over