Retirement Tax Happiness, right?

[Shabby]

I am retiring this year and have been looking at my new tax situation being a single 52 year old. If I spend MM savings and some LT Capital Gains (up to $39,375) - No tax, right? (This is an incredible revelation as my spreadsheets all assumed a 15% tax being paid).

Then since I get a standard deduction of $12,200 realistically I could w**k a part-time gig to take advantage of that, right? And if I earned a bit more it would be taxed at 10%.

Am I missing anything major?

 

[pb4uski]

You could actually have up to $51,575 of qualified dividends and LTCG at 0%... assuming no other sources if income.

One thing to be wary of though... if your at $51,575 including ordinary income over $12,200 then your marginal tax rate for any additional ordinary income will be 25% or 27% as additional ordinary income will be taxed at ordinary rates and will push some preferences income from 0% to 15%

 

[Shabby]

You could actually have up to $51,575 of qualified dividends

Wait, what??
So when you are doing a budget, are you figuring anything for taxes?

 

[pb4uski]

The last few years I have done tIRA withdrawals and or Roth conversions to the top of the 0% LTCG tax bracket and pay about 8% of income in federal tax and another 3% state... so about 11% in total.

Before 2018 I was generating more preferenced income, so it was more like 6-7% in total, but I made a decision in 2018 to focus more on reducing my tIRA to reduce the dreaded tax torpedo once SS and RMDs start.

 

[Done]

If you have an IRA, this is also an opportunity to intentionally prepay some taxes by doing a Roth conversion. The converted amount is ordinary income taxed at a low (zero to 12%) rate, never to be taxed again in the Roth. This is done to avoid a higher tax rate later in life when IRA distributions are required. As mentioned above, don't convert too much in any year or you'll end up paying a 12%+15% marginal tax rate.

 

[HI Bill]

Am I missing anything major?

Changes to the tax code last year?

 

[Stormy Kromer]

How does the state tax this income ?

 

[Shabby]

How does the state tax this income ?

I live in Washington state, what's state income tax

 

[walkinwood]

You could actually have up to $51,575 of qualified dividends and LTCG at 0%... assuming no other sources if income.

Ah.. these are 2019 numbers

If you have an HSA compatible health insurance policy, you can add the HSA deduction to the above.

 

[pb4uski]

Ah.. these are 2019 numbers .....

Happy New Year!!

Good point on the HSA... Also could have some earned income and shelter it with an IRA contribution.

 

[Offgrid Organic Farmer]

We file Married-Joint. My pension income is not large enough to be taxed, and then here in Maine military pensions are exempt from taxes.

 

[sengsational]

As mentioned, if you have 401k and/or tIRA balances, withdrawals or conversions might be wise. If you target zero tax rate now, you might be setting yourself up for the RMD tax torpedo later. To decide "properly", all years need to be modeled. I suggest i-orp as a data point, which usually shocks people by modeling more tax earlier, but the plan will maximize spending if reality ends up matching your plan assumptions.

 

[adrift]

I live in Washington state, what's state income tax

Well, there is this ... "With local taxes, the total sales tax rate is between 7.000% and 10.400%."

 

[adrift]

I suggest i-orp as a data point.

Earlier, the developer of i-orp said the the the tool was garbage. here Is there any reason to believe this is still not true?

 

[Another Reader]

Well, there is this ... "With local taxes, the total sales tax rate is between 7.000% and 10.400%."

Oregon is just across the river...

IIRC, the busiest Costco is in Oregon, just across the river.

Of course, Washington has an inheritance or estate tax...

 

[Shabby]

Well, there is this ... "With local taxes, the total sales tax rate is between 7.000% and 10.400%."

Oh don't get me wrong, it's no Garden of Eden up here. Our sales taxes are 10% and our gas tax is one of the highest in the country. My point was on my retirement budget I had a big number in there for 15% Income tax and just learned that I won't pay all that (or possibly any of it). This is a big saving to a guy that has pondered his retirement budget for years in anticipation of 2019.

 

[sengsational]

Earlier, the developer of i-orp said the the the tool was garbage. here Is there any reason to believe this is still not true?

Quite a stark interpretation of the developer's comment. I don't read it that way. Back in 2014 he said the way it did taxes was "crude", even though, all that time ago it still took into consideration deductions and exemptions. I know that the tax brackets get updated.



I've been using the tool for a long time and the taxes it calculates in my case seem reasonable. So I'd guess it's been fixed in the last 4 or 5 years. Maybe it's still "crude", depending on one's definition. Of course it's not going to do all of the intricacies of the tax code, but when it comes to pulling money out of tIRA and 401k, which determine if the RMD torpedo is heading at you, the calculations don't have to be perfect in order to give you a data point for deciding how aggressive you want to be paying tax now in low (10%, 15%) brackets.



I think that seeing 28% or other high brackets at RMD time is a great lesson for those who think they're saving money by paying 0% now. You might just be kicking the can down the road only to get wholloped later.

 

[kgtest]

We file Married-Joint. My pension income is not large enough to be taxed, and then here in Maine military pensions are exempt from taxes.

You paid your tax, with your service. Thank you!

 

[adrift]

Oh don't get me wrong, it's no Garden of Eden up here. Our sales taxes are 10% and our gas tax is one of the highest in the country. My point was on my retirement budget I had a big number in there for 15% Income tax and just learned that I won't pay all that (or possibly any of it). This is a big saving to a guy that has pondered his retirement budget for years in anticipation of 2019.

When I was a kid, I lived in Idaho. At that time, I think Idaho's sales tax was 3% and Washington's was 5%. Local government had not piled on as much then.


Back in the day, Washington allowed people from Idaho to get a card proving where they lived. The card allowed the Washington sales tax to be waved. My father had such a card. My BIL lived in Washington. In fact, at the time he worked for the state government. He had one of these cards.

 

[Nords]

My point was on my retirement budget I had a big number in there for 15% Income tax and just learned that I won't pay all that (or possibly any of it). This is a big saving to a guy that has pondered his retirement budget for years in anticipation of 2019.

You'd want to run some sort of tax-forecasting software to estimate your liability, but it's quite possible to never pay taxes again.

One of the long-time members of this forum prides himself on that achievement:
https://www.gocurrycracker.com/never-pay-taxes-again/
https://www.gocurrycracker.com/go-curry-cracker-2017-taxes-feie/ (and its related links at the bottom)

 

[Offgrid Organic Farmer]

You'd want to run some sort of tax-forecasting software to estimate your liability, but it's quite possible to never pay taxes again.

One of the long-time members of this forum prides himself on that achievement:

Yes, this is true.

During my working career, I stopped paying into Income taxation in 1983 and I did not pay the IRS again until 2017.

I had a fairly long streak of being tax-free. But it was a fairly unique set of circumstances and we had to put a lot of effort into our lifestyle and our investment strategy to hold it.

In 2017, we received an inheritance that blew it for us.

My wife nearly had a mental breakdown when she had to write a check to the IRS for the first time 34 [thirty-four] years.

 

[Shabby]

You could actually have up to $51,575 of qualified dividends and LTCG at 0%... assuming no other sources if income.

One thing to be wary of though... if your at $51,575 including ordinary income over $12,200 then your marginal tax rate for any additional ordinary income will be 25% or 27% as additional ordinary income will be taxed at ordinary rates and will push some preferences income from 0% to 15%

I only see $39,376 for 2019 qualified dividends before they are taxed for a single filer? What am I missing to get the $51,575?

 

[LOL!]

One of the long-time members of this forum prides himself on that achievement:

But something like 44% of households in the USA do not pay any federal income taxes, so not having to pay any federal income taxes is not such big deal, is it?

https://www.taxpolicycenter.org/taxvox/tcja-increasing-share-households-paying-no-federal-income-tax

 

[SecondCor521]

I only see $39,376 for 2019 qualified dividends before they are taxed for a single filer? What am I missing to get the $51,575?

pb4uski is probably including the $12K standard deduction for a single. That accounts for most of the difference.

The rest of the difference may be the difference between 2018 and 2019 rates, or a typo.

 

[Shabby]

pb4uski is probably including the $12K standard deduction for a single.

That's it, thanks!
Not to start any political chatter, but retired people must really have a big interest in any changes in the tax system with respect to interest, dividends, etc. As I prepare for this adventure and do all my models based on not taxing $51k of my earnings, I will be really annoyed if it gets changed in 2020+.