FireCalc and taxes

[Shabby]

How does FireCalc deal with taxes? Is the "Spending" section, after-tax spending?

 

[pb4uski]

You need to include taxes in your spending amount (or as off-chart spending if you expect taxes to change dramatically). Firecalc does not do tax calculations.

 

[Shabby]

OK, so if all my expenses add up to $60000 a year, I need to make the "Spending" section $70,588 (60k/.85) to account for the 15% taxes I will pay?

 

[greydog17]

Yes, if the 15% includes, Fed, State and local taxes.

 

[pb4uski]

OK, so if all my expenses add up to $60000 a year, I need to make the "Spending" section $70,588 (60k/.85) to account for the 15% taxes I will pay?

No. Even if amount withdrawn for spending were 100% taxable because they were from tax deferred accounts your aggregate tax rate would probably be less than 15% if you are in the 15% tax bracket. For example, using Taxcaster assuming MFJ and $60k of pension income (say, 401k withdrawals) the tax would be a little over $5k or less than 10% of income even though the marginal tax rate is 15%. So if you withdrew $66k, your federal taxes would be $6k and that would leave you $60k for spending.

Alternatively, if you had a big taxable portfolio, the withdrawals from the portfolio has no impact on taxable income. For example if you had a $1m portfolio that yielded 3% in qualified dividends and you lived on dividends and withdrawals, your tax return income would only be $30k, your taxable income would be only $10k after the standard deduction and personal exemptions and your taxes would be nil if MFJ.

So you really need to look at a pro forma tax return as if you were retired and look at the tax cost and factor that into your Firecalc spending so it gets complicated because it may change over a long period of time as taxable funds decay or you begin to tap into tax-deferred funds.

And as greydog suggests, you need to factor in state and local taxes as well if they apply. Income Tax Calculator - Tax-Rates.org is a good tool that includes state taxes as well as federal (but not local).

 

[SoClose]

You don't pay 15% on every dollar, and you get to subtract the standard deduction and personal exemption.

If married filing jointly Taxable income = expenses less $12,400 less $7,900

Then taxable income below $18,150 is only taxed at 10%.

60,000-12,400-7,900 = 39,700 - 18,150 * .15 + 1,815 = $5,048 tax

Tax Bracket Calculator - TaxACT

 

[LOL!]

OK, so if all my expenses add up to $60000 a year, I need to make the "Spending" section $70,588 (60k/.85) to account for the 15% taxes I will pay?

Interesting. I thought that only folks who made more than $200,000 a year paid more than about 12% effective rate in taxes. 15% sounds way, way, way, way, way too high. Can you show me how you worked that out because maybe we can save you a lot of money on taxes?

 

[pb4uski]

Interesting. I thought that only folks who made more than $200,000 a year paid more than about 12% effective rate in taxes. 15% sounds way, way, way, way, way too high. Can you show me how you worked that out because maybe we can save you a lot of money on taxes?

Where are you getting this idea? Playing around with Taxcaster if a single has $70k of ordinary income and a MFJ couple had $140k of ordinary income and each had standard deduction their taxes would be a little more than 15% of their income and they would be in the 25% marginal tax bracket.

12% would be about $50,000 for a single or $100,000 of income for a couple.

That's for 2013 but shouldn't be significantly different for 2014.