RE Income Effective Tax Rates - Higher Spenders

[audreyh1]

I am quite envious at how little tax you pay. In Canada we pay at the max marg rate at your income level. As such we pay (at the margin) about 32% on div income, 24% on cap gains (return of capital not taxed), and about 48% on regular pension income. This is combined federal and provincial. On top of that there are federal VAT’s of 5% as well as provincial VAT’s ranging up to about 8%-9%. Capital gains tax owing at death as well.

Boy you Americans have it good. Other than health care of course. But for high earners it would be much less to pay for insurance than to pay our taxes. And yet......

So what is your effective income tax rate? Taxes paid/total declared income for the year? It should be less than the marginal rates.

As for the VAT as we pay sales taxes in the US and many states are above 8% although it doesn’t apply to all items - most groceries and drugs in TX are exempt.

 

[Danmar]

So what is your effective income tax rate? Taxes paid/total declared income for the year? It should be less than the marginal rates.

As for the VAT as we pay sales taxes in the US and many states are above 8% although it doesn’t apply to all items - most groceries and drugs in TX are exempt.

Yes, our VAT is additive so it can be 13-15% in total, some exemptions also. My average income tax rate last year(2016) was about 38%. My pension represented about 38% of pretax income, divs about 40%, one time RMD (fully taxed) about 19% and the balance (only 3%) capital gains and interest.

This year(2017) my average rate will be lower as I will have more capital gains and no RMD. The vast majority of my income is taxed at max marg rates since in Canada the highest rates kick in at very low levels. Makes for easy income tax forecasting.

 

[ncbill]

I am quite envious at how little tax you pay. In Canada we pay at the max marg rate at your income level. As such we pay (at the margin) about 32% on div income, 24% on cap gains (return of capital not taxed), and about 48% on regular pension income. This is combined federal and provincial. On top of that there are federal VAT’s of 5% as well as provincial VAT’s ranging up to about 8%-9%. Capital gains tax owing at death as well.

Boy you Americans have it good. Other than health care of course. But for high earners it would be much less to pay for insurance than to pay our taxes. And yet......

Ever consider relocating?

Years ago I met a Canadian expat in Mexico who said they only paid 15% income tax on Canada-sourced income once they were officially an expatriate.

 

[Danmar]

Ever consider relocating?

Years ago I met a Canadian expat in Mexico who said they only paid 15% income tax on Canada-sourced income once they were officially an expatriate.

Yes,have considered. Big issue is paying all “accrued” cap gains on leaving and whether I could actually meet the test of non Canadian residency(given the property we own and enjoy there as well as family).

I must also be honest and admit that the current political envireonment in certain countries makes one happy to be Canadian (other than the tax rates of course).

 

[SevenUp]

But when will the software be updated to reflect the new tax laws?

The tax calculations in this spreadsheet: Case Study Spreadsheet updates
seem good (i.e., they match the tax software we use for real) and have been updated for 2018.

 

[DawgMan]

OP back here.

While I know my CPA will help me run different scenarios to hopefully find the right final strategy, I decided to run a couple of models myself using the free online H&R Block tax estimator and I-ORP, both for the first time. In both cases I assumed I was retired at 55 and living off only taxable and tax differed accounts (split 40% taxable/60% tax differed for now... no SS). I first plugged in my variables in the basic I-ORP, but frankly was confused by some of the results which raised the following comments/questions:

- The generic model produced a first year gross income equal to 2.9% of my total investment assets, not say 4%??
- The model shows pulling about 35% of my gross income from my tax differed accounts until age 60, then 100% from tax differed for ages 60 & 61, then a blend thereafter?? I cannot understand how it can assume such a small tax differed withdrawal as I would be subject to rule 72t from 55 - 59 1/2 unless it is assuming I would pay a 10% penalty
- I purposely left SS inputs blank so can I assume the Income output is projected as income only from interest, dividends each year from my taxable account?

Again, this I-ORP thing is new to me so perhaps someone can make suggestions here?

I then ran a worst case scenario on the H&R Block tax estimator which assumed a total targeted income of $300K broken down as $35K from dividends/interest and $265K from only tax differed. I also assumed standard deductions. This put me at an effective Fed tax rate of about 17%.

My initial thoughts were to live out of only taxable accounts for 5 yrs until 59.5 and essentially pay little/no tax depending upon dividends, CGs and then just bite the bullet at 59.5 and live off a combo of the taxable/tax differed. Perhaps I need to look harder at the 72T rule as RMDs may bite me in a$$ after 70, but that is a ways off. I suppose it's an issue of pay me now or pay me later... says Uncle Sam.

I am assuming most of you who are drawing these larger annual amounts (say $250K +) are drawing from a mix of account types/assets (Dividends/Interest/CGs/rental income/pensions/SS) which in the end helps reduce your effective tax rate. As audreyh1 stated, she is running an effective tax rate between 13% - 16% which is better than my 17%. I know the real answer "depends", but its helpful to hear how people reconciled their tax situations both in the ER years prior to 59.5 and then thereafter. As mentioned before, I am not leading with tax avoidance first as the strategy, but comparing best approaches after you have maxed out your returns per your individual investment strategy.

Is anyone drawing $250K + only from their tax deferred accounts? If so, any magic tricks to keep the effective tax rate down?

Did any of you blend in the 72T rule with your taxable account withdrawals prior to hitting 59.5 or just live straight out of taxable?

 

[audreyh1]

I hope it was clear in my case that we only have investment income.

Our tax-deferred accounts are about 15% of our total retirement accounts. At the moment we are not planning draws on them until RMDs are required. We also plan to wait on SS until 70.

 

[DawgMan]

I hope it was clear in my case that we only have investment income.

Our tax-deferred accounts are about 15% of our total retirement accounts. At the moment we are not planning draws on them until RMDs are required. We also plan to wait on SS until 70.

I suppose in my case I am trying to reconcile 3 time periods/phases.. pre 59.5, 60 - 70, post 70. My tax differed account is large enough that RMDs could force my income/taxes much hire than I prefer by 70 if I don’t plan accordingly. However, my gut tells me to enjoy the low/no tax period while I can better predict taxes in phase 1, and the navigate phase 2 & 3 when I get there.

 

[pb4uski]

.... Is anyone drawing $250K + only from their tax deferred accounts? If so, any magic tricks to keep the effective tax rate down? ...

Another way of framing the question is whether there are any magic tricks to keep the effective tax rate down if you have $250k of ordinary income... I suspect the answer is no... just grin and bear it and pay ordinary rates.


You might be able to avoid the 24% tax bracket by filling the 22% tax bracket with ordinary income from tax deferred withdrawals... that would be $189k ($165k top of 22% tax bracket + $24k standard deduction) and then take $61k from taxable (hopefully mostly principal and some preferenced qualified dividends and LTCG at 15%)... that would be about 15% effective tax rate.