taxcaster and dinkytown say I'll pay 0% tax?

[leibowitzn]

Hi, I'm working on fine tuning my retirement calculations.

The part I'm stuck on is how much tax I'll be paying when I retire early. I entered my data into taxcaster and dinkytown. Intuit Taxcaster says I'll get a refund while dinkytown says I'll owe $0.

Here's what I entered:
* married filing jointly
* 2 kids
* income comes from 3 sources
*** interest: $1,000
*** qualified dividends: $30,000
*** stock sales: $140,000

For stock sale I have no idea how to estimate the cost basis and capital gains. I made a rough guess of 50% would be capital gains and entered that (so I entered $70,000). (I'd love any advice on how to estimate this better.)

This meant my taxable income was around $100,000.

Does a $0 federal tax rate seem reasonable?

Also, any advice on estimating state taxes?

 

[leibowitzn]

Here's a screenshot from taxcaster:
https://imgur.com/hv8wzy6

I'm surprised it says 12% tax bracket for 0% tax rate.

 

[Koolau]

No idea about taxes but I'd love to know how you make $1000 in interest in today's low interest on cash accounts. Just nosy so YMMV.

 

[leibowitzn]

Koolau, thanks for the reply. Here's what I'm estimating my assets will look like when I retire (in today dollars):
* 401k + Roth $963,737
* Brokearage $2,396,982
* Cash $175,742

I calculated the yearly interest income at a 0.6% rate. That's what Ally Bank offers.

My naive goal is to get $30k from dividends and make the remainder from selling stocks in the taxable brokearage account. VTSAX has a 1.21% dividend yield.

(By the way, I paid a financial planner to help me with early retirement planning. Turned out to be a complete waste :-(. The financial planner just used a simple online calculator and didn't even take into account that I'll be decades away from qualifying to take money out of the 401k.)

 

[SevenUp]

Does a $0 federal tax rate seem reasonable?

Also, any advice on estimating state taxes?

For 2022, the case study spreadsheet gets $0. For 2021 it gets a $6K refund (given assumed ages for your kids). TaxCaster may still be doing 2021 calculations.

The spreadsheet has some state tax estimation capability. Federal calculations are usually spot on - don't know how good the state calculations are.

 

[leibowitzn]

SevenUp, thanks for the link to the spreadsheet. It's also good to see that such a low tax bracket doesn't immediately raise alarm bells.

 

[Koolau]

Wow, that's too bad about the so-called financial planner. Be sure to give him/her a bad review on Yelp, etc. We need folks in this business specialty that understand the real world of early retirement - not numbers crunchers. So sorry you had a bad experience.

 

[EastWest Gal]

Look at your annual brokerage statements to see what your interest and dividends are, as well as capital gains distributions. Also, what the overall cost basis is of each equity holding.

Schwab gives me the cost basis for each ETF, mutual fund, and individual stock. When I sell any equity, I can chose a particular lot to manipulate the capital gains up or down. That becomes very relevant if your health insurance is through the ACA.

The 0% income tops out at $83,350 for a married couple filing jointly. Add your standard deduction of $25,900 and you can have an capital gains and qualified dividend income of $109,250 before you pay FIT.

But you live in California, per your profile? You will be paying 8% on that income.

Having most of your retirement income in an after-tax account is quite handy. Don’t forget that if you are getting insurance through the ACA, there is a very nasty cliff that returns in 2023. One dollar over the cliff and you could pay nearly $20K more for health insurance.

 

[cathy63]

...

The 0% income tops out at $83,350 for a married couple filing jointly. Add your standard deduction of $25,900 and you can have an capital gains and qualified dividend income of $109,250 before you pay FIT.

But you live in California, per your profile? You will be paying 8% on that income...

That 8% is the marginal rate on only the last few dollars of income. The California state income tax on income of $109,250 for a family of 4 where the parents are under age 65 and taking the standard deduction should be less than $3500, so more like 3.2%. If they can itemize for the state, which many taxpayers in this bracket can, then that rate goes down even further.

 

[pb4uski]

... Does a $0 federal tax rate seem reasonable?

Also, any advice on estimating state taxes?

Yes, negligible tax given most of your income is preferenced income (qualified dividends and LTCG) maks sense.

I prefer https://www.irscalculators.com/tax-calculator

It can also estimate state income taxes. See screenshot below.

 

[leibowitzn]

Thanks everyone for their super helpful comments.

The very specific advice here's really great.

Based on the above, I realized I should do a better job calculating my healthcare costs. I didn't know about any cliffs with regard to ACA. Are there any recommended readings on this subject?

(Oh also, we're planning to move from California to North Carolina when we retire)

 

[SevenUp]

I didn't know about any cliffs with regard to ACA. Are there any recommended readings on this subject?

Roth Conversion and Capital Gains On ACA Health Insurance is a good article.

 

[rothlev]

Hi, I'm working on fine tuning my retirement calculations.

The part I'm stuck on is how much tax I'll be paying when I retire early. I entered my data into taxcaster and dinkytown. Intuit Taxcaster says I'll get a refund while dinkytown says I'll owe $0.

Here's what I entered:
* married filing jointly
* 2 kids
* income comes from 3 sources
*** interest: $1,000
*** qualified dividends: $30,000
*** stock sales: $140,000

For stock sale I have no idea how to estimate the cost basis and capital gains. I made a rough guess of 50% would be capital gains and entered that (so I entered $70,000). (I'd love any advice on how to estimate this better.)

This meant my taxable income was around $100,000.

Does a $0 federal tax rate seem reasonable?

Also, any advice on estimating state taxes?

looks like you are using last years software. Next year the child tax credit is $2000 per child, so if you have 2 children under 16 , $4000 not $6000.

 

[SevenUp]

looks like you are using last years software. Next year the child tax credit is $2000 per child, so if you have 2 children under 16 , $4000 not $6000.

With no earned income, there will be no refundable child tax credit for 2022 (unless Congress once again changes the law...).

 

[Jenna]

I think you might be able to relate to the blogger called Go Curry Cracker. He talks about how to pay 0 in income taxes while living off of investments and after tax accounts. It's quite simple math.

 

[rothlev]

With no earned income, there will be no refundable child tax credit for 2022 (unless Congress once again changes the law...).

If he has a tax liability that is wiped by the child tax credit , he will still get it.

 

[wrigley]

Thanks everyone for their super helpful comments.

The very specific advice here's really great.

Based on the above, I realized I should do a better job calculating my healthcare costs. I didn't know about any cliffs with regard to ACA. Are there any recommended readings on this subject?

(Oh also, we're planning to move from California to North Carolina when we retire)

Small world.....my BIL made that very same move!

Mike

 

[EastWest Gal]

That 8% is the marginal rate on only the last few dollars of income. The California state income tax on income of $109,250 for a family of 4 where the parents are under age 65 and taking the standard deduction should be less than $3500, so more like 3.2%. If they can itemize for the state, which many taxpayers in this bracket can, then that rate goes down even further.

It’s been 23 years since I was subject to California state income tax. You’re right. I had a moment of sheer dumbness.

 

[pb4uski]

I think you might be able to relate to the blogger called Go Curry Cracker. He talks about how to pay 0 in income taxes while living off of investments and after tax accounts. It's quite simple math.

But keep in mind that $0 income tax might be suboptimal... especially if you are not fully utiizing deductions or even the 10% and 12% tax brackets if you expect to be in the 22% tax bracket later in life... but the opportunities may be limited if ACA is a constraint.

 

[SevenUp]

With no earned income, there will be no refundable child tax credit for 2022 (unless Congress once again changes the law...).

If he has a tax liability that is wiped by the child tax credit , he will still get it.

Yes, that would be the non-refundable part of the child tax credit. Based on the OP there will be no tax liability, so no credit.

 

[pb4uski]

Yes, that would be the non-refundable part of the child tax credit. Based on the OP there will be no tax liability, so no credit.

If the OP did some Roth conversion to create ordinary income would that fully utilize the credit and avoid it going to waste? Or does it have to be earned income?

 

[SevenUp]

If the OP did some Roth conversion to create ordinary income would that fully utilize the credit and avoid it going to waste?

Yes, given the numbers in the OP a $30,900 Roth conversion would fully use $4000 in non-refundable child tax credits (assuming the children are both under age 17 on 12/31/2002), leaving $1 due to the IRS when filing.

 

[pb4uski]

No brainer then, right?

 

[SevenUp]

No brainer then, right?

Yup, assuming there is pre-tax money in traditional accounts available to convert.

Might be prudent to aim a little lower on the conversion amount, because once there is federal tax due it comes at a marginal rate of 25-27%. From the case study spreadsheet in Excel:

There would probably be 6% or 8% additional in CA and 5% additional in NC.

 

[pb4uski]

But if the incremental Roth conversions are just using credits that would otherwise go wasted then what the marginal rate is doesn't matter because the OP isn't paying the tax, Uncle Sam is.

But the state tax impacts are a consideration.