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In 2012, (just for that year) we were in the 15% tax bracket. Since 2013, we have been in the 25% tax bracket. I wanted to see what made the brackets jump. Appears to be my mtg interest going down due to refinancing. That seems to be a good thing, since it saved us over $5000.00 and is continuing. I am posting the numbers comparing 2012 to 2013.
2013- Gross income - up $3626.00. (guess that is good)
Mtg interest - down $5452 (good as well)
Total deductions - down $4199 (not as good)
Taxable income - up $7625
Tax paid - up $1132 Effective tax rate % - up .76 (from 8.41 to 9.17%)
Tax Bracket % - up 10% (from 15% to 25%)
My question is: what is the number I should be concerned about (if any)? Is the tax bracket rising to 25% a big deal? Or because the effective tax rate only went up less than 1%, is that what is better? Going forward, we will probably have the same scenarios, mtg interest will keep declining, income will rise, tax paid will rise. At 70 1/2, will have big rises due to RMD's, but I think we will remain in the 25% bracket. I don't think there is much I can do about any of this - except feel fortunate, which I do every day!
Your deductions are becoming less important. You get a standard deduction of $6,200 single or $12,400 married. Consider paying off the mortgage.
The 25% bracket means that you pay a tax of 25 cents on every dollar of new income. The RMD will probably be taxed at 25% so you will get 15% less to spend.
Yes, nothing you can do to put more cash in your pocket and not the government. This is better than going from the 25% to the 15% because your income is decreasing.
At 70 1/2, will have big rises due to RMD's, but I think we will remain in the 25% bracket. I don't think there is much I can do about any of this - except feel fortunate, which I do every day!
We're now in our mid-60's; at 59 1/2, we looked ahead at our rising tax bracket and the impact RMD's would have. For us, the best tax strategy appeared to be to start converting 401K and 403B assets to Roth's, and to pay the taxes as we go.
It's a balancing act. Every year, we convert an amount that will bring us just to the top of our current tax bracket but not move us into the next one. By the time we're 70 1/2, we will have a good hunk of the funds converted to tax-paid Roth's.
but if you convert it may not make sense if you are still in the same bracket doing the conversion as the rmd's ..
each year more and more money goes through at lower and lower brackets so if you are not just filling up the 15% bracket with the conversion you will end up paying more in tax than less.
that is my problem , i can't convert without ending up worse than just leaving things as is . each year i wait the inflation adfjusting to the tax breakets make it cheaper to wait and not convert. by the time i am 70-1/2 the 15% bracket may work its way up to 100k
but if you convert it may not make sense if you are still in the same bracket doing the conversion as the rmd's ..
We'll start collecting SS when we're 68 & 70 which will almost certainly put us into a higher tax bracket. We're 64 & 66 now so we're closer to it than you, it's less likely the inflation and brackets will change noticeably.
It just makes more sense for us tax-wise to be doing the conversions now, as we go.
you have to make sure before doing conversions . today 25% for a couple runs up to 150k and that is taxable income after deductions . that can be170-180k gross income ,more if figuring ss at only 85%.
that can be over 200k in just a few years as the brackets are adjusted each year for inflation.
in fact if you will have money left over for heirs think about what brackets the kids are in as it will be their brackets that matter.
A few thoughts:
1. Moving up to a higher tax bracket isn't necessarily a big deal, because it's not the case that all of your taxable income is taxed at the top tax bracket you're in. I.e., if filing MFJ 2014, the FIRST $18,150 of taxable income is taxed at 10% regardless of whether you have TOTAL taxable income of $18,150 or $100,000. If you had $18,151 of taxable income, the first $18,150 is taxed at 10% and the next $1 is taxed at 15%. You thoughtfully observed your effective tax rates, which is probably the right value to look at when considering the big picture. When making a decision about taking an action, however, then perhaps the current tax bracket can be useful. If you're considering a Roth IRA conversion, you can model its effects using your top tax bracket since that's the effect it will have (I'm simplifying, but you get the idea).
2. Your taxable income increased by $7,625 while the tax paid increased by $1,132? My version of Excel suggests that you paid a 14.8% tax rate on that increase. While your gross income might be eligible for the 25% tax bracket, it seems to me like you're (great!) in the 15% bracket once deductions are applied.
3. Congratulations on the remarkable amount your refinance is saving you.
in fact if you will have money left over for heirs think about what brackets the kids are in as it will be their brackets that matter.
Not sure how to think about what the brackets will be ca 2050. But since our kids, like so many today, will have zero pension income it's safe to say they'll be in low brackets.
exactly my point. your kids may be in a lower bracket than you are , especially when what is passed gets taxes paid over their lifetime . your conversion tax bracket may be much higher than their income brackets they inherit at.
conversions may just burn up good money at this point. unless you are filling up the 15% bracket odds are you will do more harm than good, like i said another few years and 100k will go througn in the 15% tax bracket as brackets are inflation adjusted. if you paid 25% on that amount from 74 to 100k you would hurt yourself.
Last edited by mathjak107; 03-30-2015 at 04:02 AM..
A few thoughts:
1. Moving up to a higher tax bracket isn't necessarily a big deal, because it's not the case that all of your taxable income is taxed at the top tax bracket you're in. I.e., if filing MFJ 2014, the FIRST $18,150 of taxable income is taxed at 10% regardless of whether you have TOTAL taxable income of $18,150 or $100,000. If you had $18,151 of taxable income, the first $18,150 is taxed at 10% and the next $1 is taxed at 15%. You thoughtfully observed your effective tax rates, which is probably the right value to look at when considering the big picture. When making a decision about taking an action, however, then perhaps the current tax bracket can be useful. If you're considering a Roth IRA conversion, you can model its effects using your top tax bracket since that's the effect it will have (I'm simplifying, but you get the idea).
2. Your taxable income increased by $7,625 while the tax paid increased by $1,132? My version of Excel suggests that you paid a 14.8% tax rate on that increase. While your gross income might be eligible for the 25% tax bracket, it seems to me like you're (great!) in the 15% bracket once deductions are applied.
3. Congratulations on the remarkable amount your refinance is saving you.
it boils down to , do you want marginal income taxed at 25% or higher if you can convert it at 15% since roth conversions tend to be talking quite a bit of dough well into the 25% bracket.
it can be about triggering the amt tax as well with a conversion. we hit the amt penalty this year and got a 16k amt tax penalty because we had a large income from a property sale .
it can also be about doing a conversion and getting your ss taxed that year.
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