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I am shocked how little taxes I am paying in my first full year of retirement (2016).
I was used to paying Social Security and Medicare Taxes and a higher tax bracket. Now I have the same take (real) home income after taxes but far fewer taxes.
Taxable dividends (mostly qualified) so 0%
Capital Gains (At most 15% of TAXABLE income)
Sale of stocks bonds and mutual funds (Mostly 0% because they are long term holdings.)
With the standard deduction and two personal exemptions, I pay almost no taxes on $50K in dividends, capital gains and sale of investments. What is your story with taxes in retirement?
Unfortunately almost all of our retirement savings went into tax deferred accounts (Roths were not widely available until after 2000) so we wind up with a notable tax bill. I dread the quarterly chore of sending money to the feds. And some quarters are really uncomfortable like this last one where I had to pay 2016 taxes owed, the estimated 2017 tax payment, and 50% of my annual property taxes. If I count income tax, property tax, sales tax, fuel tax, excise tax, etc. it turns out to be a major budget category for us.
I am shocked how little taxes I am paying in my first full year of retirement (2016).
I was used to paying Social Security and Medicare Taxes and a higher tax bracket. Now I have the same take (real) home income after taxes but far fewer taxes.
Taxable dividends (mostly qualified) so 0%
Capital Gains (At most 15% of TAXABLE income)
Sale of stocks bonds and mutual funds (Mostly 0% because they are long term holdings.)
With the standard deduction and two personal exemptions, I pay almost no taxes on $50K in dividends, capital gains and sale of investments. What is your story with taxes in retirement?
I'm thinking you have a great accountant!! How do you pay 0% on sale of stock and bonds and mutual
funds on less you did have any gain on them?
long term capital gains rates if you are in the 15% tax bracket are zero.
michael kitces did a good job explaining it in his article . this is a summary
EXECUTIVE SUMMARY
For “lower income” individuals whose income falls within the bottom two ordinary income tax brackets, the Internal Revenue Code applies a 0% long-term capital gains rate to the extent their gains also fall within the lower two brackets. However, the 0% rate only applies as long as the income actually does fall within those lower brackets – which means “too much” in capital gains will eventually cross out of the 0% rate and into the higher tax brackets.
Nonetheless, the potential for 0% long-term capital gains rates means that for those who are eligible, the best thing they can do every year is not harvest capital losses – the “typical” capital gains strategy – but instead to harvest gains! By selling investments that are up, and buying them back again immediately (without any wash sale rules to navigate!), the taxpayer can effectively get a step-up in basis on current investments without any (Federal) tax liability!
Of course, the caveat to this strategy is that while long-term capital gains may be eligible for 0% rates for lower income individuals, it is still income itself, potentially impacting certain deductions and tax credits, and the taxation of Social Security. In addition, harvesting capital gains must be coordinated with other strategies, like partial Roth conversions, which can potentially drive up long-term capital gains rates and make capital gains harvesting less effective. Still, though, the potential to claim a free step-up in basis is not one to be missed, for any years where income is low enough to take advantage of the rules, whether due to just having income low enough to qualify, having a “temporarily” low income year due to a job loss or change, or simply looking to harvest capital gains once retired when wage income is gone and required minimum distributions have not yet begun!
I was paying zero income taxes in retirement. (no property taxes either, I rent)
But then I picked up a small side gig where I'm classified as an Independent Contractor rather than an employee with a W-2, which means I have to pay certain taxes - so it's a cost of $500 taxes on the $3600 this little side gig gives me. I do this tiny gig for fun, it takes very little time.
We are paying LOTS of income taxes due to taxable pension higher than the threshold making SS taxable at 85%. Add to that all our w/d's from 457s and SEP and SIMPLE IRAs. We too saved all this money prior to Roth's.
I don't mind paying taxes (my career was in state and local taxation/revenue). And we did have the advantage of tax deferrals on these retirement accounts when our incomes were much higher and when tax brackets were much higher too. And our accounts grew significantly in these retirement stock accounts. We started IRAs when they first came out....1970s I think??
When people complain about paying income taxes, I say, be happy you have income!
Almost all of my retirement income, pension and tax deferred 401, will be taxed as ordinary income. Being single, the pension alone will cause 85% of my Social Security to be taxed. Will pay higher Medicare Part B premiums. Only a small Roth is exempt. Guess I did not plan very well for retirement taxes.
I focused my career on increasing my salary to increase my pension. By the time Roth IRAs started up, I was in the 25% tax bracket and making tax deferred contributions to keep out of the 28% bracket. Not being that interested in investments, I was content to put my savings in index funds and too nervous to make taxable investments as I had several family members who lost money in the stock market. Even though I do my own taxes, I somehow thought I would magically pay lots less taxes in retirement but it will not be that much of a decrease.
long term capital gains rates if you are in the 15% tax bracket are zero.
michael kitces did a good job explaining it in his article . this is a summary
EXECUTIVE SUMMARY
For “lower income” individuals whose income falls within the bottom two ordinary income tax brackets, the Internal Revenue Code applies a 0% long-term capital gains rate to the extent their gains also fall within the lower two brackets. However, the 0% rate only applies as long as the income actually does fall within those lower brackets – which means “too much” in capital gains will eventually cross out of the 0% rate and into the higher tax brackets.
Nonetheless, the potential for 0% long-term capital gains rates means that for those who are eligible, the best thing they can do every year is not harvest capital losses – the “typical” capital gains strategy – but instead to harvest gains! By selling investments that are up, and buying them back again immediately (without any wash sale rules to navigate!), the taxpayer can effectively get a step-up in basis on current investments without any (Federal) tax liability!
Of course, the caveat to this strategy is that while long-term capital gains may be eligible for 0% rates for lower income individuals, it is still income itself, potentially impacting certain deductions and tax credits, and the taxation of Social Security. In addition, harvesting capital gains must be coordinated with other strategies, like partial Roth conversions, which can potentially drive up long-term capital gains rates and make capital gains harvesting less effective. Still, though, the potential to claim a free step-up in basis is not one to be missed, for any years where income is low enough to take advantage of the rules, whether due to just having income low enough to qualify, having a “temporarily” low income year due to a job loss or change, or simply looking to harvest capital gains once retired when wage income is gone and required minimum distributions have not yet begun!
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