What If

We are all used to telling our employer how many exemptions we have so they can make the proper tax deductions during the year. For most of us the first time we look at our potential taxes is in January of the following year when we get our W-2s in the mail.

We can do basically the same thing during retirement, but now that we have seen what our Personal Tax Hump looks like and realize that we can save thousands of dollars each year if we avoid those extreme marginal tax rates, we should all consider doing the opposite! Start doing your tax calculation this January, not next January, and keep asking yourself What If every time you decide to create extra taxable income!

Use the following links to examine the details of each of these
What If situation that you could be facing during your retirement.

• You prepared properly for year end unexpected income.
  • 22.2% You received a taxable bonus or short term gains.
  • 10.2% You received some long term capital gains.
• You did not prepare for year end gains and some of your income was LTCGs
  • 49.95% You received a taxable bonus or short term gains.
  • 37.95% You received some long term capital gains.
• You did not prepare for year end gains and none of your income was LTCGs
  • 40.7% You received a taxable bonus or short term gains.
  • 33.7% You received some long term capital gains.
• Break Even Detailed examples after Federal, State, and Local taxes.
• QCD Detailed example of a Qualified Charitable Distribution.

What If you need more cash beyond your Sweet Spot limit?
I’m not a tax accountant, so use everything on this page at your own risk!

33.7% definitely gets confusing! The column C and column H calculations set your pre-What If income at the very top of your 12% standard tax rate, your Personal Sweet Spot. The extra $1,000 of Long Term Capital Gains are Tax Delayed income, but they do increase the Basis for the taxation of your Social Security benefits at the 85% level, so your taxable income does increase by $850. The 22% tax on that extra income increases your standard Tax Due by $187. Since you are already over the start of the Long Term Gain taxation point, the entire $1,000 of Long Term Gains will also be taxed at the 15% Long Term Gain rate for another $150 of additional taxes. Your total tax increase will be $337, $187 plus $150, which is 33.7% of the $1,000 Long Term Gain!