understanding income taxes

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FRPJunkie
Posts: 33
Joined: Wed Feb 24, 2016 8:17 am

understanding income taxes

Post by FRPJunkie »

Jim,

I'm unclear on how taxes are being applied by the planner. In the setup page I have "Income Tax Rate" set as 15%. (Though I am not sure, I would assume this is used as an average rate applied to the withdrawal, and does not take into account progressive taxation.)

I have Annual Retirement Spending set to $140,000, flexible.
Under additional inputs, I have a pension payment set to $48,960 (with no COLA). Under this entry I have Taxable Percent set to 50%. This is because I am making the assumption that $24k would be taken up by the standard deduction, which would leave $24, 440. I would then assume that this amount would be subject to the 15% income tax specified as above.

Here is the result in year 1 of retirement:

Planned expenses: $144, 805
After tax income: $45,288 (
Median Total Withdrawal: $103,475

Here's what's reported on the more details page:

After tax income: $45,288 (this appears to be: $48,960-$24,000 (standard deduction) = $24,960 x .15 = 3744, so a total after tax of 45,216?)
Addl withdrawal: $98,797
Taxes on withdrawal: $4678 (this is not 15% taxation...so perhaps the 15% IS progressive, ie. it's 15% marginal?)
Add'l withdrawal with taxes: $103,475 (matches what's above)

Are you able to help me understand what's happening? Happy to provide more data!

jimr
Posts: 614
Joined: Thu Feb 28, 2008 6:48 pm

Re: understanding income taxes

Post by jimr »

FRPJunkie wrote:
Sun Jan 05, 2020 2:35 pm
(Though I am not sure, I would assume this is used as an average rate applied to the withdrawal, and does not take into account progressive taxation.)
Yes. This is an average rate without taking progressive taxation or any deductions into account. It should be a combined rate that takes into account all federal, state, and local income taxes you expect to have to pay.
I have Annual Retirement Spending set to $140,000, flexible.
Under additional inputs, I have a pension payment set to $48,960 (with no COLA). Under this entry I have Taxable Percent set to 50%. This is because I am making the assumption that $24k would be taken up by the standard deduction, which would leave $24, 440. I would then assume that this amount would be subject to the 15% income tax specified as above.
You're close, but I get $48,960 times 50% = $24,480 rather than $24,440. Aside from that, I think your approach to handling the standard deduction should be workable, although I'd wonder if there are any state tax implications for this.
Here is the result in year 1 of retirement:

Planned expenses: $144, 805
After tax income: $45,288 (
Median Total Withdrawal: $103,475

Here's what's reported on the more details page:

After tax income: $45,288 (this appears to be: $48,960-$24,000 (standard deduction) = $24,960 x .15 = 3744, so a total after tax of 45,216?)
I get $48,960 times 50% taxable = $24,480 -> $24,480 times 15% tax rate = $3,672 -> $48,960 - $3,672 = $45,288
Addl withdrawal: $98,797
Taxes on withdrawal: $4678 (this is not 15% taxation...so perhaps the 15% IS progressive, ie. it's 15% marginal?)
Add'l withdrawal with taxes: $103,475 (matches what's above)
All withdrawals from the tax deferred portfolio should be taxed at the income tax rate. Do you have funds in the taxable portfolio? These are generally used first for withdrawals and would be tax free since the taxable portfolio is assumed to be carried at a 100% cost basis (eg gains are taxes each year as they happen).

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