The nuts and bolts of 'taxable income' in retirement

[Ladychips]

I’m trying to understand what my ‘income’ looks like in retirement.  But it’s not all clear to me, and I would appreciate some input from the forum community.

I think I pay state and federal income taxes on:
•   My husband’s pension (100%)
•   My pension (100%)
•   My husband’s SS (85%)
•   Rental income (100% minus deductions and depreciation)
Right?

FICA on none of the above, right?  Medicare? 

If I take money from my ROTH, the contribution amount (that is at least 5 years old) does NOT count as taxable income, right?  If I were to take out more (earnings) that WOULD be taxable, right?

When I take money from my taxable account, do I have to count that as taxable income?  I think I do, but I’ve already paid taxes on it so it feels like a double whammy.  I know I’m missing something very simple here, but don’t know what it is.

So, it looks something like this:
•   Husband’s pension    $500/month   $6000/yr   
•   My pension      $2500/month   $30000/yr
•   Husband’s SS      $2000/month   $24000/yr (85%=$20,400)
•   Rental income      $2000/month   $24000/yr (depreciation and deductions = $12,000)
•   Total                 $7000/month   $84000/yr

Of the $84000, $68,400 is taxable?

(6000+30000+20400+12000=68,400 in taxable income * 15% = $10,260 in taxes…).  So my actual in-my-pocket income is $73,740 ($6145/month)

So if I take out money from my non-tax deferred accounts, that becomes taxable income too? What else will be withheld from any of these sources of income?  What other factors change the equation?

I said once before on the forum that I hate figuring out taxes like a 2 year old hates naps!  But I don’t want to cipher our income and then be hit by items I don’t know about or don’t understand.

[Catbert]

Yes, you would pay federal income tax on pensions, SS (85%) and rental income as you noted.  You would not pay FICA or Medicare of these.

You can always take out your Roth contributions w/o tax or penalty.  Roth conversions   are not available without penalty until 5 years have passed.

Taking money from taxable brokerage accounts you'll only be taxed on the capital gains.  Capital gains are taxed at a lower rate than regular income.  Any capital gains which would otherwise fix in your 15% income tax bracket is taxed at 0%.

States vary.

I think I got the above right.  Someone else will chime in to the extent I'm wrong.

[MDM]

So, it looks something like this:
•   Husband’s pension    $500/month   $6000/yr   
•   My pension      $2500/month   $30000/yr
•   Husband’s SS      $2000/month   $24000/yr (85%=$20,400)
•   Rental income      $2000/month   $24000/yr (depreciation and deductions = $12,000)
•   Total                 $7000/month   $84000/yr

Of the $84000, $68,400 is taxable?

(6000+30000+20400+12000=68,400 in taxable income * 15% = $10,260 in taxes…).  So my actual in-my-pocket income is $73,740 ($6145/month)

Try putting your numbers into full commercial tax software (TurboTax, TaxAct, H&RBlock, etc.) if you have a copy from doing 2016 taxes.  Or, if that isn't convenient, use the case study spreadsheet.

Either way you should find that for your numbers above, and assuming
  $500/mo in real expenses and $500/mo for depreciation, and
  one person under age 65, the other age 65 or older,
you get
Gross cash flow in per month = $3000 (pensions) + ($2000 - $500) (rental) + $2000 (SS) = $6500/mo = $78,000/yr

Adjusted Gross Income (Form 1040) = $36000 (pensions) + ($24000 - $6000 - $6000) (rental) + $19600 (SS) = $67,600/yr.  Taxable SS is ~82% of total SS for this situation.

Taxable Income = $67,600 - $13,950 (std. deduction) - $8100 (exemption) = $45,550

Federal income tax = $4900.

That's better than $10,260, eh?

[Ladychips]

Try putting your numbers into full commercial tax software (TurboTax, TaxAct, H&RBlock, etc.) if you have a copy from doing 2016 taxes.  Or, if that isn't convenient, use the case study spreadsheet.

Federal income tax = $4900.

That's better than $10,260, eh?

uh, yea, that's a bit better!  I'm going to work on that spreadsheet (no matter how much I don't want to!)
Thanks so much for taking the time to respond.

You can always take out your Roth contributions w/o tax or penalty.  Roth conversions   are not available without penalty until 5 years have passed.

Taking money from taxable brokerage accounts you'll only be taxed on the capital gains.  Capital gains are taxed at a lower rate than regular income.  Any capital gains which would otherwise fix in your 15% income tax bracket is taxed at 0%.

So I don't understand the capital gains thing, but based on your post, I did some digging around in my Vanguard account.  And lo and behold, there's a link that tells me the capital gains.  So let's test my understanding.  Let's say (for easy math - all round numbers), I have $100,000 in Vanguard.  And Vanguard tells me I have $1,000 in capital gains.  If I take out $10,000 for the year, I'll pay 15% on the $1,000?  And nothing else on the $10,000.  Is that right? Or is it 15% of 10% (since I only took out 10% of the total) of the $1,000?

Also I appreciate your point about the contributions vs. conversions.  I absolutely was not distinguishing those two (but now that you said it, it's obvious).  Thanks so much for responding.

[anotherAlias]

Capital gains are the difference of what you bought shares at and what the shares are priced at when you sell.  If you have mutual funds, you pay capital gains on whatever the fund manager buys/sells of individual stocks within the fund during the year.  You also have capital gains when you sell off shares of the fund itself.  So in your example, it sounds like the $1K is the gains from what the fund manager sold during the year.  If you sell $10k, you would need to know your cost basis(what you bought those shares for) to determine the gains that you would be taxed on. For giggles, lets say you bought those shares for $2K.  That gives you a gain of 8K on what you sell.  So your total capital gains for the year would be the 1K that the fund turnover generated plus the 8K from the sale you inititiated =  Total of $9K of capital gains.   Clear as mud?

[MDM]

Let's say (for easy math - all round numbers), I have $100,000 in Vanguard.  And Vanguard tells me I have $1,000 in capital gains.  If I take out $10,000 for the year, I'll pay 15% on the $1,000?  And nothing else on the $10,000.  Is that right? Or is it 15% of 10% (since I only took out 10% of the total) of the $1,000?

If you paid a lump sum of $99K for the Vanguard funds, the answer is "15% of 10% of the $1,000" or $15.

See Vanguard cost basis information: Know your options | Vanguard for more.

[Ladychips]

But I've been buying shares for 20 years!  I've always done the $x/month thing.  So who knows what I paid for them.  But I guess Vanguard knows.  And Vanguard tells me.  The question I have is that it seems I don't know my cost basis or my gains until I receive my statement (after the fact) from Vanguard?  Is that right, or should I have been paying attention all of these years?  And now I have a tiny bit more insight into the tax loss harvesting thing (presumably it's selling shares when the cost is lower than your original purchase price).  But wouldn't I have to be actively managing things instead of a set and forget strategy (ex. I want $10,000 on January 1st each year...).  And if I don't know the cost basis and current price before I sell, I won't have any idea how much I'll owe in capital gains until it's sold, right?  That does not sound acceptable for the mustachian crowd. 

I appreciate your patience as I wind my way to understanding!

[Fire2025]

If I take money from my ROTH, the contribution amount (that is at least 5 years old) does NOT count as taxable income, right?  If I were to take out more (earnings) that WOULD be taxable, right?

I thought earnings in the Roth were tax free when withdrawn???  Only non qualified withdrawals, were taxed???  I'm sorry if I'm missing something.

[seattlecyclone]

If I take money from my ROTH, the contribution amount (that is at least 5 years old) does NOT count as taxable income, right?  If I were to take out more (earnings) that WOULD be taxable, right?

I thought earnings in the Roth were tax free when withdrawn???  Only non qualified withdrawals, were taxed???  I'm sorry if I'm missing something.

Roth earnings are only tax-free when it's a "qualified distribution" (i.e. you probably are at least 59½ years old). If you take the earnings out in a non-qualified distribution, it is taxed as regular income plus a 10% early withdrawal tax.

[Fire2025]

If I take money from my ROTH, the contribution amount (that is at least 5 years old) does NOT count as taxable income, right?  If I were to take out more (earnings) that WOULD be taxable, right?

I thought earnings in the Roth were tax free when withdrawn???  Only non qualified withdrawals, were taxed???  I'm sorry if I'm missing something.

Roth earnings are only tax-free when it's a "qualified distribution" (i.e. you probably are at least 59½ years old). If you take the earnings out in a non-qualified distribution, it is taxed as regular income plus a 10% early withdrawal tax.

Yes I was thinking qualified and wanted clarity.  I forget I'm an old fart sometimes.

[Greystache]

There are some ways to lower your taxable income that may or may not apply to you. I am using both of these techniques to reduce my AGI.
1. If you are still buying health insurance you can get a high deductible plan with an HSA. The money you contribute to the HSA reduces your taxable income.  Even better, it is not taxable when you later withdraw it to pay for medical expenses.
2. You did not mention if you need all of the income that you listed.  If you have excess income you may be able to roll over some or all of your pension payments into an IRA and reduce your taxable income.  Unlike the HSA, you will be taxed later on when withdraw the money from the IRA. You would have to check with your pension to see if it is possible to roll it into an IRA.

[MDM]

But I've been buying shares for 20 years!  I've always done the $x/month thing.  So who knows what I paid for them.  But I guess Vanguard knows.  And Vanguard tells me.  The question I have is that it seems I don't know my cost basis or my gains until I receive my statement (after the fact) from Vanguard?  Is that right, or should I have been paying attention all of these years?

Sorry, but it's "should have been paying attention".  It's possible, however, that Vanguard might have the information you need.  They will for the past 5 years, and maybe prior to that.  See Vanguard cost basis information: Covered and noncovered shares | Vanguard for more details.

We don't have any pre-2011 shares with Vanguard, so you'll have to check your own account to see what displays.  When we look at
https://personal.vanguard.com/us/XHTML/com/vanguard/costbasisnew/xhtml/CostBasisSummary.xhtml?acctType=IA&fromSCD=Y
we see a screen that includes this information (where the $42.15 and $44.34 are the cost basis per share for the shares purchased on those dates:


If they show the same information for non-covered shares you are in good shape.  Note also the "Specific identification (SpecID)" - if you want to sell a specific lot at its specific cost basis, you need to have your account set up that way.

And now I have a tiny bit more insight into the tax loss harvesting thing (presumably it's selling shares when the cost is lower than your original purchase price).  But wouldn't I have to be actively managing things instead of a set and forget strategy (ex. I want $10,000 on January 1st each year...).  And if I don't know the cost basis and current price before I sell, I won't have any idea how much I'll owe in capital gains until it's sold, right?

If you want to tax loss harvest, see the previous answer about selling specific lots at specific prices.  See also Tax loss harvesting - Bogleheads.

[Acastus]

The Feds counts only 1/2 of Social security as income, up to a limit in other income. That's a little flaky, but there is a simple calculation on the tax form. At high income up to 90% of SS is taxable. You make enough that you will be in between.

Your rental is a business, so you report the profit of the business, or 24k - 12k = 12k

Investment income:  Your contribution has already been taxed, so it gets a pass. Your earnings get taxed at capital gains rate - the tax is 0% as long as your overall taxable income is less than 75k, after deductions. I think you are safe here.

Pensions:  fully taxed by the Feds. Some states do not tax or tax at lower rates. PA does not tax pensions, I know from experience. Some states exclude some income from taxes for retirees (65 or older. Sorry FIRE folk). NY excludes 20k.