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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Maximum Tax rate??? Date: 7/15/2011 5:44 PM
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Hi Fellow Fools,

I'm considering cashing in my IRA. Possibly half this year and half next year, or all this year, haven't decided yet. Someone said that even if I was using the standard deduction I'd still be hit with the AMT. I'm confused because if I'm not taking any unusual deductions and was still facing the AMT then why do they even have regular tax rates?

So, is there some maximum percentage I should have withheld to be sure there is enough to cover the AMT scenario? Or should I just use the 2010 forms and figure out my possible taxes assuming things will be pretty much the same this year and for 2012, unless they pass new tax rates of course.

Regards, Ken
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113702 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/15/2011 11:27 PM
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Since you are using the standard deduction, you don't have deductions that are deductible on Schedule A but not for AMT. The other reason for AMT is capital gains. An IRA distribution is not taxed as capitial gains. An IRA distribution increases the amount of income taxed as regular income and could decrease AMT.

The only reason I can think of is if the IRA distribution is large enough that the deduction for state and local taxes results in AMT.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113703 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 12:49 AM
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I'm considering cashing in my IRA. Possibly half this year and half next year, or all this year, haven't decided yet. Someone said that even if I was using the standard deduction I'd still be hit with the AMT.

Ah, fabled tax expert Someone, spreading joy across the land since the 16th Amendment was ratified. Someone is often full of beans.

It's likely your regular tax is much larger than your AMT, but why wonder? Just mock up a Form 6251 and see. Don't worry about the apparent complexity of the form. The only adjustment to regular taxable income for you is adding back your personal exemption.

Phil
Rule Your Retirement Home Fool

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113704 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:25 AM
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"The only reason I can think of is if the IRA distribution is large enough that the deduction for state and local taxes results in AMT."

Thanks for your input vkg.

California tax rate is 9.55%(year 2010) for taxable income over ~$47K so that might effect the Fed AMT. I'm just looking for a rough estimate right now so I'll figure worst case, or what I imagine is worst case and that's the tax with no deductions. The state franchise board shows the AMT rate for individuals is 7.25%.

I'll be looking at taking half this year and half next year.

Regards, Ken

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113705 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:40 AM
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"It's likely your regular tax is much larger than your AMT, but why wonder?"

Thanks for your input Phil. Why wonder, because I HUGELY dislike figuring out my taxes ;-)

I did a quick initial look, as noted in my response to vkg's post. If a closer look reduces my initial numbers I won't mind :-) So far the number looks like something I can live with. I'd rather spread it out over a longer time frame but I think there is a risk of higher tax rates in the future and/or government playing games with retirement accounts. There's so much money sitting in these accounts that I'm not sure they will be able to keep their hands out of the honey jar.

Regards, Ken

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113707 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 3:04 PM
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I did a quick initial look, as noted in my response to vkg's post. If a closer look reduces my initial numbers I won't mind :-) So far the number looks like something I can live with. I'd rather spread it out over a longer time frame but I think there is a risk of higher tax rates in the future and/or government playing games with retirement accounts. There's so much money sitting in these accounts that I'm not sure they will be able to keep their hands out of the honey jar.



if you're talking increased rates over the next year or two, that's somewhat predictable (expiration of the 'temporary' tax cuts) for deciding between taking it all in one year or spread over two or three..

if you're talking longer term, i agree rates are likely to go up ,but you might be surprised how much your taxable income falls when you do retire.

IMO, IRAs and 401(k)s are pretty safe (from grabbing gov't)
• too many voters depending on them for retirement
• "Wall st" making good money 'managing' them
• a serious bunch of folkers wanting to replace SS with them (as they've already replaced alot of pensions)

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113708 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 3:50 PM
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if you're talking longer term, i agree rates are likely to go up ,but you might be surprised how much your taxable income falls when you do retire.

Based on my experience preparing other people's taxes, I would disagree. I have found that most of my retired clients do not find themselves in a lower tax bracket when they retire.

Ira

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113709 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:02 PM
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if you're talking longer term, i agree rates are likely to go up ,but you might be surprised how much your taxable income falls when you do retire.

Based on my experience preparing other people's taxes, I would disagree. I have found that most of my retired clients do not find themselves in a lower tax bracket when they retire.



good counterpoint.

my anecdotes are the other direction, but i've far fewer (about three)



although ..wondering how they do that .. . go from (high) wages to SS, IRA withdrawals, cap gains, & ???

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113710 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:03 PM
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"...but you might be surprised how much your taxable income falls when you do retire."

Hi 0x6a74,

Well, no surprises here, I went into semi-retirement in '97 and full retirement in '05 :-)

Washington may not go as far as Argentina did, filling pensions with gov't bonds, but I do believe they could start with 25% worth of bonds which could get dinged pretty bad once rates begin to rise. Of course the FED could keep buying gov't debt and keep rates low for a long time... but that would continue the slide in the value of the dollar.

I also do not care for the forced annuity possibility.

I haven't decided yet and I could just pull half out and see how it goes.

Thanks for your input, your thoughts will be considered...

Take care, Ken

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113711 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:14 PM
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So far the number looks like something I can live with. I'd rather spread it out over a longer time frame but I think there is a risk of higher tax rates in the future and/or government playing games with retirement accounts.

Have you considered converting to a ROTH?

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113712 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:18 PM
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although ..wondering how they do that .. . go from (high) wages to SS, IRA withdrawals, cap gains, & ???

Pensions (there are still plenty of them around) plus social security and retirement plan distributions. Investments shift towards income generating from capital appreciation. Elimination of itemized deductions as mortgages are paid off and state income tax retirement exclusions kick in. Add in inheritances received near retirement age (it's not the inheritance that's taxed, but the income it generates) and you often find a short term spike in taxes followed by a drop back to the typical level for that taxpayer.

The reduction in the number of tax brackets and the related expansion of the size of each bracket also mitigates the tax reduction in retirement.

Ira

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113713 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:29 PM
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Washington may not go as far as Argentina did, filling pensions with gov't bonds, but I do believe they could start with 25% worth of bonds which could get dinged pretty bad once rates begin to rise. Of course the FED could keep buying gov't debt and keep rates low for a long time... but that would continue the slide in the value of the dollar.

I also do not care for the forced annuity possibility.



yes, there is the possibility of Shenanigans..

i just a bit less pessimistic


[ retired in '04, so we're in similar state .. i've been moving a chunk of IRA to Roth every year ..just enough to bump me into the next bracket ]

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113714 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:39 PM
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"Have you considered converting to a ROTH? "

Yes. I figured the gov't can play with one's ROTH as easily as a Traditional IRA. If I was confident gov't would keep their hands off our IRAs I wouldn't cash it in. Unfortunately I am losing trust in gov't. I don't care for the arrogance that assumes they know better how to spend/invest my money than I do. If they're so good at managing money they why the heck are we so deep in debt?

Had the SS "trust fund" money not been borrowed and spent there would be plenty of time to make small changes to strengthen the program. Funny, I remember the threat that if I voted for Barry Goldwater, who thought SS should be privatized, that SS would be destroyed.... They were right, I voted for Goldwater and SS is being destroyed.

So, I prefer to have some money outside of gov't programs...

Regards, Ken

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113715 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 4:53 PM
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"i just a bit less pessimistic "

;-) I hope you're right and I'm wrong. So few folks are prepared for retirement...

Not many prepared for a dollar crisis either... Of course I may be wrong in that too :-)

Take care, Ken (Pessimist or realist? ;-))

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113716 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 5:02 PM
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Yes. I figured the gov't can play with one's ROTH as easily as a Traditional IRA. If I was confident gov't would keep their hands off our IRAs I wouldn't cash it in. Unfortunately I am losing trust in gov't. I don't care for the arrogance that assumes they know better how to spend/invest my money than I do. If they're so good at managing money they why the heck are we so deep in debt?

The advantage of a ROTH is that taxes have already been paid and it could be liquidated at any time, while having the advantage of tax free growth.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113717 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 5:18 PM
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although ..wondering how they do that .. . go from (high) wages to SS, IRA withdrawals, cap gains, & ???

Pensions (there are still plenty of them around) plus social security and retirement plan distributions. Investments shift towards income generating from capital appreciation. Elimination of itemized deductions as mortgages are paid off and state income tax retirement exclusions kick in.



ah ..i always forget about pensions.

[ i worked 8 yrs in the 60s for a company that did pensions .. never again did i work anywhere with a pension ]


.. and my medical deduction went way up when i retired...

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113718 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 5:20 PM
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Take care, Ken (Pessimist or realist? ;-))



that's one of those, "I'm a realist, you're a bit of a pessimist, THEY are a bunch of wild-eyed Polyannas"

(>,

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113719 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 5:25 PM
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The advantage of a ROTH is that taxes have already been paid and it could be liquidated at any time, while having the advantage of tax free growth.


i figure the Roth is the easiest to mess with ..

fewer accounts, fewer dollars, easy to say, "No more tax free Growth"



=

otoh, 401(k)s might be easy to mess with because so many people are sloppy and forget they have them (after changing jobs several times)

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113723 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 10:22 PM
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If they're so good at managing money they why the heck are we so deep in debt?

We demand more from government than we're willing to pay for. Not hard at all to see how we got where we are. It truly is a government of by and for the people.

Phil
Rule Your Retirement Home Fool

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113725 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/16/2011 10:58 PM
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We demand more from government than we're willing to pay for. Not hard at all to see how we got where we are.


Exactly

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113727 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 7:42 AM
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We demand more from government than we're willing to pay for. Not hard at all to see how we got where we are. It truly is a government of by and for the people.

I am not sure about this. How many of us are really demanding $1 trillion or more a year in military expenditure to fight wars of aggression against countries that do not even have the resources to attack us? Is it really a majority?

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113732 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 1:23 PM
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i figure the Roth is the easiest to mess with ..

fewer accounts, fewer dollars, easy to say, "No more tax free Growth"


But also the easiest to distribute if changes are unacceptable.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113733 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 2:23 PM
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i figure the Roth is the easiest to mess with ..

fewer accounts, fewer dollars, easy to say, "No more tax free Growth"

=========
But also the easiest to distribute if changes are unacceptable.



true.

"no more tax free growth" would just kill the program.
(but get those dollars into taxable accounts)

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113734 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 2:30 PM
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We demand more from government than we're willing to pay for. Not hard at all to see how we got where we are. It truly is a government of by and for the people.

I am not sure about this. How many of us are really demanding $1 trillion or more a year in military expenditure to fight wars of aggression against countries that do not even have the resources to attack us? Is it really a majority?



don't know about now .. but ,iirc, polls were like 90% in favor of Afghanistan, 70% in favor of Iraq. of course, neither was sold as a Trillion Dollar War (my WAG is there's still majority support ..combination of "we broke it, we have to fix it" and "USA doesn't quit")


but ...more on point --there's stuff in the budget for nearly everyone (i love my Medicare; someone else loves their ag-subsidies; someone else loves their wars) ; but no one's enamored of taxes and some are flat-out hostile -- so 'we' made this nasty deal: don't take away MY stuff and i won't raise YOUR taxes.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113736 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 6:02 PM
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I did not see your age. But before you suddenly generate taxable income by choice consider the cost of medicare part B. For a couple with AGI plus tax exempt interest less than $170K Medicare part B costs $96.40 per month. The highest premium currently is $253.70 per month when the AGI plus tax exempt exceeds $428K for a couple of $214K for an individual. This premium rests, but it does not happen the year after your income is high.

Gordon
Atlanta

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113737 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 6:26 PM
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"This premium rests, but it does not happen the year after your income is high."

Hi Gordon,

I'm on Medicare now. I know my premium would go up, thanks for the info. As long as it resets when my income returns to normal. I was guessing there would be a delayed effect if the gov't sets the rate based on our tax returns.

Take care, Ken

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113740 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 6:59 PM
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Ken if you have the income jump for tax year 2011, your premium will go up beginning December 2012 and it will not reset back to normal until 2013 or 2014 at the earliest. Further keep in mind these part B premiums have been held to zero increase because of a quirk in the Medicare law. Congress prohibits increases unless there is a COLA with basic Social Security. If we get some COLA, the medicare part B premiums might just 15% or more -- the law as I understand it does not limit the size of an increase, merely the increase. There is another law that says medicare part B premiums must collect either 20% or 25% of the costs -- Even though the overall CPI has not gone up since 2008, medical costs have and a lot of folks are going to be surprised when the cork is pulled out of the bottle.

Gordon
Atlanta

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113741 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 7:07 PM
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"Even though the overall CPI has not gone up since 2008, medical costs have and a lot of folks are going to be surprised when the cork is pulled out of the bottle."

Thanks for the added thoughts Gordon. I seem to recall that we're headed for a big increase, thanks to Obamacare, around 2013. Not 100% certain so take it with a grain of salt unless its confirmed.

Regards, Ken

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113743 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 9:49 PM
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I'm on Medicare now. I know my returns to normal. I was guessing there would be a delayed effect if the gov't sets the rate based on our tax returns.

While my crystal ball is permanently cloudy, recent events in Washington suggest that your Medicare premiums may be at greater risk than the status of your IRA accounts.

Ira

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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113744 of 121219
Subject: Re: Maximum Tax rate??? Date: 7/17/2011 11:13 PM
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"...recent events in Washington suggest that your Medicare premiums may be at greater risk than the status of your IRA accounts."

Medicare premiums,I believe, will be raised many times over the coming years. It was horrendously underfunded and now folks under 65 will be getting health care. Paid for by savings in the Medicare program... yeah, right. I expect limited health care ahead, we can not afford to do all things for all people.

I will be surprised if IRAs are left untouched. Probably safe until the next election...

Regards, Ken

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