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Taxes and Early Retirement

Let's take a look at taxes and how they impact the early retiree. This is a large subject area, and one that will have unique characteristics for each of us. It is my hope that there are sufficient similarities between us so that our analysis will benefit each other. I invite you to extend and evaluate alternate scenarios, and to provide corrections/clarifications to this post.

Of all my expenses, taxes will see the most change with early retirement (health care may be another big change for many. I will leave this for a separate thread.

It has been relatively easy for me to project how most of my current expense categories will change when I leave the working world. Taxes are the one expense area that I have left without rigorous study (I did perform a thumbnail study in post http://boards.fool.com/Message.asp?id=1380025000920029 ). That is, until tonight.

The reason I have neglected an absolutely rigorous study of the tax consequences is because I really dislike doing (and paying) taxes! Whenever it came time for me to figure taxes into my projections, I just “guessed” at a rate (BTW, 15% was my guess). I have, however, harbored deep doubts as to the accuracy of my guess. Mostly I worried that my 15% guess was too low. I think this doubt comes from the vast difference in this rate vs. what I currently pay (an obscenely large percentage, IMHO).

I won't bore you with the precise details of my own situation, but I will provide a couple of examples as a point of reference. Note that neither of these examples includes the taking of SEPPs from an IRA, drawing a pension, social security, etc. I invite others to make contributions to this thread that include pensions, SEPPs, etc., starting from day 1 of early retirement.

The couples in the examples below will live off the interest from their Cash and annual sales of their equities. The draw from their tax deferred accounts, pensions, etc. will occur a “long” time in the future (20+ years). The analysis of the tax consequences for this future period is not included in this post (it is very likely to change, given the propensity of the tax laws to be continually revised). I chose this set of assumptions since it closely reflects my own situation (the dollar amounts differ, but the source of withdrawals is similar). Your mileage may vary (I would love to see analysis for your situation, if it differs).

Furthermore, I assume “worst case” for itemized deductions – that there are none. No mortgage deductions, no medical deductions, etc. The only deductions included are the “standard” deductions and exemptions (e.g. for dependents, including self). All tax calculations were derived using Kiplinger TaxCut 1999 Federal and CA State).

The examples use a retirement date of January 1, 1999 with a $1,000,000 portfolio. Portfolio is divided with 83% ($830,000) in equities and 17% ($170,000) in Cash (Bonds, MMAs or CDs). Both examples use 4% withdrawal rate ($40,000 per year) and figure that the Cash portion of the portfolio earns 7% taxable interest (current 2 1/2 year CD rates are ~7.25% APY). I calculate state income taxes at the California rate (which is one of the highest in the country, from what I understand).

Example 1:
John and Jane Smith are married and have 1 child, John Jr. They have just retired early, and the equity portion of their portfolio has 50% unrealized capital gains (i.e. they have a cost “basis” of $415,000 in their $830,000 equity portfolio). What will their annual tax burden be (federal and state)?
Annual interest earned on cash portion of portfolio: 170,000 * .07 = $11,900.00
Sale of equities required for balance of $40,000 draw: $40,000 – $11,900 = $28,100
Taxable Long Term Capital Gains (50% cost basis): $28,100 * .50 = $14,050
Adjusted Gross Income (AGI): $11,900 + $14,050 = $25,950
Total Federal Tax: $550
Total CA State Tax: $0 (yes, $0!)
Total Federal and State Tax for the Year: $550
Percent of annual withdrawal that taxes represent: $550 / $40,000 = 1.3%


Example 2
John and Jane Brown are married with no dependents. They have just retired early, and the equity portion of their portfolio has 80% unrealized capital gains (i.e. they have a cost “basis” of $166,000 in their $830,000 equity portfolio. They are happy to have a “5 bagger” portfolio). What will their annual tax burden be (federal and state)?
Annual interest earned on cash portion of portfolio: 170,000 * .07 = $11,900.00
Sale of equities required for balance of $40,000 draw: $40,000 – $11,900 = $28,100
Taxable Long Term Capital Gains (20% cost basis): $28,100 * 80 = $22,480
Adjusted Gross Income (AGI): $11,900 + $22,480 = $34,380
Total Federal Tax: $2168
Total CA State Tax: $412
Total Federal and State Tax for the Year: $2580
Percent of annual withdrawal that taxes represent: $2580 / $40,000 = 6.5%


To put this in perspective, take a look at the following table (based upon the research above, I will have to update this table with tax rates below 5%!)

Annual after tax income per $100,000 portfolio value for various withdrawal rate
and income tax rate (combined federal and state) assumptions

Tax Rate

5.00% 7.50% 10.00% 12.50% 15.00% 17.50%
------------------------------------------------------------
Withdrawal 3.50% | $3,325.00 $3,237.50 $3,150.00 $3,062.50 $2,975.00 $2,887.50
Rate 4.00% | $3,800.00 $3,700.00 $3,600.00 $3,500.00 $3,400.00 $3,300.00
4.50% | $4,275.00 $4,162.50 $4,050.00 $3,937.50 $3,825.00 $3,712.50
5.00% | $4,750.00 $4,625.00 $4,500.00 $4,375.00 $4,250.00 $4,125.00
5.50% | $5,225.00 $5,087.50 $4,950.00 $4,812.50 $4,675.00 $4,537.50
6.00% | $5,700.00 $5,550.00 $5,400.00 $5,250.00 $5,100.00 $4,950.00

For a million-dollar portfolio at a 4% withdrawal rate and a 15% tax rate, I would be left with $34,000 after taxes for expenses. If I use the more accurate 5% tax rate assumption, I will have $38,000 left after taxes, a difference of $4,000. Another way to look at this is that if I need $34,000 for after tax expenses, and I yield 5% to taxes rather than 15%, I will not need $1,000,000 to retire, but rather $894,736.84. This is a difference of over $100,000! It certainly means my early retirement date is moved forward..

Now it is important to keep in mind that, over time, the percentage of unrealized capital gains in the equity portfolio will continue (hopefully) to grow. This will have the effect of raising the taxable income of the early retiree (and thus the total tax due). It will however be a “gradual” process. For example, someone starting with an equity portfolio having 50% unrealized capital gains (50% cost basis) and achieving an annual 10% appreciation will have the following approximate cost basis after (7 years) 25%, (14 years) 12.5%, (21 years) 6.25%, etc. This process may be optimized further by selling losers to offset winners, and/or selling equities with higher cost basis earlier (thus postponing taxes on equities with lower cost basis into the future).

Well, these figures really opened my eyes, in a positive way. Here I thought my 15% “guess” may be too low (I have seen others estimate their post-retirement rate at 20% or more, making me feel even less comfortable with my estimate). This is no longer the case. I can now make an informed, very accurate projection about my tax burden after retirement. I encourage you to do the same analysis for your situation ('tis the season, and you may be pleasantly surprised).

PtSurMr

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PtSurMr,

Thanks for yet another useful analysis. I especially like seeing not only the conclusion, but the input and assumptions, so I can relate the scenario you have analyzed to my own.

Dory36
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PtSurMr srote,

Well, these figures really opened my eyes, in a positive way. Here I thought my 15% “guess” may be too low (I have seen others estimate their post-retirement rate at 20% or more, making me feel even less comfortable with my estimate). This is no longer the case. I can now make an informed, very accurate projection about my tax burden after retirement. I encourage you to do the same analysis for your situation ('tis the season, and you may be pleasantly surprised).

Excellent point!

Despite all the scary things folks hear about taxes, it is very possible that one will pay less in taxes once retired. But as PtSurMr indicates, you should do your own detailed analysis to confirm that happy circumstance.

While there remains a few anomalies in the tax code where $1 in income results in more than $1 in taxes, for the most part, as your taxes rise, your income will rise even more. You shouldn't be living in fear that 10% growth in your portfolio will force you into a higher tax bracket.

While I didn't grow up poor in Alabama like famed investor (and former CNBC commentator) Jimmy Rogers, like him "I aspire to the 39.6% tax bracket."

intercst

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"While there remains a few anomalies in the tax code where $1 in income results in more than $1 in taxes..."

Intercst: Can you explain where this anomaly exists. I can't think of any circumstances where this is true.

Joe Varga
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vargaj asks,

<<<<While there remains a few anomalies in the tax code where $1 in income results in more than $1 in taxes...">>>>>

Intercst: Can you explain where this anomaly exists. I can't think of any circumstances where this is true.


I ran into one this year when I was doing my taxes.

The last couple of years I only did 1 hour of paid engineering consulting work, so my FICA tax was $0 since the first $400 in wages is exempt from FICA. In 1999 I worked 2 hours, so my FICA wages were more than $400. The problem is that $400 in wages gets the full 15% self-employment tax (roughly $60 on $400 in wages). Someone with $399 in wages pays $0 in self-employment tax. That last $1 in income results in $60 in taxes.

It's rare, but it happens.

intercst



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The examples use a retirement date of January 1, 1999 with a $1,000,000 portfolio. Portfolio is divided with
83% ($830,000) in equities and 17% ($170,000) in Cash (Bonds, MMAs or CDs). Both examples use 4%
withdrawal rate ($40,000 per year) and figure that the Cash portion of the portfolio earns 7% taxable interest
(current 2 1/2 year CD rates are ~7.25% APY). I calculate state income taxes at the California rate (which is one
of the highest in the country, from what I understand).

Example 1:
John and Jane Smith are married and have 1 child, John Jr. They have just retired early, and the equity portion
of their portfolio has 50% unrealized capital gains (i.e. they have a cost “basis” of $415,000 in their $830,000
equity portfolio). What will their annual tax burden be (federal and state)?
Annual interest earned on cash portion of portfolio: 170,000 * .07 = $11,900.00
Sale of equities required for balance of $40,000 draw: $40,000 – $11,900 = $28,100
Taxable Long Term Capital Gains (50% cost basis): $28,100 * .50 = $14,050
Adjusted Gross Income (AGI): $11,900 + $14,050 = $25,950
Total Federal Tax: $550
Total CA State Tax: $0 (yes, $0!)
Total Federal and State Tax for the Year: $550
Percent of annual withdrawal that taxes represent: $550 / $40,000 = 1.3%


I'm having a hard time making these #'s match. I'm in a bit of a rush out the door to a BBQ (it's a toasty 95 here in Phoenix) but I did some rough calculations.

For fed, your deductions would be $1170 total, so approx equal to the $ from cash intrest. That leaves approx $14k. $14k @ 10% (lowest LTCG bracket) would be $1400.

For CA, it looks like there would be a tax of about $510 (on $20k), then deductions of $144, leaving about $350 (CA doesn't care if the gains are LT, ST, or whatever. See my post back titled "AZ vs CA taxes" for more info)

To me it looks like a total of about $1750 in taxes, not $550.

The only way I can think right now to get figures close to yours would be to assume the intrest from cash is non-taxable, like from a gov bond....but you specifically say it's not.

Maybe I am just overlooking something obvious. I'll take a second look at it when I get back sometime tonight. Cya

4aapl
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4aapl writes:
I'm having a hard time making these #'s match...
<snip>
...I'll take a second look at it when I get back sometime tonight


4aapl (and others that are interested): I will save you the trouble. If you have acrobat reader installed (download free from www.adobe.com), I have uploaded pdf versions of the Example1 federal and state tax returns. These can be viewed/downloaded at...
Federal: http://www.mbay.net/~jelliott/taxes/Example1-Fed.pdf
CA State: http://www.mbay.net/~jelliott/taxes/Example1-CA.pdf

Enjoy!
PtSurMr

BTW: a couple of additional things I forgot to mention on my original post. For early retirees that fit into similar circumstances as these examples (1) mortgage interest deduction would have a pretty negligible effect and (2) moving to a state with a lower income tax rate is not necessarily saving you a lot of money (in Example1 it saves nothing, in Example2 it would save "only" $412/year for moving from a "high" tax state to a no tax state). Both of these points have been on my radar screen as things to consider. Now, for my circumstances, I can ignore them - they are non-factors.
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While there remains a few anomalies in the tax code where $1 in income results in more than $1 in taxes..."

Intercst: Can you explain where this anomaly exists. I can't think of any circumstances where this is true.


It's also possible for early retirees who continue to work. If you retire at age 62 and continue to work up to the income level where 85% of Social Security benefits are taxed, you will face a greater than 100% marginal tax bracket.

This retiree pays income taxes, FICA taxes plus forfeits $1 of SS benefits for every $2 of additional income. What SS benefits are left are then taxed at the workers marginal income tax rate (28%) up to a maximum 85% of benefits.

($2 * 1 - (.28 +.154 )) = $1.13 tax home pay.
(2 * (.85 * .28)) = -$0.48 tax on SS benefit.
= -$1.00 benefit forfeit.

= -$0.35 real take home pay
for the extra $2 income.

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...I'll take a second look at it when I get back sometime tonight

4aapl (and others that are interested): I will save you the trouble.

Ahhh, I see my error. I forgot about Jr, and his deductions.

Once I remembered him I see how you can do it. At first it seems like $26k/year for 3 people is insanely low....but then I remembered that I am looking at $16-$18k. Drop out $7200 that I pay in rent/year and it's down to $9-11K. Without housing most of those costs wouldn't shrink by living togeather, so multiplying by 3 gives $27-$33k/year. A bit more than you are suggesting, and that's not taking into account the price differences between AZ and CA (gas being the major one right now at $1.40 vs $2.00+....but I think high gas prices are good, though i won't wander off on that tangent right now).

To me it looks like your estimations are a little low for how much they would need....but everyone has their own comfort levels and income needs. (and judging by your posts I'm sure you though about it)

My only other note is that there are a few places with higher taxes that CA. From http://www.taxadmin.org/fta/rate/ind_inc.html it looks like Montana, North Dakota, and DC beat CA by a bit. But my guess is that given this level of income with 2 married folks and a kid, it will come out fairly even.

Thanks for the good post PtSurMr.

4aapl (headed out to CA for a long weekend (and the AAPL shareholders meeting :) in just over a week)
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4aapl writes:
At first it seems like $26k/year for 3 people is insanely low
<snip>
To me it looks like your estimations are a little low for how much they would need....


Please re-read the original post. The 26K/year is taxable income only. The total draw is 40K/year. While this was only intended as an example, I will say that I find 40K/year entirely plausible for a family of three (especially without work related expenses).

My only other note is that there are a few places with higher taxes that CA

Very true. That is why I said the California rate was "one of the highest in the country". Thanks for the link.

But my guess is that given this level of income with 2 married folks and a kid, it will come out fairly even.

You can't beat zero! It will either be even or the other states will be higher.

Thanks for the feedback 4aapl. I respect your thoughts and appreciate your scrutiny.

PtSurMr

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Please re-read the original post. The 26K/year is taxable income only. The total draw is 40K/year.

Ack!

Apparently my brain was baked into a thoughtless mush by sitting out by the pool at the BBQ all afternoon. <grin>

Example looks great now. The only crack in the logic I see is if a major redistribution in the taxable account is needed at some point in time. If it wasn't for that I would be (almost) ready to pack up shop here and move back to CA when I say adieu to working life. (my port will probably incure some major redistribution/diversification efforts to lower the risk....though if I do this I should probably move to someplace like NV for a bit)

4aapl


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PtSurMr, Thanks for the examples. I knew my taxes were going to be low, but it's much clearer seeing the numbers. This year will be my first year to not be paying tax on earned income(slave wages).
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JimmySD writes:

Thanks for the examples. I knew my taxes were going to be low, but it's much clearer seeing the numbers. This year will be my first year to not be paying tax on earned income (slave wages).

You are welcome. It must be a truly liberating feeling! I look forward to joining you.

For the 1999 tax year, my combined Federal and State income taxes were into the 6 figures (after all deductions). They were 4.6 times what my family and I spent on us for the year! Is it a "just" tax system that compells someone to give their governement nearly 5 times more than they spent for their own family's wants and needs? I am actually outraged by this fact (but I will not go there in this thread... I will stay on topic, I will stay on topic, ... To read my recent thoughts on this matter, look at http://boards.fool.com/Message.asp?id=1380313000166033 and http://boards.fool.com/Message.asp?id=1380313000166036 )

Anyway, I am surprised that more folks have not responded to this thread. After I ran the numbers, the conclusions were so (pleasantly) unexpected that they might as well have been that the moon really was made out of cheese! I mean, going from a current 6 figure burden to one just in the $1000 ballpark is, well, exciting.

Perhaps I was alone in thinking my total combined (fed and state) income tax burden would be in the 15-20% range? Were the examples so different from what other early retirees expect? Am I alone in the excitement of these findings? This has a pretty significant affect on reducing the size of the required RE portfolio, at least for those expecting similar draws. What gives?

PtSurMr

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Perhaps I was alone in thinking my total combined (fed and state) income tax burden would be in the 15-20% range? Were the examples so different from what other early retirees expect? Am I alone in the excitement of these findings? This has a pretty significant affect on reducing the size of the required RE portfolio, at least for those expecting similar draws. What gives?

I was impressed with your numbers, but my own situation is so different I can't address all the variables without spending lots of time on it. Briefly, my intent will be to keep myself in the 15% bracket for as long as possible while moving as much as possible from IRAs to taxable LTBH accounts. This will require creative use of debt and other tricks to (legally) postpone or minimize taxes.

1HappyFool -- who will, in only 35 days, have more time to crunch numbers.
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I am surprised that more folks have not responded to this thread.

From seeing all the posts on various calculators and SEPP questions. This is a bunch of people who like doing the math. My fed tax if so simple I can do it my head. But CA tax I haven't done yet without the slave wages. Someone posted that the little bit of state tax in your 2nd ex. wouldn't enter into his where to live quest after reading your post. I ditto that. My wife and I are always pondering where best to live. And then it snows someplace and we think we better just think this through so more. No reason to be hasty.
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PtSurMr wrote,

For the 1999 tax year, my combined Federal and State income taxes were into the 6 figures (after all deductions). They were 4.6 times what my family and I spent on us for the year! Is it a "just" tax system that compells someone to give their governement nearly 5 times more than they spent for their own family's wants and needs? I am actually outraged by this fact.

I just want to make sure I understand your statement "For the 1999 tax year, my combined Federal and State income taxes were into the 6 figures"

Are you saying you paid maybe $150,000 in income taxes? That means your gross family income would be around $400,000 per year.

If I take the $150,000 and divide by 4.6, that means you're spending about $32,000 per year? That's what I call living below your means (LBYM)! You should be able to retire inside of 5 years with that kind of savings rate.

intercst
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intercst writes:
I just want to make sure I understand your statement "For the 1999 tax year, my combined Federal and State income taxes were into the 6 figures"

Are you saying you paid maybe $150,000 in income taxes? That means your gross family income would be around $400,000 per year.

If I take the $150,000 and divide by 4.6, that means you're spending about $32,000 per year? That's what I call living below your means (LBYM)! You should be able to retire inside of 5 years with that kind of savings rate.


You are in the ballpark (I shy away from giving any more specific details than I already have). I am working very hard right now so that I can realize my goals sooner. I recently (1 year ago) had a new son, and I really want to be able to spend my time with him. I also have a teenage son from a prior marriage. Though he lives out of state, we do spend time summers together. The time we spend together is priceless, and is growing more in quantity and quality yearly. I want to have more of it! But I want to have it responsibly (i.e. not at the expense of other taxpayers, public assistance, charity, etc.).

Our family has decided some sacrifices are worth the delayed gratification for the long-term gain. (Actually, when you realize what you get for what you give, sacrifice is not the correct term. That is like saying you sacrifice $45/month for electricity. Considering the benefits we receive for our $45, I call this a bargain). We analyze these choices carefully. Though early retirement is a high priority goal for us, it is not the only such goal. We do not sacrifice all to achieve this one objective. For example, prior to having our newest son, we decided it was very important for one us to stay home to care for him. We placed a higher value on having one of us raise our son full-time than the alternative. The wife received this honor, and we gave up her 45K/year Federal Employee income (and the great benefits, including group health).

Having her additional income and benefits would have helped achieve our ER date earlier. It was not worth the trade off. Some things are, some are not. The key for us is living a thoughtful life. We try not to make decisions without considering the impact on our highest priority goals and values (spiritual beliefs, family, environment and community).

PtSurMr (who is now rambling far off the topic of this post, and begs the understanding of the audience).
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From seeing all the posts on various calculators and SEPP questions. This is a bunch of people who like doing the math. My fed tax if so simple I can do it my head. But CA tax I haven't done yet without the slave wages. Someone posted that the little bit of state tax in your 2nd ex. wouldn't enter into his where to live quest after reading your post. I ditto that. My wife and I are always pondering where best to live. And then it snows someplace and we think we better just think this through so more. No reason to be hasty.

CA income tax is designed to extract the most (as a percentage) from those with high income and the least from those with low income. CA gets you on property taxes and sales taxes. People who buy property now are subsidizing people who bought property years ago and they therefore need to stay in one place for a long time to be subsidized by future purchasers.

Tax burdens are roughly equivalent everywhere, because the states all have the same kinds of programs. CA is a little more into social engineering than other other states, but probably not the worst.

1HappyFool
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Tax burdens are roughly equivalent everywhere, because the states all have the same kinds of programs. CA is a little more into social engineering than other other states, but probably not the worst.

OK, but still I'm delighted to be replacing California's 9.3% income tax rate with Nevada's 0%. I intend to celebrate when I get there next month and establish Nevada citizenship with my very first ever withdrawal from my IRA.

People who buy property now are subsidizing people who bought property years ago and they therefore need to stay in one place for a long time to be subsidized by future purchasers.

The real subsidies go from payers of property taxes who are not using the city schools to the users of those schools. I'm selling a California house that I've lived in for 26 years. The purchase price is several times my current assessed value, so the property tax will rise by hundreds of percent. Is this a good deal for taxpayers? I don't think so. I've never had children in public school. Even one school child living here will cost the taxpayers several times the new property tax. It appears that there will be many children living in this house soon. California's taxpayers evidently do too little to coddle us geezers and get us to stay, less even than is the taxpayers' own interests. Meanwhile, the federal government is doing a bang up job importing poverty.

the grizzled Chips, soon to make good his escape from Sacramento's reach, and recommending that anyone with a taxable income retire outside California
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OK, but still I'm delighted to be replacing California's 9.3% income tax rate with Nevada's 0%. I intend to celebrate when I get there next month and establish Nevada citizenship with my very first ever withdrawal from my IRA.

Nevada has the best kind of tax. It's called a "Let them touristas pay the stinking taxes" tax.

Be careful with form 540NR. It might find a way to get some of that first IRA withdrawal. I would be awful tempted to take that first withdrawal in the next tax year to sever any relationship between the last year that you paid any CA taxes and the year of the withdrawal. I got double taxed on income earned in VA during the year I left CA.

1HappyFool -- who isn't very happy with CA's taxes.
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Chipsboss writes:
the grizzled Chips, soon to make good his escape from Sacramento's reach, and recommending that anyone with a taxable income retire outside California

Chipsboss, what is your reponse to the two examples I posted at the start of this thread? The families in these examples take a 40K / year draw, yet pay either $0 or $412. This is a far cry better than 9% (9% of 40K = $3600. The 9%+ rate is onerous, unjust and unfair. However, it does not affect most early retirees (unless they have quite a lot more retirement income than I plan on). Have you run the actual calculations on what the CA state income tax would be for your projected/actual retirement draw?

PtSurMr
(Who used to be of similar persuasion, until he ran the actual numbers. He now concludes that CA state income taxes will be small enough, for him, to be considered a non-issue).
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I am surprised that more folks have not responded to this thread

I didn't respond sooner because I think my case is not of general interest and posting it is redundant. Here's a sketch of it anyway, since TMF's search function seems out of order today:
• age 60,
• retired for seven years,
• no dependents or heirs,
• no debts (house is paid off),
• (very) small corporate pension started, no COLA
• (rashly?) planning to draw social security starting at age 65 and 4 months,
• managing the retirement stash to hold both its purchasing power and my after-tax standard of living as level as possible for the next 35 years,
• that stash is over 30 years worth of my after-tax budget and mostly in an IRA
• only small withdrawals (around 2%) from the IRA in my 60's, then the legal minimum withdrawals thereafter
• 4% real return annually on assets invested chiefly in S&P 500 index fund
• 4% annual inflation
• 6% annual return (dividends and realized capital gains) in the taxable account, with the other 2% return being unrealized capital gains

Results of my predictions:

During my 60's, my income taxes will average 17% of my income and 0.6% of my financial assets per year; thereafter, my income taxes will average over 23% of my income and 2% of those assets per year. The tax jump comes from the required IRA withdrawals after age 70. The benefits of tax-deferred growth are so great that depleting my IRA faster would not benefit me given my determination not to erode the purchasing power of the retirement assets.

For this, I need a 2.95% withdrawal rate in my 60's and a 4.0% thereafter. So, I achieve independent results quite consistent with the safe withdrawal rate studies. That feels good.

Chips, planning to avoid estate taxes by bequeathing most of these assets to a tax-exempt foundation
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OK, but still I'm delighted to be replacing California's 9.3% income tax rate with Nevada's 0%.

Is that every dollar of capital gains. Is there a STD deductions and is it graduated? Sorry if I'm asking something the might be complicated. Jimmy
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OK, but still I'm delighted to be replacing California's 9.3% income tax rate with Nevada's 0%.

Is that every dollar of capital gains. Is there a STD deductions and is it graduated? Sorry if I'm asking something the might be complicated. Jimmy

CA taxes are graduated up to 9.3%, hitting that level at something like $54k for a single. And there are STD deductions and so forth.

NV taxes are a flat rate of 0%. No need for deductions. If you feel you need to pay a tax just head on over to a casino. (much more entertaining way to pay your taxes too <grin>)

4aapl
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... For the 1999 tax year, my combined Federal and State income taxes were into the 6 figures (after all deductions). They were 4.6 times what my family and I spent on us for the year! Is it a "just" tax system that compells someone to give their governement nearly 5 times more than they spent for their own family's wants and needs? I am actually outraged by this fact (but I will not go there in this thread) ...

It may be 'just' because our income tax system taxes income, not expenditures. Try living in most other countries where they tax income and expenditures via a VAT (Value Added Tax) which in many cases is 20% or so. (on all goods and services !)
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I was impressed with your numbers, but my own situation is so different I can't address all the variables without spending lots of time on it. Briefly, my intent will be to keep myself in the 15% bracket for as long as possible while moving as much as possible from IRAs to taxable LTBH accounts. This will require creative use of debt and other tricks to (legally) postpone or minimize taxes.


This may or may not always be a good strategy, it depends on many variables. If, for example, you kept as much income out in early years as possible to remain in the 15% bracket, but at age 70.5 you sudddenly rise to the 39.6% bracket, it may have been better to allow some income to creep into the 28% bracket in earlier years to prevent it from being taxed at 39.6% in later years. (perhaps reducing your bracket to 36% or 31% instead in later years)
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Thanks for the warning about the 540NR. I think the crucial issues are to re-register my car, my driver's license, my voting address, and get local banks, brokers, doctors, clubs, etc. to show a bona fide new citizenship. I exchanged messages with California's Franchise Tax Board on this subject, as posted here:

http://boards.fool.com/Message.asp?id=1380025000461020&sort=id

My admitedly flawed crystal ball says that the situation in California will only get worse, as tax payers continue to flee the state and new people pour in, demanding far more government service than they intend to pay for personally. The next reapportionment (gerrymandering, that is) will destroy all effective opposition to the majority party since they already control both houses of the legislature and the governorship. (In 1984 I counted up all the popular vote for Congress in California. The two parties split the popular vote almost exactly 50:50, and the resulting Congressional delegation was 60:40. That's the power of the gerrymander.) An acid test will be passage of the proposition on the November ballot to make selling bonds and raising property taxes easier.

May history show that I'm dead wrong in my predictions.

Chips, leaving California where his family has lived for 95 years
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Jimmy, California generally follows federal income tax law. IIRC, one of the exceptions is that California treats mutual fund distributions as ordinary income, even if they are in fact long-term capital gains. Actually, I don't know the ins and outs of the California tax torture, since I let the tax software handle the details for me. I just do the withholding and pay the final bill.

the grizzled Chips, looking forward to filing no more state income tax forms ever, ever
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You in the Carmel area live in one of the world's most beautiful places. If you don't find California's tax burden burdensome to you personally, that's terrific. It won't pressure you to leave your Eden.

I told my story at http://boards.fool.com/Message.asp?id=1380025000906010 Briefly, when I first retired seven years ago, I had twenty years living expenses on hand and was in a position something like the people in your examples. Since then, the assets have supported me and more than tripled in value. My tax situation changed as a result. I'm pulling income (optional income from IRA withdrawals) into my 60's to make more use of the 28% federal tax bracket, rather than have quite so much in the 36% federal bracket after age 70. That federal tax bracket reduces the effective California top tax rate to around 6%, since state income tax is deductible. My federal income tax will come to an average over 23% of all income each year after 70. Adding 6% to that doesn't appeal to me. All this is based on the conservative estimate of 4% annual real return in the S&P 500.

Chips, who supports your recommendation that people do the calculations themselves
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This may or may not always be a good strategy, it depends on many variables. If, for example, you kept as much income out in early years as possible to remain in the 15% bracket, but at age 70.5 you sudddenly rise to the 39.6% bracket, it may have been better to allow some income to creep into the 28% bracket in earlier years to prevent it from being taxed at 39.6% in later years. (perhaps reducing your bracket to 36% or 31% instead in later years)

Well, I did a spreadsheet that showed the effects of using debt interest to cancel investment income and increasing my IRA withdrawal to set my taxable income at the CPI indexed 15/28 margin. If my real ROI is only 4%, my IRA can be depleted by age 71 but my taxable port and my net worth will rock. If my expenses stay below the 15/28 margin and my investments do really well, I'll run the risk you mention but in that case, I too aspire to the 39.6% bracket. Of course, uncle sam could screw this up six ways from sunday, but I'll try to keep all the balls in the air for as long as possible.

1HappyFool --
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From a friend on another MF Board!

Oh! By the way I better get at least 150
recommendations for posting this post!!!

MoonBucks
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Yesterday I had the pleasent experience of submitting a post that generated at last count
45 recommendations. I think my previous high was 5, and I think that many of you (at
least 75%) would agree with me that 45 is more than 5. Thus by narrowly beating my old
record it brought to my attention some things that I had only vaguely been cognizant of
before.
After doing some exhaustive research-almost 11 minutes (or twice the average time some
spend researching a company before flipping a coin and saying heads I buy, tails I don't),I
have had the following revelations. Revelation # 1(and you can imagine my disappoinment
when I found this out):The stars next to your name are not given out for
recommendations,but for the # of posts i.e 50,250 etc. Revelation # 2: some people really
care about these stars and recs. Revelation # 3: Some people really care about these
stars. I came across one person who was begging for recommendations to reach his goal
of 200. I also discovered that there is evidently a board for people to post just to get stars
or where you can say anything and get a recommendation. As I find that the number of
my posts is whoafully inadequate and that I am not even half way to my first star it has
become increasingly clear that I must dramatically increase the number of my posts to
obtain a coveted star. The following is a list of tried and true ways to increase both the #
of your posts and in some cases your recommendations.
First-2 disclaimers:1) My tongue is firmly in my cheek and I in no way wish to belittle
anyones posts. 2) I am LTBH on xyr2d2 and own 1 1/2 shares.
Top ways to increase your postings
1. Ask when the split date is.
2. sumbmit a post flaming anyone with the audacity to ask # 1. (make sure you include
some profanity to show that you are a genius and your intelligence has been insulted).
3.Submit a poll such as this:What do you think(insert stock symbol here) will close at
tomorrow-be sure to include the appropriate responses which in this case would be
Yes,NO,Maybe and I thought this was ebay where do I submit my bid.
4.Submit another poll.
5.Post an obscure news item (the more meaningless the better) and state emphatically
that this will cause your stock to skyrocket the next day.
6.Submit a post proclaiming that you have lost all your money trading on margin (this one
is also good for 1500 recommendations--Yeah I know I felt bad for him too) I do not
personally reccomend this method.
7.Submit a post stating what the price of a stock will be by years end (make sure this is
not based on p/e;sales or market conditions but on absolutely nothing). This can also be
done with a poll: What will this stock do in the next year? rise
100%;200%1000%;12000%. Be sure not to include anything under 100% as that would
be plain silly.
8.Scour TMF looking for a board with 199,499,or 999 posts. When you find one post the
following:Hey we made it to 500 posts, yeah! it is not important to add anything else here
as the significance speaks for itself.
9.Ask if any one knows anything about such and such a stock--make sure not to do any
research beforehand as that would spoil it for those who eagerly await their chance to
respond.
10.Compile a list of ways to increase your posts.
11.I never said this was a top 10 list!
12.Respond to the most annoying person on the board asking them to either chill out or go
elsewhere. Ask those who agree with you to recommend this post. This is good for many
recs. and is much preferred to losing all your money on margin.
13.Submit a post stating emphaticallly your LTBH stance on a stock you have owned for
3 days
14.Submit a post that says XYZ ROCKS!!! Remember to recommend this type of post so
the rest of us can enjoy it too.
15.Submit a poll.
16.Okay there is no 16, but I wanted to increase the quantity.

P.S. When is the split date for XYR2D2? I can't wait to have 3 shares and see my money
double overnight!

P.P.S. Be sure to reccommend this post-do not force me to beg at Gimme some stars.

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I got double taxed on income earned in VA during the year I left CA.

I second that warning... I am getting screwed without getting kissed by the great state of CA this year because I didn't have the foresight to change jobs and move to Connecticut exactly on January 1. Probably you would want to establish Nevada citizenship so that the first tax year you are withdrawing from your IRA the sunshine state has no further claim on you.

FoolLaLa -- who right now wishes she'd never heard of California

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<lengthy list of ways to get more posts...>

I think the lack of the types of posts referred to on this list is one of the several reasons that I'm now hanging out on this board more than any other...

Even the polls here generate meaningful discussion.

OK, this has absolutely nothing to do with Tax Projections for ER. Sorry.

:)

FoolLaLa
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1HappyFool:
I got double taxed on income earned in VA during the year I left CA

FoolLaLa:
I am getting screwed without getting kissed by the great state of CA this year because I didn't have the foresight to change jobs and move to Connecticut exactly on January 1.

Could the 2 of you give some more info on this. When I moved from CA to AZ at the start of July in 98 things went smoothly, both then and come tax time. MOT paid for someone to do my taxes, but looking over them they were cake...even with the money I made from investments. I had earned a few thousand while in CA at a temporary job I took right after graduating to give me some extra cash. It was the only thing that ended up being taxable by CA, as my first stock sale was in August.

I looked over my tax filings and was pretty thorough at looking through the CA tax publications when I was reasearching a previous post I wrote comparing AZ and CA taxes

http://boards.fool.com/Message.asp?id=1380025000507000&sort=id

One main point that I found is that CA wants to tax anything that you earn from that state. For example, I'm looking at teaching some Mac OS X Server courses. Under the CA tax code, if I taught a class in CA I would have to pay CA taxes on that money, even if my residence is in AZ.

There were also a couple of things in the residency section, about how they decide if you are a resident. It included the normal things (housing, car reg, drivers lisence) but also ones not as common (where you are spending your money (Credit Cards and ATM), "country club" fees, where your friends are). Seems a bit much, but with it being one of the most popular places to live and also having one of the highest state taxes, you know there has to be lots of people looking for ways around it. And infact somewhere in there is lists specifically whether the goal of moving somewhere was to avoid taxes. I forget the specific pubs, but I listed them back in one of my AZ vs CA responses.

Also of note was that in the AZ taxes, there is a place to subtract out money you're having to pay taxes on in another state. So, if I was paying CA taxes on income from teaching classes, I wouldn't also have to pay AZ taxes on it.

I don't mean to be defending CA too much. While I might be moving back there at some time, if all things were equal I would just as much assume some other place not as crowded (that INTJ showing it's stuff???)

But since I might be moving back I would love to hear more specifics in how you got screwed by CA. The more I learn about it, the better prepared I can be.

Thanks

4aapl
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<1>Could the 2 of you give some more info on this. When I moved from CA to AZ at the start of July in 98 things went smoothly, both then and come tax time. MOT paid for someone to do my taxes, but looking over them they were cake...even with the money I made from investments.

For me this occurred in '94. I moved from CA to VA in NOV and had supplemental relocation pay (bonuses) paid to me in VA in DEC. CA taxed 11/12 of those relocation payments as ordinary income by withholding them from my refund and forcing me to add them to form 540NR because it did not have some kind of reciprocal agreement with VA. VA taxed the full amount because I received it while living in VA and because it was reported as VA income on my W2. The details are a little fuzzy now, but I remember reviewing the form multiple times and finding no way around it. I think the cost to me was an additional $300, which I just considered to be a parting dagger in the back from those a******s in Sacramento.

1HappyFool who thinks the cost of leaving CA was relatively cheap (considering the benefit).
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Thanks for the info 1HappyFool.

Strange that I had the same exact thing (moving expense in the form of a bonus midway through the year), but didn't have that problem. Were the 2 jobs for the same company? Or was the bonus paid by the CA company?

It also might be that the rules changed since then.

I'll definitly have to take another big look at the CA tax issue before moving back....especially since I'll probably need to do some big adjustments/diversification (I can't say I really enjoyed seeing my port go down 17% yesterday <ungrin>...but such is the life of the concentrated and margin heavy port) to my port on or around R-day.

Taxes aren't everything, but saving several thousand by living on the NV side of tahoe is sounding more and more tempting <grin>

4aapl
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Were the 2 jobs for the same company? Or was the bonus paid by the CA company?

It also might be that the rules changed since then.


The two jobs were for the same company. I suspect that CA has reciprocal agreements with adjacent states but not distant states. The amount of movement between adjacent states would be greatest. Then again, the rules might have changed as you said. The feds beat on CA a few years ago for other double taxation practices and this may have been resolved.

1HappyFool
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