How to calculate your tax bracket for retiremenet?

Question

Hi guys,

How do you calculate your tax bracket for when you retire?

Can you please correct me if I am wrong:

Lets say you have 10 paid off houses that each bring you 1k so total you have 10K per month. Plus lets say you have 1 mln dollars in your 401K.

So when you retire you withdraw 4% per year from your 401K, which is 40K (if I am not mistaken) plus 120K in rents yearly.

So 40K+120K=160K Does it mean you will be in a 24% tax bracket?

Lets pretend there is no any deductions, depreciation, nor anything else that complicates matters...

Eamonn McElroy · Answer

The problem is, if I do not do a research myself on a question then I am lost when an accountant is trying to explain me something.

Generally...the solution to that problem is to tell the professional you don't understand, and ask them to clarify...

Attempting to educate yourself on the minutiae of tax mechanics is the very, very inefficient solution to that problem.

If an attorney is explaining a legal concept to me, and loses me in the details, I interject and bring it back to high-level concepts until I have an understanding. I don't try get a legal degree so I can understand him.

Not all tax practitioners are skilled at explaining tax concepts to laypeople. In fact, I'd say that most aren't. You may need to be more transparent with your professional.

There are various types of income, and they're not all taxed the same. Therefore marginal tax bracket is more an informational item, usually framed in the context of how much one saves via a deduction of $X amount. Outside of that context, it matters little.

For example, at most, 85% of social security is taxed, not the full 100%. Long-term capital gains have different tax brackets. Collectible gains have different tax brackets. 1250 gains have different tax brackets. Qualified dividends have different tax brackets. The Foreign Earned Income Exclusion influences tax bracket, even though it provides an exemption from taxation. And then we have to consider state marginal bracket. Many states do not tax, or provide an exemption for, retirement income. But not all do.

To be frank, the big problem is that you're trying to oversimplify a complex issue:

Lets pretend there is no any deductions, depreciation, nor anything else that complicates matters...

That's like asking how a car works, and then saying let's ignore the tires...the spark plugs...the gas... anything that complicates things.

Well, those things matter... a lot...

Michael Plaks · Answer

@Mary Jay

Your goal of "calculating a tax bracket" is pointless.

Let me explain on an example. You receive $50k from rentals (net after all expenses, including depreciation) + $30k from retirement + $20k Social Security. Your total income is $100k. If you use tax software, you will find out that your tax bracket is 22%.

22% of $100k is $22k. However, your taxes for the year are $14k, not $22k. Why? Because tax bracket only applies to the next dollar. If you make another $100, then it will cause you an extra $22 tax. But on the existing $100k, your total tax is calculated in a very complicated way. Complicated not just for you, even for us accountants. I have no way of estimating this $14k without software.

So, even if you knew your tax bracket, it would not help you estimate your taxes.

Mike Cumbie · Answer

Hi @Mary Jay

It is really an impossible question to answer. You are saying that you have 10 paid off houses, there is no way to deduct any "property management, repairs, maintenance, taxes, advertising, depreciation" on any of them. Also there is a mil in 401K. Is it pulled out straight? Is it in investments? If you are just putting everything in a savings account and no income is generated but you are cashing out and just want a number for liquidity..... If we are taking your numbers at what they are, then sure. Based on current rates 160K a year is in the 22% tax bracket for 2020.

However if I was in that scenario I would waste no time paying a CPA to figure this all out. Well worth the money in my eyes. Trying to 1040EZ that idea or using an accountant at "Local retail store" is just going to cost you a ton. Accountants spend 10 hours a week keeping up with all of the changes and finding how it can help their clients. Use them

Good luck in whatever you decide to do!

Michael Plaks · Answer

Hmm, maybe this is what my mechanic has been trying to tell me for the last 20 years. Something about gas or plugs.

Mary Jay · Answer

Thank you guys all so,so,so much!Honestly, Ive been just trying to see if I should convert my 401K into a Roth.

You know how they say: "If you anticipate that at your retirement you will be at higher tax brackets then convert now."

But its really hard to calculate my tax bracket in my retirement...

Ryan Lane · Answer

@Mary Jay I agree with others have said. On the most simple level, that is how you would determine your marginal tax rate. That is, the tax you would pay on the next dollar earned. To determine your effective tax rate "ETR" you would look at the 1040 publications and tax bracket tables. They'll help you determine the amount of tax you pay at every level. You would then sum up the total tax you paid, divide it by your total income and that gives you your ETR. Your ETR, in almost every scenario, will be less than your marginal tax bracket.

Like others said, don't forget your state income taxes either. That will increase your tax burden significantly too (unless you live in one of the few states that doesn't have income taxes).

Carl Fischer · Answer

Look at 1040 publication tax tables. They are graduated the first 12k is tax free, then it starts going up incrementally until you reach the max
take your tax return and put the tax you pay divided by the amount you made and that is your tax rate. Use turbo tax or ask your accountant.

Mike Cumbie · Answer

@Mary Jay

I understand your thought process. But I would suggest a different question. Something more like "If my calculated taxable income was 160K, what tax bracket would I be in". Then the answer is much easier". The difficulties are getting you to your taxable income. Sure 1 McDonalds sells 4,000 Big Macks a day for $2.00 a piece, sounds like they are taxed on $8,000 a day, But the truck to drive it there costs, the burger costs, the lettuce costs, the franchise fee costs, the employees and their employment taxes cost, the lights cost, the driveway pavement costs, the water for the bathrooms cost, the depreciation for the new chairs cost, the land tax costs. There are so many variables that just saying "I make 10K on a paid off rental what's my bracket?" is not a number that can be answered. Imagine if someone owns 3 McDonalds that each sell different amounts of Big Macs?

That's why we hire accountants (Because part of that is my accountant costs). What are the fuel costs for the lettuce on a big mac? If they got it from a local store or from a farm in Idaho? How much are the costs of sugar packets, and their associated costs based on the cost of paper packaging in Mexico?

So your original statement of "Lets pretend there is no any deductions,depreciation, nor anything else that complicates matters..."

Then it's an easy answer, just find the federal and state tax rates (Pay taxes on $8,000 a day in Big Mac sales)

Mary Jay · Answer

The problem is, if I do not do a research myself on a question then I am lost when an accountant is trying to explain me something.

If I do do a research on a question (and I am doing a research on the question by googling things and asking you guys) then I do understand things much better when an accountant is trying to explain me something.

That is just how my brain works...

Mary Jay · Answer

I want to understand how to calculate a tax bracket, just for the understanding sake.

How to calculate your tax bracket for retiremenet?

How to calculate your tax bracket for retiremenet?

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