Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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MrCheapo
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Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by MrCheapo »

Hi,

Short version of question. For those of you retired what is your typical total income tax deductions? Is it the standard $25,100 or is it more.

Long version of question. Currently we are just in the boundary of the 24%-32% federal tax bracket (and paying 10% CA state tax). When we retire our pensions will pay out about $84K a year, but with the standard deduction of $25K our taxable income is effectively $59K. So I am planning on drawing a further $21K from our IRA accounts to put us right at the 12%-22% boundary.

My strategy is what I don't use of the $21K I'll roll over into a ROTH.

So a few questions:
1) I was wondering if $25K is the typical deductions people get or is there a way to increase this.
2) Is rolling over 12% taxable retirement income into your ROTH the best approach if you have expenses less than $80K (i.e. extra income at the 12% tax rate).

I ask this question because most of my IRA investments are in 2040+ targeted accounts. I was going to move the appropriate amount into less aggressive funds.

We will retire we we are 55.

$0.00+ 10%
$19,750.00+ 12%
$80,250.00+ 22%
$171,050.00+ 24%
$326,600.00+ 32%
$414,700.00+ 35%
$622,050.00+ 37%
Last edited by MrCheapo on Sat Jul 31, 2021 11:49 am, edited 2 times in total.
jebmke
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jebmke »

We no longer have a mortgage and 99% of our charitable donations come out of our Donor Advised Fund (previously deducted while in a high tax bracket) so we are consigned to standard deduction going forward. For us it was $27,400 for 2020 since we are over 65.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by livesoft »

We do the bunching deductions thing into every-other year: Standard deduction one year, itemized the next. We get the $10K SALT and then charitable deductions. No mortgage interest.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by retiredjg »

Standard deduction for me. From what I've read around here, I suspect that applies to a large majority.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by cdc »

livesoft wrote: Sat Jul 31, 2021 11:27 am We do the bunching deductions thing into every-other year: Standard deduction one year, itemized the next. We get the $10K SALT and then charitable deductions. No mortgage interest.
+1 We do bunching, too, every other year, though we still have interest expense on our mortgage we can deduct.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by sport »

Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by Mike Scott »

Take a look at the itemized deduction instructions and form and see what you get compared to the standard deduction. If your itemized deductions are getting close to the standard deduction, you may consider "bunching" deductions into one year and taking the standard deduction other years. The recent increase in the standard deduction amount and soem of the other tax changes means many fewer people itemize deductions now.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by gwe67 »

Since you are not yet retired, keep in mind that the standard deduction and tax brackets will increase over time due to inflation and will be higher than today's values.

Also the 12% rate mentioned in your subject will be 15% in 2026.
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MrCheapo
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by MrCheapo »

gwe67 wrote: Sat Jul 31, 2021 11:35 am Since you are not yet retired, keep in mind that the standard deduction and tax brackets will increase over time due to inflation and will be higher than today's values.

Also the 12% rate mentioned in your subject will be 15% in 2026.
Ah good point, It seems everything goes up by 3+%: 12-15, 22-25 and 24-28.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jebmke »

sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by sport »

jebmke wrote: Sat Jul 31, 2021 12:15 pm
sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
Good catch! Thanks for the correction.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by lws »

Standard deductions for me too.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by Flobes »

jebmke wrote: Sat Jul 31, 2021 12:15 pm
sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
QCDs at 70.5 is a great option for Inherited IRA RMDs.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by retiredjg »

jebmke wrote: Sat Jul 31, 2021 12:15 pm
sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
That does not sound right to me. I think if the money goes from IRA to charity, it is not added to taxable income...even if only 70.5. Is that wrong?
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by MrCheapo »

For those of you saying "standard deduction". Are my calculations correct? That is my pension of $84K a year + $21K a year in IRA withdrawals together will be taxed at 12% now (and 15% in 2026)? My calculations is transition b/w 12% to 22% starts at $80K and $84K+$21K - $25K deduction = $80K?
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jebmke »

retiredjg wrote: Sat Jul 31, 2021 2:06 pm
jebmke wrote: Sat Jul 31, 2021 12:15 pm
sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
That does not sound right to me. I think if the money goes from IRA to charity, it is not added to taxable income...even if only 70.5. Is that wrong?
No; but think through the math. If you don't have an RMD you always have the option to defer the withdrawal and not have the income hit the top line. If you have an RMD the income is not optional, therefore the QCD is an incremental deduction.

Of course, if you have no other means to do a charitable donation, a QCD can be a good option. Prior to RMD a DAF is generally a better option because you can bunch the deductions and, in many cases, pick a year where your tax rate is high to maximize the benefit.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by retiredjg »

jebmke wrote: Sat Jul 31, 2021 2:45 pm
retiredjg wrote: Sat Jul 31, 2021 2:06 pm
jebmke wrote: Sat Jul 31, 2021 12:15 pm
sport wrote: Sat Jul 31, 2021 11:33 am Once you reach the age of 71.5, you are eligible for QCDs. These are even better than deductions. We use QCDs for all of our charity donations and the standard deduction for everything else.
70 1/2

But it doesn't really generate a deduction until you start RMDs which is generally age 72 for anyone who has not started one.
That does not sound right to me. I think if the money goes from IRA to charity, it is not added to taxable income...even if only 70.5. Is that wrong?
No; but think through the math. If you don't have an RMD you always have the option to defer the withdrawal and not have the income hit the top line. If you have an RMD the income is not optional, therefore the QCD is an incremental deduction.

Of course, if you have no other means to do a charitable donation, a QCD can be a good option. Prior to RMD a DAF is generally a better option because you can bunch the deductions and, in many cases, pick a year where your tax rate is high to maximize the benefit.
Thanks. I see what you mean.

I guess I am thinking of the people who want to reduce tax-deferred accounts before RMDs actually start. Doing QCDs that extra year (2 years?) might help some of them. As I understand it, DAF donations are only taxable funds, not IRA. But I've never done one and could be wrong.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jebmke »

retiredjg wrote: Sat Jul 31, 2021 3:42 pm I guess I am thinking of the people who want to reduce tax-deferred accounts before RMDs actually start. Doing QCDs that extra year (2 years?) might help some of them. As I understand it, DAF donations are only taxable funds, not IRA. But I've never done one and could be wrong.
Correct; if you want to drain down an Traditional IRA, QCDs might make sense if you have charitable donations you want to make now anyway. Of course, those same QCDs can be made from RMDs later (up to $100K). And you are correct on DAF donations. The best source of funding for a DAF is appreciated securities with unrealized long term gain.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jayoco »

I believe you need earned income to contribute to a Roth.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by jebmke »

jayoco wrote: Sat Jul 31, 2021 4:00 pm I believe you need earned income to contribute to a Roth.
Not if you are simply converting a Traditional IRA to a Roth IRA.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by gobel »

MrCheapo wrote: Sat Jul 31, 2021 11:04 am When we retire our pensions will pay out about $84K a year, but with the standard deduction of $25K our taxable income is effectively $59K. So I am planning on drawing a further $21K from our IRA accounts to put us right at the 12%-22% boundary.

My strategy is what I don't use of the $21K I'll roll over into a ROTH.
Don't forget about any taxable qdivs and capital gain distributions. That will reduce your 21k window dollar for dollar.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by RyeBourbon »

MrCheapo wrote: Sat Jul 31, 2021 2:28 pm For those of you saying "standard deduction". Are my calculations correct? That is my pension of $84K a year + $21K a year in IRA withdrawals together will be taxed at 12% now (and 15% in 2026)? My calculations is transition b/w 12% to 22% starts at $80K and $84K+$21K - $25K deduction = $80K?
Yes, your calcs are correct. It's exactly the strategy we will have. Stay under the 12/22 (15/25) line. Once on Medicare, Roth convert as needed to get to the top of the bracket. Before that we will be targeting income at 249% of FPL for ACA subsidy purposes. That will be a combination of LTCG, dividends and withdrawals from tax-deferred.
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Post by GerryL »

livesoft wrote: Sat Jul 31, 2021 11:27 am We do the bunching deductions thing into every-other year: Standard deduction one year, itemized the next. We get the $10K SALT and then charitable deductions. No mortgage interest.
I also bunch -- in even-numbered years. I don't have to worry about SALT, so I time my property tax payments. In late 2021 I will pay 1/3 of the prop tax bill (foregoing the discount that comes with a 100% payment) and pay the rest of the bill in early 2022 along with the full payment at the end of the year. I also contribute two years' worth of giving to my DAF in the even-numbered years.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by BL »

I believe QCDs are not deductible, but are tax-free. It lets you donate money that has never been taxed and now it will never be taxed. It also lowers your IRA balance and may help lower future RMDs, just as Roth conversions do.

DAFs avoid tax on increases in value of money you originally paid tax on and also gives you the opportunity to deduct if you are able to do so.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by MrCheapo »

jebmke wrote: Sat Jul 31, 2021 4:05 pm
jayoco wrote: Sat Jul 31, 2021 4:00 pm I believe you need earned income to contribute to a Roth.
Not if you are simply converting a Traditional IRA to a Roth IRA.
That's correct, I believe its a max of $7K a year.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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BL wrote: Sat Jul 31, 2021 4:31 pm I believe QCDs are not deductible, but are tax-free. It lets you donate money that has never been taxed and now it will never be taxed. It also lowers your IRA balance and may help lower future RMDs, just as Roth conversions do.

DAFs avoid tax on increases in value of money you originally paid tax on and also gives you the opportunity to deduct if you are able to do so.
QCDs reduce the amount you must report as a taxable IRA distribution. If you withdrew $250K from your tIRA but did $100K via a QCD, you just report a taxable distribution of $150K on your 1040.

Agree that it helps reduce future RMDs.

BTW, apparently you can't QCD into a DAF per multiple online search results. QCDs must go to directly to a charity.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by MrCheapo »

RyeBourbon wrote: Sat Jul 31, 2021 4:19 pm
MrCheapo wrote: Sat Jul 31, 2021 2:28 pm For those of you saying "standard deduction". Are my calculations correct? That is my pension of $84K a year + $21K a year in IRA withdrawals together will be taxed at 12% now (and 15% in 2026)? My calculations is transition b/w 12% to 22% starts at $80K and $84K+$21K - $25K deduction = $80K?
Yes, your calcs are correct. It's exactly the strategy we will have. Stay under the 12/22 (15/25) line. Once on Medicare, Roth convert as needed to get to the top of the bracket. Before that we will be targeting income at 249% of FPL for ACA subsidy purposes. That will be a combination of LTCG, dividends and withdrawals from tax-deferred.
So our strategy to stay under the 12/22 line is:

Age 55-67: Pension ($84K) and IRA withdrawals ($21K)
Age 67-: Pension ($84) + SSN ($48K) + Roth Withdrawls

The nice "problem" is we have $1.3M in our IRAs so we'll still most likely have close to $1M left over at age 67.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by sport »

secondcor521 wrote: Sat Jul 31, 2021 4:45 pm
BL wrote: Sat Jul 31, 2021 4:31 pm I believe QCDs are not deductible, but are tax-free. It lets you donate money that has never been taxed and now it will never be taxed. It also lowers your IRA balance and may help lower future RMDs, just as Roth conversions do.

DAFs avoid tax on increases in value of money you originally paid tax on and also gives you the opportunity to deduct if you are able to do so.
QCDs reduce the amount you must report as a taxable IRA distribution. If you withdrew $250K from your tIRA but did $100K via a QCD, you just report a taxable distribution of $150K on your 1040.

Agree that it helps reduce future RMDs.

BTW, apparently you can't QCD into a DAF per multiple online search results. QCDs must go to directly to a charity.
If you want the official rules on QCDs, refer to IRS Pub. 590-B
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MrCheapo wrote: Sat Jul 31, 2021 4:43 pm
jebmke wrote: Sat Jul 31, 2021 4:05 pm
jayoco wrote: Sat Jul 31, 2021 4:00 pm I believe you need earned income to contribute to a Roth.
Not if you are simply converting a Traditional IRA to a Roth IRA.
That's correct, I believe its a max of $7K a year.
A max of $7k a year per Roth IRA for contributions from earned income, but no limit nor earned income requirements for Traditional IRA to Roth IRA conversion.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by bsteiner »

Some excellent comments in this thread. To the extent you don’t need distributions for living expenses, Roth conversions at 12% are likely to be beneficial.

Note that the standard deduction is scheduled to revert to pre-2018 law in 2026.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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bsteiner wrote: Sun Aug 01, 2021 8:02 am Some excellent comments in this thread. To the extent you don’t need distributions for living expenses, Roth conversions at 12% are likely to be beneficial.

Note that the standard deduction is scheduled to revert to pre-2018 law in 2026.
Oh. That's a very good point. The problem is that the standard deduction was increased to offset removing a whole bunch of deductions such as mortgage, state income tax etc. I guess we'll see if we keep on or regress. If its the later I expect they would re-instate all the deductions they took away.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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MrCheapo wrote: Sun Aug 01, 2021 8:39 am The problem is that the standard deduction was increased to offset removing a whole bunch of deductions such as mortgage, state income tax etc. I guess we'll see if we keep on or regress. If its the later I expect they would re-instate all the deductions they took away.
The mortgage interest deduction was not removed. The state income tax deduction was capped. I'm pretty sure that the cap on state income taxes disappears at the same time the standard deduction reverts.

Some of the miscellaneous deductions that were removed as part of the 2017 change may be gone for good (at least in terms of how the law is written). The best place to find out is to look at the sections of the code that apply. I've found that once you get beyond the code and IRS documents, you tread into the whole world of unreliable internet interpretations which can often be wrong or outdated.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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jebmke wrote: Sun Aug 01, 2021 8:44 am The best place to find out is to look at the sections of the code that apply. I've found that once you get beyond the code and IRS documents, you tread into the whole world of unreliable internet interpretations which can often be wrong or outdated.
Very good advice
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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MrCheapo wrote: Sun Aug 01, 2021 8:39 am
bsteiner wrote: Sun Aug 01, 2021 8:02 am Some excellent comments in this thread. To the extent you don’t need distributions for living expenses, Roth conversions at 12% are likely to be beneficial.

Note that the standard deduction is scheduled to revert to pre-2018 law in 2026.
Oh. That's a very good point. The problem is that the standard deduction was increased to offset removing a whole bunch of deductions such as mortgage, state income tax etc. I guess we'll see if we keep on or regress. If its the later I expect they would re-instate all the deductions they took away.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

Post by Marmot »

bsteiner wrote: Sun Aug 01, 2021 8:02 am Some excellent comments in this thread. To the extent you don’t need distributions for living expenses, Roth conversions at 12% are likely to be beneficial.

Note that the standard deduction is scheduled to revert to pre-2018 law in 2026.
Last edited by Marmot on Sun Aug 01, 2021 10:15 am, edited 1 time in total.
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Re: Your Total Income Tax Deductions When Retired and Playing the 12% Tax Rate Game!

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Marmot wrote: Sun Aug 01, 2021 10:13 am
bsteiner wrote: Sun Aug 01, 2021 8:02 am Some excellent comments in this thread. To the extent you don’t need distributions for living expenses, Roth conversions at 12% are likely to be beneficial.

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