Under our current tax code, The Tax Act of 1986, as amended to date, the income that we earn for income tax purposes can be subject to either ‘no taxation’, ‘regular income taxation’, or an ‘alternative rate of taxation’ know as capital gains rates.
For some taxpayers the regular income taxation rate will be defaulted to a ‘parallel’ tax system known as the Alternative Minimum Tax (AMT) and an alternative tax rate on that income which is a flat tax rate of 26 or 28%.
For individuals who are not subject to AMT, their income would be subject to one of the following tax rates – 10%, 15%, 25%, 28%, 33%, 35% and 39.6% ($400,000 single or head of household or $450,000 if married filing jointly). Well technically one who is subject to the 33% tax rate, for example, is subject to each of the 10, 15, 25, and 28% tax rates because we have a progressive tax system that taxes us at various levels as we fill up those lower income tax rate buckets with income. If we took each bucket’s tax and income number, we could calculate a weighted average tax paid from all of those buckets of income and we would call it the taxpayer’s ‘effective tax rate’. The lower one can get that effective tax rate for a given level of income, the better one will have done to ‘manage’ their tax liability on income.
For taxpayers making over $200,000, as single or head of household, and $250,000, as married filing jointly there will be an additional 3.8% tax on investment income which could be either regular income, called ordinary income, like interest earned, or capital, like capital gains. This new tax will alter how we manage our income resources.
Capital gains taxes could be 0%, 15%, 20% (taxpayers making over $400,000 single or head of household and $450,000 married filing joint), 25% (real property depreciation unrecaptured gain) or 28% if a collectible is sold at a gain.
Social Security income is tax free if we do not earn too much income so for those who are receiving social security benefits managing income and the taxability upon it is crucial. Too much income annually is defined by the IRS as $25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year; $32,000 for married couples filing jointly; and $0 for married persons filing separately who lived together at any time during the year. For every dollar of income earned over those thresholds a dollar of otherwise tax free social security benefits becomes taxable. For a taxpayer in the 35% tax bracket, for example, the loss to taxes from social security benefits becoming entirely taxable would be 32 cents on a dollar – (85% maximum of benefits that could be taxed) times (35% the marginal tax bracket). The least amount of benefits that could become subject to taxation if you go over the threshold is 50%.
3.8% Investment Tax Effect
Interest Income from a bond taxable at 35% or interest free? What is better? The formula for determining net yield after tax would be (yield) times (tax). So to determine the tax equivalent of a municipal (tax free) bond to a corporate bond we would divide the tax free yield by (one) minus (marginal tax rate). For example, before the 3.8% extra tax a taxpayer in the 35% tax bracket would have been indifferent between a corporate bond that paid 5% and a tax free bond that paid 3.25%. Now, after the 3.8% tax, the same taxpayer would be indifferent if the tax free rate was only 3.07%. Alternatively stated, to earn equivalent of a 3.25% tax free now, the taxpayer would be looking for a taxable bond earning 5.29%.
Social Security Income Taxability Management
When one is receiving social benefits it is even more important to manage the timing and character of income (ordinary, tax free, capital) so that one minimizes the impact of taxation on those benefits. Municipal bond income is tax free but it is considered taxable for purposes of determining whether or not, and how much of, your social security benefits could become taxable. To the extent the muni bond can provide more income than the taxable bond considering all of these factors it may (always run the numbers) be a tax optimizing investment choice when one is drawing social security benefits. Alternatively, an investment that provides cash flow without large taxable components to the cash flow might be a very good strategy to manage social security benefit’s taxability. An immediate annuity purchased with after tax dollars will have an exclusion ratio to the payments received that will then provide cash flow without taxation.
Concluding Thoughts and Observations
Wealth accumulation and wealth management require vigilance in both tax and risk management from an investment perspective. Tax rates have a huge impact on our net returns so strategizing for optimizing our tax impact with our own risk tolerance, and need to take risk, if any, for investment returns is an ongoing responsibility. Choices of tax-free, tax deferred, ordinary or capital gains income are very important in achieving optimal results with our resources earned over our lifetime. I hope you are maximizing and keeping all that you have worked so hard to earn.
David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA
Pingback: Keeping What You Make – Managing Taxes Owed On Income … « Tax Rate Calculator
March 19, 2013 at 1:05 am
Tax rates have really a big impact on an individual’s net returns. Everyone should be aware of this. However, sometimes strategizing with taxes may require a professional advice. That’s what financial advisors are for. They can help you to achieve optimal results and to keep all that you have worked so hard to earn.
May 12, 2013 at 7:57 am
I feel like I’ve been on the receiving end of a stampeed after reading all this. It’s bloody tough reading with a hangover.
May 15, 2013 at 10:16 pm
Whilst you could get a partner or close friend to give your
shoulders, back or feet a good rub down, to truly feel long-term benefits you should enlist the services of a trained professional to give you regular massages.
Just a few evenings ago we were at a meeting with other volunteers
to find out more about RSVP: the Retired Senior Volunteer Program.
I would recommend having a Mimosa out on the patio overlooking
the waterway.
May 16, 2013 at 10:15 am
If with the classic version, you only get to play the same game over and over again, with Simon 2
game, you get to play more games with more challenges
ad game highlights. The player who spins the coin is referred to
as the spinner. The nature of Reddit’s platform makes it possible — through great and creative effort, it appears — to give users a gift of the unexpected, rather than deriving humor from humiliation.
May 19, 2013 at 9:29 am
Dominion: Intrigue is a standalone expansion for the award-winning Dominion card game that shook the gaming world in 2008.
Understanding video gaming is a must tip on how to
run a game store. Making your game play is the next phase
you’ll be focusing on.
May 21, 2013 at 6:25 am
Could do with some extra stuff on this – any recommends as to what to read or what websites I might go to?
?
May 22, 2013 at 4:26 am
Great post! We will be linking to this great
article on our site. Keep up the great writing.
May 22, 2013 at 5:50 am
This paragraph is really a fastidious one it assists new net people, who are wishing for blogging.
May 24, 2013 at 12:11 pm
Fantastic blog! Do you have any suggestions for aspiring writers?
I’m hoping to start my own website soon but I’m a little lost on everything.
Would you suggest starting with a free platform like WordPress or go for a paid option?
There are so many choices out there that I’m completely overwhelmed .. Any tips? Thanks!
May 26, 2013 at 4:17 am
If you cannot write love poems for your guy, don’t be disappointed easily. Friendship Collection: a beautiful selection of friendship audio poems to share with your closest friends. So choose the perfect Funny Family Poems to surprise your mother and make it a special memory to always remember.
May 28, 2013 at 7:28 pm
Don’t mind looking at blogs and so forth on rainy days.
May 28, 2013 at 7:56 pm
No longer does a music lover need to bother about traveling out of range when a fantastic song comes on over the
vehicle radio. Much of your best players marketplaces in
the united states are supervised. Perfect for long
trips and for up to date information on road conditions ahead.
May 29, 2013 at 2:00 pm
(Game scheduled for December 15th with Utah State playing Toledo).
Caution: when a hole is made in a can, there may be metallic edges that can cut one’s mouth. The tables used for this unique drinking game can in fact be purchased commercially.
May 30, 2013 at 9:31 pm
I am sure this paragraph has touched all the internet users, its really really fastidious article on building up new web site.
May 31, 2013 at 4:52 am
How did this article become so messy it’s tirin reading them.
June 1, 2013 at 7:35 am
I’m sure there was a video linked to on here by someone, with some good advice on this. I can’t
see the url.
June 2, 2013 at 2:35 pm
I bought a comparable domain to this a few weeks ago, I’m hoping to add something a little different to this niche.
June 3, 2013 at 4:59 am
In other trick taking games, players can take tricks on a number of kind of contract.
Leveling up to defeat all the enemies can
be time arresting so apprehend to absorb a acceptable bulk
of hours anniversary day accepting the a lot of out of this game.
Making your game play is the next phase you’ll be focusing on.
June 3, 2013 at 3:12 pm
Hit ‘copy’ from windows and tried to paste into an android app.
I ought to retire from life.
June 8, 2013 at 2:10 pm
Thank you for every other excellent post. The
place else could anybody get that type of info in such a perfect manner of writing?
I’ve a presentation next week, and I am at the look for such info.
June 14, 2013 at 5:49 am
Do you mind if I quote a few of your articles as long as I provide credit and sources back to your site?
My blog is in the exact same niche as yours and my users
would truly benefit from some of the information you present here.
Please let me know if this ok with you. Cheers!
June 21, 2013 at 8:40 am
How did this article get so confused it’s wearisome reading em.
July 12, 2013 at 3:06 am
Appreciating the time and effort you put into your site and detailed information you present.
It’s good to come across a blog every once in a while that isn’t the same outdated rehashed
information. Excellent read! I’ve saved your site and I’m adding your RSS feeds
to my Google account.
July 17, 2013 at 9:07 pm
hello there and thank you for your info – I’ve certainly picked up anything new from right here. I did however expertise several technical points using this web site, as I experienced to reload the site a lot of times previous to I could get it to load correctly. I had been wondering if your hosting is OK? Not that I’m complaining, but sluggish loading instances times will often affect your placement in google and can damage your high quality score if advertising and marketing with
Adwords. Anyway I am adding this RSS to my e-mail and could look out for a lot more of your respective intriguing content.
Ensure that you update this again soon.
November 4, 2013 at 1:35 pm
my friend, this are a nice post. http://yorkdetection.com/shopping/louboutin-on-sale-real.html
November 28, 2013 at 4:34 am
You will discover vastly assorted seasons on Planet Earth. Protection to the exposed sections of one’s home is essential for those that reside in locations exactly where the seasonal adjustments are drastic. But, a storm door is still called for should you live in climate circumstances that are mainly made up of rain or sunshine.
bottes ugg pas cher http://tullingegym.se/uggboots-fr.html
January 23, 2014 at 6:29 pm
999 Registration is rapidly, uncomplicated and certainly at no cost so you should, be a part of our community at the moment!. The Paris ReadytoWear collections turned the big trend information tale.
cheap louis vuitton shoes free shipping http://www.qu.org/cheap-louis-vuitton-shoes-c-27.cfm
February 8, 2014 at 12:03 pm
I was suggested this blog by my cousin. I’m not sure whether this post is written by
him as nobody else know such detailed about my problem.
You are incredible! Thanks!
February 13, 2014 at 11:57 am
Hey! This is my first visit to your blog! We are a team of volunteers and starting
a new project in a community in the same niche.
Your blog provided us valuable information
to work on. You have done a marvellous job!
April 17, 2014 at 2:53 pm
Excellent post. I was checking continuously this weblog and I am impressed!
Very useful information specially the final part :
) I take care of such information much. I was looking for
this particular info for a long time. Thank you and
good luck.
September 20, 2014 at 6:50 am
Hurrah, that’s what I was looking for, what a material!
present here at this website, thanks admin of this web site.
September 21, 2014 at 2:11 am
I believe this is among the most significant info for me.
And i’m happy reading your article. However wanna statement
on some normal issues, The site taste is wonderful, the articles is actually great : D.
Excellent job, cheers
October 2, 2014 at 9:40 am
I needd to to thank you for this good read!! I certainly loved
every bit of it. I’ve got you saved as a favorite to check out new stuff you
post… how to buy followers on instagram cheap
April 4, 2015 at 3:12 am
Thank you for some other wonderful post. The place else may anyone get that type of
info in such an ideal manner of writing? I’ve a presentation next week, and I am on the look for such info.
April 4, 2015 at 6:51 pm
It’s awesome for me to have a web site, which is helpful designed for
my know-how. thanks admin
April 21, 2015 at 6:40 pm
Good information. Lucky me I came across your website by chance (stumbleupon).
I have saved it for later!
June 8, 2015 at 8:40 am
28 février 2014, 17:57 par Beno?t Jamet .Benoit_JametLe meneur des Lakers, Steve Nash, n’est p.
Comment différencier deux joueurs qui n’ont pas le même r?le, pas le même poste, pas le même age et qui n’évolue pas dans la même équipe.
La superstar du Thunder a inscrit le panier du milieu de terrain au premier tour mais il n’a rien pu faire face à la chatte au talent de Chris Bosh.
http://www.cap-soleil-oleron.com/pdf/pdf.asp
NewsWTFTerrence Jones arr锚té pour avoir donné un coup de pied à un SDF31 juillet 2013, 21:30 par Ant.
Le sophomore des San Antonio Spurs se disait聽pr锚t à relever le défi聽聽鈥?à seulement 21 ans et pour ses premières finales NBA 鈥?de défendre sur le meilleur joueur du monde.
Ces derniers ont été très actifs sur le marché cet été.
June 12, 2015 at 7:06 am
I find your article very cognitive and meaningful. Thanks for sharing this information
January 15, 2016 at 6:49 pm
Als Werbemailservice und Shopping Portal besitzen wir Kunden, die gezielt nach Schnäppchen im Internet suchen und auch mal die Preise vergleichen oder immer auf der
Suche nach Neuigkeiten sind.
January 28, 2016 at 2:59 pm
May I simply say what a relief to uncover an individual who
actually knows what they’re talking about over the internet.
You actually realize how to bring a problem to light
and make it important. More people ought to read this and understand this side of the story.
I was surprised you’re not more popular since you certainly possess the gift.
February 26, 2016 at 8:07 pm
Wie auch immer IHR Weg, IHRE Heilbehandlungen aussehen mögen, wir
begleiten Sie ganz individuell zu Ihrem Ort der Kraft und Gesundheit.
March 3, 2016 at 5:08 am
Der Tee sollte circa acht Minuten ziehen und wird morgens und abends
ungesüßt getrunken.
March 3, 2016 at 6:00 pm
Renate Jansen aus Hamburg (02.07.2013): Man sollte versuchen, ohne
Chemie auszukommen, denn die macht nur kränker, als
man ist.
March 31, 2016 at 2:18 am
Die Abwechslung zwischen Ruhe und Bewegung ist neben der körperlichen Fitness
ebenfalls ein gutes Stoffwechseltraining.
April 7, 2016 at 2:42 am
Extra-Tipp: Wissenschaftler haben festgestellt, dass Walnüsse stressbedingten Blutdruck senken können.
April 11, 2016 at 11:45 am
Der Tee sollte circa acht Minuten ziehen und wird morgens und abends ungesüßt getrunken.
May 19, 2016 at 9:09 am
Aber auch hier gilt: Vorher immer mit dem behandelnden Arzt oder einem
homöopathisch erfahrenen Therapeuten reden.
May 28, 2016 at 4:51 pm
Außerdem ist Essen etwas sehr Wertvolles, das man mit Genuss und Muße zu sicht nehmen soll.