Transition Tax Topics: Your REAL Tax Bracket Thumbnail

May 18, 2020

Transition Tax Topics: Your REAL Tax Bracket

- Welcome to Curt's Chalk Talk. The transition tax topic series. I'm Curt Sheldon with CL Sheldon and Company, and today I want to talk to you about your real tax bracket.

Now most of us think in terms of I'm in the 22% bracket, or I'm in the 25% bracket, but in your case after you retire you're going to have to think another level deeper.

Let's take an example, let's say you've got two kids in college. You used your GI bill on Junior, so you're footing the bill for these two kids. You're working your job, and you've got an income of $160,000 dollars when combined with your military retirement. The boss comes in one day and says congratulations, you got a promotion, we're going to give you a $20,000 dollar raise which will increase your income to $180,000 dollars. You're squarely in the 22% tax bracket with your deductions, how much will your income go down?

Well let's see if we can walk through that. We've got a $20,000 dollar increase multiplied by 22%, that's about $4,400 dollars. Uh oh, you just hit the threshold for the American Opportunity Credit. That $5,000 dollar credit you were getting on your taxes for paying for the kid's college, it's gone. You're going to pay about another, oh let's say $1200 dollars in social security taxes, depending on what rank you retired at. You're gonna pay about $250 dollars in Medicare taxes. And if you live in a state with income tax like I do in Virginia, you're going to pay about another $1,000 dollars in state income taxes, for a total of $12,080 dollars in taxes, or a tax rate of 60.4%. Now it won't always be exactly like this, but you've got to think beyond your tax bracket. You've got to look at the credits that you might lose to see whether taking that $20,000 dollar increased responsibility that comes with it is worth it. Again, you want to think both levels on this.

Now if you'd like some more information on things you need to know financially as you make the transition, check out our checklist. You can get it at www.CLSheldon.com/tax, that's a financial checklist for retirement at www.CLSheldon.com/tax.

Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.