
Transition Tax Topics: Your REAL Tax Bracket
Taxes Videos
- 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.