My Marginal Tax Rates 1997 - 2018

I've been employed for the past 21 years with a healthy salary.    Over that time my base salary has gone up about 5% annually in total.    It grew faster in the first 10 years then the raises slowed down as I peaked within my job role.    At the same time my marginal tax rates have gone down.

Here is the plot of my personal federal income tax marginal tax rate :

I got the marginal tax rates from the information at the Tax Foundation up to 2013 and at Moneychimp after that


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Rental Sale Tax Calculator

I found a calculator that figures your tax bill between capital gains, depreciation recapture and medicare tax :

Capital Gain Tax Calculation

Use it for estimation purposes only.

The calculator is hosted by Asset Preservation Inc. who handles 1031 exchanges.     I am not a CPA or anything and I can't attest to the 100% accuracy of the calculator but it looks correct to me.    


We've got a rental property for which my initial investment was about $50,000.   If I sold that property today for $55,000  then my tax bill would be about $4750.   Huh?    Yeah.   Taxes would eat up almost my entire gain.   If our income was significantly higher we'd get hit with the new 3.8% Medicare tax and the bill would be $5548.    I could theoretically have a tax bill that eats up over 100% of our gains.   Yikes!     Well almost all of that is due to depreciation recapture.   I've owned that property for over a decade and would have to repay the depreciation at 25%.   That alone accounts for ~$4500 in taxes.   Remember folks that depreciation on rentals is really just tax deferral.

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Who Paid the 91% Tax Rate In The 1960s?

Back in 1960's we had a 91% top marginal tax rate.   Gee thats high.   It must have sucked to be a rich  1% guy back then... or did it?    Who actually paid that 91% rate?

The 91% rate was on only the top marginal income.   In Tax Foundations history of the tax rates we can see that the 91% rate was only on the income over $400,000.     If we inflation adjust that $400k to 2016 we come out with about $3.2M.    This is not just your high paid doctor then, we're talking very rich people.   However we can't really tell who made that kind of money back in the 60's by just inflation adjusting as high incomes have ballooned over the decades.   Lots of people make >$3M now.

Looking at an old Census report we can see that there were about 60M people / families with incomes.   We can also see from that report that the top 1% started at about $25,000.   Inflation adjusted that $25k is about $200k today.   But todays 1% is more in the $400k level.

Figure 2 and 3 from this report : Striking it Richer: The Evolution of Top Incomes in the United States gives us the % of total income earned by the top 1% and the top .01% respectively.   Roughly speaking the top 1% in 1960 made about 10% of the personal income and the top 0.01% made about 1% of all personal income.   Total personal income was about $418B.   I got that from this source who got it from the BEA.  I tried finding the 1960 figures on the BEA but couldn't find it easily.

Add this all up and we have : 

$418B total personal income 

60M people/families making incomes

1% of people (=600k people) make 10% of incomes or $41B

0.01% of people (6000 people) make 1% of incomes or ~$4B

Therefore the top 6000 people make average incomes of about $667k

Roughly speaking I'd estimate that the top 5,000 to 10,000 people in the US in the early 60's would have incomes high enough to fall in the top 91% tax bracket.

However, that doesn't mean they actually paid that 91% tax bracket.   I bet a lot of those ultra rich people found some pretty good tax loopholes.
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Average CPA Fee for Tax FIling is $273

My wife and I haven't gotten our taxes done yet but we're working on it.   We hire a CPA to do our taxes for a few reasons.  1, I'm lazy, 2, the forms are complicated with Schedule A, D, E,  covering multiple rentals and stock purchase and stock incentive options at my job, 3. I'm lazy, and 4, we can deduct some of the CPA fee as a rental expense.   Still its pretty pricey and I question if I should just stop being lazy and do it myself.   Maybe next year.

We pay around $500 a year for our taxes.   Thats a hefty sum.   But apparently its not far off the averages.

According to the National Society of Accountants the average cost for preparing a typical 1040 with Schedule A and state tax form is $273.

The NSA website has more details on costs and breaks it down by region and costs for additional forms.     They also have an infographic.

In the Pacific states area where we live the average is $348 for that kind of form.   Plus we've got schedules D & E on top of that which average $115 and $126 respectively.     Added up the average cost for a filing like  ours seems to be more like $589 total.

Its good to know I'm not over paying compared to typical fees.   But it doesn't make me feel all that much better when I write the check to the CPA.

I'd say unless your taxes are particularly complex (like ours) then you're best to just use tax accounting software and file on your own.   That is certainly cheaper than hiring a CPA and most peoples taxes are easy enough to do with computer software.  

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Your Tax Rate is Likely to Be Lower After You Retire

Most people have lower incomes when they're retired compared to when they're working.  With lower incomes comes lower tax rates.  So it ought to follow that your tax rate is likely to be lower when you're retired.   Thats often the case.  

A married couple has a combined income of $60,000 from wages of $40,000 and $20,000 currently.   Their expected social security checks will be $1200 and $800 monthly for total of $2000 or $24,000 a year.   They've done a good job saving 10% of their pay and have amassed a total retirement nestegg in IRAs and 401ks of $600,000.    They plan to withdraw 4% of that annually for $24,000 of income.   This gives them a combined retirement income of $48,000 a year between their SS checks and retirement accounts.   That replaces 80% of their pre-retirement income.    They paid their house off a few years ago so their basic living expenses aren't too high now.

While the couple is working they would have a taxable income of about $33,700.   Thats after taking out 10% they saved in IRA/401k's and then the standard deduction and exemptions.    That $33,700 income puts them in the 15% tax bracket with $4,148 due to the IRS.

After retirement they would have lower household income.   Half of their income is from SS and little of it will be taxed.   Given their total income of $48,000 then only $2,000 of their SS check counts towards taxable income.   They'd get a higher standard deduction of $14,600 due to being 65 years or older.   Their final taxable income is just $3,500 and they'd be in the 10% bracket.    They'd only owe the IRS $350.

Of course this is just one random example.   But in this relatively typical looking couple their tax bracket went down from 15% to 10%.   Most people will see better tax situation in retirement due to social security tax treatment and the higher standard deduction for people over age 65.  

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You Probably Shouldn't Cash Out a Large Inherited IRA

A lot of retired people now have IRA accounts and when they pass they will leave the IRA accounts to their heirs.    When someone inherits an IRA they are liable to pay taxes on it since its all pre-tax income.   The heir gets to choose between 3 basic options : 

1. cash it out as one lump sum
2. roll the IRA into an Inherited IRA then cash out in 5 years
3. roll into Inherited IRA and cash out over your lifetime

All three options do require you to pay regular income taxes on the money.

The problem with #1 can be that this large lump sum of money can easily move you up into a much higher tax bracket and you'll owe significantly more money in taxes than if you spread it out over time with the Inherited IRA.

Lets look at an example.   Say you're married with about $55,000 of taxable income.  That puts you in the  15% marginal tax bracket.    You inherit $100,000 from a relative.   If you pull that out in a lump sum then your tax bill would be mostly in the 25% bracket and a little in the 28% bracket.   If you do the lump sum you'd be paying about $23,300 in taxes.   On the other hand if you went with option 2 from above and pulled the money out over 5 years then you'd be taking out $20,000 a year and most of it would be taxed at 15%.   Your annual tax would go up $3120 on that $20,000 increase for a total tax bill over the 5 years of $15,600.     Thats a tax savings of $7700


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The Marriage Tax Bonus

You've probably heard of the Marriage Tax Penalty.    Have you heard of the Marriage Tax Bonus?

Most married couples receive a Marriage Tax BONUS rather than a penalty.


My wife and I pay a lower tax bill then I would pay if I was single.   Since my wife doesn't work we get a lower tax rate and higher deduction and exemption.   This is generally the case for a married couple with only one income earner.   This gives us a Marriage Tax Bonus of several thousand dollars a year.

Lets look at a couple examples.

Say you make $50,000 and you're single.   Your basic tax bill would be $5,929.   If you get married and your spouse does not work then your taxes would be $3,608.   The Marriage Tax Bonus is the difference or $2,321.
  
If you make $100,000 then the single filer tax bill would be $18,493 and married would be $11,858.    Thats a Marriage Tax Bonus of $6,635.

 A single income couple is going to cause the largest Marriage Tax Bonus.   For married couples with two incomes there may be a bonus or there can be a penalty.  It depends on the income levels and resulting tax brackets before and after marriage.

The TaxPolicyCenter said :
"Before the 2001 tax act, married couples were already significantly more likely to get bonuses than penalties. The Congressional Budget Office estimated that 51 percent of married couples received marriage bonuses totaling nearly $33 billion in 1996, and 42 percent incurred marriage penalties totaling almost $29 billion."

But note that is before the 2001 tax act.   The 2001 tax act changed things to remove the penalty for the lower tax brackets.   After that 2001 reform the % of people getting bonuses should be even higher.   So now the % of people getting a marriage bonus is above 51%.

To roughly figure if you have a Marriage Tax Bonus or a Marriage Tax Penalty you can use the calculator at the Tax Policy Center.

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FREE after rebate - HR BLock Deluxe & Total Defense Premium Internet Security

Go to TigerDirect : 
H&R Block Tax Software 13 Deluxe and Total Defense Premium Internet Security Bundle

The bundle cost is $59.99 and you can then get a $60 rebate making it free after rebate.   Deadline for the rebate is 3/31.

The rebate form is here.    You DO have to jump through a couple hoops to qualify for the rebate.   You have to register and sign up for the Total Defense account.   That requires registering and activating the software and giving them a credit card.    However you can then cancel the account at any time and they won't bill you anything.      You do not need to actually install the Total Defense software if you don't want to and you probably should not do so if you've already got virus software.  (if you don't already have virus software then you should get some)

But if doing that is worth it to you then you can get a free copy of H&R block Deluxe in the deal.

I used a similar rebate deal with Total Defense via Tigerdirect in the past and it worked fine.  I registered and got the rebate then canceled Total Defense after the fact.  


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What Percent of People Historically Receive a Refund versus Owe Taxes

Most people get a refund on their taxes in any given year.    Generally speaking around 80% of people filing taxes get a refund.

I found the historical IRS tax data going back to 1950 showing who gets refunds versus who owes taxes.

Here's a chart of the trend from 1950 to 2011 from the current IRS data set :

I am sure there are various things that drive the longer term trends.    IRS tax withholding processes have undoubtedly evolved over the decades.   Things like more dual income households may impact it as well.    The introduction of earned income tax credits may have increased refund rates as well.

The green line indicates people who get neither a refund nor owe money.  I'm assuming thats mostly for people who had no money withheld but owed nothing.   Maybe people like retirees on social security and minimal other income.

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How Many People Claim Itemized Deductions? What and How Much Do People Deduct?

I got the data from IRS taxstats.  The most recent data on Tax stats site is from 2011.    Specifically Individual Complete Report (Publication 1304), Table 2.1

46,293,834 returns claimed itemized deductions in 2011.  

If you add it all up, theres over $1.2 trillion in itemized deductions.  

If the 46 million filers instead claimed a $6100 single deduction they'd have $282 B in deductions and its likely more than that since many itemizers are married or heads of households.    The standard deductions would be somewhere between $282B and $564B.

Over 2/3 of the amount deducted is for taxes and homeownership.   I broke down the total deductions into major categories and here's how they stack up :

I put the deduction for real estate property taxes into its own category of home/tax as its both a homeowner related deduction and a tax deduction.


Here's the break down first ranked by the total people claiming the deduction  :

deduction	# returns	$ billion
Real estate taxes	40.1	$173
Home mortgage interest	36.0	$364
Cash contributions	34.6	$139
state/local income tax	33.7	$266
Other than cash contributions	22.5	$44
Tax preparation fees	22.1	$7
Personal property taxes	19.9	$8
Unreimbursed employee business expenses	14.7	$77
state/local sales tax	10.9	$16
Medical and dental expenses deduction	10.4	$44
Other limited miscellaneous deductions	7.9	$38
Qualified mortgage insurance premiums	4.5	$5
Deductible points	2.7	$1
Other taxes	2.6	$2
Investment interest expense deduction	1.5	$13
Gambling loss deduction	0.9	$18
Miscellaneous deductions other than gambling	0.4	$2

And next sorted based on the dollar value of the total amount deducted :

deduction	# returns	$ billion
Home mortgage interest	36.0	$364
state/local income tax	33.7	$266
Real estate taxes	40.1	$173
Cash contributions	34.6	$139
Unreimbursed employee business expenses	14.7	$77
Medical and dental expenses deduction	10.4	$44
Other than cash contributions	22.5	$44
Other limited miscellaneous deductions	7.9	$38
Gambling loss deduction	0.9	$18
state/local sales tax	10.9	$16
Investment interest expense deduction	1.5	$13
Personal property taxes	19.9	$8
Tax preparation fees	22.1	$7
Qualified mortgage insurance premiums	4.5	$5
Miscellaneous deductions other than gambling	0.4	$2
Other taxes	2.6	$2
Deductible points	2.7	$1

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Limits on Rental Property Income Tax Loss Deductions

You may have heard that rental properties can have some good tax deductions.    One of the major deductions is the depreciation of the property which can add up to a lot of money.    So owning rentals can be advantageous from a tax perspective.   However you may not know that there are limits on how much you can deduct in rental losses or if you can even deduct a loss at all.

We actually ran into this ourselves last year on our taxes.   We had about $9000 total loses that exceeded the amount we were allowed to deduct for the year.

Hows this all work then?    The article Can You Deduct Your Rental Losses? from NOLO covers the topic pretty well.    I'm not going to reinvent the wheel here by rewriting their whole article.   I'd recommend you read the NOLO article yourself.

I'll summarize quickly though: 

• There is a $25,000 limit on passive losses that you can deduct.  Generally rentals are considered a passive income.   Maybe you don't think its 'passive' considering the amount of work you do but it is in that category according to the IRS.    
• However if you make over $100,000 MAGI for a couple then that $25,000 deduction limit is phased out.   Above $150,000 and you get no deduction for losses.    Keep in mind the losses we're talking here are the net number out of a Schedule E so it means your total rent minus all expenses.   
• Real estate professionals get an exception.  To qualify you have to work minimum 751 hours in the year in the real estate business and materially participate in running your properties.

But all is not lost.   For any loss you're not allowed to deduct you can carry it over into future years.   The IRS says: "Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. Disallowed passive losses are carried forward to the next taxable year."


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Get Extra 10% Bonus from TurboTax When You Use Income Tax Refund to Buy Amazon Gift Card

Here's the deal in short.   If you use TurboTax to file your income tax refund they will give you the option to use some or all of your refund to buy an Amazon.com gift card.    If you do so then they'll kick in another 10% bonus gift card on top of that.    So for example if you are due $2000 and use $500 to buy an Amazon GC then you'll get another extra $50 gift card.


Here is the page on Amazon about the deal.

You can also get $10-15 off of TurboTax if you're a Prime member.

"Prime Members save as much as $10-$15 more on TurboTax 2013. Limited time offer. See product detail page for more information.'

If you're not a member you can  sign up for Prime


Details on the 10% gift card offer...

I copy pasted the details & fine print below.

• Use some (or all) of your federal refund to purchase an Amazon.com Gift Card** and Turbo Tax will tack on a bonus
• The remainder of your refund will be deposited to your bank account
• As soon as your refund is received, TurboTax will email you your Amazon.com Gift Card claim code
• Receive an extra 5% with TurboTax Basic – So $500 would become $525
• Receive an extra 10% with TurboTax Deluxe, Premier, and Home & Business – So $500 would become $550
• TurboTax Business is not eligible for this offer

*Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. See here for full details.
**Amazon.com is not a sponsor of this promotion. Amazon.com Gift Cards ("GCs") sold by Intuit, an authorized and independent reseller of Amazon.com Gift Cards. Except as required by law, GCs cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com, Inc. or its affiliates. No expiration date or service fees.”


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Free TurboTax online for Low Income

If your household income is under $30,000 AGI or you're in the military then you can use TurboTax online for free.

They offer the TurboTax Taxfreedom Edition.

You may also qualify for free filing for your state taxes in the following states : 
AR,AZ,DC,DE,GA,IA,ID,IN,KY,MI,MN,MO,MS,NC,ND,OK,OR,PA,RI,SC,VA,VT,WV

For full details visit the TurboTax Taxfreedom page.

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Alternative Minimum Tax (AMT) is Not a Bonus Penalty Tax

Have you heard someone who has to pay AMT for the first time talk about AMT?    They act as if they're being punished with a penalty tax.   "Oh no, I made too much and now I have to pay AMT!" is how the complaint usually sounds.   AMT is not really an extra tax paid as a penalty simply because you made a lot of money.   We already have tax brackets setup that cause higher taxes for higher income.  AMT is not a extra tax either in the sense that they don't simply say "oh you made too much money so you have to pay $1000 more" as some people seem think.   It is an alternative way to calculate taxes to set a minimum tax, hence the name.   What in effect AMT does is basically disallow some deductions and credits then figure a different tax calculation of basically 26-29% tax rate after a large exemption.

First lets go back and review some basic info on AMT that I've written before.  In an old article from 2008  What is the Alternative Minimum Tax (AMT) and how does it work?  I gave a basic discussion of the tax.  That article is now a bit dated since the numbers have changed but the basic idea is the same.  Who Pays the Alternative Minimum Tax (AMT)? I discussed how only around 2-3% of people pay it and almost all of them have AGI over $200k.

The key word in Alternative Minimum Tax is MINIMUM.   Its not the Maximum tax.    Its a minimum tax rate.      The AMT tax rate is LOWER than the standard tax rate with standard deductions.

Here's how it works.   First you figure your taxes normally.   You take your income then subtract any kind of deduction you can claim and calculate your income tax rate based on the progressive tax brackets.  Then you subtract credits you're eligible for.    Thats the normal tax calculations.  But way back people realized that high income folks were finding all sorts of tax loopholes to avoid taxes and ending up paying little in tax.  So they implemented the AMT which simply takes your income, subtracts a large exemption then figures a tax % of the rest.   Then you pay the tax which is higher.   If your normal tax figures are higher than the AMT then you don't pay AMT.  

Lets look at some examples :
I'll use TaxCaster to estimate taxes.   I'll take an example of a single person living in Texas where there is no state income tax.   Lets say you make $200,000 from your job and you own a house.   Your house is pricey and you have a $25,000 interest bill.    For arguments sake lets say that since you just bought the house this year there is no property taxes due this year but you'll have to pay double property taxes next year.       Your tax situation is simply $200k of income and $25k of deductible mortgage interest.   You would owe a tax bill of $41,201 for that year.   OK.  Then the next year you've got that property tax bill due. So in the next year you've got a $25,000 property tax bill (double the normal).   That gives you $200,000 of income plus $50,000 of deductions ($25k mortgage interest + $25k property tax).   Your taxable income is only $150,000 and your regular tax rate works out to $34,201.      BUT here comes AMT.    When you figure the AMT you don't get that property tax and your AMT rate adds another $1,679 to your tax rate for a total tax bill of $35,880.

Situation A :   $200k income, $25k mortgage interest = $41,201 regular tax bill, NO AMT
Situation B: $200k income, $25k mortgage interest, $25k property tax = $35,880 tax bill including $1679 of AMT

Situation B has a lower tax bill and pays AMT.   Would you prefer to pay $41,201 in taxes or $35,880 in taxes?    Thats an easy one.   Clearly $35,880 is cheaper.   Yet the $35,880 tax bill includes AMT?    This tax payer in situation B is "Hit with AMT" yet has a lower tax bill than in situation A.

Now lets say a few years later you are promoted to VP and your income has more than doubled and you now make a whopping $500,000 a year.  You're still paying that $25,000 mortgage interest and again hit with the $25,000 property taxes.   In this situation you would have $500k income and $50k deduction.  Your regular tax bill would be $138,934.   However you would NOT owe any AMT even though $25k of your deductions from property tax is disallowed in the AMT calculation.

Situation A : $200k income = $41,201 tax bill, NO AMT= 20.6% effective tax
Situation B : $200k income = $35,880 tax bill & AMT of $1679 = 17.9% effective
Situation C : $500k income = $138,934, NO AMT = 27.8% effective

Again, lets play dumb and choose between A,B, & C and decide if we want the one with AMT or not.   Situation B has the lowest effective tax rate, and the lowest total tax bill yet they are still paying an AMT. 

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Half off of H&R Block Tax Software today at Amazon

Amazon has H&R Block tax software half off today.

Here is the link : Gold Box Deal of the Day H&R Block Tax Software



For example you can get the H&R Block Tax Software 2013 Deluxe + State for $21.99


I haven't used the software personally but this seems like a pretty good sale price.



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Assets of Millionaires (gleaned from estate tax data)

The IRS has data on estate taxes which breaks down the nature of the assets.   Estate taxes for 2012 the latest year with data is only applicable to estates with over $5 million in value.   Therefore if we look at the estate tax data we can get a sample of the asset mix of multi-millionaires in the US.   The information is going to be skewed towards older people as these are for the estates of deceased people.

Here are the numbers for the 9,412 returns filed in 2012 :

	Value	% of total
Publicly traded stock	31,868,113	26%
State and local bonds	13,595,957	11%
Cash assets	11,726,706	9%
Other real estate	10,327,985	8%
Closely held stock	9,654,433	8%
Retirement assets	6,631,757	5%
Personal residence	5,908,960	5%
Real estate partnerships	4,495,892	4%
Mortgages and notes	4,298,336	3%
Other limited partnerships	4,015,354	3%
Farm assets	3,729,481	3%
Other noncorporate business assets	2,843,852	2%
Art	2,757,975	2%
Private equity and hedge funds	2,489,808	2%
Corporate and foreign bonds	2,228,937	2%
Other assets	1,931,019	2%
Insurance, face value	1,922,184	2%
Other Federal bonds	1,731,202	1%
Depletables / intangibles	832,080	1%
Unclassifiable mutual funds	814,457	1%
Bond funds	519,606	0.4%
Insurance, policy loans	66,809	0.1%
Federal savings bonds	63,407	0.1%

And here's a graph showing the larger asset groups :

(click image for full size)

Roughly speaking stocks and bonds of various types make up about half the assets.   Looks like real estate including personal homes is around 20% ballpark.   The remaining 30% is a mix of various things.

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Traditional IRA vs Roth IRA - Which is Better for a 'Typical' Family?

In the personal finance realm it seems that most everyone is hopelessly in love with the Roth IRA.   I've seen people give blanket general advice that everyone should use a Roth IRA for their retirement savings.     There are a lot of scenarios where a Roth IRA is a poor choice.  Don't get me wrong, a Roth IRA is a good way to save for retirement but its not always the most optimal.

Today I'll look at an example of a 'typical family' and see how their retirement will fare if they use a Roth IRA exclusively or if they use a traditional IRA instead.

Assumptions for our 'typical' family:   You make exactly the median income for your age.  In your mid 20's you have 2.3  children (we'll round down for simplicity).   Then lets say you're less typical in that you consistently save a full 10% of your pay towards your retirement and then get a consistent 8% annual growth through fairly smart investing.

I got the income data from the Census.   I'm just assuming you make the median income level of each age group over your life. 

For taxes I'm assuming that the earliest age you're a single person.  Then between age 25 and 44 I'm assuming you're married with two kids.   Then after 45 years old I assumed the kids would be out of the house and you'd be filing as a married couple with no dependents.   I figured the tax bills with the TaxCaster online calculator.   TaxCaster does a good job of figuring all the credits and makes estimating the tax bill pretty easy.

You'll notice the taxes are pretty low during the 25-34 year period.   That is because of child tax credits and the two exemptions for dependent children.    Right now based on current tax laws your marginal income tax bracket would bet 15% for the entire time if you make the median income level for the given age group.

I only got median income levels for 10 year age groups, so that doesn't tell us what a 23 year old or a 46 year old would make.   I estimated the income by age by simply assuming it grew or shrunk steadily.  Here's how the income looks from my modeling :

So we're assuming your income will grow steadily over time due to promotions and increased experience.   In addition to this you will also see wage increases due to basic inflation.   I'm going to also assume a general 3% annual inflation rate.

Now once we have an assumed income pattern over time I can figure out the retirement savings.

I'm going to go with a flat 10% retirement savings rate and also assume 8% annual investment growth.

Based on all these assumptions, I figure that if you start work at age 24 and work until age 65 that you will have accumulated $2,386,085 in a Roth IRA account.

If on the other hand you wanted to save an equivalent amount of post-tax money in a Traditional IRA then you'd be saving about 18% more.   Thats because if you save the money pre-tax then you won't have to pay taxes on it, and at the 15% tax bracket that comes out to about 18% extra money pre-tax.   Now if you save over the same 41 year work history via a Traditional IRA with the same 8% investment growth then you'd have a total of $2,807,158 in your retirement.

Roth : $2,386,085
Traditional : $2,807,158

Of course this is money that is inflated over 41 years so in todays equivalent dollars you'd have less.   Working back with the 3% annual inflation rate todays dollars would be :

Roth : $710,166
Traditional : $835,489

If we assume the 4% annual withdrawal rate then that would give us retirement income in todays dollars of :

Roth : $28,407
Traditional : $33,420

You would also qualify for household social security income of about $24,000.    I used the Social Security quick calculator to estimate the monthly SS payments at full retirement age.  The exact amount of social security will vary based on the exact work history and whether or not you've got one spouse working with $60,000 income or two working spouses making a combined $60,000.  But I'm assuming a $24,000 figure which is in the ballpark of what such a couple will likely get.   Of course this is based on todays Social Security rules which are subject to change.

Roth : $28,407 + Social security : $24,000 = total = $52,407
Traditional : $33,420 + Social security : $24,000 = total =$57,420

With the Roth retirement you'd pay no taxes and none of your social security would be taxable so you'd have a tax bill of $0.   With the traditional IRA you would owe taxes on your withdrawal and you'd be making enough income that some of your social security would be taxable.   You can use the How much of my social security benefit may be taxed? calculator to find out how much of your income is taxable.  That calculator figures  with a $33,420 IRA withdrawal that 30% of your social security would be subject to taxes.  That would give you a total taxable income of $7,200 from social security and $33,420 from the IRA or $40,620.   Taxes for a married couple on $40,620 will run you $1,841.



Roth : $28,407 + Social security : $24,000 = total = $52,407 - $0 taxes = $52,407 net
Traditional : $33,420 + Social security : $24,000 = total =$57,420 - $1,841 = $55,219 net

And there we have it folks. ..   the bottom line.   When all is said and done your net take home after taxes during retirement would be :

Roth : $52,407
Traditional : $55,579

Thats a difference of $3,172 more per year you'd have with the traditional IRA route over the Roth IRA.    This is a boost of 6% to your take home after tax income.

Of course this example has a lot of variables and assumptions and changing any of them could change the picture some.   We don't know what taxes will be like in 40 years.  We don't know how social security will work in 40 years.   We don't know if your income will have a pattern like I'm assuming.  We don't know what inflation will do. We don't know how your investments will grow.   Its all a crap shoot.   But I think the assumptions I'm making are reasonable and based on historical norms.    When projecting estimates like this 40 years into the future thats about the best you can do, make assumptions based on historical averages and use current rules. 

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How Much Are Health Care Subsidies?

With the implementation of the Patient Protection and Affordable Care Act (PPACA) commonly known as "Obamacare" there will now be tax credit subsidies to help pay for health insurance.   To be eligible you have to buy insurance on your own (outside of employer plans ) and have a family income that is 400% of the federal poverty level or lower. 

Keep in mind this won't impact most people since most people get insurance through their employer or via government programs like medicare or medicaid.   You are only eligible for a subsidy if you buy private insurance via an exchange.

How much are the tax credits available? 

They figure the subsidy based on how much the tax payer is expected to pay for insurance and then the subsidy pays the rest of the cost for a 'silver' level plan. 

In other words :

Subsidy = Cost of silver plan - Tax payer premium

The tax payer premium is a % of their income based on the following table :

Federal Poverty Level	% of income
under 133	2%
133	3%
150	4%
200	6.3%
250	8.05%
300	9.5%
400	9.5%

I found the table both at the KFF and in a US News article.

If your income is in between one of those points then there will be a sliding scale.   So for example if you're at 225% of poverty then you'll be halfway between 200 and 250 so your % of income is the midpoint of 6.3% and 8.05% or 7.175%. 


Also refer to the 2013 Federal poverty levels

Abbreviated table :

Persons in family	Poverty level
1	$11,490
2	$15,510
3	$19,530
4	$23,550
5	$27,570

Lets say for example that you're a 40 year old single person making $28,725 that would put you right at 250% of the poverty level.  So your premium is 8.05% of your income which is $2,312.36  

Now lets say as an example that a 'silver' level health plan would cost you $4,800 a year.   Therefore the subsidy is $4800 - $2312.36 = $2,487.64

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Hodge Podge : Tax Estimator, Medical Cost lookup and Median Incomes & Rents

Here are three interesting sites that I've ran across.   They are all useful or interesting.   These were sitting in my pile of stuff to write about but didn't warrant a article on their own so I figured I'd post about them all together...

Estimate Your Tax Bill : TurboTax's TaxCaster This one is pretty useful to figure out your rough income tax bill.   You can also use it to model how different changes would impact your taxes.   Its smart enough to know what you can and can't claim based on your tax levels.

Get Average Medical costs: FairHealth's medical cost lookup
You can look up specific medical procedures by ZIP code.   It gives estimated costs in your area for various procedures and it figures both the insured costs and uninsured costs.

Median Income & Median monthly rents by Census tracts: Rich Blocks, Poor Blocks
You can put in your address and find the median rents in your area.   This is handy for setting rents or market research for rentals.   You can also look up median income levels which is more for curiosity sake.  I found it interesting to see the huge differences in median incomes in various areas of our town.


--This article may contain referral links which pay this site a commission for purchases made at the sites.

Limits on Small Estate Sizes to Avoid Probate Rules For Each State

When someone passes away their estate will usually have to go through probate.   Probate is a legal process where the courts officially handle the assets in a legal manner.   Probate can be costly with legal fees and/or a % of the estate gross being charged.   However if an estate is small enough then probate can be avoided.   The threshold on how small an estate has to be to avoid probate varies state to state based on each states law.

The Nolo site has links to each state in their article Small Estate Probate Shortcuts: Why Even Large Estates May Qualify  I went to each individual state page and got the numbers there.    Some of the numbers below are for a 'simple affidavit' and some are for the 'small estate' form of probate.   These are two different ways of either avoiding probate or doing a shortened probate.   They are different but for my purposes here good enough to show the maximum estate value below which you can avoid probate.    A list of state laws is at the Findlaw page State Laws: Estates & Probate

To be clear, this is not even close to legal advice.   If you're going through probate you ought to review your states current laws.   This list is bound to get out of date fast since 50 states tend to change laws once in a while so a couple years form now I bet 1-2 states will have changed it.

If you want the detail for your state then I encourage you to check the Nolo site : Small Estate Probate Shortcuts: Why Even Large Estates May Qualify 

Here is the list by state for assets below which you may be able to avoid probate :

Alabama	$3,000
Alaska	$15,000
Arizona	$75,000
Arkansas	$50,000
California	$150,000
Colorado	$60,000
Connecticut	$40,000
Delaware	$20,000
D.C.	$40,000
Florida	$75,000
Georgia	no debts*
Hawaii	$100,000
Idaho	$100,000
Illinois	$100,000
Indiana	$50,000
Iowa	$100,000
Kansas	$20,000
Kentucky	$15,000
Louisiana	?*
Maine	$20,000
Maryland	$50,000
Massachusetts	$25,000
Michigan	$15,000
Minnesota	$20,000
Mississippi	$12,500
Missouri	$40,000
Montana	$50,000
Nebraska	$30,000*
Nevada	$100,000*
New Hampshire	spouse/child*
New Jersey	$10,000
New Mexico	$50,000*
New York	$20,000
North Carolina	$20,000
North Dakota	$50,000
Ohio	$35,000
Oklahoma	$20,000
Oregon	$275,000*
Pennsylvania	$25,000
Rhode Island	$15,000
South Carolina	$10,000
South Dakota	$50,000
Tennessee	$25,000
Texas	$50,000
Utah	$100,000
Vermont	$10,000
Virginia	$50,000
Washington	$100,000
West Virginia	$100,000
Wisconsin	$50,000
Wyoming	$200,000

* Theres some details to add per states: Nebraska allows $30k of real property / $50k of personal property, Nevada allows up to $200k if theres no debts, New Mexico allows up to $500k for spouses only, Oregons total is $75k personal and $200k real.   Georgia seems to avoid probate if theres no debts, Nolo didn't have a page for Louisiana and New Hampshire seems to avoid probate entirely for spouses and children.

Some states may allow larger amounts than the figures given above based on circumstances.  The laws can get more convoluted based on various situations.   

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