Hello All,

I'm trying to get an answer to something that should be simple. I am trying to estimate our future federal tax burden to see if we can retire or not.  But in order to anticipate our NET income (upon which we will live) I need to be able to figure out how much of our GROSS income will be misappropriated by the government.  Here is the way I think it works.  Please tell me if I'm all wrong, and what the correct method is!

I believe each tax bracket is a tier, and that money made within that income range is taxed at that rate.  As you move up, each bracket taxes a portion of the income at the new rate, but it doesn't reach back and change your previous tax bracket rates, right?

So if we use a figure of $80K as your gross income, you could figure out the tax liability of each tier, add them all together, and have your total tax liability for the year.

Hypothetical rates and tiers:

First 25K is taxed at 10% = $2500

25-50K is taxed at 15% = $3750

50-80K is taxed at 20% = $6000

Total Tax for $80K income = $12250

Am I correct in my methodology? If not, please enlighten me so we can figure out when we can launch our fulltime adventure! 

Thanks,

Roy

Ranger,

You are correct about tiers.  But your bracket amounts are off:

• 10% on taxable income from $0 to $9,075, plus
• 15% on taxable income over $9,075 to $36,900, plus
• 25% on taxable income over $36,900 to $89,350, plus
• 28% on taxable income over $89,350 to $186,350, plus
• 33% on taxable income over $186,350 to $405,100, plus
• 35% on taxable income over $405,100 to $406,750, plus
• 39.6% on taxable income over $406,750.

http://taxes.about.com/od/Federal-Income-Taxes/fl/Federal-Income-Tax-Rates-for-the-Year-2014.htm

Cool! I was just trying to confirm my methodology, as the rates/tiers change every so often. 

Thanks!

Roy

Roy, your methodology on the brackets is correct.

The Brackets listed above are for single taxpayers.  Here are the 2014 brackets for Married Filing Jointly from the same link:

• 10% on taxable income from $0 to $18,150, plus
• 15% on taxable income over $18,150 to $73,800, plus
• 25% on taxable income over $73,800 to $148,850, plus
• 28% on taxable income over $148,850 to $226,850, plus
• 33% on taxable income over $226,850 to $405,100, plus
• 35% on taxable income over $405,100 to $457,600, plus
• 39.6% on taxable income over $457,600.

Of course, Gross Income can be reduced by IRA contributions and other deductions to get Adjusted Gross Income.  Then you subtract your Standard Deduction ($12,400 for Married Filing Jointly in 2014) or Itemized Deductions (most full-timers don't have enough to use Itemized) and your Personal Exemption ($3,950 per person in 2014) to get Taxable Income.  THEN you use the brackets.

So, $80,000 Gross Income - $0 Deductions = $80,000 Adjusted Gross Income.  $80,000 AGI - $12,400 Standard Deduction - $7,900 Personal Exemptions = $59,700 Taxable Income.  Now, using the above brackets, your example tax would be $8,047.50.

Of course, an easier method is to plug numbers into an online tax calculator like this one:  https://www.calcxml.com/calculators/federal-income-tax-calculator 

You probably know all that, but I'm doing the example for others than might be reading this thread.

At $80,000, using your example, some people might say "That puts you in the 25% tax bracket", when in fact, you would only pay about 10% without doing anything at all to try to reduce your tax liability.  And, it would be even less if you had deductions for qualified IRA or Health Savings Account contributions, etc.

Of course, that example assumes the $80,000 is "ordinary income".  If it includes income from certain dividends and investment sales, things get a bit more complicated.     

Wow, Howard, that's the most comprehensive yet simple answer I have found on the Internet!  Your methodology will help me figure out where we stand as we prepare to go fulltime.  I hope to meet you, Linda and the rest of the RV Dreams gang out there soon!

Roy

Ditto, Roy. I had a blank spot in our budget calculations for taxes with a rough guess of 10% of income set aside. It was one of those I'll figure that one out later kind of things.  Now I have a higher confidence in that category based on more complete info.  Thanks Howard. 

EBendana wrote:

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This is for EARNED income, if your income is from DISTRIBUTIONS from retirement or pension, that its only 15% tax on the first 72K (for married filing jointly)

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 Not necessarily.   It depends upon what type of retirement account or pension plan you have.   If the retirement accounts are from a 401k, 403b, or an IRA, then they are taxed as normal earned income, because the tax was deferred when you were working.   If it is from a Roth IRA, then no taxes, as you paid them when you earned the money.   If from dividends, etc., then the 15% may apply.   And when you start taking Social Security, then a portion of that will also be tax.

Barb

Here's a random question! If my wife is retired and has no W2 income, does she have to file with me as Married filing Jointly? Or does she drop off the radar entirely? This question just occured to me! But, I am also thinking that we will get a better standard deduction if she is included on my tax forms......

Thanks for all the help!

Roy

Howard wrote:

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At $80,000, using your example, some people might say "That puts you in the 25% tax bracket", when in fact, you would only pay about 10% without doing anything at all to try to reduce your tax liability.  And, it would be even less if you had deductions for qualified IRA or Health Savings Account contributions, etc.

 

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 Thanks for clarifying this Howard...I recently talked to an accountant and was concerned I misunderstood.    If you jump to the higher tax bracket that's on the full amount correct.  So it seems there is a good reason to try to keep your Adjusted Gross Income below $73,800 otherwise all the additional you make would be eaten up by taxes.  It matters to me because as a consultant I will have some ability to control my income plus Lee would like to work less rather than more and this gives us a cut-off point.  I do understand you can contribute the "extra" to ira or HSA but there are limits on that depending on age??  

Trace, the 25% only applies to the portion of your income that is above the 73,800 but not above 148,850 for a joint return.  Above that the rate is higher and so on up the income scale. Below 73,800 but above 18,150 is taxed at 15% and the first 18,150 of income is taxed at 10%. Those dollar amounts refer to taxable income.(amount after deductions)

In Howard's example, 80,000 income yields 8047.50 in taxes but if, say, you made an additional 1,000 dollars your total tax would increase by 250 dollars or 25% of 1,000 dollars(because that extra money was in the bracket between 73,800 and 148,850 dollars.

-- Edited by biggaRView on Wednesday 23rd of April 2014 08:16:00 AM

To put it another way, every dollar your make above 73,800(after deductions have been taken out) will be taxed 25 cents on the dollar until you reach 148,850 then the IRS will take even more from each dollar above 148,850.

Brian

PS: Trying to avoid paying taxes is not a reason to limit income. The IRS will just take a higher portion as your income increases from one bracket to the next. The only reason to not earn more is if the effort needed to produce it exceeds what you get from it or, the time needed to earn it sufficiently cuts into the time you have alloted for other activities that you can no longer enjoy them.

Roy,

Yes, it's better if you still file jointly.  That way your brackets are better - the higher rates kick in at higher income levels AND you get the additional benefits of the married filing jointly standard deduction and a personal exemption for her.

Trace,

Three points here.

Tax Brackets Based On TAXABLE INCOME

First, the income tax brackets are based on TAXABLE INCOME not Adjusted Gross Income.  In the example I did earlier, we used Adjusted Gross Income of $80,000, but you see that after the Standard Deduction & Personal Exemptions the TAXABLE INCOME was only $59,700, well down into the second bracket.  So, if you are shooting to stay out of the next higher tax bracket, you can actually have AGI much higher but then let the Standard Deduction and Personal Exemptions take you back down into the lower bracket.

Let's change our example.  You could have $94,000 in AGI.  Then we would subtract the 2014 Standard Deduction amount of $12,400 (married filing jointly) and the 2014 Personal Exemptions amount of $7,900 (two personal exemptions at $3,950 each) to get TAXABLE INCOME.

$94,000 - $12,400 - $7,900 = $73,700 which keeps you in the lower tax bracket which has a top limit of $73,800.

The Tax Rate For Your Highest Bracket DOES NOT Apply TO ALL Your Income

Second, the answer is "No" to the brackets applying to the full amount. If you jump to the higher tax bracket, the higher rate ONLY applies to the amount OVER the lower limit of that higher bracket.

Let's use another example.  This time we have 100,000 in AGI.

100,000 - 12,400 - 7,900 = 79,700 TAXABLE INCOME which would put you in the "25% tax bracket.  But you only pay 25% on the amount over $73,800.

Total Tax

10% of 18,150 = $1,815.00

15% of (73,800 - 18,150) = 15% X 55,650 = $8,347.50

25% of (79,700 - 73,800) = 25% X 5,900 = $1,475.00

Total Tax $11,637.50  or 11.6% of the $100,000 AGI

I verified with the online calculator. 

That's where people get a little crazy trying to stay out of certain tax brackets.  It would be understandable IF the higher rate applied to ALL of the TAXABLE INCOME, but it doesn't.  In the above example, you could earn $5,900 less and avoid that last $1,475 in taxes, BUT then you'd have no additional money in your pocket.  OR you could earn the $5,900, pay the $1,475 and have $4,425 in your pocket.

2014 IRA & HSA Deductible Contributions

2014 Traditional IRA Contribution Limit is $5,500 ($6,500 if over age 50) - the deduction phases out at certain income levels but most of us won't have to worry about that.

2014 Health Savings Account Contribution Limit is $6,550 ($7,550 if over age 55) for a family plan.  For singles it's $3,300 & $4,300 if over 55.

So a married couple that has two IRAs and a family HSA could have an additional $17,550 - $20,550 in deductions from Gross Income to get to AGI.

Just For Fun

Example 1

Married Couple, both over 55, both with Traditional IRAs, and they have a family HSA 

Gross Ordinary Income of $58,000 - $13,000 in IRA Deductions - $7,550 in HSA Deduction = $37,450 Adjusted Gross Income

$37,450 AGI - 12,400 Standard Deduction - $7,900 Personal Exemptions = $17,150 TAXABLE INCOME;  $1,750 Federal Tax Due (10% bracket, but only 3% of Gross Income)

Example 2

Married Couple, both in their 40s, no IRAs, and no HSA 

Gross Ordinary Income of $38,300 - $0 in IRA Deductions - $0 in HSA Deduction = $38,300 Adjusted Gross Income

$38,300 AGI - 12,400 Standard Deduction - $7,900 Personal Exemptions = $18,000 TAXABLE INCOME;  $1,800 Federal Tax Due (again 10% bracket, but only 4.7% of Gross Income).

My point is we full-timers can earn pretty nice incomes on the road and not be overly concerned about federal income taxes.  However, see the next section.

Be Aware Of Self-Employment Taxes

Okay, now for my third point.  As you can see, you can earn pretty significant amounts of "ordinary" income and end up with a fairly small percentage of income taxes.  However, because you own your own business, you have to be careful about self-employment taxes which are 15.3% of your business net income to pay Social Security & Medicare Taxes.

Let's use our "Just For Fun" Example 1.

That couple's Gross Income all came from their own business - $58,000 Gross Income = Business Net Income

Let's say they made the IRA & HSA contributions indicated.  In the end, they ended up in the "10% bracket" and had $1,750 "income" tax because they ended up with less than $18,150 in TAXABLE INCOME.

HOWEVER, they still have to pay self-employment taxes on the $58,000 (58,000 X 15.3% = $8,874).  So, they have just a little "income" tax, but still have to pay 15.3% in taxes.  AND if they didn't pay in quarterly estimates, there can be huge penalties at the end of the year.

For the self-employed, we can sort of control our income and manage our income taxes.  But those self-employment taxes can jump up and bite us if we're not paying attention.

Another long post by Howard.  Sorry about that. 

Howard, a very thorough explanation and certainly better than my simplified one.

Dave & Denise,

Yes, that's correct, you are limited to the smaller of the $5,500 ($6,500 over age 50) OR your taxable "compensation" for the year.

From the IRS Website:

Who Can Open a Traditional IRA?

You can open and make contributions to a traditional IRA if:

biggaRView wrote:

PS: Trying to avoid paying taxes is not a reason to limit income. The IRS will just take a higher portion as your income increases from one bracket to the next. The only reason to not earn more is if the effort needed to produce it exceeds what you get from it or, the time needed to earn it sufficiently cuts into the time you have alloted for other activities that you can no longer enjoy them.

_________________________

This is correct... however, another situation where it's important to understand this concept is when you are withdrawing money (in retirement) from your standard (i.e., non-Roth) IRAs and 401k.  Since we'll be living on these plans when I retire this year (yay!), I want to be smart about withdrawals toward the end of the year.  Once I near the next bracket, it might be smart to make an effort to differ the withdrawal until the following tax year to net more money.

Good discussion!

Ron

 

I,m starting to appreciate the accountant more and more!!! 

Dave and Denise wrote:

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Thanks Howard, I guess I need to figure out a way to earn some income this year! I was hoping I could do it without working. :)

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 The POWERBALL is your only hope........................That's if you win.

TRAILERKING wrote:

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 The POWERBALL is your only hope........................That's if you win.

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 PT Barnum once said, "It easier to get 10,000 people to give you a dollar than to get 10,000 dollars from one person." Lotteries function the same way. Since they are gov't run entities, they are voluntary taxes on people who are NOT good at math. The best option is NOT to play.

Brian

Roy,

I'm hesitant to answer in this thread because we're getting way off topic.  But it looks like that ship has already sailed, so here goes.

If you are workamping and earning pay above and beyond your campsite, that income is taxable.  You should be a W-2 employee and state and federal taxes should be withheld.  If you want to get a refund of state taxes, you would have to file a return in the state you worked (assuming it is a state with state income tax and state taxes were withheld).  So, if you work in two or three states a year (and they all have state income tax) and you get paid, yes, you would likely have to file a return in each state.  BUT you would not be "self-employed".  (Lots of full-timers refuse to work for pay in states with income tax just to avoid the hassle.)

If, however, they are paying you cash or paying you out of "accounts payable" and they issue you a 1099, now you are an independent contractor (not common, but it does happen) and you may report it as Miscellaneous income on your 1040 OR you could report the income on Schedule C in which case you would be self-employed.  I would only report it on Schedule C if you have other income from other sources and you need to offset your total income against business expenses.

If you are working as a volunteer for a government entity and all you are getting is a campsite, there is generally no tax consequence.

If you are working for a private employer and you are getting a campsite (with or without additional pay), the "value" of your campsite MAY be taxable.  The following three conditions must be met to make the campsite value non-taxable to you.  From the IRS website on taxable "fringe benefits" from the employer viewpoint:

Lodging on Your Business Premises

You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests.

Every year I get at least one email or phone call from someone that got a 1099 for the value of their campsite that they weren't expecting, so it's always a good idea to have the employer tell you in advance, in writing, whether or not the value of your campsite will be taxable.

We discuss all of this and more in our "Working On The Road" seminars.  Hope that helps a little.

Howard wrote:

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.....If you are working as a volunteer for a government entity and all you are getting is a campsite, there is generally no tax consequence.

If you are working for a private employer and you are getting a campsite (with or without additional pay), the "value" of your campsite MAY be taxable.  The following three conditions must be met to make the campsite value non-taxable to you.  From the IRS website on taxable "fringe benefits" from the employer viewpoint:

Lodging on Your Business Premises

You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests.

• It is furnished on your business premises.

• It is furnished for your convenience.

• The employee must accept it as a condition of employment...... 

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As an interested spectator, since the train of thought on this thread has already derailed, lets spread the resulting wreck further into the corn field and ask... and because I'm still confused a bit...

 By lodging, are you referring to a physical structure/other living space or does the definition of lodging also mean a campsite with nothing more than a place to park your rig and hook up to provided utilities?  In my mind it doesn't since I would be providing the "lodging", but then I am not the IRS. We'll definitely be attending one of your "Working on the road" seminars when we actually start this adventure.

Brian

Brian,

Certainly, the law was probably written for physical structures, but "lodging" is not defined.  There is no difference between having dorms on site for seasonal college students and providing a campsite for seasonal workampers under the intent of the provision.

So if I workamped as a camp host for a private campground (all things being equal) my site (per your list of criteria) is not a taxable (to me) benefit if I am an employee. Assuming I have the necessary iron-clad contract stipulating all the relevant caveats to protect myself. If I understand your "Workamping Tax Implications" page. Gate Guarding, as I understand it, is an independent contractor position and it gets a bit more complicated.

Yes Brian, that is correct.  But I don't know if even an "iron-clad" contract will help if the IRS determines the employer's position is wrong.  It gives you a darn good argument, but if the IRS says you owe, then you'll owe. 

A camphost for a private employer is a good example.  A camphost would need to be on the employer's premises, it would be for the convenience of the employer, and it would be a condition of getting the position.  That last criteria can get employers in trouble.  If a workamper holds a position doing reservations, and there are other local employees that live off-site performing the exact same duties, then "living on the premises" wouldn't be a condition to getting the position.

Of course, I doubt anyone is looking that closely at the smaller private employers, but it might trip up the bigger ones.

Here's where I think the stray 1099s at the end of the year come from.  Mom & Pop Campground turns over their financial records to their accountant at the end of the year.  The accountant says "How come there was no income on those three campsites?"  "Well, we had workampers on those sites", Mom & Pop say.  The accountant says "That's lost revenue to you because those sites could have been rented.  If we characterize the value of those campsites as compensation, we can deduct that amount from your revenue and lower your net income and your taxes a little.  BUT, you will need to send the workampers a 1099 as evidence of this business expense."  Of course, that's just the scenario I play out in my head, but it's usually in January or February every year when I get the emails about this.

And "yes", it does get more complicated if you are an independent contractor ... for several reasons.  But that's another thread.  Time to put this one to rest before we go off on another tangent.   

Ellen,

Not necessarily.

You can report it as Miscellaneous Ordinary Income on your 1040.  If it's not a lot of income, that's probably the best thing to do.  BUT if you earn a good amount of income and you have a large amount of expenses related to generating that income, then it becomes beneficial to offset the income and expenses using Schedule C.  It's a balancing act.

We're trying to avoid paying too much in income tax or too much in self-employment tax.  However, it may be a good thing to pay self-employment tax (Social Security & Medicare).  Remember, your Social Security benefits are based on the average of your highest 35 years of earnings.  If you don't have 35 years of earnings, like we didn't when we started, then each year you don't have earnings for which Social Security tax was withheld you get a big fat ZERO averaged in.  By having business income and paying self-employment taxes, in our case, we improve our Social Security benefits a little bit.

So, if all your income is coming from 1099 sources, then it might be best in your situation to just report it all as Miscellaneous Ordinary Income ... IF you don't end up having to pay a lot of additional income tax at the end of the year (because no taxes were withheld and you can't offset the income with expenses).  IF you end up having to pay a lot of additional income tax (and possibly penalties), then you may end up having to pay quarterly estimated taxes.  But, there may be other reasons to establish a "business" and report income and expenses on Schedule C and pay self-employment taxes.

Again, it's different for every situation and it can get a little complicated. 

Thanks Howard...what would you say is the Threshold for "not a lot of income?"  Under 5K for the year?  Under 10 K for the year?  Any guidance is appreciated!