I need an accountant to answer!(Maybe)

[Wanderin Star]

Tried looking to the Internet and elsewhere for the answer to this question but can't get the specifics. Thought somebody here may know how to calculate this answer. I see many places calculating gross income to net (after taxes) but how do you do it in reverse?

My wife is retiring at the beginning of the year and starts drawing her social security, (non-taxable) I'm already getting my social security, VA disability and a retirement from state PERF. Altogether we are drawing $$$??? per month, checks directly into the bank. All that gets taxed is the voluntary (that I selected for investments) portion of the state retirement. I'm trying to figure out how to directly convert the $$$??? (into the bank amount) into a gross amount equivalent of an annual salary. We are all used to referring to our salaries as a before tax amount, but I'm wandering what my after tax amount is equivalent to in a before tax figure. Any percentages or formulae or suggestions??

 

[twistedtree]

It's very hard to go backwards as you describe, but I think you should be able to get a reasonable ball park number. I'd suggest going back to your last year when both were earning, and figure out what you effective tax rate was. This is the total taxes divided by your gross income. For argument's sake, let's say it comes out to 15%.

Then your current equivalent before tax income (what you are looking for) would be your current net income divided by 0.85 (1.00-0.15).

 

[BandB]

It's very hard to go backwards as you describe, but I think you should be able to get a reasonable ball park number. I'd suggest going back to your last year when both were earning, and figure out what you effective tax rate was. This is the total taxes divided by your gross income. For argument's sake, let's say it comes out to 15%.

Then your current equivalent before tax income (what you are looking for) would be your current net income divided by 0.85 (1.00-0.15).

As he said, but in your case you have other factors too. You should have statements on all and most is easily available on the web. Yours and your wife's social security has Part B medicare deducted. It could have other insurance deducted if she so elected. The check detail is available at socialsecurity.gov

On your state retirement you'd just add back the amount you elected to be deducted.

On the VA, I don't know if you might have any deductions.

One other thing you put in parentheses is non-taxable beside social security. While no taxes are withheld, please be aware that other income can in fact make part of your social security taxable.

 

[Bacchus]

... We are all used to referring to our salaries as a before tax amount, but I'm wandering what my after tax amount is equivalent to in a before tax figure. Any percentages or formulae or suggestions??

I ran a similar analysis when preping & deciding on retirement...and agree with above comments.
I also did sort of the reverse and believe it more useful...
Helpful to do it both ways as a comparison.

I started with combined gross income while still working and calculated net by deducting all taxes (easy from prior yrs returns).
I did the same for estimated net income after retirement.
I think this is a better approach for two reasons...
1) Tax rates can differ before to after retirement
2) What you are most interested in a your true income that is available to spend.

The other worthwhile exercise was to account for (reasonable est's OK) 100% of after tax spending while still employed.
One can then more closely estimate items that may increase, decrease or stay the same to arrive at a post retirement starting budget (that will likely increase by inflation).
Don't forget - the largest amt that is likely to change is savings for retirement - sometimes a hurdle to go from the saving to spending mindset?!

in hind sight... I found we did a pretty good job of estimating post retirement spending by understanding pre retirement spending first and applying some judgement.

Nice when a plan comes together - Good Luck w/ your retirement

 

[BandB]

I ran a similar analysis when preping & deciding on retirement...and agree with above comments.
I also did sort of the reverse and believe it more useful...
Helpful to do it both ways as a comparison.

I started with combined gross income while still working and calculated net by deducting all taxes (easy from prior yrs returns).
I did the same for estimated net income after retirement.
I think this is a better approach for two reasons...
1) Tax rates can differ before to after retirement
2) What you are most interested in a your true income that is available to spend.

The other worthwhile exercise was to account for (reasonable est's OK) 100% of after tax spending while still employed.
One can then more closely estimate items that may increase, decrease or stay the same to arrive at a post retirement starting budget (that will likely increase by inflation).
Don't forget - the largest amt that is likely to change is savings for retirement - sometimes a hurdle to go from the saving to spending mindset?!

in hind sight... I found we did a pretty good job of estimating post retirement spending by understanding pre retirement spending first and applying some judgement.

Nice when a plan comes together - Good Luck w/ your retirement

I'd say this too. Budgeting cannot start with generalities and stock formulas. It's in the details. We budget our personal income and spending no differently that I do a business. Not that we expect to hit it exactly or to never vary outside what we planned. It becomes a tool for knowing what is coming in and where we're spending. When I was young, I was great at budgeting in business and never did it at all on a personal basis.

I don't like surprises. I like feeling in control. In many ways "Budget" may not be the right word for what we do. We don't get upset at ourselves if we don't stay within it. But it's more a "Projection" and with knowledge of how we've done against past projections, then we can project better next time.

And, if you're having major changes, then do some pro-forma tax returns based on what you think the situation is going to be in the future. Again it's to avoid surprises. I knew one lady on disability, both a private plan and social security. She guessed at how much tax to withhold on the private plan. She didn't think about the fact that because of it a large portion of her social security was going to be subject to income tax.

 

[Bacchus]

... In many ways "Budget" may not be the right word for what we do. We don't get upset at ourselves if we don't stay within it. But it's more a "Projection" and with knowledge of how we've done against past projections, then we can project better next time. .

Absolutely agree w/ B&B...
Maybe "target" or "projection" better represents what we are both saying...
Very helpful to look at actual vs the previous projection make any necessary +/- adjustments.
I find it very comforting to have a plan and see that life is working approximately per the plan

 

[BandB]

Absolutely agree w/ B&B...
Maybe "target" or "projection" better represents what we are both saying...
Very helpful to look at actual vs the previous projection make any necessary +/- adjustments.
I find it very comforting to have a plan and see that life is working approximately per the plan

Yes, this year our biggest favorable item was fuel. But it's a good example. While we were way under our budget on fuel, that's not likely to happen in other years. Our diesel expense for the year was 40% under our budget.

 

[Bay Pelican]

Try this:
This is Indiana specific, since your boat is in Indiana I assume you are an Indiana income tax payer. If not let me know the state.
The result you want is not just the adjustment for federal income tax. You need to take into account the fact that you will not pay Indiana income tax on your social security income, nor will you pay a contribution to social security and Medicare.
One complication is the county income tax rate (depends on where your claim as a residence). Lets assume it is a 1% rate so the total Indiana rate will be 4.3%. (Note the rate was reduced for 2015).
Social security and Medicare equal 7.5%
Your federal income tax marginal rate will be one of : 15%, 25%, 28%, 33%, 35%, and 39.6% depending on your adjusted gross income. Assuming you have other income than social security it may be 25% (upwards of $75,000).
If we assume 25% for federal the way to calculate this is to add 25, 4.3 (Indiana) and 5.75 (Medicare and Social Security). This equals 35.5%.
Take your total income, subtract $4,050 for each person for the exemption, and $6,300 for each person for the standard deduction. A married couple would subtract $20,700.
Divide the remainder by the 64.5%. Take this amount and add back your standard deduction and personal exemptions. That would be a rough approximation of your pretax income if it were all taxed at ordinary rates.

 

[markpierce]

If it's that all complicated to you, visit a CPA specializing in taxes and spend some bucks to get good answers. ... When I retired, my income dropped 50 percent, not counting I was no longer required to pay for retirement/SS payments nor Medicare taxes. Still, when turning 65 when my employer no longer contributed toward health care, began paying into Medicare about $3000 a year (depends upon one's income), more than I paid while working.

 

[DavidM]

The tax code is too complicated to do what you want to do with a simple formula. SS and pension payouts are taxable under some situations. You also have to take into consideration moving up and down tax brackets. The list goes on.


I do my own taxes with TurboTax. If I want to see what a difference in income or deductions will do to my tax situation, I take last years tax return and plug in the differences and see the tax effect.


David

 

[BandB]

I do my own taxes with TurboTax. If I want to see what a difference in income or deductions will do to my tax situation, I take last years tax return and plug in the differences and see the tax effect.


David

I typically have several "What If's" set up in my tax software at any given time with the various possible scenarios. But to do any of them, you do need to get the details of the money you're receiving.

 

[THD]

As a tax attorney and accountant, I think my advice is a bit different. First, depending on your specific situation, some of your SS may indeed be taxable. There is a worksheet in the Form 1040 instructions to determine how much if any is taxable. As for other retirement income, the Form 1099-R you receive fro payors will show any portion which is taxable. However, if your combined SS and retirement income is non-taxable as you say, then I don't really see the point of the exercise. It may be interesting to estimate a pre-tax income but it is a meaningless number. If I had to try and describe what you want, you want an earned income equivalent (that is income that is fully taxable) for your unearned income (income that is non-taxable). In other words, if I have x dollars net cash, I would have to have y dollars in taxable income to end up with my x dollars after paying income tax. If you just want to know for the hell of it, you first need to assume an "effective tax rate." This is not the actual tax rate applied to taxable income, but is actual tax paid divided by Adjusted Gross Income (AGI). AGI is income before taking the standard (or itemized, as the case may be) deduction and the personal exemption. For the vast majority of people, their effective tax rate is somewhere between about 7 and 14%. It is a bit difficult to be accurate as it is a circular calculation, and oddly enough, it is hard to do in tax software doing "what-if" runs because the software will always take the standard deduction and personal exemption automatically (unless you can override it). In doing the calculation you want, these need to be ignored as they are non-cash items.

Again, I am not sure I see the point other than for curiosity, the cash you have each month is the single most important thing you need to know for budgeting/financial planning. If no taxes need be paid from it, then you have more for fuel!

 

[BandB]

Again, I am not sure I see the point other than for curiosity, the cash you have each month is the single most important thing you need to know for budgeting/financial planning. If no taxes need be paid from it, then you have more for fuel!

I see the point as simple. He wants to be able to know what his gross income is. He may be asked it on forms at various times. Should be simple though to just look at each source. Maybe he's ready to buy a boat and applying for a loan. He'll need to know.

You indicated he said the retirement was not taxable. He actually said a portion was. We don't know the size of that portion and whether his retirement will make a portion of his social security taxable so there is reason for some tax understanding and planning. Actually I'd be very surprised if all the state retirement isn't taxable for federal purposes. It generally is.

 

[markpierce]

One surprise for me was being subject to Medicare tax (about $3000 a year, about twice as much as when I worked for wages) upon reaching 65-years. With all your retirement incomes, I'd be surprised you won't be subject to the same.

 

[Wanderin Star]

BandB is correct. When applying for a car loan at my CU, the loan officer asked for my gross annual income. I could only reply what my NET income was and she became all confused trying to figure my disposable income. They actually had my older Jeep loan, and my new, smaller model Jeep was $300 cheaper per month, and she couldn't figure it out, and ended up not approving a loan that was $300 a month less than what we had been paying! Had to wonder if I had a reasonable gross income estimate to give her if the outcome would have been different.

 

[BandB]

One surprise for me was being subject to Medicare tax (about $3000 a year, about twice as much as when I worked for wages) upon reaching 65-years. With all your retirement incomes, I'd be surprised you won't be subject to the same.

Medicare is 1.45% of all earned income and, if self employed, you're subject to both employee and employer portion for 2.9%.

It only applies to earning income so most retirement income is not subject to it.

 

[menzies]

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