Friday, May 7, 2010

Budgeting for pension cut-2 Taxes

Part 2. Taxes on Gross Income.

After projecting my gross income for the next five years based on what I know at this point, I worked out the income taxes and property taxes that I will have to pay based on the income I estimated.

There are many other taxes of course such as sales tax and VAT in Canada as well as property and licensing taxes. I decided to exclude them at this stage and build those taxes into my expense costs later on. Since many of the expenses will incur some form of tax and those number s are variable this seemed to make most sense to me.

If you live in the US you will have to pay Federal tax, State tax and local property tax.

There are 9 states that don't require income tax though they offset that with sales and other taxes. They are:
New Hampshire
South Dakota

There are other states which provide exemptions for seniors such as Georgia (where I live). Georgia provides a $35K exemption for people over 62 on retirement income such as pensions, annuities, and interest. Two people can claim $70K exemption as long as each individual brings in $35K in retirement income, so you have to carefully examine how you name the bank accounts and annuities to make sure each partner has enough income to take advantage of the exemption.

The following web site provides a wealth of information on taxes by state and is very useful if you are contemplating moving to a lower cost environment.

In order to determine your taxes you will have to work out your taxable income which is your gross income minus exemptions and deductions.

Exemptions are allowed for yourself your spouse and any dependents and are worth $3650 for each. If you and your spouse are over 65, that merits another deduction of $1100 each, or $1400 if single. In addition the standard deduction is $11,400 for a married couple and if you paid State tax you are allowed another $1000.

You may be able to claim more deductions by itemizing if you have state income tax, or sales tax, mortgage interest,property taxes,medical costs over 7% of your gross income, and charitable deductions that exceed the standard deduction. By examining that carefully you may be able to reduce your taxable income and therefore the amount of tax you have to pay both federal and state.

The following are the US federal rates for 2010 based on the calculated taxable income.

Tax Bracket Married Filing Jointly ----------Single

10% Bracket $0 – $16,750 -------------$0 – $8,375
15% Bracket $16,750 – $68,000 --------$8,375 – $34,000
25% Bracket $68,000 – $137,300 -------$34,000 – $82,400
28% Bracket $137,300 – $209,250 ------$82,400 – $171,850
33% Bracket $209,250 – $373,650 ------$171,850 – $373,650
35% Bracket Over $373,650 ------------Over $373,650

In Canada you will have to pay Federal and Provincial or Territory taxes as well as local taxes.

The Federal tax rates for 2010 are:
15% on the first $40,970 of taxable income, +
22% on the next $40,971 of taxable income (on the portion of taxable income between $40,970 and $81,941), +
26% on the next $45,080 of taxable income (on the portion of taxable income between $81,941 and $127,021), +
29% of taxable income over $127,021.

Taxable income is determined using all the gross income minus some expenses that are specific to Canada. There are no personal exemptions or standard deductions similar to the US system. The T1 return is generally used and may be viewed at:

To help understand how to work out the taxes you owe the following few sites provide a wealth of information about taxes in Canada:

The following site is a very useful calculator which provides you with a calculation by Province of your total taxes based on your taxable income, so you can compare province by province to see if you want to make a move.

Working out taxes is a complicated process which can be assisted by some free online software such as turbo tax. For this budget projection you need to be close to the answer but it doesn't have to be accurate to the last few cents, so make use of previous tax returns and estimates where possible so that you can determine what your net income will be after income taxes.

At that point I suggest you also reduce your income by the amount of property tax that you will need to pay each year. Your past record should give you an idea of what that amount is and for 2010 the assessed value of your house may have fallen somewhat due to the economy, and your city and county can tell you what house value they plan to assess your property tax on. Once you have that estimate, deduct it from your net income after taxes and you have your basic disposable income going forward over your planned period.

In the next post I will outline the various expenses that I build into my budget planning, and will include as many ideas as I can regarding the expenses you should budget for. The intent is to make sure that your disposable income is greater than your overall expenses so if that is not the case looking forward with the pension cut, then you ( and I) will have to start making sacrifices and reducing the overall expenses incurred.

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