The theme this week on the Retirement Quick Tips Podcast is: Analyze Your Tax Return Like A CPA

Today, I’m talking about the place you’ll want to start analyzing your tax return, and that is your marginal tax rate. By reviewing your tax return and finding your taxable income and your marginal tax rate - both of these figures can be found on your tax return. For example, let’s say you’re married and your taxable income in 2021 was $250,000, and you expect your income to remain the same in 2022. 

This income puts you in the 24% marginal tax bracket for both 2021 and 2022, and knowing both your taxable income and your marginal rate is helpful for future planning and determining what types of investments are appropriate for you. 

Your taxable income will indicate whether or not you’ll owe capital gains tax on investments you sell this year, and whether or not the additional Net Investment Income Tax of 3.8% on top of state and federal capital gains taxes will apply to interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.

Understanding the general impact of  interest, dividends, capital gains, and the like can help you make more informed decisions about your investment portfolio, but knowing your marginal tax rate is essential for determining the impact of financial planning decisions like Roth conversions, and whether or not you should own taxable bonds or municipal bonds in taxable accounts. 

I find that many people in lower tax brackets, especially retirees like owning municipal bonds simply because they don’t pay tax on the interest they earn. But municipal bonds really only make sense for investors in higher tax brackets. 

For example, if I’m in the 24% tax bracket and I live in a state like Oregon (which I do) with an additional state tax of almost 9% and I buy a tax-free Oregon municipal bond that yields 3%, because of my income, that’s like buying a corporate bond that pays 4.5%. Not a bad yield and in many cases, it might make more sense to buy tax-free municipal bonds.  If my income is a lot higher than that, that same 3% bond for an Oregonian in the 35% tax bracket would be like buying a taxable corporate bond with about a 5.5% yield. 

The higher your marginal tax bracket, the more tax you’ll pay on dividends and bond interest, and the more careful you’ll want to be about your trading activity in your taxable accounts and the types of bonds you own. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance