Taxes are most likely our largest ongoing liability. Therefore, we should understand the latest tax brackets for 2023. I go through this exercise every year to guide how I will spend my time, my most valuable asset.
Based on a thorough understanding of the 2023 tax brackets, we can then logically come up with the most tax-efficient, best income to earn to live our best lives.
The best income is subjective. However, it is an income that enables an individual or family to save for retirement, take vacations, raise two kids, own a home, drive a safe car, and not feel like they are getting ripped off by the government. The best income also means you feel like you have work-life balance.
In 2023, the median household income in America is roughly $75,000. Therefore, at the very least, we can agree the best income to live a great life is higher. However, a household could be one person or several.
To find the optimal income, let's first review the 2023 income tax brackets for both singles and for married couples. In these charts, I have also included the long-term capital gains tax rates. The short-term capital gains tax rate equates to the ordinary federal income tax rate.
We’ll then move onto the latest standard deduction amounts, alternative minimum tax exemption levels, and estate tax thresholds.
Single 2023 Income Tax Brackets
The biggest income tax rate jump is from 12% to 22%. This occurs when an individual's income increases from $11,011 to $44,725 to $95,376 to $182,100.
The second biggest income tax rate jump is from 24% to 32%. This occurs when an individual's income increases from $95,376 to $182,100 to $182,101 to $231,250.
Further, the biggest differential between the ordinary income tax rate and the long-term capital gains tax rate is for income between $231,251 to $578,125. This difference is 20% (35% – 15%).
Married, Filing Jointly 2023 Income Tax Brackets
The biggest income tax rate jump is from 12% to 22%. This occurs when a married couple's income increases from $22,001 to $89,450 to $89,451 to $190,750.
The second biggest income tax rate jump goes from 24% to 32% when a married couple's income goes from $190,751 to $364,200 to $364,201 to $462,500.
The biggest differential between the ordinary income tax rate and the long-term capital gains tax rate is for income between $462,501 to $693,750. This difference is 20% (35% – 15%).
2023 Income Tax Brackets For Heads Of Households
There are still ongoing talks with Joe Biden and most Democrats about increasing income tax rates and capital gains tax rates. With a divided Congress, it doesn't seem likely there will be tax increases.
However, if there are increases, the highest marginal income tax rate would increase from 37% to 39.6%. The rate would kick in for single filers with income over $400,000, heads of household over $425,000, married joint filers over $450,000, and for married separate filers over $225,000.
In other words, the income thresholds would be lowered for the highest marginal income tax rate for all household formations.
2023 Standard Deduction Amounts
The 2023 standard deduction amounts are as follows:
- Single or married filing separately: $13,850 ($12,950 in 2022)
- Married filing separately: $13,850 ($12,950 in 2022)
- Married filing jointly: $27,700 ($25,900 in 2022)
- Head of household: $20,800 ($19,400 in 2022)
If you are age 65 or older, your standard deduction increases by $1,750 if you file as single or head of household. If you are legally blind, your standard deduction increases by $1,750 as well.
In other words, the standard deduction amounts reduce your taxable income by the amount per filing status. You can also make up to the 2023 standard deduction amounts and pay no income taxes. This is ideal for students and other low-wage workers who want to contribute to a Roth IRA.
Please encourage your children to earn money and contribute the maximum $6,500 into a Roth IRA. You're supposed to contribute after-tax money into Roth IRA. It then compounds tax-free and gets to be withdrawn tax-free. However, for those children and adults earning under the standard deduction amount, they get to contribute tax-free as well!
If you have a small business, opening up a custodial Roth IRA for your child is a no-brainer. In 10 years, your children will likely thank you for your tutelage. Starting with $50,000 – $100,000 in a Roth IRA as an adult will put them far ahead of the average 18-22-year-old with nothing.
2023 Capital Gains and Qualified Dividends Tax Rates
For 2023, long-term capital gains and qualified dividends face the following tax rates:
Single Or Married Filing Separately Long-Term Capital Gains Tax Rate
0% tax rate up to $44,626
15% tax rate up to $492,300
20% tax rate over $492,300
Married Filing Jointly Long-Term Capital Gains Tax Rate
0% tax rate up to $89,250
15% tax rate up to $553,850
20% tax rate on any income beyond $553,850
You will see these capital gains and qualified dividends tax rates conveniently included in the charts above in the most right column.
One of the best reasons to generate more passive income is due to the lower long-term capital gains tax rate compared to ordinary income.
2023 Alternative Minimum Tax (AMT)
The 2023 AMT exemption amount is increased to:
- $81,300 for unmarried individuals (single people)
- $126,500 for married people filing jointly
In 2023, the 28 percent AMT rate applies to excess AMT of $220,700 for all taxpayers ($110,350 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once AMT income reaches $578,150 for single filers and $1,156,300 for married taxpayers filing jointly.
The AMT is what nullifies many of the tax benefits given to six-figure and seven-figure income-earners.
2023 Earned Income Tax Credit (EITC)
The maximum Earned Income Tax Credit (EITC) in 2023 for single and joint filers is $560 if the filer has no children. The maximum credit is $3,995 for one child, $6,604 for two children, and $7,430 for three or more children.
Here's another way to look at the maximum income you're able to earn by number of children to receive a child tax credit.
If the U.S. government really wants to boost the population replacement rate, perhaps it should give child tax credits for all households.
2023 Annual Gift Tax Exclusion
For 2023 the annual exclusion for gifts to individuals is $17,000, up from $16,000 in 2022. Each $17,000 gift basically reduces your estate value by $17,000.
If you have an estate valued at greater than the estate tax threshold or is likely to be above the estate tax threshold upon your death, it behooves you to give more money away or spend more. Otherwise, any money above the estate tax threshold will be taxed at 40%.
2023 Estate Tax Threshold
The 2023 estate tax threshold per person is now $12,920,000, up from $12,060,000 in 2022. But again, the estate tax threshold could come down under the Biden administration. President Biden has proposed cutting the estate tax threshold in half.
Another benefit from increasing the annual gift tax exclusion is that you can now superfund a 529 plan with $85,000 in 2023, up from $80,000 per person in 2022. After a bear market in 2022, super funding in 2023 seems like a relatively better value.
A married couple can superfund a beneficiary's 529 plan in one lump sum with $170,000. But remember, your IRS Form 709 must reflect your option to take the five-year election.
Superfunding multiple 529 plans is one of the most tax-efficient generational wealth transfer strategies. Instead of just gifting children, grandchildren, nieces, and nephews money, gift them eduction. A great education is what will set people free.
2023 Maximum Income For Social Security Tax (FICA)
In 2023, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $160,200, up from $147,000 in 2022, and up from $142,800 in 2021. The maximum income amount for Social Security tax tends to follow inflation up every year.
In other words, if you make $160,200, your maximum FICA tax will be $9,932.40. But don’t forget. You also have to pay a Medicare tax rate of 1.45%. Therefore, your total FICA tax rate is 7.65%. 7.65% X $160,200 = $12,255.3. If you are self-employed, you have to pay double (15.3%)!
Below is the historical maximum income amounts that that must pay Social Security Tax. FICA stands for Federal Insurance Contributions Act, which includes 6.2% for Social Security Tax and 1.45% for Medicare tax.
The reason why lots of businesses are set up as S-Corp is to save money on FICA tax. Business owners do so by paying themselves a lower salary and higher distributions, which don't face FICA tax.
2023 Best Income Based On 2023 Income Tax Rates
Now that you know the 2023 income tax brackets, long-term capital gains tax rates, standard deduction amounts, and AMT thresholds, we can now calculate the best tax-efficient income for maximum happiness while still paying a reasonable amount of tax.
Yes, it's true that most working Americans don't pay federal income taxes. But someone has to pay income taxes to help support this great nation, so that might as well be us.
In terms of the ideal income based on 2023 income tax rates, I say they are:
- $182,100 AGI for singles
- $364,200 AGI for married couples
The above income levels face a marginal income tax rate of 24%. Any dollar over gets taxed at a more egregious 32%, an 8 percentage point jump. Why there's such a large tax rate increase compared to only a 2 percentage point increase from 22% to 24%, is a mystery.
But if you go through a detailed budget, as I have done with a $300,000 household income, you'll see that earning $182,100 for singles and $364,200 for married couples provides a very comfortable lifestyle for most Americans. Yes, at these income levels, AMT will still need to be paid. But the AMT amounts aren't egregious.
These income levels are high enough to save for retirement, own a house, vacation, and raise children. But the income levels are also low enough that you're still paying a reasonable income tax rate. The effective tax rate is actually lower.
Budget Example Of Best Income Amount For Married Couple With Kids
2023 Best Passive Investment Income Amount To Make
Earning passive investment income that is taxed up to 15% seems ideal. Therefore, if you had zero ordinary income, the ideal passive income amount in 2023 is $492,300 for singles and $553,850 for couples.
Such ideal passive income amounts are hard to achieve. Therefore, a more realistic combination is to earn the ideal income levels of up to $182,100 for singles and $364,200 for married couples and earn passive investment income up to a total combined income of $492,300 and $553,850, respectively.
In other words, the ideal income combination for a single person would be $182,100 in ordinary income plus up to $310,200 in passive investment income ($492,300 – $182,100).
The original income faces the highest marginal income tax rate of 24% and the passive investment income faces the highest long-term capital gains tax rate of 15%. In other words, the two income types are taxed at different rates.
Just note that there is also the 3.8% Net Investment Income Tax you have to pay on investment income if you earn above $150,000 as a single or $250,000 as a married couple. Hence, you're 15% long-term capital gains tax rate really could be 18.8%.
If you haven't started building your taxable portfolio to generate passive income yet, get going. It took me 13 years to generate enough passive income to cover my basic living expenses. And it has taken me 23 years to make enough passive income to provide for a family of four in San Francisco.
Best Passive Income Amount For A Married Couple Is Different
Using the same math and logic, the ideal income combination for a married couple would be $364,200 in ordinary income plus $189,650 in passive investment income ($553,850 – $364,200).
But does this sound ideal? I'd rather have the majority of my income come from passive investment income. This way, the pressure is off to always have to grind to generate active income.
Therefore, the ideal income composition would be at least $276,926 (50.1% of $553,850) in passive investment income taxed at 15%, and $276,924 (49.9% of $553,850) in ordinary income taxed at a marginal 24% rate.
See: The Ideal Split Between Active Income And Passive Income
The Second Best Income Amounts To Earn Based On 2023 Income Tax Brackets
If you can't make $182,100 as a single person or $364,200 as a married couple, there's a second best income amount for a balanced life while paying a reasonable amount of taxes. They are:
- $44,725 AGI for singles
- $89,450 AGI for married couples
At these income levels, you are only paying a marginal income tax rate of 12%. Every dollar more than these levels faces a 22% marginal income tax rate up to $95,375 for singles and up to $190,750 for married couples filing jointly. A 10 percentage point jump in the marginal federal income tax rate is pretty steep.
Given these are Adjusted Gross Income amounts, you can actually make more by adding up the deductions. For example, $89,450 plus $27,700 in standard deductions for a married couple equals $117,150.
The only problem with earning less income is that you have less of an absolute dollar amount to save and invest.
Therefore, if you plan to earn the second ideal income amount, you had better enjoy your job or already be near or in retirement. At these income levels, it will be very hard to retire early and do something else. Taking on a side hustle is a good ideal.
Budget Example Of Second Best Income Amount For Married Couple
Note: MAGI stands for Modified Adjusted Gross Income. It takes into account all the deductions and credits.
What's Your Ideal Income Based On Future Income Tax Rates?
I've argued the best time to retire may be when tax rates are rising and the social safety net is growing. I left work in 2012 mainly because I was burned out.
The possibility of also facing a 39.6% marginal income tax rate just didn't sound appealing. I didn't love the money that much. If I had, I would have kept grinding away for maximum income. But like I’ve argued, the best income is not an infinite amount due to taxes.
Today, I'm mainly focused on doing work that I 100% enjoy. The income that comes from it is a bonus. However, I'm still careful about trying to accurately forecast my future investment income because it plays a big part in the overall tax rate I will pay and the effort required to earn.
Paying a total effective tax rate (federal, state, FICA) up to 25% is ideal in my opinion. At 25%, you're contributing to the greater good while also keeping 75% of your hard-earned money. Paying any more than a total effective tax rate of 25% starts to get in the grey zone.
Sure, during your high-energy years when you're aggressively looking to earn as much as possible, paying a higher tax rate is more digestible and may even be welcome. However, as you get older and stop to smell more roses, you'll want to optimize more for time than money.
Please let me know what you think is the best tax-efficient income to earn is and why! Do tax rates and rules affect the amount you’re willing to work? What do you think is missing from the tax code to make society better?
Related: 2024 Income Tax Brackets And The New Ideal Income
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Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything written is based on firsthand experience because money is too important to be left up to pontification.
I recall reading your very excellent blog many years ago on Soc Security bend points.
Not having to pay a thing is like making more tax free money. Going on Medicare dramatically lowers your outlay for health care expenses. For the self employed, Medicare premiums remain deductible. Sad you lose the ability to contribute to HSA once on Medicare. By far, the sweetest tax deductions are business deductions: no FICA. To a long term high earner, very unlikely there is much payback to contributing to FICA.
Since LTCG stack on top of income, the 12% tax bracket is the “sweet spot.” My brokerage account kicked off 10K in Qual. Dividends and LTCG this year. One could easily go to 35%+marginal tax rates unless careful.
What super helpful info & comments!
However, I disagree withe figure for the ‘2nd best income to make for a married couple’. You say it’s $89,450 keeping it within the 12% bracket. Shouldn’t it be $117,150? Take that amount, deduct the std deduction of $27, 700 and that puts you at the $89,450 staying inside the 12% bracket.
I look forward to your reply.
Yes. These are Adjusted Gross Income amounts, meaning, they are after deductions.
I don’t see the net investment income tax in this analysis. This kicks in at $200k for single filers and $250k for married filing jointly.
https://www.irs.gov/taxtopics/tc559#:~:text=A%203.8%20percent%20Net%20Investment,income%20above%20applicable%20threshold%20amounts.
Thanks Greg. I mention it here in the post:
Just note that there is also the 3.8% Net Investment Income Tax you have to pay on investment income if you earn above $150,000 as a single or $250,000 as a married couple. Hence, you’re 15% long-term capital gains tax rate really could be 18.8%.
Can you please do a blog about cross border families and the complications investing for them .
Or even ideas about that topic with the reporting and tax implications involved.
I inherited a house in another country and am just learning about this.
We’d like to live there part time but being a US tax resident doesn’t make it easy.
It’s daunting.
Any thoughts
Thanks
A
Give the chance to clarify, especially as my comment was called out in the FS newsletter :D
Agent: “Good news! The Capitol City Bushwhackers want to sign you for $100M for 3 years with option to extend another 2.
Athlete: “That’s a lot of money. But how much of that will I see after taxes?”
Agent: “About half.”
Athlete: “Is there any way they’ll let me do it for $276,926/year instead?”
Agent: “Yeah, but I won’t.”
I’ll say it again: I’m not condoning that one wing it. Not in the least. I’m saying that if you’re going to project an ideal, and therefore, a limit to your earning… it should be based on the balance between your ability (as determined by your personal situation, aptitude, and temperament) and tolerance (stress, responsibility, attention, etc.). These things are difficult to quantify, so you’ll have to feel it out as you progress to that point. And if the effort is near zero as it is with passive income, why would you EVER place a limit on it?
The transcendent, North Star ideal of personal finance is quality of life. All the items above, including taxes, are subordinate to that. As for me, I will only stop squeezing the lemon because my hand hurts… not because it’s increasingly harder to get the juice out.
P.S. As someone pointed out in the comments, the 8 point jump from the 24% to the 32% tax bracket nearly coincides with the drop of the 6% Social Security Tax, so the jump is more like 2 points.
Would be cool to see a Canadian version of this!
I am over 65, married, and my ideal income should cover: groceries, utilities (gas, electric, water, internet), taxes, medical and dental expenses (premiums and out of pocket expenses), vehicle expenses(gas and maintenance), reserve for future vehicle purchase, home and auto insurance, reserve for LTC/assisted living.
Adult children, no debt. Everything else including vacations and play activities are discretionary. If pension and SS can cover the expenses listed above, our IRAs can be comfortably invested 80 – 20, stock – bond.
Sam, Long time reader and just subscribed to the newsletter. I look at some of your budget numbers and (I live as well in the SF Bay Area) it’s too low. It’s not all about money when you choose a place to live but it would be interesting for you to compare other areas. I have many friends who have decided to move out of state or intrastate . It basically comes down to burn rate for them VS quality of life. Wait until your kids learn to drive… Car insurance sticker shock
Keep up the good work!
Howdy Eddie, feel free to highlight which budget line items are too low and we’ll discuss! That’s part of the fun as we all have different spending habits. Thx
I think the biggest miscalculation is the mortgage. I also live in the bay area and with SFHs at 1.5M to 2.5M – this budget does not 100% reflect reality.
I think the other numbers feel right though.
Got it. What do you think is the right home price to own in San Francisco if the median home price is ~$1.6 million? $1.6 million is what I used in the $300K budget. Also, the family could’ve bought five years ago, not today.
What is a more appropriate mortgage amount to make it a more proper calculation? Thanks
What is the standard deduction for your kids you give the deduction for married jointly but how about if you can deduct kids also.
This is probably the most technical, multi-factored topic imaginable, and yet I think the answer is simple: “Earn much as possible until you feel like it isn’t worth the extra effort.” Otherwise, you may sell yourself short.
Winging it can be an OK strategy. But after a while, knowing the exact figures to better optimize one’s income and time makes a huge difference, and that difference only grows overtime.
I really believe people who pay way more attention to their personal finances is one of the biggest reasons why they are much wealthier than those who don’t.
The wealth differential I see is striking.
I’m not suggesting one wing it. Not at all. I’m saying let your gut be the regulator on your path to maximum income rather than government logic.
Most people would say about going with your “gut” and not doing any analysis is winging it. What’s the downside and understanding the tax rates and the various tax laws?
Give me the chance to clarify, especially since I got called out in the FS newsletter :D.
I’m am not saying one should wing it. Not in the least. What I am trying to argue is that, when it comes to the income side of personal finance (especially the active income side), goals and plans should be more based on a qualitative metric rather than just a quantitative one… especially an ever-changing one established completely outside of your control like taxes.
For example, I would not map out an ideal income and therefore limit earning because all income beyond said limit is taxed more. Even at 32%, you still keep MOST of your income. But because it’s 8 points higher than the next bracket down (but not really because of SSI), it’s not a step worth taking? I’ve never heard of an actor or pro athlete negotiating their contract down because the last dollar wasn’t worth as much as the first.
No matter where you are on the income ladder, there are a litany of qualitative metrics that increase with each rung: stress, responsibility, liability, complexity, attention, flexibility, notoriety, impact, etc. These factors will have a different impact on everyone according to their personal situation and temperament. Everyone complains about Fortune 500 CEOs making 100x the average employee, but I doubt 1 in 100 employees has the aptitude and willingness to make the personal sacrifices required to be the CEO (It’s probably more like 1 in 10,000,000). I will stop climbing the income ladder when I feel the effort required to earn more outweighs the benefits that come with the extra income. Taxes have but a marginal effect on that.
Knowing your own limits is important, but none of us knows our true capacity until we reach it. Therefore, I am always wary of advice that sets limits on earning based on an objective metric. All that is said assuming the income is active. If the income is passive, why would you EVER place a limit on your earning potential?
A few comments/clarifications:
“The above income levels face a marginal income tax rate of 24%. Any dollar over gets taxed at a more egregious 32%, an 8 percentage point jump. Why there’s such a large tax rate increase compared to only a 2 percentage point increase from 22% to 24%, I have no idea.”
The reason for the 8% jump is because $182,100 of pre-tax income roughly corresponds to the $160,200 phase out for paying Social Security tax (after subtracting the standard deduction or typical itemized deductions). So you are paying 8% more in Federal income tax, but 6.2% less in Social Security Tax, for a net increase of only about 2%,
“But if you go through a detailed budget, as I have done with a $300,000 household income, you’ll see that earning $182,100 for singles and $364,200 for married couples provides a very comfortable lifestyle for most Americans. Yes, at these income levels, AMT will still need to be paid. But the AMT amounts aren’t egregious.”
It’s unlikely that someone with $182,100 of income would pay AMT tax unless they exercised Incentive Stock Options.
“ The reason for the 8% jump is because $182,100 of pre-tax income roughly corresponds to the $160,200 phase out for paying Social Security tax (after subtracting the standard deduction or typical itemized deductions). So you are paying 8% more in Federal income tax, but 6.2% less in Social Security Tax, for a net increase of only about 2%,”
Great insight. Will include. I added the section about the max income for FICA tax after publishing. $160,200 max income for 2023 is impressive.
S-Corp and more distributions for the win.
Right, AMT is an alternative tax, not an additional tax. And as you say, very unlikely to be an issue for someone who doesn’t have ISOs, which are becoming more and more rare.
That part needs to be re-written.
I don’t have ISOs, made $190,000 and had to pay AMT. It wasn’t huge, but I still had some.
How much do you make? Perhaps you simply don’t make enough to pay AMT.
One of the best ways and times to fit yourself into these ideal tax brackets is during retirement when you are converting traditional IRAs or 401Ks into a Roth IRA, but it takes planning. If you have some spreadsheet skills, use the Excel referenced below to guide you.
https://iraconversionspreadsheet.com/
I recently crossed the threshold where the Net Investment Income Tax applies (https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax). This should probably factor into your calculations for the ideal amount of passive income. For a married couple filing jointly, it’s an extra 3.8% tax on dividends and capital gains once you cross the $250k MAGI threshold.
It may not change the ideal numbers much, but it might surprise people to find that their passive income will be taxed at 18.8% instead of 15%. It surprised me this tax season…
Good to point out the NIIT. All the more reason to get ordinary income down if possible when receiving capital gains.
The biggest tax jump is not 24% to 32%….it is 12% to 22%.
When your a hammer, everything is a nail lol. I am guilty of that one too lol.
Good catch and corrected. What is the best income based in taxes in your opinion and why?
Retired at the start of 2022 at 52 and followed the Second best plan. This plan allowed us to do some Roth conversion, signed up for a low cost ACA, and the bonus of paying no taxes on all our LTCG and qualified dividends. Actually got a small refund! First time in years we didn’t have to pay our fair share and it actual feels pretty good.
Good to know! The second best income might be best during retirement due to lower taxes and lower expenses. Did you guys raise kids?
Yes sir, my son didn’t take the college path and is now 32 and in a trade. Three daughters, one graduating in May 2023, another May 2025, and youngest will be in high school next year. Thank you Sam for your teachings. I got them all your book so they can have a even better start in life when than my wife and I.
Wow! What a blessing. Great to hear about the kids and thanks for picking up copies of my book. I hope your children will absorb the info!
I want to convert my IRA to my Roth and stay within the 12% tax bracket. In deciding how much money to convert, do I hold my income at less than $89,000, or since my standard deduction will be about $30,000 range, can I roll that much more into my Roth? It sounds to me like if I showed an income of $119,000, then reduced it by the $30,000 standard deduction, that what I would actually pay taxes on would still be in the 12% bracket. Am I thinking right?
Yes, you figure out your taxable income without the conversion, after any and all deductions and credits, and then you add the conversion amount to bring you to whatever income threshold you are targeting.
JM495, thank you so much for your reply. You are awesome!
Sam,
You mention tax rates on passive income but it my understanding that any icome except for qualified dividends and long term capital gains are taxed as ordinary income. I know my dividends from Fundrise are taxed this way.
I had thought I could convert part of my traditional IRA to a Roth and write that off against capital losses but that is also not true. IRA withdrawals are considered income.
I understand it would be great to only have long term gains but like you I feel much more comfortable buying T-bills this year. At least the interest on Ibonds is deferred until you cash them out.
Any recommendations? I’m retired with a govt pension and eligible for social security (age 62) but I’m holding off a bit given the current COLAs.
Hi Marc,
You hit the lottery with the government pension for life. Hopefully it’s a decent amount to cover your living expenses.
I did an analysis and concluded the best age to take Social Security is 66. Check it out.
Sam
The only important thing you are not factoring in is if you are 65+ and on Medicare. In that case you might have significantly higher Medicare costs due to the IRMAA surcharges on those with higher incomes.
Thanks. Can you elaborate on what that surcharge rate is starting at what higher incomes? Is the IRMAA surcharges high enough to derail the lifestyle of a single individual or couple making:
$182,100 MAGI for singles
$364,200 MAGI for married couples
For married couples with kids, I feel expenses go down significantly by 65+ mainly due to having independent adult children.
IRMAA will raise Part B premiums from $165 a month for a couple making up to $194k to $428 a month at a MAGI of $364k.
Not insignificant, but not a derailment in my opinion, particularly when you consider that to have that kind of MAGI, you likely are still working, in which case your employer health plan premiums are already higher than that.
Of note is that IRMAA are not phased over income brackets; for instance as soon as you cross over $194,000by even one dollar, your Part B premium goes from $165 to $231. This is contrary to many other items where there is a phaseout instead of a cliff.
Another big advantage of a Roth IRA is that there is no Required Minimum Distribution like there is for IRAs. I’m gradually transferring assets from a Traditional IRA into a Roth IRA, especially when the market dives.
Yes, good positive for a Roth IRA.
Sam,
Looking at your next most ideal budget, I can’t imagine anyplace in the U.S. (or industrialized world) where utilities are only $100 a month. Does anyone here have electric bills < $100/month who doesn't also have an independent source of energy? Not to mention water/sewer/trash, etc.
I can bump it up. What do think is a more reasonable average number in a medium-to-lower cost area of the country?
And on the topic of this post, what do you think is the best, most tax-efficient income and why?
If one lives in a 1BR apartment and uses a window AC only when home, your electricity is likely $60 in winter, $100 in the summer. HVAC seems to be the biggest contributor to Utilities. Internet is also expensive. The most basic package I get (and I don’t get cable, etc) is $65/month. Gas depends can be around $10-$30, And water is usually around $20-50. All these are conservative estimates for 1BR apartments with generally one inhabitant. I own and manage 11 of them.
Best income for a couple? $89,250/yr, but all in LT CG’s. Now if I can find a passive investment vehicle that will only pay me in LT CG’s, I’ll be set. Any suggestions?
Sam, do you consider pensions passive income in these equations?
Yes, one the best type of passive incomes only a minority of people are eligible to receive.
Related:
The difference between active and passive income
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So, if someone is going to receive a nice pension, I’m assuming there is much less incentive for after-tax investing, right, especially if a relatively short timeline until receiving the pension? It would seemingly just be better to go heavier on pre-tax investing (treating as if intermediate or long-term after-tax investing) by maxing out 401K/403b and/or SEP.
Thanks for all the information, it is nice to have this in one location to see the changes for 2023.
In terms of the budget that you are publishing, you might be missing some of the inflation for the last 18 months or so. I am only going to pick on a few, but I do take note with Utilities, vacation and property maintenance.
Utilites @ $300 per month seems exceptionally low. I too am a member of the California Republic and perhaps have a slightly larger house in Socal, but $300 a month doesn’t even start the conversation. We pay over $200 or electricity/mo, $70+ for GAS (last month $371, two bills not one like NorCal), Water is over $100+ a month, Garbage is $40+/mo and sewer (don’t recall what that costs us). We run at least $450/mo but last month we topped $700.
Vacation – Hard to understand how you can do 3 weeks of vacation for $6600. Just hitting a flight for a family of 4 would be rarely less than $1000 and if you can find a place to stay for less than $200 a night you vacationing in very small markets or you know someone. I would assume you should dial this budget to a more realistic 2 weeks (or less). Since this is decretionary, obviously this can be adjusted.
Finally, property maintenance at only $2400 is a very low number that would largely assuem you were a DYI. Given that we just had to replace a small appliance which cost us over $600 plus installation much of which was DYI. Last year it cost us almost $2K to remove a medium
sized tree and that was after many bids. I think the estimate of $2400 is quite low, but you might be able to defer maintenance if you are OK with taking some chances. Roofs, applicances, plumbing, electrical (lighting, wiring, code changes), landscape, paint, termites, cleanings (filters, HVAC, pumps), security, garage doors etc. We always end the year greater than $2400 and I do most of the work myself.
Just my two cents on how hard it is to live, at least in CA under a budget :)
Thanks for your two cents! I’m digging the analysis on the budget more than the analysis on the best, tax-efficient income.
The utilities can definitely be higher.. up to $500-$600/month.
Staycations are pretty cheap. I’m in Sonoma County now, 41 miles away from San Francisco. Transportation cost is $30 and the house is a friend’s, hence no lodging costs.
$2,400 a month in maintenance costs seems about right for a $1.5-2 million home. How much are you spending and how much is your home?
I got a new $3,000 water heater and it should last 15 years.
Sam,
Welcome to Sonoma County! Long time reader. I live in Petaluma and work in Santa Rosa. Let me know if I can buy you a coffee, beer or lunch tomorrow.
Rob
Thanks Rob! I’ll be spending time with my kiddos. Fun to see hail and snow in the mountains today. Any recommendations for kids during a rainy day are welcome!
The first thing that comes to mind is the Charles Schulz museum and Ice Rink in Santa Rosa. Have fun!
I try to learn something new about taxes every year. Thanks to your site it’s helped me learn things in an easy to understand way unlike a lot of websites that discuss tax stuff. So thank you!
Please encourage your children to earn money and contribute the maximum $6,500 into a Roth IRA. You’re supposed to contribute after-tax money into Roth IRA. It then compounds tax-free and gets to be withdrawn tax-free. However, for those children and adults earning under the standard deduction amount, they get to contribute tax-free as well!
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Tell your kid to earn the money, put it in a Roth IRA, and then you match them dollar-for-dollar as a gift ;)
Sounds like a good idea to me!
I would also suggest when discussing 529s these days you include the new provisions in the tax law allowing rollover of unused 529 to Roth IRAs for the beneficiary, as long as the account has been in existence for 15 years, and the amount rolled over must be from contributions and earnings over 5 years old.
Every parent and grandparent should at least find their state run 529 plan and deposit $100 to start the 15 year clock at birth, even if they never end up using the plan.
Sure. Let me know what else you’d like me to add to this post: Rolling Over Leftover 529 Funds Into A Roth IRA
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