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Ignorant tax question

My wife, with her MBA, does the taxes. Me, as a lowly engineer, is tasked with creating spreadsheets projecting cash flow in retirement. My question concerns marginal Federal tax rates. The projection for 2020 includes \$405K in ordinary income and \$125K in qualified dividend income. When estimating taxes I assume a \$24K standard deduction. What are the appropriate rates for each income group? I am assuming that the qualified dividends are taxed at 20% + 3.8% and the ordinary income \$91379.00 35% over \$400K
I suggest you look at the instructions for IRS Form 1040, specifically the “Qualified Dividends and Capital Gain Tax Worksheet”. (Available at IRS.GOV — page 40 — this is the 2018 version). I use that worksheet in my own spreadsheet to estimate taxes due, since I have qualified dividends and LT capital gains.

While my investment income isn’t as high as yours (not enough to trigger the extra 3.8% tax), I note that it appears that, as you go through the worksheet, some of the qualified dividends/ capital gains are taxed at 0%, and then if your income exceeds a certain threshold, an extra portion is taxed at 15%, and then a final portion is taxed at 20%, and the taxes on each portion are added together to arrive at your total tax (except for the extra 3.8% tax, which isn’t in this worksheet). For example, in my case, some of my qualified dividends/ capital gains are taxed at 0% and another portion is taxed at 15%.

In other words, I think —but DO run the numbers — that the entire amount of your qualified dividends is NOT taxed at 20%. Rather, I think it works like the basic income tax brackets, that is, if you’re in the 35% federal income tax bracket, not all of your income is taxed at 35% — some is taxed at the rates applicable to lower income thresholds, and only the excess over the dollar amount at the beginning of your tax bracket is taxed at 35%. (In other words, the 35% is your marginal tax rate on the dollar income over a threshold amount, not an effective rate on all your income; it looks like the tax on qualified dividends/ capital gains works the same way.)

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