My Retirement Income Taxes: 2018

New Reader? Get free regular updates from Can I Retire Yet? on saving, investing, retiring, and retirement income. New articles weekly. Join more than 18,000 subscribers. Unsubscribe at any time:

A few weeks ago I completed and filed my returns for the 2017 tax year. Once again, without much attention to the matter, I paid very little in taxes. And, once again, despite what many financial professionals will tell you, I didn’t find taxes threatening my retirement lifestyle…

I’m proactive about most financial matters. But, I tend to wait and do my taxes in early April. That reduces the odds that I’ll be forced to file an amended return due to a late-breaking 1099. Filing tax returns is just about my least favorite financial task, and I sure don’t want to spend any more time on them than necessary!

Again this year I needed only about a day to complete my federal and state returns. Over the decades, I’ve gotten more comfortable with the labyrinthine U.S. tax code. I avoid large sections now and short-cut much of the tedious TurboTax interview. My ongoing efforts to streamline our investments and reduce our annual paperwork also continue to pay off.

Let’s look over my tax return now for insights about paying your taxes in retirement. Just keep in mind that your situation and your financial priorities could well be different from mine…

Looking Back to 2016

My most recent article on our income taxes was posted more than two years ago. I didn’t write about our income taxes last year, because there wasn’t a great deal of note for tax year 2016. But here are the highlights:

This blog business did relatively well due to the publication of my second book — the best received of all my efforts so far.

Once again in 2016 we were able to itemize deductions on Schedule A, mostly thanks to very high medical expenses, which look likely to be a feature of our retirement for most years going forward. Our overall medical expenses in 2016 including health insurance premiums were over $19K.

The vast majority of the tax we paid in 2016 was self-employment tax for the blog business. We were in the 15% marginal tax bracket and paid no tax on our long-term capital gains. Our combined state and federal effective tax rate was 9.4%. However, if you subtract out the business income and tax, the effective rate was a mere 3.5%.

Note: I’m computing effective tax rates here as total tax paid divided by adjusted gross income. I occasionally see effective tax computed as total tax divided by taxable income, but that makes less sense to me, as taxable income already has some arbitrary expenses like the standard deduction and exemptions subtracted out.

2017 Income

For tax year 2017, our overall tax situation was similar, though there was a greater income contribution from capital gains and less from blog income.

With no more books to publish in my foreseeable future, in 2017, blogging income was back in a “normal” range. (For those under the impression that all blogs are money trees, understand that this blog has typically been at least a 20-hour/week “job,” and netted at best around $2K/month. And that’s after years of unpaid work to build an audience.)

We had the usual taxable dividends — approximately $15K — and capital gains distributions from our investments. Additionally, I was a more “active” trader this past year than most. Though, for me, that still means only a handful of transactions over the course of the year. I sold some long-term holdings in VXUS and GLD to add to our cash cushion for living expenses. Those sales generated sizable long-term capital gains. The presence of those capital gains, which will be consumed over multiple years, has a misleading impact on our annual gross income number. But we were not taxed on them since we are in the lower two tax brackets.

I also sold some of our digital currency holdings at handsome profits. These were short-term gains, unfortunately, so they were taxed at our ordinary income rate. (I’m choosing not to write more about this activity, since I don’t think digital currencies are appropriate for most people, especially retirees. But, if you want a few more thoughts, see my articles on alternative investments for savvy retirees.)

2017 Deductions

Once again, thanks to our high health insurance premiums, and the realities of caring for ourselves in the back half of our 50’s, our medical expenses — at over $15K — were high enough to generate an itemized deduction. That, along with our gifts to charity allowed us to benefit from taking itemized deductions on Schedule A. Next year, however, with the new TCJA tax law and its $24K standard deduction for joint filers, I’m expecting we’ll no longer be filling out Schedule A most years.

(In the past, readers have written to suggest we should be deducting our health insurance on the front of Form 1040 as a “self-employed health insurance deduction.” But that doesn’t work for us: The IRS says the health insurance policy has to be in “my name or the business name.” But it’s my wife’s policy — her retirement benefit. I’m also uncomfortable describing myself as “self-employed.” I’m retired, with a part-time business on the side. This business doesn’t support us, or even come close.)

IRA Contribution

The modest income from this blog means we can make IRA contributions for the past year. This time around, we made the maximum contribution of $6,500 to my wife’s IRA, and that further reduced our taxes owed. It’s a nice benefit for any early retiree who is working part-time to remember: You can still tax shelter some of that job income. We didn’t make a contribution to my IRA, though we could have contributed another $6,500, because we don’t know for sure what our tax situation will be like later in retirement — whether it makes more sense to avoid taxes now or later. So we split the difference.

We made that contribution to an existing Traditional IRA. Why not a Roth? We don’t have an existing Roth account, because our income was too high in our working years to start one. At this point I just can’t stomach creating another account to manage plus giving up the definite tax savings now for a possible savings, if current law holds constant, many years from now. At any rate, we have substantial taxable investments, which already give us a pool of money we can draw from with no or minimal tax consequences when needed.

How did we invest that IRA contribution? I’ve been downsizing our current portfolio to be simpler and simpler to manage, and I’m not about to gum it up with new kinds of holdings. So we just added to my wife’s Vanguard Wellesley Income (VWINX) — one of our go-to balanced funds.

Roth Conversion, Not

Those who believe that early retirement or financial independence are reliant on hacking the tax code will be mortified that I have once again declined to do a Roth conversion this year. But the truth of my early retirement is that I’m still not personally convinced the hassle of a conversion is necessary for our long run financial health.

Many people take it as an article of faith that you should do everything possible to reduce taxes. But you can achieve and maintain financial independence without needing to take advantage of every possible tax angle.

For a Roth conversion, the decision isn’t always that simple. For me, the issue hinges on trading off my time this year and every year to come for the possibility of a tax benefit more than a decade from now. And I’m just not convinced that we can predict tax rates that far into the future. What I do know is that I don’t value spending my limited time today on creating a separate account to hold the conversion, deciding what investments it should hold, managing those investments, dealing with the complexity around the nondeductible contributions in my Traditional IRA, and — until recently — navigating the law around recharacterizing conversions.

Lastly, the fact that we do have significant income from dividends and a side business, reduces the potential benefit of a conversion anyway. As Chris wrote here recently, “When you have a spouse working, or otherwise earn income with semi-retirement, you fill up lower tax brackets with earned income. This limits or eliminates the effectiveness of Roth IRA conversions.”

Am I arguing that you should not take on the tasks to potentially save money from a Roth conversion? No! Don’t get me wrong. If you enjoy that kind of overhead or think it’s worth your time, by all means go for it. Depending on your situation, retirement modeling often shows that Roth conversions will save you some money in later years, primarily if your tax rates are elevated due to taking Required Minimum Distributions (RMDs). But, for me, it boils down to time spent today on tasks I don’t enjoy for a distant reward that I don’t need and that may never materialize.

Low Effective Tax Rates

When all the numbers were crunched for our tax return this year, we paid tax at a 15% marginal rate — the second lowest. That means our last dollar of income was taxed at 15%.

However, our state plus federal effective tax rate was only 4.6%. And, take out the 15.3% bite of self-employment tax on my modest blogging income, which represented about one-fourth of our gross income last year, and the effective rate drops to just 1.8%.

That business income is superfluous to our financial independence, and shouldn’t figure into your realistic assessment of tax rates for middle-income retirees.

Why did we pay so little?

First, the standard deduction and personal exemptions mean we get more than $20K in tax-free income every year. Second, because about half of our net worth is in taxable accounts, in many years we can live primarily off money that has already been taxed. Third, because we are in a low tax bracket (10% or 15%) the long-term capital gains and qualified dividends we do receive are not taxed at all (0% rate).


Though we don’t live in a big house or drive fancy cars or do much international travel, the rest of our retirement lifestyle is frankly pretty luxurious. Yes, we watch our budget, but we live quite well in retirement:

This past year we spent freely on food, clothing, recreation, travel, and contributions. It was a blow-out spending year, by our standards. Yet, because our income was constrained, we still wound up in the second lowest tax bracket.

We rent a comfortable two-bedroom townhome in one of the most desirable vacation spots in the country. We eat the finest foods at home and dine out regularly. We travel when and where we want. We get the modern health care we need, from first-rate providers. And, we inhabit a safe and prosperous country with adequate infrastructure and an unparalleled national park system.

How much did we pay in total state and federal income taxes for this retirement lifestyle last year? About $260/month. And that’s without any particular effort toward sheltering income. Given what I get for what I pay in my retirement, I have no complaints.

* * *

Disclosure: Some links on this site, like the Amazon links, may be affiliate links. As an Amazon Associate we earn from qualifying purchases. If you click on one of these links and buy from the affiliated company, then we receive some small compensation. The modest income helps to keep this blog going. Affiliate links do not increase your cost, and we only use them for products or services that we're familiar with and that we feel may deliver value to you. By contrast, we have limited control over most of the display ads on this site. Though we do attempt to block objectionable content. Buyer beware.


  1. Nice post Darrow and thanks for the details on your situation. But this..

    understand that this blog has typically been at least a 20-hour/week “job,”

    I’m from the retirement police and I’m making an arrest. You sir, are not retired.

    Just kidding 😉 I’m concerned about doing taxes for myself next year with the new law. It’s likely that I won’t be itemizing deductions anymore with the change in mortgage interest, so I’m not sure how it’s going to pan out at all. It’ll be an adventure.

    • Phillip says

      I’m also concerned about doing taxes myself given all the changes. A few year back, I started using an accountant who charges around $350 or so to do my joint income taxes. She usually finds a tax break or two I didn’t catch that is enough to pay for her fees (e.g. created a separate return for a dependent, reminded me of some childcare expense, etc.). My brother found the same thing when he switched from self-preparing to a paid preparer. Also, I read that returns done by reputable paid preparers have a smaller chance of audit. Plus, its soooooo much easier just scanning/uploading docs and then just signing them at the end. My time is worth something too.

  2. Good points, but I believe that a Roth conversion is not much of a hassle. With the use of computers it takes but a few minutes.

    • Chris Mamula says


      I think the bigger point is whether it is worth any effort. Note in post that 2017 effective tax rate was 4.6% and without business income it was 1.8%. Why pay 15% marginal tax rates to convert to Roth when paying <5% anyway when need the money. There may be some other benefits, such as estate planning if anticipating leaving an inheritance, but take home for me is many people complicate things w/o thinking about why.


      • Balthazar B says

        Chris, the value of converting a Roth is realized further out in the future, when you get to the point of RMDs from aone or more tIRAs. Depending on how large your holdings have grown over the years, you could find yourself having to withdraw close to or over $100K per year. That will savage your nice low tax rate, since it’s all considered equivalent to earned income, and is likely to get only worse over time. Now if you don’t plan to live for very long, then perhaps RMDs won’t be an issue for you (but they would still be for your spouse, only doubly worse).

        • Chris Mamula says

          I agree and personally take a different approach. I’ll be sharing my own tax strategies and discuss the benefits of tax diversification in future posts.

  3. David Emery says

    Between my Obamacare premium (about $1200/month) and NH real estate taxes (about $1k/month), I’m having to draw a lot of $ to meet those. Obamacare uses a different formula to determine reimbursement eligibility than strict ‘Adjusted Gross Income’.

    Question: Is the Qualifying Amount for 0% or 15% Capital Gains tax based on AGI, or something else?

    • Chris Mamula says

      Long term capital gains rates are determined by your adjusted gross income (AGI), found on your tax form. ACA subsidies are determined by modified adjusted gross income (MAGI).

  4. Gilbert Fleming says

    Here is a good reason NOT to convert IRA assets to Roth IRA assets: You might have major long-term care expenses. If you needed $5,000 per month to pay for an asseted living expenses, $60,000 per year, this is a tax write off (92.5%) as a medical expense. Most folks do not have long-term care insurance. The IRA can be a substitute.

    • Gilbert, could you please expand on your thinking here? Medical hardships may allow you to make a withdrawal from an IRA, but they do not negate the need to pay taxes or penalties on IRA withdrawals.

      If the IRA participant is UNDER 59-1/2 years old then medical hardship withdrawals will be taxed and subject to 10% penalty. If the participant is OVER 59-1/2 years old then a distribution used for medical expenses will not be subject to the 10% penalty but will still be taxed.

      If IRA assets are converted to Roth IRA in a tax efficient manner (using 0% or low tax-rate space due to early retirement/low-income) then withdrawals will not be taxed and will not be subject to penalty.

  5. Retired, Married, receiving SS retirement benefit plus taxable Annuity income
    Gross income – 45K, tax $900. About 2%.
    Financial advisors get paid to help avoid this tax nd the elderly complain and about it.
    Personally, I’m with you, I think it is a bargain for the country I live in.

  6. Just a point on the Roth conversions and the fact that they do not need to be any more complicated than adding regular IRA money to your wife’s Wellesley account at Vanguard, although I realize conversions are not for everyone. It only takes us a few minutes a year to convert. We conservatively estimate what room we will have left in late December in the 15% (now 12% bracket), and since we have all of our IRAs (regular and Roth) in Vanguard Wellington, that is where it goes, from Wellington to Wellington. A few clicks on the Vanguard site once a year, and we are done. I recall that it was very simple to add Roths to our Vanguard accounts online. Not trying to detract from the fact that they do not always make sense for everyone!

  7. I’ve come to a similar conclusion regarding Roth conversions. My thinking is the money paid in taxes to fund the conversion is gone forever; it may be more advantageous to keep that money invested. Either way it’s a bit of a gamble because we don’t know what tax rates will be in the future.

  8. I agree with other blog commenters here in that the Roth conversions are quite easy. I also have my accounts with Vanguard and online it only took minutes to set up the account and move $ from a regular IRA account to the Roth account. For simplicity I also keep the money transferred to the Roth account in the same ETF as is in the original IRA. And as you pointed out, the main reason for doing so in my case is to lower the amount that will be required to come out down the road when RMDs kick in. Regardless of how you go, best wishes.

  9. You indicated you have high insurance premiums and paid over 15K in medical expenses last year. Since your income falls into the 15% tax bracket, though, don’t you qualify for Obamacare subsidies?

    • Chris Mamula says

      Obamacare subsidies are only available if purchasing a plan on the exchange. One of the many complexities in our current health care system. Hope that helps.

  10. Dan Wick says

    “But, for me, it boils down to time spent today on tasks I don’t enjoy for a distant reward that I don’t need and that may never materialize.”

    I still can’t wrap my mind around this statement. I agree that Roth conversions are not for everyone, but it requires a minimum amount of advance planning(much like the simplicity of a 3 fund portfolio). If you did the planning, and conversions were not providing additional income in the future, I understand your decision. I have read many of your articles, and was wondering if maybe you were kidnapped and replaced with a bot!!

    Best wishes

  11. Stephen says

    On Social Security income for myself ,wife and my pension we gross about 7400 per month and pay about 600 a month in income tax. I have a 457B account but do not need it to live and if not careful would push me from a marginal 15% tax rate into the 25% tax rate of 2017. You are doing remarkable well controlling your tax rate.

  12. Maria Rose says

    Obviously, most of the commenters on this article have much higher monthly and yearly retirement income than me, which was my question reading the article addressing lowering tax liability. I would really appreciate an article addressing keeping your taxes at the minimum when your income is just over the cutoff in the tax rates by a few hundred dollars e.g. 10% versus 25% under the new tax rates. I don’t have all those items listed in the article to claim as a deduction and the only way I keep taxes at minimum is to pay taxes all year on my Social Security and my two small pensions.
    As far as costs for health care, I am already paying for Medicare plus a subsidy for a plan that covers the drug program and since I still have to pay that Medicare fee, it makes no sense to add extra cost to something that my plan already covers. Sort of like paying extra money for nuggets exactly like McDonald’s but cost more because of the plate it is served on. I see the same doctor as covered by the fancier plan and have the same exact coverage and out of pocket cost (they all use the same claim notations and determinations on the percentage of coverage beyond the basics. There’s no reason to pay an extra $8-10,000 yearly to see the doctor the 3-4 times a year. I’d rather save my money and cut my expenses to the minimum.

    • Maria, do you mean you do not have a supplemental plan for Medicare part B? You only have Medicare, which pays 80% of your part B expenses? I purchased a plan F supplement to Medicare,and it pays the 20% Medicare doesn’t pay. It cost about $210/ month at my age 73. Since I have a string family history of cardiac disease, I do not want to risk the out of pocket Part B cost of a major illness.

  13. Over the last 10 years of early retirement we have managed to keep our income at or below the 15% bracket. Thanks to that we have managed to do some tax-gain-harvesting, and some Roth conversions, all while staying at or just below the 15% bracket. We haven’t paid any taxes for the entire 10 years (we legally domicile in South Dakota, so no state income tax either). All while traveling around all of North America in our motorhome. 8^)

  14. East Coast says

    Hi. I guess I’m surprised that financial projections don’t show a clear advantage to doing some Roth conversions each year if they can be done in the lowest 1-2 brackets. Do you have projections as to what your tax will be once you start collecting social security and the IRA RMD’s kick in? I recently had projections done and while nothing is set in stone (but we can probably assume tax rates will only go up), my doing Roth conversions each year up to the top of the 12% bracket will save me a huge amount of money in taxes overall. This does assume I live to a reasonable old age…… I’d appreciate any thoughts on this.

    • Chris Mamula says

      Interesting question. The answer to this question will vary considerably from person to person based on a couple of factors including; 1.) how your money is allocated between pre-tax, taxable and Roth accounts, 2.) the size of your tax-deferred accounts which will determine the size of RMD’s, and 3.) your annual spending needs. I plan to write more about these topics going forward, stay tuned.

  15. We discovered your blog about three years ago, and one of the features of your posts–and Chris’s too–that we enjoy so much is the relatively laid-back approach of FI/RE investing and living.

    Sure, tax-saving tips are always nice, but if you are comfortably middle class (or even higher), it doesn’t seem like you’d have to optimize every cent in order to feel like you can have a contented attitude towards your finances in retirement. As you say, your life seems pretty luxurious to you, and that’s all that matters. Thanks for sharing.

    • Chris Mamula says

      Thanks for reading and giving that feedback Julie. The overarching theme of this blog that I took away as a reader for years and am trying to continue as a contributor is that we should use money to build a better life, NOT structure our whole life around optimizing our finances. Darrow and I have pretty different approaches to investing, tax planning, etc, but at the end of the day we both consistently agree on that.