How Should I Read the Income Graph in Tax Lab 'Explore'?

In the Tax Lab's Explore section, the Income tab shows the estimated amount of income of each type for each year in the plan.\

This tab includes a 'Tax Brackets' graph, which shows how those types of income 'stack up' in the Federal ordinary and long-term capital gains tax brackets. In the US tax system, the tax bracket and amount of tax paid on long-term capital gains depends on how much ordinary income is also present that year. That is why you will see the yellow long-term capital gains income appearing to float in its side of the graph, as in the example below.

The Tax Brackets graph includes all income, whether taxable or not, that is realized in that year of the plan. That means that the amounts seen in the graph are not taxable income, but rather total income. That means that the 0% brackets in this graph may be a bit confusing to those who are used to thinking only about non-zero ordinary income tax brackets.

These 0% brackets are made up of the following.

1. 0% ordinary income tax bracket: All non-taxable income, including Roth distributions, withdrawn cost basis, QCDs, qualified HSA distributions, any income specifically marked as non-taxable (e.g., an inheritance), untaxed Social Security benefits, untaxed earned income (due to pre-tax expenses like insurance premiums), as well as income that is deducted either under the standard deduction or itemized deductions.
2. 0% Long-Term Capital Gains Bracket: Long-term capital gains income does have a stated 0% bracket. So, the 0% bracket in this graph includes all untaxed ordinary income, plus any of the single or married-filing-jointly 0% long-term capital gains bracket that has not been 'eaten up' by taxable ordinary income.

Because of these 0% brackets, which can vary in size depending on the amount of untaxed income in that year of the plan, the y-axis labels my be confusing. For example, in the screenshot above, the top of the 12% bracket is shown as $134,200. But if you check the top of the 12% bracket for 2024 you'll see it ends at $94,300 in taxable income. The 0% bracket explains the difference. Here that bracket contains $7,600 in non-taxable Social Security benefits and $32,300 in standard deduction. ($7,600 + $32,300 + $94,300 = $134,200).

We'll now spell out this and another example more fully.

Roth Conversion Example

In 2024, a plan has the following amounts of estimated income:

You can see this income 'stacked up' on the left (ordinary income) side of the Tax Brackets graph, lining up exactly with the top of the 12% bracket. That's because this plan is executing Roth conversions to fill up that bracket.

The 0% ordinary tax bracket in this graph is composed of:

The standard deduction here is made up of $29,200 + $1,550 x 2 for each spouse since they are both 65+ in age. This leaves $94,300 in taxable income in 2024, leading to $23,200 x 10% + $71,100 x 15% = $10,852 in ordinary income tax. The 10% tax bracket runs from $0 to $23,200 in taxable income. The 12% bracket runs from $23,200 to $94,300 (and so contains $71,100).

This plan also contains $10,000 in realized long-term capital gains in 2024. The 0% long-term capital gains bracket for married filing jointly is $94,050. Since this plan already has $94,300 in taxable ordinary income, there is no space left in this bracket in 2024, so all $10,000 is taxed at the 15% bracket: $10,000 x 15% = $1,500. (The top of the 0% long-term capital gains bracket is almost exactly aligned with the top of the 12% ordinary income tax bracket.)

You can find tax values on the Taxes tab.

Example without Roth Conversions

Using the same example, but excluding Roth conversions, we have a less income in this year of the plan.

The 0% ordinary tax bracket in this graph is composed of:

This leaves $56,198 in taxable income in 2024, leading to $23,200 x 10% + $32,998 x 15% = $6,280 in ordinary income tax.

This plan also contains $10,000 in realized long-term capital gains in 2024. The 0% long-term capital gains bracket for married filing jointly is $94,050. Since this plan has only $56,198 in taxable ordinary income, there is $37,853 remaining in this bracket. Therefore, all $10,000 is taxed at 0%.

Taxable Social Security

In these examples, the amount of Social Security that is subject to tax is slightly different. That's because the taxability of Social Security depends not just on the amount of benefits received (which is the same in both examples: $50,664), but also on other income in that year. Here's how those calculations work for these examples.

In both cases, benefits and other income in 2024 put Social Security into the 85% taxability bracket. However, that does not mean that 85% of benefits will be taxed in that year. Instead, this is the maximum amount that can be taxed. In the presence of Roth conversions, the plan hits that cap. Without Roth conversions, somewhat less, about 79%, is taxable.

Of course, just because income is taxable does not mean it will in fact be taxed. That calculation involves looking at the year's deductions.

For more on the taxability of Social Security, please see our article titled 'Why don't I see exactly 50% or 85% of my Social Security benefits being taxed?'.