Are my Tax assumptions correct on Roth and Investments?

[Fleur58]

I wonder if someone could check my assumptions.

1. I am 59.5, in the new 12% tax bracket; and have $975K in TIRA money. Of this amount, $32.5 were non-deductible contributions. I did my first 10K Roth Conversion this month (April). When I did the calculation as to how much of the 10K was taxable, I used the $975K as my total IRA balance. My question is, if my TIRA balance grows by the end of the year, is that the amount the IRS will use to determine how much tax I owe on that conversion?

2. Do I have this correct: I will pay 12% income tax on my taxable acct dividends and interest; and Roth conversion; and I will pay 0% on capital gains distributions; including any gains from investments I sell (while staying in 12% tax bracket)?

3. I sent in a quarterly IRS tax payment equal to the total amount of my Roth conversion tax I owed, plus 12% of investment dividends, interest, and capital gains to date. I do realize I could have sent in 1/4 of that amount. I also sent in money to my State which charges a 7.5% state and local tax rate. Should I have not included the capital gains I received?

Thanks!

 

[pb4uski]

You can probably call your tIRA administrator and they can tell you how much of the $10k is taxable.... [-]I believe that is it based on the date you did the conversion.[/-]

Qualified dividends... dividends from domestic stocks, domestic stock funds and a portion of dividends from international equity funds, et al) are in the 0% rate just like long-term capital gains and LTCG distributions. Short-term capital gains and STCG distributions are 12%.

 

[kaneohe]

You should do a dummy run on F8606. One line asks you for current yr end value of TIRAs. You then add the amount you converted to get the "total value at end of yr " . You divide the basis by this number to get the fraction
non-taxable. If your TIRA grows further by the end of the yr,this makes the denominator larger and the fractional basis smaller......so somewhat more will be taxable than your initial calculation.

 

[gauss]

You should do a dummy run on F8606. One line asks you for current yr end value of TIRAs. You then add the amount you converted to get the "total value at end of yr " . You divide the basis by this number to get the fraction
non-taxable. If your TIRA grows further by the end of the yr,this makes the denominator larger and the fractional basis smaller......so somewhat more will be taxable than your initial calculation.

+1

From memory:

No growth between now and the end of the year
32.5k/975k * 10k

$333 non-taxable 9,667 taxable

10% growth between now and the end of the year

32.5/(975k *1.10) * 10k

$303 non-taxable 9,697 taxable


< 1% (ie 0.31%) difference in taxable amount.
Please check my calculations someone

edit
I checked my calculation above with tax software. The denominator should have included the amount of the distribution. Thus the 975k should actually be 985k when the 10k distribution is added in. Note this changes both results by about $3 each

-gauss

 

[SecondCor521]

I agree with suggesting a dummy run with Form 8606. It is, IMHO, one of the more complicated IRS forms out there, so read the instructions carefully and be sure you use the right terminology for what you did.

The taxable portion of your Roth conversions are calculated via lines 1-11 in the first part and 16 through 18 in the second part. Your $32.5K in non-deductible contributions goes on line 2. Your 10K conversion goes on line 16. The 12/31/18 balance of your tIRA goes on line 6, so it looks like the answer to your first question is yes.

On your second question, I'll defer to pb4uski, who I think is correct. I will add that I'm pretty sure ordinary interest from taxable accounts is taxed at ordinary income tax rates (12% in your case).

As for your third question, I would suggest reading about the annualized installment income method and Form 2210. I don't know how it works exactly, especially since the tax impact of those capital gains depends on what happens the rest of the year. Maybe they will be taxed at 0% if you stay in the 12% bracket, or they could be taxed at a higher rate if you go into the 22% bracket. It's also possible that they will not represent taxable income at all if you for some reason realize an equal amount of capital losses before 12/31.

Your state may be different, but my state taxes capital gains at ordinary income tax rates. But my state also doesn't seem to require estimated tax payments at all. So if you included your capital gains when calculating your state tax owing I think that is more likely to be correct than not.

 

[Fleur58]

Thanks everyone!
PB4uski--I did not realize qualified dividends received 0 tax treatment at the 12% bracket. Thanks If so I sent in more money than I needed to for now.
Kaneohe- I will do a dummy run on Form 8606. If I need to do another conversion to top off the 12% bracket; I will wait until the end of Dec when my investment income will be clear.
Secondcor521--My state does require estimated tax payments. I must include capitol gains in my state total income.
Guass-- thanks for the calculation, I checked it--OK

You guys are great!

In case your wondering, I live off my savings; not my investment returns. Therefore I know I won't be out of the 12% bracket, in fact one of the reasons I am doing a conversion is to get my low "income" in range for a healthcare subsidy for a Silver plan. Currently without the 10K Roth conversion I would qualify only for Medicaid which I don't want. I'm paying full ride on a bronze plan and its expensive ($640 a month) and covers practically nothing. When I apply for the 2019 subsidy in November I need to show at least $16, 643 in income by then. Even if I were to appeal for 2018 I have to show that amount now and I am not there yet unless I sell off something.

 

[VanWinkle]

Thanks everyone!
PB4uski--I did not realize qualified dividends received 0 tax treatment at the 12% bracket. Thanks If so I sent in more money than I needed to for now.
Kaneohe- I will do a dummy run on Form 8606. If I need to do another conversion to top off the 12% bracket; I will wait until the end of Dec when my investment income will be clear.
Secondcor521--My state does require estimated tax payments. I must include capitol gains in my state total income.
Guass-- thanks for the calculation, I checked it--OK

You guys are great!

In case your wondering, I live off my savings; not my investment returns. Therefore I know I won't be out of the 12% bracket, in fact one of the reasons I am doing a conversion is to get my low "income" in range for a healthcare subsidy for a Silver plan. Currently without the 10K Roth conversion I would qualify only for Medicaid which I don't want. I'm paying full ride on a bronze plan and its expensive ($640 a month) and covers practically nothing. When I apply for the 2019 subsidy in November I need to show at least $16, 643 in income by then. Even if I were to appeal for 2018 I have to show that amount now and I am not there yet unless I sell off something.

I have a similar situation and am doing Roth conversions to get to the sweet spot in the silver plan with cost subsidies. In my area, they just ask for your estimated income for the next year, and base your premium on that amount. The premium subsidies are "corrected" to the actual amount allowed based on your actual income at tax time. Cost subsidies are not "corrected" based on your income at tax time.

 

[broadway]

Thanks everyone!
In case your wondering, I live off my savings; not my investment returns. Therefore I know I won't be out of the 12% bracket, in fact one of the reasons I am doing a conversion is to get my low "income" in range for a healthcare subsidy for a Silver plan. Currently without the 10K Roth conversion I would qualify only for Medicaid which I don't want. I'm paying full ride on a bronze plan and its expensive ($640 a month) and covers practically nothing. When I apply for the 2019 subsidy in November I need to show at least $16, 643 in income by then. Even if I were to appeal for 2018 I have to show that amount now and I am not there yet unless I sell off something.

I am in the same boat for this year, if I don't get a job.

Last year I ended up at 270% of FPL because I got a contract job for 10 weeks in the fall which meant I had to repay $750. I had estimated 200% of FPL.

This year I estimated again 200% FPL for my income.

So it seems most people ignore the cost sharing subsidies and make the Roth conversion so that they end up at slightly below 400% FPL so that they get the premium subsidies. Am I right?


.

 

[VanWinkle]

I am in the same boat for this year, if I don't get a job.

Last year I ended up at 270% of FPL because I got a contract job for 10 weeks in the fall which meant I had to repay $750. I had estimated 200% of FPL.

This year I estimated again 200% FPL for my income.

So it seems most people ignore the cost sharing subsidies and make the Roth conversion so that they end up at slightly below 400% FPL so that they get the premium subsidies. Am I right?


.

Not if there are health concerns- I have 50 deduct and 2450.00 max OOP due to my wife's 3 year battle with cancer. So far she is fighting it back, but the costs are high in dollars. So the answer is "it depends".