Calculating Income

[RunningBum]

I've never seen where they are asking for taxable income, nor net income, nor that some seldom used practice be used.

 

[Rianne]

As far as the car, in real life, I've been leasing Mercedes from the same dealer for over 25 years now. When I first RE'd I asked my regular salesman what I should put down as my income; at the time I technically didn't have any income at all.

He shook his head and said: "Just put down anything. We've already pre-approved you" adding with a laugh "that's what got this country into the financial mess it's in!".

We've gotten a few lines of credit with a "made up" income. I didn't think income had anything to do with net worth.

I guess that's how my DB friend is on medicaid and is worth $M+ from a trust fund in irrevocable trust.

 

[HI Bill]

Not substantively different but if he had a history of $8,333 withdrawn monthly it seems that they would count it as income but $100k whenever marko wants they won't count... silly but that is from the same folks who would consider Roth conversions to be income... so go figure.

The point is if you're asking them for credit (like in a lease) you need to conform to their perceptions of what income is, not yours (unless you don't care if you are approved or not).

Right...for example, the mortgage I applied for, they wanted my last 3 months of pay statements...so I would assume that proof of three months of roughly equal distributions would be about the same....

 

[Amethyst]

Do y'all include tax-deferred income? For some reason I haven't been doing so.

 

[RunningBum]

Do y'all include tax-deferred income? For some reason I haven't been doing so.

Do you mean distributions for a tIRA or 401K? I haven't taken anyone, but I would include that as income because I see that going into my checking account to cover expenses.

I haven't been counting Roth conversions. Apparently I could've, but it's not money in a form that's available for me to pay off expenses such as loans. I considered it but decided not to since I didn't feel it was consistent with what I am counting.

If you mean dividends and distributions thrown from tIRA investments that stay in the tIRA, no, never considered that.

 

[Amethyst]

Yes, or tax-deferred annuities, etc. I think I don't "count" it because it doesn't show up on our 1040. We are certainly glad to get it, though!

Mr. A.'s RMDs do get reported to the IRS, so I count those as income. We spend it, so why not?

If you mean dividends and distributions thrown from tIRA investments that stay in the tIRA, no, never considered that.

 

[pb4uski]

It is interesting that the lenders don't have or provide more detailed guidance on what they want to be included in income... otherwise they get a potporri of individual interpretations of what income is.

 

[RunningBum]

https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1026/51/

These are the guidelines for credit cards set forth by the Consumer Financial Protection Bureau

§ 1026.51 Ability to Pay.



...


(ii) Reasonable policies and procedures. Card issuers must establish and maintain reasonable written policies and procedures to consider the consumer's ability to make the required minimum payments under the terms of the account based on a consumer's income or assets [emphasis mine] and a consumer's current obligations. Reasonable policies and procedures includetreating any income and assets to which the consumer has a reasonable expectation of access as the consumer's income or assets, or limiting consideration of the consumer's income or assets to the consumer's independent income and assets. Reasonable policies and procedures also include consideration of at least one of the following: The ratio of debt obligations to income; the ratio of debt obligations to assets; or the income the consumer will have after paying debt obligations. It would be unreasonable for a card issuer not to review any information about a consumer's income or assets and current obligations, or to issue a credit card to a consumer who does not have any income or assets.

No specific definition for income. Note that they include assets as well as income. Certainly the intent is clear, to determine whether I can make the payments, and my assets that I'm willing to withdraw at a sustainable rate would seem to meet that criteria.


https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1026/ is the base page for the Truth in Lending Act.

 

[Jerry1]

It is interesting that the lenders don't have or provide more detailed guidance on what they want to be included in income... otherwise they get a potporri of individual interpretations of what income is.

Agree. There should be something that addresses people with means that don’t necessarily have typical income streams. Of course they don’t care if they lease a Mercedes to a person with a couple million in net worth. That person has the ability to pay the payment, but as this thread makes clear, may not have what is a standard definition of income.

Silly, really. I assume people of significant means would be likely to lease a car while, if using all after tax money to live, they may not have significant income.

 

[2retireearly]

I just make up a number. I don't use numbers from tax forms because I set my income there to whatever amount I think will work out for me in the line run. Using dividends and interest also doesn't make sense to me because if I'm a growth investor, I have no dividends, but at least as good prospects for portfolio growth. Take 3 or 4 percent of your portfolio as a starting point and alter as needed.

I have a similar question, as I just went through this with a request to refinance my small remaining mortgage. I made up numbers, as I have a 'large' 401k and IRA, and a not large defined pension..pays about 1/3of my expenses, and cash. I love to calculate the smallest amount I will need to wd from 401k,IRA, to live comfortably, and to pay the smallest taxes. In many years I needed to remove none. It's a fun game. So I don't have a repetitive wd amount coming out. The refi couldn't happen because traditional mort requests require seeing a future repetitive amount. I might go ahead and do that, in January, as some of my cash has run out after a number of years, and I'll need it to live. But, if I don't do that, and pull out what I need as I need it, can I apply to rent a 2nd home..tiny apt, at the beach? I have the cash set aside to even pay a whole years rent up front, if need be. But what do I put on the application? What do they look at? I can put the savings acct balance, the defined pension, and the IRS and 401k balances. But I can't really show finite income. To me I'm less of a risk, as I have the money. If I had a real job, at one of application, and later lost it..then I may not have the means to pay the rent. Can someone give me experienced guidance? Thanks

 

[HI Bill]

I can't really show finite income. To me I'm less of a risk, as I have the money. If I had a real job, at one of application, and later lost it..then I may not have the means to pay the rent. Can someone give me experienced guidance? Thanks

Credit rating agencies and banks don't care AT ALL about assets, unless you're using them for collateral. They care about regular income (which is how they determine whether you have the ability to repay a loan), % of credit utilized, your repayment history, etc. Here's what FICO uses to create your credit score. No assets here.

• 35% Payment History (longer on-time payment history = higher score)
• 30% Amount You Owe (Utilization goal is <30% of available credit)
• 15% Length of Credit History (the longer your oldest account is open, the better - best not to close your oldest accounts)
• 10% New Credit Opened (opening new accounts lowers your score)
• 10% Types of Credit You Have (Installment, revolving, mortgage, etc. The more types of credit you have utilized in the past several years, the better).

From other threads here, you're best off setting up regular, more or less even distributions.

 

[2retireearly]

Credit rating agencies and banks don't care AT ALL about assets, unless you're using them for collateral. They care about regular income (which is how they determine whether you have the ability to repay a loan), % of credit utilized, your repayment history, etc. Here's what FICO uses to create your credit score. No assets here.

• 35% Payment History (longer on-time payment history = higher score)
• 30% Amount You Owe (Utilization goal is <30% of available credit)
• 15% Length of Credit History (the longer your oldest account is open, the better - best not to close your oldest accounts)
• 10% New Credit Opened (opening new accounts lowers your score)
• 10% Types of Credit You Have (Installment, revolving, mortgage, etc. The more types of credit you have utilized in the past several years, the better).

From other threads here, you're best off setting up regular, more or less even distributions.

Yes, my nice refi mortgage told me that. But, my Credit Score is GREAT..well over 800... But he suggested, as you did, that I set up the repetitive payout stream if I want to qualify for the refi mortgage...or I guess any loan.
But, my real question is, is this 'need to show real income' necessary for a rental of an apartment? Or does the proof of cash in the bank allow the lease to be approved? Thanks

 

[morriss003]

An idle question on a foggy Saturday morning:

Not counting SS, rental income or anything other than your portfolio, how do you count your income?

Example: If your portfolio made $400K and your SWR is $120K but you only paid taxes on $30K what would you consider your income?

I think it might depend on who's asking; that is, when it's time to do a new car lease, I'd use the total portfolio number (if larger that year) but on a practical day-to-day level I consider my income to be my SWR, then there are instances where I might answer on what I paid taxes on.

Again, limiting it to portfolio only. Just curious.

My income is what ever my wife lets me spend.

 

[SecondCor521]

But, my real question is, is this 'need to show real income' necessary for a rental of an apartment? Or does the proof of cash in the bank allow the lease to be approved? Thanks

In 2006, I was both unemployed and going through a divorce and needed to rent an apartment. The place I rented was happy to give me a 6-month lease (shortest they had at the time) with a few printouts of my taxable accounts that had more than enough to cover the monthly rent payments.

As for the OP, I have found that many places use many different definitions of income. So what I do is ask them what their definition is and then calculate and report my income according to their definition. As I suspect for most people, their varying definitions result in varying answers on my part.

If there is any ambiguity in their definition and I'm unable to resolve the ambiguity with them for whatever reason, then I generally err in my favor.

 

[rk911]

An idle question on a foggy Saturday morning:

Not counting SS, rental income or anything other than your portfolio, how do you count your income?

Example: If your portfolio made $400K and your SWR is $120K but you only paid taxes on $30K what would you consider your income?

I think it might depend on who's asking; that is, when it's time to do a new car lease, I'd use the total portfolio number (if larger that year) but on a practical day-to-day level I consider my income to be my SWR, then there are instances where I might answer on what I paid taxes on.

Again, limiting it to portfolio only. Just curious.

simple. it's all income. every penny, every source...SS, pension, PT job (when i had one), gifts, interest & dividends, realized gains. all income flows into our checking account and whatever $ hits our checking acct is counted as income. from there we spend some, save/invest some, give some now, plan to give more later.

 

[Rianne]

Fairly long thread, I don't think anyone asked this:
DH consults part time (20 hours/week) We have to keep our income within MAGI~$62K I think. Since we never know before January of the following year what VG income (dividends and qualified capital gains), it's usually a guessing game-we do have the HSA advantage of $8K to deduct.
DH took a job in 2019 as consultant and will finish the job in 2019. He told the hiring company he did not want to get paid until 2020. This will keep us safely under $62K. I question this. So he invoices in 2019. Payment in 2020, income in 2020?

 

[CyclingInvestor]

For casual conversation with other ERs, I use dividend flow (all in IRAs). If they want a deeper discussion of IRRs, long term portfolio appreciation, dividends and how I evaluate stocks, I give them as much as they can stomach.

For the IRS, I use tIRA withdrawals (they insist).

 

[pb4uski]

Fairly long thread, I don't think anyone asked this:
DH consults part time (20 hours/week) We have to keep our income within MAGI~$62K I think. Since we never know before January of the following year what VG income (dividends and qualified capital gains), it's usually a guessing game-we do have the HSA advantage of $8K to deduct.
DH took a job in 2019 as consultant and will finish the job in 2019. He told the hiring company he did not want to get paid until 2020. This will keep us safely under $62K. I question this. So he invoices in 2019. Payment in 2020, income in 2020?

Yes, since you are a tax-basis taxpayer.

But if he billed and received in 2019 couldn't he make a deductible tIRA contribution to nullify the income (if he doesn't need the money for spending)?

 

[Rianne]

Yes, since you are a tax-basis taxpayer.

But if he billed and received in 2019 couldn't he make a deductible tIRA contribution to nullify the income (if he doesn't need the money for spending)?

I feel so ignorant. So, if on December 30, 2019 he made a $20K contribution to his tIRA, we'd be in the clear for 2019 income, no worries? That $20K no longer income. But if they take the taxes when issuing the check, does that change things? YourEncore (consulting middleman takes out taxes when issuing his check).


EDIT: I just found this. There is no limit on contributions as he is not covered by employer for tIRA plan at his consulting job.
https://www.irs.gov/retirement-plan...-are-not-covered-by-a-retirement-plan-at-work
Do I understand this correctly?
Another EDIT: He can contribute $7K and take off MAGI. Sorry, just did my homework. OMG, I am now truly confused as this is my 3rd EDIT. I'm getting conflicting info all over the place in my search.

 

[Rianne]

Found this:
https://www.investopedia.com/terms/m/magi.asp


"A taxpayer can then calculate MAGI after finalizing AGI. To calculate MAGI, the taxpayer adds back certain deductions to AGI, many of which are rare and not utilized. Therefore, it is fairly uncommon for one's MAGI to differ greatly from AGI. The IRS explains that deductions added back to calculate MAGI include items such as foreign investment income, half of any self-employment taxes, student loan interest, passive or rental losses, IRA contributions, and higher education costs. The MAGI then dictates the use of premium tax credits and retirement plans. For example, eligibility for premium tax credits occurs when an individual's MAGI is greater than 100% but less than 400% of the federal poverty line for their family size."

 

[pb4uski]

Found this:
https://www.investopedia.com/terms/m/magi.asp


"A taxpayer can then calculate MAGI after finalizing AGI. To calculate MAGI, the taxpayer adds back certain deductions to AGI, many of which are rare and not utilized. Therefore, it is fairly uncommon for one's MAGI to differ greatly from AGI. The IRS explains that deductions added back to calculate MAGI include items such as foreign investment income, half of any self-employment taxes, student loan interest, passive or rental losses, IRA contributions, and higher education costs. The MAGI then dictates the use of premium tax credits and retirement plans. For example, eligibility for premium tax credits occurs when an individual's MAGI is greater than 100% but less than 400% of the federal poverty line for their family size."

You need to be careful... there are different MAGIs for different purposes.... for ACA, IRA deductions are not added back.

http://laborcenter.berkeley.edu/pdf/2019/magi.pdf

 

[pb4uski]

I feel so ignorant. So, if on December 30, 2019 he made a $20K contribution to his tIRA, we'd be in the clear for 2019 income, no worries? That $20K no longer income. But if they take the taxes when issuing the check, does that change things? YourEncore (consulting middleman takes out taxes when issuing his check).


EDIT: I just found this. There is no limit on contributions as he is not covered by employer for tIRA plan at his consulting job.
https://www.irs.gov/retirement-plan...-are-not-covered-by-a-retirement-plan-at-work
Do I understand this correctly?
Another EDIT: He can contribute $7K and take off MAGI. Sorry, just did my homework. OMG, I am now truly confused as this is my 3rd EDIT. I'm getting conflicting info all over the place in my search.

No, contributions are limited.

... For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than:

$6,000 ($7,000 if you’re age 50 or older), or
your taxable compensation for the year, if your compensation was less than this dollar limit. ...

If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A. ...

https://www.irs.gov/retirement-plan...yee/retirement-topics-ira-contribution-limits

So if he earned $20k, you could contribute a total of $14k if you are age 50 or older ($7k him and $7k you) but would still have $6k of MAGI left from his working.

 

[Rianne]

You need to be careful... there are different MAGIs for different purposes.... for ACA, IRA deductions are not added back.

http://laborcenter.berkeley.edu/pdf/2019/magi.pdf

Ahh,
Specifically:
"IRA deduction (traditional IRAs)" Not Roth

"Certain self-employed expenses5"
5 Deductible part of self-employment tax; SEP, SIMPLE, and qualified plans; health insurance deduction. See IRS Publication 974 for further details about calculating the deduction for tax households that also receive ACA premium tax credits"


I just e-mailed our CPA. I'm beginning to think his office plugs numbers in on forms. They kept saying last year, AGI is the same as MAGI. That does not seem to be the case for DH LLC.