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Old 02-12-2015, 03:21 PM   #1
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Instant 240% ROI!

Sounds like a scam, right? In this case it's not -- it's a public service announcement!

When I worked at Megacorp I earned too much to ever look at this, but since then, with a much more moderate income, it can come into play.

I share this as an example so some of you on the 'cusp' of qualifying for this can look if putting a little more into a TIRA for the 2014 tax year may help out in a big way.

I've been entering all my tax documents into my tax software as I get them. The last piece -- a 1099-DIV from Schwab -- generated $600 in taxable dividends. Adding that reduced my reported refund by about $1300. Getting another $600 in income raised my taxes by $1300? Ouch!

Doing a little more research, I realized what happened. Before that extra $600 in income, I was getting a full $2000 tax credit for the Retirement Savings Contribution Credit (RSCC) -- getting a 50% credit on the first $4000 in TIRA contributions. That extra $600 in dividend income not only increased my taxable income but also reduced the credit to 20%, or $800!

So playing the "what if" game, I went back to the tax software and added in another $500 in TIRA contributions for 2014. (We contributed over $4000 previously, but hadn't maxed out.) That increased my refund back by more than $1200, as the $800 credit became $2000 again. So in a nutshell, Uncle Sam *gave* me $1200 for putting another $500 into my IRA!

Suffice it to say I logged on to my Schwab account and quickly transferred another $500 into a TIRA for the 2014 tax year.

Those of you in the appropriate income range (for MFJ the 50% credit -- up to $2000 -- becomes only 20% at the level of $36,000 in AGI for 2014) may want to play with this a little and see if you can get an instant 240% return on investment. In my case, the extra $500 in TIRA contributions gets my AGI below $36K again, and that made all the difference.
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Old 02-12-2015, 03:55 PM   #2
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You ran into a tax code cliff. Too many of these in the tax code.

But congrats on your move. Well done!
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Old 02-12-2015, 04:02 PM   #3
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That's a great illustration of why completing one's own tax forms is important. It's doubtful a paid preparer would have noticed that cliff and told the client about it.
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Old 02-12-2015, 04:53 PM   #4
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Originally Posted by JoeWras View Post
You ran into a tax code cliff. Too many of these in the tax code.

But congrats on your move. Well done!
Well, don't want to get into public policy debate, but yeah, I think there should be fewer cliffs and more gradual phase-outs where they are appropriate. I have to watch the cliffs in our MAGI for ACA purposes, too -- doubly so because as an American Indian I have an extreme incentive to keep our MAGI below 300% of the poverty line.

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That's a great illustration of why completing one's own tax forms is important. It's doubtful a paid preparer would have noticed that cliff and told the client about it.
Yeah. I saw my tax rise by over $1300 as soon as I entered only $600 in income, and I knew something was up (if it wasn't a software bug). Sure enough, when I dug deeper I realized that income put me over a big cliff and I had to reduce AGI in order to climb out of it. Fortunately TIRA contributions do that for both this purpose and for ACA purposes.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 02-12-2015, 06:23 PM   #5
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Congrats, Ziggy. I did my DD's taxes last year. She had a low annual income from a mix of odd jobs, both W-2 and independent contractor. Some of the income was overseas, just to make it fun.

It was confusing, but playing with Form 8880 was well worth the effort. From my e-mail to her:
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I reentered the data in TaxAct, the program I use, with a $2200 IRA contribution to bring your AGI below $17,750. You don’t get the full 40% credit, because you are limited to only the amount of federal tax you owe, $768. Still, $768 / $2200 means Uncle Sam will be subsidizing 35% of the $2200 contribution. Sweet!
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Old 02-12-2015, 06:45 PM   #6
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I've been in that exact situation - having the saver's credit drop from $2000 to $800 IIRC. I think I was doing Roth's that year and recharacterized a couple thousand bucks to trad IRA to get a dollar under the 50% credit threshold for the year.
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Old 02-12-2015, 06:57 PM   #7
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Good idea! Thanks for sharing Ziggy.
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Old 02-12-2015, 08:39 PM   #8
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Yes, thanks to ziggy for sharing this. We all need to be on the look out for some of these really steep cliffs. They seem more common with credits, like for education, etc.

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Originally Posted by GrayHare View Post
That's a great illustration of why completing one's own tax forms is important. It's doubtful a paid preparer would have noticed that cliff and told the client about it.
Good point. I've often wondered this (I've always done my own taxes). On one hand, they are pros and spend so much time doing this that it might be second nature to them, OTOH - they are cranking out returns as fast as they can, time is money, and no way will they take the time to figure stuff like that out.

Anyone have an idea which is closest to reality?

-ERD50
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Old 02-12-2015, 10:09 PM   #9
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You know, I am way above this level.... but I just looked and if I can convert my and my wife's ROTH contributions to TIRA contributions I can save $3,600...

SOOOO, thanks for putting this down as it got me thinking of what I could do on my return....
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Old 02-13-2015, 12:11 AM   #10
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When I do my taxes (TT), I watch the rolling total after every entry. I've found cliffs like this a number of times just from keeping an eye open. It's absurd the way the tax code works. But I have to say that using a tax program has saved me a ton of money I would never have seen doing it all by hand.
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Old 02-13-2015, 07:00 AM   #11
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I used taxhawk and love the do over features and the what if scenarios. they can and do save a lot of money from the taxman. not to sound stupid, but what is a tira? is that a taxable ira or what?
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Old 02-13-2015, 07:02 AM   #12
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tira = traditional IRA (not a Roth)
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Old 02-13-2015, 09:48 AM   #13
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You ran into a tax code cliff. Too many of these in the tax code.

But congrats on your move. Well done!
what are some of the others?
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Old 02-13-2015, 12:17 PM   #14
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what are some of the others?
The ACA's subsidy/cost sharing mechanism is an obvious one, for starters. There are cliffs where you can earn one extra dollar and lose hundreds in subsidy.
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RIP to Reemy, my avatar dog (2003 - 9/16/2017)
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Old 02-13-2015, 12:47 PM   #15
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There was no cliff for me when changing the tIRA to Roth conversion amount.
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Old 02-13-2015, 01:00 PM   #16
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Anyone have an idea which is closest to reality?

-ERD50
In the early '70's I went to a tax preparer who was practically begging me to come up with a deduction - anything. "Well, I spent $12 on some black socks for work" (back then you could deduct all of your work-related expenses) and that was enough to get me into the next lower tax bracket.

So some of them do at least some of the time.
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