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NO Federal Tax??
Old 03-19-2017, 09:22 PM   #1
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NO Federal Tax??

I was doing some calculations to try to figure out if I will make under the ACA threshold this year and I found this site:

Tax Calculator - Estimate Your Tax Refund | Bankrate.com

I will be using this keeping handy as I reach year end to determine if I need to take losses or put money into an IRA to get that deduction to keep under the $64,080 income threshold to get ACA tax credits.

I played with it to see what 2018 taxes will be with just our capital gains and dividends and I was excited to see that in 2018 I will pay ZERO tax on federal!

I never thought I'd not have to pay income taxes in retirement!
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Old 03-19-2017, 10:48 PM   #2
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Just wait until you have to take out RMD's while getting SS, it might be a different picture then..
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Old 03-19-2017, 10:57 PM   #3
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Sounds like ROTH conversion time.
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Old 03-20-2017, 12:58 AM   #4
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hey good idea to start doing roth conversions! I have 470k in IRA...so RMD would be 18k or so in 18 years...so I will start converting so I don't have to! Thanks for the idea!
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Old 03-20-2017, 05:16 AM   #5
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But if you do the Roth conversions, wont that negatively impact your ACA credits. (which may not be a factor, soon, anyway)
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Old 03-20-2017, 05:30 AM   #6
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yes. But are all of your dividends qualified? In previous years I did roth conversions up to the top of the 15% bracket as I had cobra. This year will likely be small roth conversions and stay under the cliff. I have not modeled the taxes for this case... and don't really care to. But fed taxes will be low. State will not be as low as q-divys are just income to the state.

But if you assume LTCG and Qdivys only and stay below the top of the 15% bracket.. fed tax law is no tax.

If you got an HSA compatible health insurance ... fund the HSA which will drop you income to allow either more divy, cap gain or roth conversions.
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Old 03-20-2017, 07:25 AM   #7
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also have to be alert for the hidden 30% tax bracket
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Old 03-20-2017, 07:45 AM   #8
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While I haven't achieved a zero federal tax liability, I have been able to get it pretty low in the last few years. There are several ways to have income free from federal income taxes.


The first is to have qualified dividends and LT cap gains although an increase in them does slightly increase my federal tax bill because that income is tied into the ACA subsidy and my deductible medical expenses.


The second is to have muni bond income exempt from federal taxes. Like the QD and LTCG, it will affect the ACA subsidy but not the deductible med expenses.


The third is that ordinary income within the standard/itemized deduction and personal exemption, at least $10k (for me, a little more) is tax free.


The result of this is under half of my income is not subject to at direct federal taxes. The last few years, I have owed more in state income taxes than in federal income taxes. And my state marginal rate is 6.45%, less than the 10% marginal rate bracket I am in.
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Old 03-20-2017, 08:07 AM   #9
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Quote:
Originally Posted by NoOneGetsIt View Post
hey good idea to start doing roth conversions! I have 470k in IRA...so RMD would be 18k or so in 18 years...so I will start converting so I don't have to! Thanks for the idea!
Look at a scenario with no Roth conversions, and the a scenario with Roth conversion to the edge of the ACA cliff. Look at the change in tax and the change in subsidy. The total divided by the Roth conversion is you incremental tax rate with respect to the conversion. It will likely be much lower than your marginal tax rate when you deferred that income or if you wait until RMD.
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Old 03-20-2017, 08:09 AM   #10
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also have to be alert for the hidden 30% tax bracket
True, but you can easily avoid the 30% by recharacterizing any excess.
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Old 03-20-2017, 10:45 AM   #11
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Before my pension began the only income I had was from rent an some dividends. I fell below the Federal poverty level and so paid almost no tax. I also qualified for Medicaid and fuel assistance which was an even bigger benefit.


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Old 03-20-2017, 11:01 AM   #12
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I pay zero tax unless I do Roth IRA conversion. This is one of the many reasons why I retired early. Before I retired, I kept a spreadsheet of everything I paid for 2 years, in those 2 years, I did pay extra taxes. So now those expenses are off. Give me a little bit more spending money.
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Old 03-20-2017, 11:43 AM   #13
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Dh and I paid zero for 2015 and I felt mildly guilty. (We did owe the state.) I needn't have bothered feeling guilty- we're back to having a tax liability for 2016 and, since DH ides late last year and I'll file as Single for 2017 it's gonna be ugly.
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Old 03-20-2017, 11:56 AM   #14
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Dh and I paid zero for 2015 and I felt mildly guilty. (We did owe the state.) I needn't have bothered feeling guilty- we're back to having a tax liability for 2016 and, since DH ides late last year and I'll file as Single for 2017 it's gonna be ugly.
Don't you have to file as Single for 2016 also?
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Old 03-20-2017, 12:43 PM   #15
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@Nun so sorry for your loss

@jebmke what is the 'hidden 30%'?

yes, all dividends are qualified so that is a plus
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Old 03-20-2017, 12:48 PM   #16
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Don't you have to file as Single for 2016 also?

No- I was careful to check on that. You can still file jointly for the year your spouse died.
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Old 03-20-2017, 01:56 PM   #17
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@jebmke what is the 'hidden 30%'?
In the 15% bracket LTCG and Q-divys are not taxed.
so, say you have filled up to the top of the 15% bracket with income and Q-divys. Also assume the last dollar of normal income is taxed in the 15% bracket.

Given that case you add 1 more dollar of income. That one dollar is taxed at 15%. However, that dollar also pushes 1 dollar of Q-divy above the top of the 15% bracket where it is now taxed at 15%. So that one added dollar created 30% tax due to its inclusion. Half taxed on the dollar of income and half on Qdivy that was pushed above the top of the 15% bracket. Thus a marginal 30%
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Old 03-21-2017, 03:31 PM   #18
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True, but you can easily avoid the 30% by recharacterizing any excess.
Right, but you have to watch for it and do the calcs. Many people just eyeball the brackets and assume they are relevant.
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Old 03-21-2017, 04:03 PM   #19
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I echo all who suggested Roth conversions. Once you get to RMDs, you have few choices (I think the only way out is charity gifting - fine if you are going to do it anyway, but not so much just to save taxes.) The sooner you begin Roth conversion, the sooner your total nest-egg in tIRAs, 401(k)s, etc. goes down (less to appreciate to ultimately be RMD'd - heh, heh, I like that word "RMD'd")

I've been converting for 12 years and now (at about 70) it's too late to do any more (unless I try to avoid future 28% tax by taking a 25% hit)

Even having done conversions for this long, I still have good chunk that will be subject to RMD's (good problem to have in the great scheme of things.) I always offer the "free" advice to young whippersnappers to take the company match, then do Roths before adding any more to 401(k)s. To us old folks, I always give the "free" advice to convert as much as possible to Roths from qualified plans - before its TOO LATE!:cool smiley:

Keep in mind that my free advice is probably not even worth what you paid for it. Consult your blah, blah, blah... as YMMV
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