Tax question for Roth Conversion

[Russ2020]

I have what I believe is a simple tax question for the forum, for me not so simple. I have been using Turbo Tax for a long time and have not been understanding how taxes work. I just enter what is asked for and get a refund or pay additional tax. This was a mistake.

My wife retires today at 64. I will retire the end of the year at 63. I am trying to figure out how to manage our income so I can do a Roth conversion in 2020. We will have no earned income in 2020. My wife will start social security 1/1/20.

Our income for 2020 will be:
Wife’s social security $21,419
Estimated dividends from taxable account $5,500 almost all qualified.
Sale of S&P500 fund shares in taxable account (LTCG) $48,000
This will provide an income for us in 2020 of $75,000.

So my question is there any room left for a Roth conversion staying in the 12% marginal tax rate. I couldn’t find tax tables for 2020 but for 2019 filling married the 12% bracket goes up to $78,950. How does the standard $24,000 deduction effect this?

Thank You
Russ

 

[RunningBum]

The $24K deduction gives you that much additional space. Gross income - deductions = Taxable Income.

Social security is only 85% taxed at most. Unless it's all taxed at 85%, this is the trickiest thing to estimate, IMO.

The $48K on the sale of shares is really the gain, right? Sale proceeds - basis?

Easiest thing to do IMO is to put all these things in your tax program. Add $1000 of Roth conversion and you should see the tax go up by $120, or less, if your regular income isn't yet at 12%. Keep adding $1000 until you see a larger than $120 jump. This is when you've started pushing some of those QDivs/LTCGs into being taxed at 15%, so the effective rate becomes 27%. Of course if you catch it somewhere in the middle of that new $1000 it will be somewhere between $120 and $270 of tax added.

Actually, now that I think about it, you may be pushing more social security into being taxed as well. So you may have a period where that $1000 is taxed at 12% for $120, and $850 of social security becomes taxed for another $102, or $222 total. So as you add $1000 at a time, you may see $222, $222, ..., $222, then $120, $120...$120, then $270, $270 until all of your divs and CGs are taxed, at which point it drops back to $220 (22% tax rate), then $240 (24% tax rate), and so on. You'll have to decide at which level you've had enough. That may make conversion less attractive, but you'll just run into it when you have to take RMDs, and your SS, so it's still probably worth it. Some of us delay SS in part to give us a larger window for conversions. Something to consider unless you have other reasons to take her SS now.

Also keep in mind that if you are getting health care from the ACA and looking for a subsidy, Roth conversions will impact that negatively. You didn't mention anything so maybe you have retirement health care from another source.

I think those numbers are right, but someone can correct me if I'm wrong, and the real verification is to run it through your tax program. Of course the 2020 tax numbers may be slightly different if the tax brackets move at all, but you should be able to adjust to that once those are announced.

 

[joylesshusband]

I agree that you could estimate the annual amount of dividends paid in a taxable account, provided you know what the account holds.
However, estimating the long-term capital gains from a stock sale which will take place in 2020 can not be very accurate. How do you know the '2020 valuation of your S&P500 fund shares you intend to sell?

Thus I question your estimate of $48k generated in LTCG for 2020. How did you arrive at this figure?

As to the $24,400 standard deduction - you add it to the $78,950 bracket threshold, to arrive at an income of $103,350.
However, you need to consider another "not to exceed" threshold of $103,150 if you desire to pay Zero tax on LTCG and qualified dividends.

 

[CardsFan]

I had a post ready to send, but I see RunningBum beat me to it.

I will just add that TurboTax has a what if spread sheet you can use, but I find it just as easy to use this tool to run simulations: https://www.mortgagecalculator.org/calcs/1040-calculator.php

 

[CardsFan]

The $48K on the sale of shares is really the gain, right? Sale proceeds - basis?

OP needs to clarify this, I interpreted it as the sales proceeds, so cost basis needs to be subtracted.

 

[Russ2020]

Oh I may have made a mistake. The appreciation of those shares I estimate to be 60%. So If I sell $48,000 worth of stock the LTCG would be $28,800. This is good news. Also I will be using Cobra for health care.

 

[Russ2020]

After re-reading all your posts I think I need to go home a spend a little more time thinking about this. It will be a good exercise for the weekend. I think I should be able to figure this out. Thanks for your replies.

 

[pb4uski]

I have what I believe is a simple tax question for the forum, for me not so simple. I have been using Turbo Tax for a long time and have not been understanding how taxes work. I just enter what is asked for and get a refund or pay additional tax. This was a mistake.

My wife retires today at 64. I will retire the end of the year at 63. I am trying to figure out how to manage our income so I can do a Roth conversion in 2020. We will have no earned income in 2020. My wife will start social security 1/1/20.

Our income for 2020 will be:
Wife’s social security $21,419
Estimated dividends from taxable account $5,500 almost all qualified.
Sale of S&P500 fund shares in taxable account (LTCG) $48,000
This will provide an income for us in 2020 of $75,000.

So my question is there any room left for a Roth conversion staying in the 12% marginal tax rate. I couldn’t find tax tables for 2020 but for 2019 filling married the 12% bracket goes up to $78,950. How does the standard $24,000 deduction effect this?

Thank You
Russ

Oh I may have made a mistake. The appreciation of those shares I estimate to be 60%. So If I sell $48,000 worth of stock the LTCG would be $28,800. This is good news. Also I will be using Cobra for health care.

Using 2019 numbers:

Top of 0% LTCG bracket = $78,750 + 2019 standard deduction for MFJ of $24,400 = $103,150

Income before Roth conversion = $5,500 div + $28.800 LTCG + 85% of SS* of $18,206 = $52,206

Leaves $50,643 of headroom for Roth conversion... so figure ~$50k.

* SS would not be 85% taxable based on income before Roth conversion, but would be after Roth conversion... so 85% is used for calculating headroom.

YMMV. Confirm with TT What-If worksheet.

 

[Russ2020]

I sat down this weekend and spent some time with the calculator CardsFan provided. It is a very easy calculator to use. My results pretty much reflected what pb4uski posted. Thanks for all your replies.

 

[Gotadimple]

One other item: IRMAA. Income Related Medicare Adjustment Amount. You won't be impacted by an increased Part B/Part D premiums next year for your wife and the year after for you if your MFJ is less than $170,000 in 2019.

IRMAA apples to tax returns 2 years prior to beginning Medicare. So, your 2019 income will be used to determine any increased medicare B/D premiums in 2020 and 2021. Just be aware of the threshold!



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