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Two Personal 2013 Tax Oddities
Old 01-02-2014, 07:35 AM   #1
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Two Personal 2013 Tax Oddities

With 2013 just ending, I was reviewing my income tax projections because I have to make some estimated income tax payments to both the Feds and to my home state (NY). I have a spreadsheet I use as a skeleton version of my income tax forms so I can update it throughout the year and make estimated income tax payments prior to the 4th quarter.

I found two unusual things for 2013. One is how simple my 2013 income taxes will be for the first time in 25 years. In 2013, I made no redemptions of any of my mutual fund holdings in my taxable accounts, so I can avoid having to prepare a Schedule D (including those fairly new additional forms related to Sched D). This also happened in 2011. However, I also will be taking the Standard Deduction instead of itemizing my deductions using Schedule A. This happened in 2012 but not in 2011 or any other year since I began investing in taxable account mutual funds in 1990.

The combination of these two things (no Sched A and no Sched D) means I can switch to filing the shorter and far easier Form 1040A for my 2013 income taxes. Cap Gain distributions and Qualified Dividends are allowed on 1040A. The last time I used Form 1040A was in 1988 when I was still renting, before I bought my co-op apartment and added all the itemized deductions associated with that and having a mortgage (paid off in 1998). I was still working full-time back then, of course, so I had a W-2 form (not any more, YAY!). My state income taxes have been relatively simple after I paid off said mortgage in 1998 because I was able to switch to its Standard Deduction nearly every year since then.

This brings me to the second personal tax oddity for 2013. While I was working, my federal income tax bill was always 2x to 3x greater than my state income tax bill. This makes sense because the federal income tax brackets are much steeper than the state ones. When I ERed back in late 2008, the gap between those two tax bills shrunk a lot starting in 2009 to as small as a few hundred dollars in 2009, 2011, and 2012. Another contributor to the shrinking gap was my having a greater percentage of my income in the 0% federal bracket for Qualified Dividends and Long-Term Cap Gains. (New York taxes both as ordinary income.) But for 2013 more than half of my federal taxable income gets taxed at 0% because it is QD or LTCG. Add to that the small amount of muni bond fund interest from states other than NY which gets taxed in NY but is exempt from federal taxes. As a result, I will end up with a slightly larger income tax bill for NY than I will for the Feds, something which has never happened to me, and this is despite NY having slightly cut its income tax rates back in 2012.

Any of you ever owe your home states more in income taxes than you owe the Feds?
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Old 01-02-2014, 08:10 AM   #2
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Last year I paid more to state than to the feds. It was due to their different treatment of long-term cap gains and dividends.
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Old 01-02-2014, 08:20 AM   #3
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Originally Posted by scrabbler1 View Post
Any of you ever owe your home states more in income taxes than you owe the Feds?
I'm in the same situation. I had no earned income in 2013 and most of my taxable income is LTCG which I deliberately harvested a few days ago. There are also some qualified dividends as well CG distributions. In 2012, I had a few months of earned income but I still paid more in state income tax than federal. I itemize deductions because my property tax alone is above the threshold of the standard deduction, and that keeps me in the 15% federal bracket for an even larger amount of LTCG, or in the future, Roth conversions.
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Old 01-02-2014, 08:28 AM   #4
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Originally Posted by scrabbler1 View Post

Any of you ever owe your home states more in income taxes than you owe the Feds?
Almost every year since I retired. Only exception is one year when I exercised some NQ options that I had left over when I retired. I do have one anomaly when I did my pro-forma 1040 with a ROTH conversion. While my taxable income falls clearly in the 25% bracket, my marginal rate is 30% due to the way dividends and other income flow through the 1040. At first I thought the software had a glitch but when I walked through the Schedule D worksheet it made sense. The marginal rate in my case is not any of the bracket rates. Just goes to show how careful you need to be when making marginal decisions. Can't just look at brackets.
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Old 01-02-2014, 08:36 AM   #5
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I owe the Feds $0. My KY income tax bill will be $~3K due to the QD's & voluntary LTCG which KY doesn't recognize as different than ordinary income. OTOH, KY doesn't tax SS benefits as the Feds would/do.
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Old 01-02-2014, 09:55 AM   #6
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Last year I paid more to state than to the feds. It was due to their different treatment of long-term cap gains and dividends.
+1 last year. Feds was $0 due to capital gain harvesting and state was ~$3k because minimal capital gain preference.

For 2013 I changed to prioritizing Roth conversion and federal tax will be almost twice the state tax.
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Old 01-02-2014, 02:08 PM   #7
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Originally Posted by pb4uski View Post
For 2013 I changed to prioritizing Roth conversion and federal tax will be almost twice the state tax.
I am right now thinking about this issue for 2014. My state has no income tax. Could you discuss in this thread or elsewhere your thought process for deciding whether to prioritize capital gain or Roth Conversions? I don't really know how to structure the problem.

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Old 01-02-2014, 03:06 PM   #8
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I am right now thinking about this issue for 2014. My state has no income tax. Could you discuss in this thread or elsewhere your thought process for deciding whether to prioritize capital gain or Roth Conversions? I don't really know how to structure the problem.

Ha
What I did was I created a rather complex model with our taxable, tax-deferred and tax-free accounts to age 100 with the same assumptions that I use in my QLP retirement plan that took withdrawals first from taxable, then tax-deferred and then tax-free and included federal and state tax computations based on current rates.

I had one scenario that prioritized capital gains starting with my then current unrealized gain position and assuming that a portion of the return on my taxable accounts was appreciation (and the rest was dividend income).

From now (58) to 70 I will have some capital gains in any event from just raising cash each year for living expenses but one scenario was to also do some capital gain harvesting up to the top of the 15% bracket.

Both scenarios did either gain harvesting (in addition to gains from raising cash for living expenses) or Roth conversions to the top of the 15% tax bracket .

My net worth at age 100 was about 10% higher by priortizing Roth conversions over capital gain harvesting. In both scenarios I am into the 25% bracket at age 70, but with Roth conversions I am not as deeply in the 25% bracket and I come out of the 25% bracket earlier. I assumed that I deferred SS and pensions as much as possible (70 and 65, respectively).

While I concede the model is assumption bound, I used my best estimates and decided that the best approach for me was to prioritize Roth conversions over gains harvesting. My conviction was challenged when I had to write out the big check for my 4Q federal estimated taxes, but that is my decision and I'm sticking to it.

YMMV.
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Old 01-03-2014, 12:53 AM   #9
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Since Texas does not have any individual income tax.... NOPE....
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Old 01-03-2014, 01:39 AM   #10
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I er'd in July. Partner and I sold our home, with a nice after-cost profit of about $350k. Because we got married, are now able to take advantage of full $500k home sale gains exclusion. Also, with some of the profits I set up a fidelity charitable trust to take full advantage of the charity exclusion. End result: we will pay only about $20k of federal/state taxes on about $600k of income - or about 3%. Very odd, in a good way. .
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