Tax Planning

[foxfirev5]

How far to you go in planning future your total income tax burden? I'm currently working on DM's state tax and rediscovered the Homestead Tax Credit for Michigan. Even as a renter she qualifies for a significant credit.

Before the new federal tax law I bunched our property taxes every other year to exceed the standard deduction and reduce taxes. Now that is not a factor. However I'm exploring our state tax laws to do a similar tactic. It's not as easy but certainly doable.

My goal is to take full advantage of the minimum federal bracket while still qualifying for a property tax credit on the state level. Several factors will facilitate this working for the current year. First is the HSA adjustment for $8100 combined with medical ins. premiums from an ancient after tax account. Another is that our primary home is barely under the max taxable value.

Also, we split our 40k per year IRA w/d 16/64 to capture a big chunk of the state refund while optimizing the 10% fed tax bracket. (the delta on the tax credit is greater than the federal rate)

The net result in our case is an overall savings of nearly $2k vs taking a steady 40k out of the IRA for 2 years.. Turbo Tax will not help you in this planning process. Neither will most financial advisers or CPA's.

I know many would say this is a one off, but my entire life is a series of non repeatable occurrences.

How far would you go?

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[pb4uski]

What I am doing is taking Roth conversions to the top of the 12% tax bracket as I think my tax bracket once we are collecting SS and RMDs is likely to be 22% tax bracket. Over the last 7 years I have done almost $400k of conversions and paid, on average, about 8.5% in federal income tax on those conversions, vs 22% later or 28%+ when I deferred that income.

You may want to look at expanding beyond the 10% tax bracket to the top of the 12% tax bracket... get while the getting is good!

I focus on the pro forma incremental tax on the conversion (incremental tax/conversion amount) rather than a specific tax number.

 

[RunningBum]

Yep, managing income to the ACA subsidy, filling up the 12% bracket and 0% LTCGs, heavily funding a Donor Advised Fund in my last year of itemizing deductions, and so on. In years I don't take the ACA subsidy I try to better position myself to qualify in future years, such as selling off funds with unpredictable CGs and replacing with index funds.

 

[foxfirev5]

pb4. Good points. I've been doing the Roth conversions but the one time state tax deal might work for this year. I definitely agree overall about maxing out the 12% bracket. The 10% figure was for this year only.