2014 tax planning

[haha]

I know it is early, and changes may come, but I am trying to lay out my income and tax plan for 2014 as best I can.

Basically, I have a floor amount of ordinary income that comes from interest, net profits from Sched E, RMDs and SS. If I do not get any short term option CGs, or losses, and do not do any Roth conversions, that is below my 25% marginal rate, and also below the $85,000 AGI Medicare premium bump-up. Far enough below to give me some room.

I am bearish on equity levels (I know, I am crazy, but please humor me), so I would like to sell some securities with extended valuations and embedded ltcgs. I have already realized maybe $15,000 ltcg, and estimate another $6000 from Ki-1s. From messing with 2013 Turbo-Tax, it appears that within limits my additional tax on additional recognized ltcgs is only slightly higher than 15% of the additional gain. Does this sound right, or have I likely misunderstood something? I won't go over $85K AGI as adjusted for Medicare. I am single.

Looking forward to any comments.

Ha

 

[kaneohe]

From messing with 2013 Turbo-Tax, it appears that within limits my additional tax on additional recognized ltcgs is only slightly higher than 15% of the additional gain. Does this sound right, or have I likely misunderstood something? I won't go over $85K AGI as adjusted for Medicare. I am single.
Ha

Ha.........just for educational purposes, you might want to replace any SS with another type of ordinary income. My impression is that if you have a stack of LTCG on top of a stack of ordinary income with the total stack still in the 15% bracket you have 2 types of marginal rates:
1) If you increase ordinary income so that total stack goes into the 25% bracket, your marginal tax rate is 30%.........15% comes from the 15% tax on the ordinary income; another 15% comes because you have pushed LTCG into the 25% bracket where it is taxed 15%. Both 15%s total to 30%.
2) IF you increase LTCG instead as you are suggesting, the marginal tax rate should be 15%. I'm thinking the slightly more than 15% might come because you haven't saturated the SS amount at 85% of the SS amount yet.
If you replace the SS income w/ some other form of ordinary income , you get a 15% marginal rate for more LTCG. Or if you increase the LTCG, you should eventually saturate the SS effect and then get a marginal 15% rate on any further LTCG.

 

[haha]

Ha.........just for educational purposes, you might want to replace any SS with another type of ordinary income. My impression is that if you have a stack of LTCG on top of a stack of ordinary income with the total stack still in the 15% bracket you have 2 types of marginal rates:
1) If you increase ordinary income so that total stack goes into the 25% bracket, your marginal tax rate is 30%.........15% comes from the 15% tax on the ordinary income; another 15% comes because you have pushed LTCG into the 25% bracket where it is taxed 15%. Both 15%s total to 30%.
2) IF you increase LTCG instead as you are suggesting, the marginal tax rate should be 15%. I'm thinking the slightly more than 15% might come because you haven't saturated the SS amount at 85% of the SS amount yet.
If you replace the SS income w/ some other form of ordinary income , you get a 15% marginal rate for more LTCG. Or if you increase the LTCG, you should eventually saturate the SS effect and then get a marginal 15% rate on any further LTCG.

Very clear, thank you Kaneohe. When I look directly at the 1040, it appears that the SS is being taxed on the max 85%, so I am pretty much bewildered. But the difference is small, and my main interest is whether I can take more LTCGs without increasing my rate? From my result, and your answer, it appears that the answer to this is yes I can.

I will bend over backward to avoid any more ordinary income or STCG. To avoid the 30% taxation that you mention. To some extent that is unknowable to me until the year is closed and I get my K-1s and tax schedules from royalty trusts. But I will definitely avoid any elective ordinary income, like Roth conversions. Also no options, since if I win, I have STCGs taxed like ordinary income, and if I lose he loss just gets subtracted from my tax-favored ltcg. At least I think that is what would happen.

I think unless the market crashes, I am done with Roth conversions for a while. Gradually my TIRA will run off, as I am only keeping interest and non-qualified dividend generators in it, and without some CGT income the slow drain of increasing RMD rates will overpower the current low interest rates and drag down the TIRA value.

Thanks again.

Ha

 

[nwsteve]

Ha
I just completed a similar activity last month as I tried to manage thresholds to capture 0 rate for ltcg and div (total income under 72500). While I like TTax for doing a tax return, I found this 1040 calculator at bankrate.com much easier to use to sort out deflection points and to keep track of other variables. 1040 Tax Calculator
This calculator has the necessary detail without forcing you to maneuver between TTax forms. I did use TTax to be sure my Sch E results for our rental property would be reasonably close--really helpful for dealing with depreciation which TTax auto calculates for you each year.
Nwsteve

 

[scrabbler1]

I have been doing some 2014 tax planning already, too. While I do not have to make a decision on this until the end of 2014, I am looking at the total, 2-year effect o "bunching" my itemized deductions. While at first glance it looks like a good idea, there is a catch for me. If I "bunch" my deductions for 2014 by making my 4th quarter 2013 estimated state income payment in January 2014 (which I already did) and my 4th quarter 2014 estimated state income tax payment in December 2014, I can itemize a larger deduction in 2014 while taking the Standard Deduction in 2015.

However, there is a catch. If I itemize my deductions in 2014, I will have to include in my 2015 income (AGI) a NY property tax rebate I receive to offset the property taxes I pay in 2014. This tax rebate will do several things: (1) it will increase my income tax bill for 2015, (2) reduce the ACA subsidy for 2015, and (3) slightly lower my medical expense deduction for 2015.

Of course, it is tough to project my 2014 income and 2015 income right now, but I can look at it on a marginal basis, just by adding the amount of the rebate (which has changed very little in th last several years). The initial tax reduction I can project by bunching the deductions will be pretty much offset by the reduction in the ACA subsidy and displacement of some 0% Qualified Dividends and LTCG and reduction in medical expense deductions.

I will keep track of this especially at the end of 2014 when I have to decide whether or not to make my 4th quarter 2014 estimated income tax payment in December of January. Right now it looks like a wash.

 

[kaneohe]

.

I will bend over backward to avoid any more ordinary income or STCG. To avoid the 30% taxation that you mention. ................................... But I will definitely avoid any elective ordinary income, like Roth conversions. Also no options, since if I win, I have STCGs taxed like ordinary income, and if I lose he loss just gets subtracted from my tax-favored ltcg. At least I think that is what would happen.
Ha

Ha...........didn't mean to scare you off from Roth conversions...............depends on your particular mix of SS, LTCG, ordinary income............and best to model w/ tax software to find the effect of increasing ordinary income. If you've already pushed all the LTCG up into the 25% bracket w/ SS and ordinary income, you won't see that 30% marginal bracket......but ,of course, you would then be doing the Roth conversion at 25% which isn't as good as at 15%.

 

[RockyMtn]

Ha
I just completed a similar activity last month as I tried to manage thresholds to capture 0 rate for ltcg and div (total income under 72500). While I like TTax for doing a tax return, I found this 1040 calculator at bankrate.com much easier to use to sort out deflection points and to keep track of other variables. 1040 Tax Calculator
This calculator has the necessary detail without forcing you to maneuver between TTax forms. I did use TTax to be sure my Sch E results for our rental property would be reasonably close--really helpful for dealing with depreciation which TTax auto calculates for you each year.
Nwsteve

Nice calculator. I agree...much better than TT.

 

[kaneohe]

Nice calculator. I agree...much better than TT.

One significant shortcoming tho (for us geezers) is that it doesn't take raw SS as an input but requires the taxable amount of SS to be input instead. That's not necessarily a trivial operation and so if SS is involved , the calculator is not too useful.

 

[nwsteve]

One significant shortcoming tho (for us geezers) is that it doesn't take raw SS as an input but requires the taxable amount of SS to be input instead. That's not necessarily a trivial operation and so if SS is involved , the calculator is not too useful.

I made a worst case assumption and recognized I would be in the 85% tax category and since I know my SS income for the year, it is easy number to drop in.
Since I was trying to be sure I stayed in the 15% bracket, I did allow plenty of buffer. One buck over the bracket break at 72.5k, then suddenly all LTCG and div goes from 0 tax to 15%.

Nwsteve

 

[kaneohe]

Since I was trying to be sure I stayed in the 15% bracket, I did allow plenty of buffer. One buck over the bracket break at 72.5k, then suddenly all LTCG and div goes from 0 tax to 15%.

Nwsteve

one buck over.............try it w/ the tax calculator. I think you'll find that it is not a step function but a smooth ramp. Only the LTCG that go over the bracket break get taxed at 15%. The rest is still taxed at 0% so not so much caution required.

 

[walkinwood]

one buck over.............try it w/ the tax calculator. I think you'll find that it is not a step function but a smooth ramp. Only the LTCG that go over the bracket break get taxed at 15%. The rest is still taxed at 0% so not so much caution required.

Exactly!

I had the same impression as nwsteve, but this thread made me go study it earlier today.

If you used Turbotax last year, study the "Qualified Dividend and Capital Gains Worksheet". It helped me figure this out.

 

[nwsteve]

one buck over.............try it w/ the tax calculator. I think you'll find that it is not a step function but a smooth ramp. Only the LTCG that go over the bracket break get taxed at 15%. The rest is still taxed at 0% so not so much caution required.

Kaneohe,
Thanks!! I thought I had looked at that effect accurately but obviously not. Perhaps I confused the transition with some other "gotcha" that seems to lurk in our so called "transparent" tax compliance system.
Nwsteve