Another rant about taxes

[Z3Dreamer]

Used my 2016 TurboTax to look at 2017 taxes. That's right, 2017. I am retired, looking to Roth convert AND qualify for ACA subsidies. One more thing - will draw some SS. Yes, we are drawing at 62.

Anyhow, I put in some IRA distribution so as to Roth convert in my 15% Federal bracket. This was fine. Still qualified for ACA. Then I bumped the IRA distribution up by $5,000. Still qualified for ACA.

Here is the rant part: Federal and state taxes increased by $1,346. Subsidy decreased by $746. So, that is an effective tax rate of 27% combined Fed and state and a 15% "tax" in the form of decreased ACA subsidies. 42% combined even though my top tax bracket is 15%.

In case you did not know this, increased income causes more SS to be taxed creating a super-marginal tax rate. Will have to find that sweet spot - draw SS later, convert less, find more above the line deductions. But 42%!!!

 

[hesperus]

Be grateful you even get subsidies, we don't even come close.

 

[Pilot2013]

Be grateful you even get subsidies, we don't even come close.

If your'e not getting them, isn't that because of your higher income? Who should be grateful?

 

[Dash man]

We couldn't possibly qualify for subsidies. I guess we're pretty darn fortunate!

 

[aaronc879]

I wish I didn't qualify for subsidies under today's guidelines. It would mean i'm loaded...by my standards.

 

[Texas Proud]

Welcome to the world of ACA credits...


I have kept my income as low as I can the past couple of years just because of the higher tax rate you experience... I learned this the hard way my first year when I went over and got nothing!!! But, I had a paycheck for awhile so could not do that much about it....

 

[COcheesehead]

I wouldn't be able to qualify either and I have to pay the 3.8% ACA excise tax in addition. Wow, I must be really, really fortunate.

 

[Amethyst]

It's OK to complain about paying AMT, though. AMT at our income level is just wrong, wrong, wrong!

 

[jkern]

Used my 2016 TurboTax to look at 2017 taxes. That's right, 2017. I am retired, looking to Roth convert AND qualify for ACA subsidies. One more thing - will draw some SS. Yes, we are drawing at 62.

Anyhow, I put in some IRA distribution so as to Roth convert in my 15% Federal bracket. This was fine. Still qualified for ACA. Then I bumped the IRA distribution up by $5,000. Still qualified for ACA.

Here is the rant part: Federal and state taxes increased by $1,346. Subsidy decreased by $746. So, that is an effective tax rate of 27% combined Fed and state and a 15% "tax" in the form of decreased ACA subsidies. 42% combined even though my top tax bracket is 15%.

In case you did not know this, increased income causes more SS to be taxed creating a super-marginal tax rate. Will have to find that sweet spot - draw SS later, convert less, find more above the line deductions. But 42%!!!

Could be worse, if that additional $5k was earned income you would owe an extra 7.65% in Payroll tax. Or even worse yet, self employed income and owe an extra 15.3%.

 

[gcgang]

The complexity of our tax code/govmt subsidy system is mind boggling. I used to kind of enjoy playing the games to get the most out of the system, and still do try to minimize tax liability, but it becomes less fun with every revision.

Your 42% effective rate in the 15% bracket just screams for a better system.

 

[rodi]

I agree that the system is far to complex.

But - by Roth converting now, you're working to avoid the RMD tax torpedo later...

Like the OP I did some "what if" turbo tax runs to figure out my best tax strategy for 2016 (and will do so again in 2017)... Sure I'm paying more taxes AND reducing my ACA tax credit, but hopefully it will be worth it when I turn 70.5.

My main goal for running "what if" turbo tax calculations was to make darn sure I didn't go over the ACA cliff doing something optional (like Roth Conversions.)

 

[Hermit]

The only thing I can ever qualify for is higher tax brackets and additional fees for Medicare! (Not a bad problem to have.)

 

[ivinsfan]

I have to quibble with your terminology...you call the reduction of your ACA subsidy a "tax"...no it's less subsidy, if you don't want less subsidy don't take the extra income, you're trying to have your cake and eat it too. W-2 earners don't have that flexibility, imagine how they all feel. The SS taxable income issue has been around for awhile as well. All the tax rules don't have to be in your favor.

 

[Dash man]

DW just exercised some option that expire next month. After federal and state income, Medicare and social security withholding we got about half of the proceeds of the sale. No salary coming in this year but any interest, some dividends, my small pension and our rental income will all be taxable at the highest rate for the rest of the year. It's because of our good fortune but still hurts.

 

[EastWest Gal]

The only thing I can ever qualify for is higher tax brackets and additional fees for Medicare! (Not a bad problem to have.)

I hope to be in your position some day. I'll be about $10K over the ACA subsidy limit in 2017. It's a weird system--if I could get my income under the limit by one dollar, I would save almost $16K in subsidies. As it is, my premium will be about 1/4-1/5 my annual spending planned for this year. What if I was Joe Blow with that income and no assets? If one's MAGI is over $64,080 one has to shell out $22K (yes, that's right) for health insurance? The way it's set up, some people may be deciding between eating or making their house payments and paying for health insurance. It makes no sense. It just encourages people who have to pay for their health insurance to work LESS.

 

[aaronc879]

It's OK to complain about paying AMT, though. AMT at our income level is just wrong, wrong, wrong!

I googled AMT since i've never had to deal with it yet. Looks like you don't have to worry about it until you reach $54,300 in 2017. I couldn't find if that is taxable income of $54,300 or $54,300 plus standard deduction and exemption. What if I contribute to a 401k? I'm starting a new job in a couple weeks and although I won't hit $50K this year, I will next year. I could top $55K with OT. I'm not sure how I feel that I may finally make enough money to qualify for a higher tax.

 

[meierlde]

I googled AMT since i've never had to deal with it yet. Looks like you don't have to worry about it until you reach $54,300 in 2017. I couldn't find if that is taxable income of $54,300 or $54,300 plus standard deduction and exemption. What if I contribute to a 401k? I'm starting a new job in a couple weeks and although I won't hit $50K this year, I will next year. I could top $55K with OT. I'm not sure how I feel that I may finally make enough money to qualify for a higher tax.

Note that the AMT really applies if you have large excluded deductions such as state taxes. The way it works, is you add back the excluded deductions as well as personal exemptions (so a large family adds to amt) to your income See here for details:https://en.wikipedia.org/wiki/Alternative_minimum_tax
then you calculate the tax both using the standard method and the AMT. Since the amt is a flat 26% after the exclusion, it takes a fairly large income to exceed the standard tax. Typically at 60k a year you pay 8000 or so a year in income tax, while the AMT would work out at about 1,560 so you pay the higher regular tax.

If you get tax software it does both calculations to see what happens.
It won't show you the AMT form unless you hit it.

 

[aaronc879]

Note that the AMT really applies if you have large excluded deductions such as state taxes. The way it works, is you add back the excluded deductions as well as personal exemptions (so a large family adds to amt) to your income See here for details:https://en.wikipedia.org/wiki/Alternative_minimum_tax
then you calculate the tax both using the standard method and the AMT. Since the amt is a flat 26% after the exclusion, it takes a fairly large income to exceed the standard tax. Typically at 60k a year you pay 8000 or so a year in income tax, while the AMT would work out at about 1,560 so you pay the higher regular tax.

If you get tax software it does both calculations to see what happens.
It won't show you the AMT form unless you hit it.

Oh, I thought it was affecting middle income people. Sounds like you have to make quite a lot to be affected. I know "quite a lot" is a relative term. I won't have to worry about it. Thanks.

 

[Bamaman]

After 8 years of ER, getting to real retirement age and Medicare makes me feel good.

I've been going through my checking account looking for healthcare expenditures for 2016. I'm up to about $14K so far--and that's with really good supplements. My daughter's just got to find a job with insurance, as I'm paying BCBS regular healthcare for her.

I'd hate to see how much we would have spent on ACA with a Silver Plan and incredibly high deductibles.

 

[Svensk Anga]

Look on the bright side. You may not have to deal with the ACA subsidy issue after 2017.

 

[dtbach]

Look on the bright side. You may not have to deal with the ACA subsidy issue after 2017.

Yeah, you can pay full freight. That should make you happy.

 

[HadEnuff]

that's an interesting interpretation: the loss of subsidies as a tax increase.

 

[rodi]

Technically the subsidies are tax credits. You can take them up front, through premium reductions... or pay full freight through the year and get them in the form of a tax refund.

So the subsidies are definitely part of our current tax code...

 

[Toocold]

Yeah, you can pay full freight. That should make you happy.

Under this post's logic, all those who are getting ACA subsidies will get a tax hike!

 

[harley]

But - by Roth converting now, you're working to avoid the RMD tax torpedo later...

After almost 10 years of doing Roth conversions to the top of the 15% bracket for the very reason you stated, I've come to the conclusion that I'm not making much of an impact. My t-IRAs totaled ~$1M when I FIREd, so doing a $30-$50K conversion (in the good years) hasn't even kept my balance the same. My t-IRAs have gained more than I've been able to convert. I'm still glad I've done it, but I'm not avoiding any torpedoes. I guess I could have gone deeper into the 25% bracket, but then it becomes a financial wash for me. It might have benefited my heirs someday, but I'm not too worried about that.