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Another Roth conversation question
Old 02-13-2020, 01:12 PM   #1
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Another Roth conversation question

My plan is to do a Roth conversion to the top of the present 12% tax bracket that I foresee the DW and I being in until and if actual tax rates change. My understanding is that I use the figure that our adjusted gross income (after the 24,400 standard deduction) to determine how much is to convert? Is this correct?

A simple example if adjusted gross income after the standard deduction is 50,000 does that leave me 28,000 that I can convert and stay entirely in the 12% bracket?

Thank you in advance!
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Old 02-13-2020, 01:20 PM   #2
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That sounds correct to me. Of course, consider other cliffs such as Medicare IRMAA or ACA income limits.
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Old 02-13-2020, 01:22 PM   #3
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AGI isn't after the standard deduction, it's before. Just so we're not confused on terms. Taxable income is what you'd look at. If that's 50,000, you have $28,950 to convert within the 12% bracket.

A brute force but effective way to confirm this is the model this with your tax program. Add in income at some increments and look at the difference in taxes paid in those increments. If you're already in the 12% bracket and add $1000 for a conversion you should see a $120 increase in taxes. Do this until you see a larger increase. One reason to do this is to make sure nothing else is happening like pushing any capital gains from 0% tax to 15%.

After doing this, you'd have to adjust to the 2020 limits rather than 2019, unless it has a way to test 2020 scenarios. Or you could find an online tool such as tax caster to do this.
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Old 02-13-2020, 01:23 PM   #4
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If you have qualified dividends or long-term capital gains, you'll want to use the top of the 0% qualified dividends/long-term capital gains tax bracket of $80,000 for MFJ in 2020 rather than the top of the 12% tax bracket which is $80,250. The reason is that if your go up to $80,250 then that last $250 gets taxes at 27% rather than 12%.

So if your taxable income after the standard deduction of $24,800 in 2020 but before Roth conversions was $50,000 then you would convert $30,000.... bringing your taxable income to $80,000. The $30,000 conversion would cost $3,600 in tax.
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Old 02-13-2020, 02:01 PM   #5
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Originally Posted by pb4uski View Post
If you have qualified dividends or long-term capital gains, you'll want to use the top of the 0% qualified dividends/long-term capital gains tax bracket of $80,000 for MFJ in 2020 rather than the top of the 12% tax bracket which is $80,250. The reson is that if your go up to $80,250 then that last $250 gets taxes at 27% rather than 12%.

So if your taxable income after the standard deduction of $24,800 in 2020 but before Roth conversions was $50,000 then you would convert $30,000.... bringing your taxable income to $80,000. The $30,000 conversion would cost $3,600 in tax.
Right down to the last nickel! You all are so smart! 'Aint no way the gubment gonna get that $37.50 from me!
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Old 02-13-2020, 02:03 PM   #6
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Originally Posted by pb4uski View Post
If you have qualified dividends or long-term capital gains, you'll want to use the top of the 0% qualified dividends/long-term capital gains tax bracket of $80,000 for MFJ in 2020 rather than the top of the 12% tax bracket which is $80,250. The reson is that if your go up to $80,250 then that last $250 gets taxes at 27% rather than 12%.

So if your taxable income after the standard deduction of $24,800 in 2020 but before Roth conversions was $50,000 then you would convert $30,000.... bringing your taxable income to $80,000. The $30,000 conversion would cost $3,600 in tax.
To add, that $3,600 in tax doesn't get any easier to pay today (during a conversion) than it does tomorrow WITHOUT the conversion. But psychology is funny and numbers tell us that we pay the tax today by way of conversion. EVERYONE literally has a hard time paying that first conversion bill but anyone after that seems to just be a no-brainer. Almost like the mind must be trained to save some dough.
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Old 02-13-2020, 02:04 PM   #7
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Right down to the last nickel! You all are so smart! 'Aint no way the gubment gonna get that $37.50 from me!
^^^ You mean $67.50.... right?
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Old 02-13-2020, 02:06 PM   #8
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To add, that $3,600 in tax doesn't get any easier to pay today (during a conversion) than it does tomorrow WITHOUT the conversion. But psychology is funny and numbers tell us that we pay the tax today by way of conversion. EVERYONE literally has a hard time paying that first conversion bill but anyone after that seems to just be a no-brainer. Almost like the mind must be trained to save some dough.
Yes, after years of trying to avoid taxes like all get out, it is difficult to "vountarily" pay taxes when you don't absolutely have to even though intellectually you know it is the right thing for you.
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Old 02-13-2020, 02:16 PM   #9
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The good news is, if you go $1 or $100 over the 12% bracket or into the LTCG/QDiv 15% tax, you still only pay a fraction of that $1 or $100. But if you are going for an ACA subsidy, or on the IRMAA border, $1 too much can cost you $1000s.
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Old 02-13-2020, 07:30 PM   #10
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Originally Posted by pb4uski View Post
^^^ You mean $67.50.... right?
Hahaha. YES!
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