Check my tax thinking please

[SecondCor521]

Hi all,

This is sort of a continuation to the following thread of mine from September:

http://www.early-retirement.org/foru...ize-93589.html

I'd appreciate people checking my tax situation and making sure I'm thinking about this correctly.

I have entered all of my existing YTD tax related items into TaxAct that have happened already. To this I have added an additional chunk of Roth conversions and 0% LTCG that I tentatively plan to do before 12/31.

If I go with this plan, it appears that my marginal rate will be:

10% federal tax on ordinary income
0% federal tax on LTCG
6.55% ACA on AGI
6.925% state tax on AGI
5% FAFSA EFC on AGI

For a total of 28.475% marginal rate.

In 2040 when I must start RMD's, it appears that I will be in the middle of the 24% federal bracket. Adding Idaho's top marginal bracket of 6.925% means I'll be in a 30.925% bracket then. It is possible I will receive an inheritance between now and 2040 that will make my income even higher.

I know things can change, but it seems like I should be willing to execute this plan since my marginal rate on this income this year is below what I'll ultimately pay on my income when I start RMDs.

Questions:

1. Seem reasonable?
2. Fill up more of the 10% bracket with more Roth conversions? This seems logical if I believe in the marginal rate story above.
3. Fill up more of the 0% LTCG bracket with more LTCG? Again, same marginal rate story, but it's even better because the marginal rate on my LTCG would just be 18.475%.
4. I should be looking at marginal rates when deciding how much to convert or realize, correct? As it turns out my effective rate with this plan is less than 2%, but I think that really shouldn't matter, right?

Thanks!!

[bingybear]

Quote:

Originally Posted by SecondCor521 I'd appreciate people checking my tax situation and making sure I'm thinking about this correctly. I have entered all of my existing YTD tax related items into TaxAct that have happened already. To this I have added an additional chunk of Roth conversions and 0% LTCG that I tentatively plan to do before 12/31. If I go with this plan, it appears that my marginal rate will be: 10% federal tax on ordinary income 0% federal tax on LTCG 6.55% ACA on AGI 6.925% state tax on AGI 5% FAFSA EFC on AGI For a total of 28.475% marginal rate. l up more of the 10% bracket with more Roth conversions? This seems logical if I believe in the marginal rate story above. 3. Fill up more of the 0% LTCG bracket with more LTCG? Again, same marginal rate story, but it's even better because the marginal rate on my LTCG would just be 18.475%. 4. I should be looking at marginal rates when deciding how much to convert or realize, correct? As it turns out my effective rate with this plan is less than 2%, but I think that really shouldn't matter, right?

I'm at a loss on the bolded part.

you list
10% federal tax on ordinary income
0% federal tax on LTCG
6.55% ACA on AGI
6.925% state tax on AGI
5% FAFSA EFC on AGI
and then get
For a total of 28.475% marginal rate-- where does this come from.

If you have 0% capital gains rate, then your still in the 10% or the 12% bracket.

And how are you using the ACA and FAFSA marginal rates?

[Potstickers]

FAFSA - the Free Application for Federal Student Aid - has what to do with your taxes?

[pb4uski]

I think what the OP is saying is that if his income goes up by a dollar then his expected family contribution goes up by $0.05

[SecondCor521]

In this plan, I have some ordinary income and some LTCG+QDIV. The ordinary income would be taxed at 10% at the federal level and 6.925% at the state level. The LTCG+QDIV would be taxed at 0% at the federal level and 6.925% at the state level.

For every $100 additional income I create (whether it is ordinary income or LTCG), I lose $6.55 of my ACA premium tax credit on Form 8962. This functions like a parallel tax system.

In 2020, I will probably fill out a FAFSA for my middle son who will likely be in college at that point. For every $100 additional income I create (whether it is ordinary income or LTCG), our EFC increases by $5. This functions like a parallel tax system.

10% federal + 6.55% ACA + 6.925% state + 5% FAFSA = 28.475% on ordinary income.

0% federal + 6.55% ACA + 6.925% state + 5% FAFSA = 18.475% on LTCG+QDIV.

[SecondCor521]

Anyone? Bueller?

[pb4uski]

Quote:

Originally Posted by SecondCor521 In this plan, I have some ordinary income and some LTCG+QDIV. The ordinary income would be taxed at 10% at the federal level and 6.925% at the state level. The LTCG+QDIV would be taxed at 0% at the federal level and 6.925% at the state level. For every $100 additional income I create (whether it is ordinary income or LTCG), I lose $6.55 of my ACA premium tax credit on Form 8962. This functions like a parallel tax system. In 2020, I will probably fill out a FAFSA for my middle son who will likely be in college at that point. For every $100 additional income I create (whether it is ordinary income or LTCG), our EFC increases by $5. This functions like a parallel tax system. 10% federal + 6.55% ACA + 6.925% state + 5% FAFSA = 28.475% on ordinary income. 0% federal + 6.55% ACA + 6.925% state + 5% FAFSA = 18.475% on LTCG+QDIV.

Sounds like you have all the bases covered... and no great alternatives... every additional $ of roth conversions will cost you .28475 or more and every additional $ of LTCG will cost you .18475.

I do have to wonder how real the 5% FASFA will be (IOW, will you really get aid such that your net cost is the EFC and if your income increases will your aid really decline)... but having not been through that I really don't know... other than that not much I can add.

[SecondCor521]

Quote:

Originally Posted by pb4uski Sounds like you have all the bases covered... and no great alternatives... every additional $ of roth conversions will cost you .28475 or more and every additional $ of LTCG will cost you .18475. I do have to wonder how real the 5% FASFA will be (IOW, will you really get aid such that your net cost is the EFC and if your income increases will your aid really decline)... but having not been through that I really don't know... other than that not much I can add.

Thanks for the reply @pb4uski!

Because there are others who seem to manage their taxes very strategically and have plans that extend out five years, I feel like I should be able to do so also.

But your comment about FAFSA is illustrative of a larger point: Other than the taxes I'll pay this year, I don't really know, so I have to make a guess based on SWAGs. You're right, my FAFSA in 2 years will likely be different, because my kids' plans might change, or the FAFSA rules might change (like how they switched to prior-prior-year a few years ago), or the school might change their award methodology, or....

Will my RMD's in 2040 really be in the 30.925% bracket? Probably not; they'll probably be higher, because it is more likely than not that I will have other income besides my RMD and SS. But maybe the percentage increase in growth assumption I was using to calculate that will be off. Or maybe SS gets cut. Or maybe I'll be dead.

I'm OK with all of that as long as my logic and approach and assumptions are reasonable. Since you didn't express any abject horror or point out any glaring errors, and because I think I do a decent job at my own taxes, I'm feeling pretty decent about my plan.

Thanks again for the reply. If anyone else sees any errors or wants to poke holes, I would truly appreciate the input.

[RunningBum]

Looks good to me, and yes, look at marginal rates. Reasons for doing Roth conversions over LTCGs are that you have other options for appreciated stock, like gifting/donating it, or never selling it and letting it pass to heirs with step up basis. Or if you could avoid some or all of the SS hump with no RMDs, but it doesn't sound like you can do that. If none of those apply, taking 0% LTCGs sound better.

[sengsational]

My ACA is 0%. Not tax advice, but it might not be a bad idea to see if the difference in premium between the bronze and whatever you're modeling would pay for your expected usage. Not counting the free well visit, our annual historical doctor visit count is about 1, so not worth paying the extra premium for silver. And the HSA plan allows me seven grand off my AGI. Worth a look if you haven't checked on that angle.

[SecondCor521]

@RunningBum, thanks for the additional confirmation. My original plan was to spend down my taxable account (from whence the 0% LTCG come when I realize them) while seasoning my Roth pipeline. I'll think more about the tradeoffs between Roth conversions and LTCGs in terms of tax rates, step up basis, cash flow, and marginal rates - I think I have a good picture now of the moving pieces.

@sengsational, good point. I have two dependent children, and until they age out of the constraints of my divorce decree, I have to cooperate with their mother on their health insurance. She would not go for a bronze plan; she likes having good insurance in place, even if it means spending more for peace of mind. So I'm stuck for the next two years or so. After that I do plan on looking at lower cost options like bronze and catastrophic, since I am, knock-wood, pretty healthy and a pretty low utilizer of medical care.

[Trawler]

Ben looking at the same thing. using the chart from 2018 IRS form 8962 Instructions. I found one needs to look at incremental cost of ACA. In my case I found that with MAGI $44,600 for family of 2 would be 274% of Federal poverty rate thus my contributions to cover premium to be 8.8% of MAGI or $3924 if I took $15k In additional gains or conversions MAGI goes to $59,600 would be 9.56% of MAGI or $5,697 for $1,773 for a 11.82% incremental rate on the extra $15K. This due to the percentage is to dollar one . Something to consider in my IMHO.

[Animorph]

I might be reluctant to take 0% CG's when they are still subject to ACA and EFC adjustments. That's a lot of extra taxes you won't have in 2040. On the other hand, you will need income from somewhere.

Same thing for Roth conversions. An extra 11.55% lost if you do it now.

The Roth conversion still might be worth it, if you think your tax rate will be even higher in the future. The lower marginal rate and the additional tax-free value in the Roth would drive that.

But, will there be a time between now and 2040 RMD's when your taxes will be lower and you still have enough time to Roth convert to avoid RMD's hitting a higher tax bracket? Seems like things would be better in 5 - 15 years when EFC wouldn't be a problem and you turn 65 for Medicare or ACA changes.

[pb4uski]

Quote:

Originally Posted by sengsational My ACA is 0%. Not tax advice, but it might not be a bad idea to see if the difference in premium between the bronze and whatever you're modeling would pay for your expected usage. Not counting the free well visit, our annual historical doctor visit count is about 1, so not worth paying the extra premium for silver. And the HSA plan allows me seven grand off my AGI. Worth a look if you haven't checked on that angle.

Quote:

Originally Posted by SecondCor521 .... @sengsational, good point. I have two dependent children, and until they age out of the constraints of my divorce decree, I have to cooperate with their mother on their health insurance. She would not go for a bronze plan; she likes having good insurance in place, even if it means spending more for peace of mind. So I'm stuck for the next two years or so. After that I do plan on looking at lower cost options like bronze and catastrophic, since I am, knock-wood, pretty healthy and a pretty low utilizer of medical care.

I would push the ex on this. Bronze level is just as "good" as silver... in many cases same company and same networks.... it is just that the deductibles and co-pays are different... if you are willing to take the risk with the deductibles and the co-pays, what skin is it off of her nose? You are obligated to provide insurance and you fully intend to fulfill that obligation... since she isn't paying for it how you do is not her concern.

The fact is that if you and your kids are healthy, you might save a lot with a bronze plan.

[simple girl]

Quote:

Originally Posted by Animorph But, will there be a time between now and 2040 RMD's when your taxes will be lower and you still have enough time to Roth convert to avoid RMD's hitting a higher tax bracket? Seems like things would be better in 5 - 15 years when EFC wouldn't be a problem and you turn 65 for Medicare or ACA changes.

I was wondering the same thing. According to this article, in the comments the author states:

"The short answer is that phasing out the premium assistance tax credit is the equivalent of a significant surtax on income, and makes Roth conversions drastically less appealing. :/ So you may find it’s preferable to delay Roth conversions until you switch over to Medicare and the premium assistance tax credits are a moot point."

Also, have you seen this article? Thought you might find it helpful/interesting.

I wish I could help more but I am struggling to understand this topic!

[SecondCor521]

Quote:

Originally Posted by Trawler Ben looking at the same thing. using the chart from 2018 IRS form 8962 Instructions. I found one needs to look at incremental cost of ACA. In my case I found that with MAGI $44,600 for family of 2 would be 274% of Federal poverty rate thus my contributions to cover premium to be 8.8% of MAGI or $3924 if I took $15k In additional gains or conversions MAGI goes to $59,600 would be 9.56% of MAGI or $5,697 for $1,773 for a 11.82% incremental rate on the extra $15K. This due to the percentage is to dollar one . Something to consider in my IMHO.

Yup, I figured out the same thing playing with my numbers. Increasing the MAGI increases both the percentage and the amount that it's applied to, so it ends up being a larger effective rate (11.82% > 9.56% in your example).

The applicable figure, or tax rate, goes up between 133% and 400% of FPL on a graduated basis. There is a couple hundred dollar bump in PTC contribution when one's income goes from 132.9% to 133% because the applicable figure goes from about 2% to about 3%.

Thanks!

[SecondCor521]

Quote:

Originally Posted by Animorph I might be reluctant to take 0% CG's when they are still subject to ACA and EFC adjustments. That's a lot of extra taxes you won't have in 2040. On the other hand, you will need income from somewhere. Same thing for Roth conversions. An extra 11.55% lost if you do it now. The Roth conversion still might be worth it, if you think your tax rate will be even higher in the future. The lower marginal rate and the additional tax-free value in the Roth would drive that. But, will there be a time between now and 2040 RMD's when your taxes will be lower and you still have enough time to Roth convert to avoid RMD's hitting a higher tax bracket? Seems like things would be better in 5 - 15 years when EFC wouldn't be a problem and you turn 65 for Medicare or ACA changes.

Emphasis added. Excellent question, and one I hadn't thought about much. EFC considerations should be done in about 5 years, so you're right; that would be a ~7% tax I can avoid by waiting. I'm not sure about ACA credits in 5 years - my kids in theory should be independent so I would have a household size of 1; 400% of FPL would be something in the mid $40K range. I'm having a hard time guessing now what my target taxable income would be in 2023 though.

I redid my tax torpedo estimate based on current numbers, and it looks like I will still be in the 24% federal bracket plus ~7% state tax bracket in 2040. So converting in 2018 was a good deal, but converting in 2023 or so may be an even better deal.

As you note, I do need to do some LTCG and conversions to maintain cash flow. But the discretionary realizing of income is subject to your comments.

Quote:

Originally Posted by pb4uski I would push the ex on this. Bronze level is just as "good" as silver... in many cases same company and same networks.... it is just that the deductibles and co-pays are different... if you are willing to take the risk with the deductibles and the co-pays, what skin is it off of her nose? You are obligated to provide insurance and you fully intend to fulfill that obligation... since she isn't paying for it how you do is not her concern. The fact is that if you and your kids are healthy, you might save a lot with a bronze plan.

Good points. Unfortunately, the structure of our divorce decree is not what you think. First, we have 50/50 legal guardianship, which means that we get an equal vote in major decisions about the kids; I would include health insurance as one of those decisions. Second, she does share the costs of all OOP expenses (premiums, copays, deductibles) in proportion to our income. Third, while I don't utilize much health care, the two kids still covered under the decree are moderate utilizers of health care. Finally, it's just not that much money - my net OOP for premiums is about $122 per month after everything is taken into account.

[SecondCor521]

I thought I would also follow up with what I decided to do and why.

I decided to Roth convert enough to absorb the $1000 in other dependent credits (I have two dependents over age 17) which are otherwise nonrefundable.

I was going to do more LTCG, but before I could, the market tanked so I decided to hold off because (a) I have enough cash to last me for a while and (b) I felt I can safely realize the gains in 2019 rather than 2018 and end up with pretty much the same result.

Overall it looks like I landed at about a 28% total marginal tax bracket between federal, state, ACA, and EFC. My effective tax rate will be -4.37%. I've kept my cash flow in good shape, will remain in SNT range for EFC, and, as noted, absorbed all of the CTC.

Thanks again to everyone who responded. I really appreciate the double checking and the additional insights.