How to plan this years income ?

[rkser]

I am retiring this year, all our income will be from investments, so I get to decide how much to withdraw & from which accounts (taxable vs Tax Deferred)

As I am getting started on Medicare this year, our income will decide our Taxes & also my Medicare Premiums 2 yrs down.

In 2020, we shot up unintentionally into 24% bracket (MFJ) & missed several income irmaa levels for Medicare Premiums & will be paying a surcharge of 3 rd Tier in 2022.
Although I was planning to the top of 21% mfj, in the last month of the year the income from dividends, interest, some cap gains with balancing the portfolio etc.. started trickling in & we overshot the target & paid a hefty tax bill.

I am curious & want to learn from other members, as to how to plan the income of this year. Is there a software I can use to do this proactively, because by the time I do my taxes by TurboTax next year, I cannot change the past year's income.

Is it just by eye balling or by trial & error ?

I will appreciate any feedback regarding planning this years income, thank you in advance.

 

[disneysteve]

in the last month of the year the income from dividends, interest, some cap gains with balancing the portfolio etc.. started trickling in & we overshot the target & paid a hefty tax bill.

I don't have an answer for you but this is what always messes with us, too. We have a large taxable portfolio, mainly in mutual funds. There's just no way I know of to predict the capital gains that will get paid out in December. Some years they're modest but other years they can be 3 or 4 times more, particularly for a couple of non-index funds that we own.


I'm looking forward to hearing everyone's input on this.

 

[SecondCor521]

I do several things.

First, I keep track of my income throughout the year so I know how much in interest, dividends, capital gains, and other income I have. I just use a simple Excel spreadsheet which mimics the first 11 lines or so of Form 1040.

Second, in taxable I only invest in an index fund which pays low and fairly predictable dividends quarterly. This avoids large capital gains distributions in December, foreign taxes, and corrected 1099's, all of which make planning more difficult.

Third, I sit down in December and do my taxes for the current year (so this December I'll sit down and do my 2021 taxes). Because I do volunteer tax preparation, I have access then to the tax software for that season, so it's pretty straightforward. But usually TurboTax and the like publish early versions around November, so you could get that software and do likewise.

Fourth, I figure out what I want my AGI to be. This is based on a number of factors, but mostly I aim to be under a certain FAFSA limit since I still have two in college. I also look at what my age 75 tax bracket will be.

Finally, I do a Roth conversion which gets my AGI up to where I want it to be for the year. I generally Roth convert up to whatever my age 75 bracket will be. I do this in the last week of December because by then my taxable index fund has paid it's last distribution so I know the rest of my income situation exactly.

That's the yearly process. It has taken me about three years to get my system dialed in. It helps that my tax situation is generally pretty stable from year to year because I generally have had approximately the same expenses and approximately the same income sources.

...

There is also a multi-year planning process, but for me that's mostly looking at the broader picture of what I need to do Roth conversion-wise to try to maximize after-tax income over my lifetime. I do that with a custom spreadsheet which projects my traditional IRA balance and Social Security income through age 86 or so and calculates my federal taxes and IRMAA surcharges.

 

[Finance Dave]

I am FIRE'd but self-employed working about 200 hours/year. I therefore am able to contribute to a TIRA to "manage" my income to some small extent...so that is my "tool". You may not have the same option.

I propose you talk to a CPA and ask them to create a simple spreadsheet for you where you can enter income numbers and it automatically figures in deductions and tax law to give you an estimate of income. You may have to pay a few hundred dollars to get them to do this for you...but it may be worth it. Only issue may be that if tax laws change, you might have to have it "redone".

Good luck.

 

[pb4uski]

Our taxes are pretty simple... interest, dividends, capital gains, my pension and Roth conversions. I have a spreadsheet that does a calculation of the income elements, deductions, taxable income and taxes for the year. I check it to Turbo Tax What-If Worksheet.

In the fourth quarter I update it and in December do a Roth conversion to bring our taxable income close to the top of the 0% preferenced income tax bracket.

You could just use TT's What-If Worksheet if you prefer not to get into a spreadsheet.

 

[tdv2]

This calculator works well.

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[bingybear]

I've found it easy to target an income provided I have enough controls. This year Ed Slot's ticking tax time bomb killed all control.

Leave some slack and realize gains in December.

What is your long term plan is the question.

In early December the distributions are pretty well known.

 

[Time2]

I have only been retired two tax years, what I have done so far is generate the bulk my income for the year during the previous December, minus what I expect for dividend income.
So I figure out my wanted gross income, say $65k. I see about what my dividend income will be, say $15k. I pick a fund and let's say it has doubled, meaning 50% will be the Cap Gains. I sell $100k and generated $50k of capital gains. In reality I now have $115k of cash, in my case I can reinvest $50k and live on $50k + $15k Dividends. Where you store that income for the year is your choice, I'm just putting it in checking and watch it slowly decrease for the year. (not the best, but easy)
Your problem is how to get started, because the first year you need income to live and then Dec. comes and you need to generate income for next year, so you might have a high income that year.
That $50k I reinvested, the next year I could sell that and have a lot of income with a much smaller Cap Gain. But, maybe I don't want to, because of the $0 cap gains tax up to $80k income.
For my second year I wanted to do Roth conversions, So I sold and Roth converted IRA funds, that generated some taxable income, that $50k from last year with low cap gains, was sold for living expenses helped keep my income lower and my tax bill low.
I do use Dinkytown for my planning.
There are a lot of possible iterations, so work it over in Dinkytown.

 

[DawgMan]

I do several things.

First, I keep track of my income throughout the year so I know how much in interest, dividends, capital gains, and other income I have. I just use a simple Excel spreadsheet which mimics the first 11 lines or so of Form 1040.

Second, in taxable I only invest in an index fund which pays low and fairly predictable dividends quarterly. This avoids large capital gains distributions in December, foreign taxes, and corrected 1099's, all of which make planning more difficult.

Third, I sit down in December and do my taxes for the current year (so this December I'll sit down and do my 2021 taxes). Because I do volunteer tax preparation, I have access then to the tax software for that season, so it's pretty straightforward. But usually TurboTax and the like publish early versions around November, so you could get that software and do likewise.

Fourth, I figure out what I want my AGI to be. This is based on a number of factors, but mostly I aim to be under a certain FAFSA limit since I still have two in college. I also look at what my age 75 tax bracket will be.

Finally, I do a Roth conversion which gets my AGI up to where I want it to be for the year. I generally Roth convert up to whatever my age 75 bracket will be. I do this in the last week of December because by then my taxable index fund has paid it's last distribution so I know the rest of my income situation exactly.

That's the yearly process. It has taken me about three years to get my system dialed in. It helps that my tax situation is generally pretty stable from year to year because I generally have had approximately the same expenses and approximately the same income sources.

...

There is also a multi-year planning process, but for me that's mostly looking at the broader picture of what I need to do Roth conversion-wise to try to maximize after-tax income over my lifetime. I do that with a custom spreadsheet which projects my traditional IRA balance and Social Security income through age 86 or so and calculates my federal taxes and IRMAA surcharges.

I will be starting my first withdrawal in 2022 and will have similar issues in knowing exact fund related capital gains, dividends & interest my after tax accounts will spit out from year to year, however, I plan on doing something similar to the above, especially during the current tax year. For planning beyond 1 year, I really like the NewRetirement Planner (NRP). You can manipulate which accounts you withdraw from in any given year and see the projected tax impact year after year. It's not perfect and uses today's known tax code into the future, but helps with a bigger picture strategy (i.e. how much/when to Roth convert, lifetime tax impacts).

Like most here, I like to minimize both my annual taxes year after year, but also keep on eye on the future tax implications (i.e. RMDs, IRMAA, SS, Roth conversions, surviving spouse). At 57, with so many unknowns, I try not to get too worked up on the whole tax thing, which isn't always easy to do. Here's what helps me... I run NRP in default mode which depletes my after tax accounts first, then tax deferred, then Roth, then HSA. If the end of life balance shows a balance which has some margin, then frankly, I don't sweat the impact of taxes year after year, including should I/shouldn't I do Roth conversions. In my case, I have more than 50% of my investments in after tax accounts and can pay very little taxes until 72, at which point I get hammered when RMDs start. This looks pretty attractive for the next 15 years and it still shows a fat balance at the dirt nap. As attractive as that looks, I will still probably be tactical year after year doing some level of Roth conversions.

That's where I sit in how I plan to manage taxes both annually and longer term, but always subject to change.

 

[MrLoco]

I don't have an answer for you but this is what always messes with us, too. We have a large taxable portfolio, mainly in mutual funds. There's just no way I know of to predict the capital gains that will get paid out in December. Some years they're modest but other years they can be 3 or 4 times more, particularly for a couple of non-index funds that we own.


I'm looking forward to hearing everyone's input on this.

Sounds like you have a few actively managed MF's which I am sure generate large CAp Gains distributions every Dec.
The only actively managed MF I have is in an IRA so no tax consequences every year.
In my taxable account, I have only index funds and a few tax managed funds which generate little or no annual cap. gains that I need to worry about in Dec. of each year.
Curious why you have what I assume are actively managed MF's in a taxable account?

 

[disneysteve]

Sounds like you have a few actively managed MF's which I am sure generate large CAp Gains distributions every Dec.

Curious why you have what I assume are actively managed MF's in a taxable account?

Correct.
Why? Because we opened those accounts when we were young and uneducated on all the investment stuff. I chose a couple of funds with really good track records, and they've done extremely well for us over the years. We stopped contributing many years ago but held on to what we had and it has continued to grow and grow.

 

[Exchme]

I think the issue is capital gain distributions from mutual funds. Everything else is fairly predictable by the end of the year. In 2018, I had $51,000 CGD come in as a surprise from an active money manager. That was particularly annoying as it was my highest income year in my whole career, so it was taxed at 23.8%. In 2020, I fired the manager, went with some boring (but profitable) index ETFs with little portfolio turnover. With more $ in the market, my CGD was $400. Of course the gains will have to be taxed someday, but I want to control when.

 

[pb4uski]

Correct.
Why? Because we opened those accounts when we were young and uneducated on all the investment stuff. I chose a couple of funds with really good track records, and they've done extremely well for us over the years. We stopped contributing many years ago but held on to what we had and it has continued to grow and grow.

Many funds provide estimates of what their capital gains distributions will be in advance of the actual distribution. Does yours? Also, you could always call them towards the end of the year and ask if they have an estimate of capital gains distributions.