Tax question

[FREE866]

Trying to optimize my tax situation with regards to Roth conversion. I asked my accountant for estimates and his numbers don't make sense to me. I almost have more faith in people on this board so figured I'd throw it out there:


File status is single.




If I receive 10K in qualified dividends, 12K in LTCG, and a 40K Roth conversion--total 62K income-- the total tax expected is $9822


In another example of 10K in dividends, 20K in LTCG, and 30K conversion-total 60K income-- the total tax expected is $8122.



So there is a $1700 increase in taxes while the total income is up only 2K. Is that right?


Thank you

[pb4uski]

No!

For the first scenario I get $4,550 in taxes and for the second scenario I get $3,058 at https://www.dinkytown.net/java/1040-tax-calculator.html

In the first scenario you would have $28k of ordinary income taxed at 10-12% and $22k of preferenced income... the first $12k taxed at 0% and the remaining $10k at 15%.

In the second scenario you would have $18k of ordinary income taxed at 10-12% and $30k of preferenced income... the first $22k at 0% and the remaining $8k at 15%.

The extra $10k at 0% is the major part of the difference.

[FREE866]

Quote:

Originally Posted by pb4uski No! For the first scenario I get $4,550 in taxes and for the second scenario I get $3,058 at https://www.dinkytown.net/java/1040-tax-calculator.html In the first scenario you would have $28k of ordinary income taxed at 10-12% and $22k of preferenced income... the first $12k taxed at 0% and the remaining $10k at 15%. In the second scenario you would have $18k of ordinary income taxed at 10-12% and $30k of preferenced income... the first $22k at 0% and the remaining $8k at 15%.

I need to get on that calculator and play around with it, but FYI that tax amount he sent includes Federal , State and NYC

[SevenUp]

Quote:

Originally Posted by FREE866 I need to get on that calculator and play around with it, but FYI that tax amount he sent includes Federal , State and NYC

Using a flat 3.8% for NYC, the spreadsheet used to make the Ordinary income marginal tax rate when causing LTCGs to be taxed chart gives the same $1700 difference between your two scenarios. The absolute amounts are slightly different, due to the 3% NYC bracket at lower incomes.

Once your AGI reaches $52,400, you'll pay 37% (fed + NYS + NYC) on Roth conversions from that point through the amount of your qualified dividends and long term capital gains. See the linked article for an explanation. You can also download the spreadsheet mentioned and do your own "what if...?" calculations.

[FREE866]

Quote:

Originally Posted by SevenUp Using a flat 3.8% for NYC, the spreadsheet used to make the Ordinary income marginal tax rate when causing LTCGs to be taxed chart gives the same $1700 difference between your two scenarios. The absolute amounts are slightly different, due to the 3% NYC bracket at lower incomes. Once your AGI reaches $52,400, you'll pay 37% (fed + NYS + NYC) on Roth conversions from that point through the amount of your qualified dividends and long term capital gains. See the linked article for an explanation. You can also download the spreadsheet mentioned and do your own "what if...?" calculations.

Thank you SevenUP. My initial reaction was that "total income" should be the determining factor, but it seems like having more income from LTCG than the Roth conversion has its benefits?

[SevenUp]

Quote:

Originally Posted by FREE866 Thank you SevenUP. My initial reaction was that "total income" should be the determining factor, but it seems like having more income from LTCG than the Roth conversion has its benefits?

Yes, you pay less tax on LTCG than on the same amount of traditional withdrawals (whether those withdrawals are converted to Roth or not).

Eventually, however, you will be subject to Required Minimum Distributions from your traditional account. Whether to do Roth conversions now vs. later depends on the marginal tax rate you'll pay now vs. later.

[FREE866]

Quote:

Originally Posted by SevenUp Yes, you pay less tax on LTCG than on the same amount of traditional withdrawals (whether those withdrawals are converted to Roth or not). Eventually, however, you will be subject to Required Minimum Distributions from your traditional account. Whether to do Roth conversions now vs. later depends on the marginal tax rate you'll pay now vs. later.

Gotcha. Yes ( I did another thread on this last month) I'm 53 now and am starting some Roth conversions this year as a way to lower my RMD's at 72 and have , hopefully, a decent Roth IRA account at that time to use a source for funds as well. The way it works out is I should be able to do,for this year anyway, 10K in dividends, 12K in Cap gains and 30K in Roth conversion which will keep me under that $52,400 cap you mentioned in previous posts.

Regarding my OP, I had sent my accountant a few scenarios if I did have more LTCG or more Roth conversions just to get an idea of what I'd be looking at as far as tax situation.