taxcaster and dinkytown say I'll pay 0% tax?

[SevenUp]

But if the incremental Roth conversions are just using credits that would otherwise go wasted then what the marginal rate is doesn't matter because the OP isn't paying the tax, Uncle Sam is.

The actual marginal tax rate (not necessarily the tax bracket) incurred by the taxpayer always matters, does it not?

When "the incremental Roth conversions are just using credits that would otherwise go wasted" the marginal tax rate is 0%, as shown in the chart.

It isn't until the taxable income rises to where there is $4000 tax liability, thus using all the non-refundable CTC, that the marginal tax rate goes above 0%.

At that point it jumps to 25% because the ordinary income is in the 10% bracket but each extra dollar of ordinary income pushes another dollar of QD&LTCG into that income's 15% bracket.

 

[npage]

For us simpletons. Roth conversion is simply treated as income of ACA purposes at least putting aside tax rates and subsidies for a moment?

So if I have $30K in dividend income and I convert $30K from pretax IRA funds to Roth my income as far as ACA is concerned is $60K, correct?

 

[SevenUp]

...putting aside tax rates and subsidies for a moment?

Other than that, Mrs. Lincoln, how was the play?

So if I have $30K in dividend income and I convert $30K from pretax IRA funds to Roth my income as far as ACA is concerned is $60K, correct?

Correct, if that is your only income.

 

[npage]

Thanks, sometimes I have to revert to basics with the depth of knowledge and detail here.

Not quite there yet but when wife retires in a few years we will have some interest from bond fund, VTI dividends and be living off taxable withdrawals from said bond fund (not expecting much if any capital gains) for a good 10 years before we need IRA.

I plan on doing roth conversion during this period up to some ideal amount to manage ACA subsidies.

 

[pb4uski]

The actual marginal tax rate (not necessarily the tax bracket) incurred by the taxpayer always matters, does it not?

When "the incremental Roth conversions are just using credits that would otherwise go wasted" the marginal tax rate is 0%, as shown in the chart.

It isn't until the taxable income rises to where there is $4000 tax liability, thus using all the non-refundable CTC, that the marginal tax rate goes above 0%.

At that point it jumps to 25% because the ordinary income is in the 10% bracket but each extra dollar of ordinary income pushes another dollar of QD&LTCG into that income's 15% bracket.

On the first part, not if it is covered by credits that would otherwise go unutilized. For example, say there is $100 of unutilized credit and in order to utilize that $100 you need to "create" $400 of income and that income is taxed at 25% resulting in $100 of tax, which is offset by $100 of tax credits.

Even though the marginal tax on the $400 of income is 25%, it is still smart to do rather than let $100 of tax credit go wasted.

While I don't have them anymore, I used to have foreign equities in my taxable account and received a tax credit for foreign taxes paid, which allowed me to do additional Roth conversions. I didn't care what the marginal tax rate on the additional Roth conversions was because I wasn't paying it, so ven if it was 40% I still would have done it rather than let the tax credit be wasted.

 

[SevenUp]

On the first part, not if it is covered by credits that would otherwise go unutilized. For example, say there is $100 of unutilized credit and in order to utilize that $100 you need to "create" $400 of income and that income is taxed at 25% resulting in $100 of tax, which is offset by $100 of tax credits.

Even though the marginal tax on the $400 of income is 25%, it is still smart to do rather than let $100 of tax credit go wasted.

While I don't have them anymore, I used to have foreign equities in my taxable account and received a tax credit for foreign taxes paid, which allowed me to do additional Roth conversions. I didn't care what the marginal tax rate on the additional Roth conversions was because I wasn't paying it, so ven if it was 40% I still would have done it rather than let the tax credit be wasted.

Seems we agree that what happens on some intermediate line of Form 1040 is not nearly as useful as how the bottom line (i.e., line 34 or 37) changes.

It is the change in that bottom line (and any changes to IRMAA and state tax), divided by the amount of conversion/contribution/whatever under consideration, that I'm referring to as "the" marginal tax rate.

Look good to you?

 

[pb4uski]

Seems we agree that what happens on some intermediate line of Form 1040 is not nearly as useful as how the bottom line (i.e., line 34 or 37) changes.

It is the change in that bottom line (and any changes to IRMAA and state tax), divided by the amount of conversion/contribution/whatever under consideration, that I'm referring to as "the" marginal tax rate.

Look good to you?

What you described I think of as the effective tax rate of the conversion... increase in tax caused by the conversion divided by the amount of the conversion... and I would agree that if IRMAA and state tax apply then they need to be considered.

But the marginal rate, on the last $100 of conversion or next $100 of conversion is also relevant. See post #10 in this thread for details. https://www.early-retirement.org/fo...rage-12-on-conversion-114198.html#post2780531

 

[SevenUp]

What you described I think of as the effective tax rate of the conversion... increase in tax caused by the conversion divided by the amount of the conversion... and I would agree that if IRMAA and state tax apply then they need to be considered.

But the marginal rate, on the last $100 of conversion or next $100 of conversion is also relevant. See post #10 in this thread for details. https://www.early-retirement.org/fo...rage-12-on-conversion-114198.html#post2780531

Ah, nomenclature!

As that noted financial guru, William Shakespeare, once wrote,

What's in a name? That which we call (change in tax)/(change in income)
By any other name would be as useful

Marginal, effective, effective marginal, marginal effective, cumulative, incremental, etc. - one can find all of those used.

The nomenclature and reasoning in Marginal Vs Effective Tax Rates And When To Use Each and Marginal rates explained seem most appropriate, but it may be an "eye of the beholder" thing.

In other words, one should always use (change in tax)/(change in income) as the metric, but care is needed when deciding how much "change in income", and starting at what income, is pertinent.

Seeing the actual marginal rate changes in chart form can be illuminating, but not everybody likes Excel and the case study spreadsheet seems to need Excel to work well. It does include ACA, IRMAA, and at least rudimentary state taxes.

 

[Almost There 2021]

Cost Basis

Will be sent to you by your brokerage firm early next year. No guessing necessary and they will also provide the IRS a copy for you. Nice people.
GL