I have been playing with some numbers to better understand how my marginal tax rate is impacted by various levels of IRA withdrawal/Roth Conversion.
If all taxable income including IRA withdrawals stay below72500, no issues. Qualified dividends and cap gains get taxed at 0%, rest at 15%.
Using a benchmark income just below the threshold of 72500, I added $1000 to taxable income, marginal rate on the 1000 is .25. What I expected.
What I did not expect is when I add say 10000 to taxable income, marginal rate went to .287, and at 20000, marginal rate increased a tad more to .294.
From playing with IRS 'Qualified Div/Cap Gains worksheet, it looks like to me not only are you paying the higher 25% rate of the next bracket over 72500, but you are also "pushing some portion of your 0 bracket cap gains into a 15% tax burden since you are now above the break point for the 15% general tax rate.
Is this correct? Is it dollar for dollar for the income above 72500--but why does the marginal rate keep growing as you add more $$ in the over 72500 bracket?
If I correctly understand the math, it would seem that Roth conversion dollars when you move above the 15% bracket, actually "cost" more than just the bracket bump. (a 15% "surcharge on what had been 0 tax on your cap gains).
BTW, I am using the 1040 tax estimator at bankrate.com for running the options.
All help appreciated. Many thanks
Nwsteve
If all taxable income including IRA withdrawals stay below72500, no issues. Qualified dividends and cap gains get taxed at 0%, rest at 15%.
Using a benchmark income just below the threshold of 72500, I added $1000 to taxable income, marginal rate on the 1000 is .25. What I expected.
What I did not expect is when I add say 10000 to taxable income, marginal rate went to .287, and at 20000, marginal rate increased a tad more to .294.
From playing with IRS 'Qualified Div/Cap Gains worksheet, it looks like to me not only are you paying the higher 25% rate of the next bracket over 72500, but you are also "pushing some portion of your 0 bracket cap gains into a 15% tax burden since you are now above the break point for the 15% general tax rate.
Is this correct? Is it dollar for dollar for the income above 72500--but why does the marginal rate keep growing as you add more $$ in the over 72500 bracket?
If I correctly understand the math, it would seem that Roth conversion dollars when you move above the 15% bracket, actually "cost" more than just the bracket bump. (a 15% "surcharge on what had been 0 tax on your cap gains).
BTW, I am using the 1040 tax estimator at bankrate.com for running the options.
All help appreciated. Many thanks
Nwsteve