Time to check year end taxes

[RunningBum]

I understand the concept of the SS hump.

I have a lot of trouble figuring out the spreadsheet. I suspect it's the same problem anyone would have with mine. I know my own, but it's not too clear for others how to use. I guess some of you have figured it out. I'm not collecting SS yet so I haven't tried too hard. I look at that graph and see Column Q, Column W, etc, and I don't follow what those represent.

Isn't it kind of late to be looking at the SS hump once you are collecting SS and taking RMDs? It seems there isn't much left to do at this point. Isn't the real message that you should do what you can in the years before, like try to convert your tIRA to a Roth so you don't have RMDs? I see people say, if it's going to be 22% now or 22% later, why convert now, but this exercise helps show that there will be a hump above 22% for many people, which favors conversion.

 

[Sandy & Shirley]

The new version which handles all 7 tax brackets is:
https://drive.google.com/open?id=1ymGIu6Hk4N12iUkUXybeiEIrGWH-sw-l


I changed the raw data input from 12 point text to 8 point. All 7 brackets now fit in the single landscape output page.


My special thanks to rose for finding the error on the original spreadsheet.


For those who are excel geeks, the old formula for tax calculation was:


IF(G13>$L14,(G13-$L14)*$K12+$M14,
IF(G13>$L13,(G13-$L13)*$K13+$M13,
IF(G13>$L12,(G13-$L12)*$K12+$M12,
IF(G13>0,G13*$K11,0))))


My error was that the first K12 was supposed to be K14. That line was supposed to say if your taxable income(G13)is over the start of the 24% bracket(L14) then how much over (G13-L14) times 24%(K14) plus total of lower brackets (M14).


The new formula adds the 3 extra tax bracket tests, L17, L16, and L15 at the start of the equation.


Again, thank you rose for finding the problem. My focus was on those with income levels close to the tax humps, by the 24% bracket those humps are way in the rear view mirror.

 

[Sandy & Shirley]

I understand the concept of the SS hump.

I have a lot of trouble figuring out the spreadsheet. I suspect it's the same problem anyone would have with mine. I know my own, but it's not too clear for others how to use. I guess some of you have figured it out. I'm not collecting SS yet so I haven't tried too hard. I look at that graph and see Column Q, Column W, etc, and I don't follow what those represent.

Isn't it kind of late to be looking at the SS hump once you are collecting SS and taking RMDs? It seems there isn't much left to do at this point. Isn't the real message that you should do what you can in the years before, like try to convert your tIRA to a Roth so you don't have RMDs? I see people say, if it's going to be 22% now or 22% later, why convert now, but this exercise helps show that there will be a hump above 22% for many people, which favors conversion.

Yes, that is the real message, but if you look at the tables I posted, the larger your SSB, the more income you can get prior to The Hump. Even after you start your benefits, if you a have set things up to get the highest income you still want to maximize your pre-hump, 22.2% marginal rate. You want to get as close as possible to the hump each year without going over it!

 

[RunningBum]

Alright, I'm starting to get a better picture. I'm still confused about that graph though

I don't know what those column Q, W, etc are. I know for brevity you probably don't want to explain it, but maybe in a key somewhere, or just tell us here rather than using a secret code.

And I see 2 bars. A green one that is apparently my total income. And a blue bar, that doesn't seem to match any number. It's a few thousand over AGI, and a couple thousand under "After Fed Tax". I inputted age 70, regular income (WST) 40,000, SS 37,000. No spouse.

I did just download the newest spreadsheet you put up.

 

[sengsational]

Late to the party but I gather that one may use this tool to visualize the marginal tax rate change as certain alternatives are entered. My question is, what are the alternatives people are trying? I can see only one for 2018 and that's how much to pull or Roth convert from tIRA/401k/etc. And whether to take capital gains. Others?



What I did yesterday was write a script to keep upping the tIRA withdrawal in the tax software and track what the marginal rate was for my specific situation. It went 12% for a while, then a couple thousand percent when it hit the ACA cliff, then back to 12%.

 

[Sunset]

Late to the party but I gather that one may use this tool to visualize the marginal tax rate change as certain alternatives are entered. My question is, what are the alternatives people are trying? I can see only one for 2018 and that's how much to pull or Roth convert from tIRA/401k/etc. And whether to take capital gains. Others?



What I did yesterday was write a script to keep upping the tIRA withdrawal in the tax software and track what the marginal rate was for my specific situation. It went 12% for a while, then a couple thousand percent when it hit the ACA cliff, then back to 12%.

Your script didn't go high enough...., keep going and you can get to the 22% tax rate.

 

[Sunset]

Alright, I'm starting to get a better picture. I'm still confused about that graph though

I don't know what those column Q, W, etc are. I know for brevity you probably don't want to explain it, but maybe in a key somewhere, or just tell us here rather than using a secret code.

And I see 2 bars. A green one that is apparently my total income. And a blue bar, that doesn't seem to match any number. It's a few thousand over AGI, and a couple thousand under "After Fed Tax". I inputted age 70, regular income (WST) 40,000, SS 37,000. No spouse.

I did just download the newest spreadsheet you put up.

I think the blue bar is the after Fed tax number, but since the numbers are on an angle on the bottom of the graph, it doesn't line up well.
For me, the numbers are angled the opposite way, with today's downloaded version.
I'm using Libre Office. on Linux.

 

[Sunset]

OP - I compared this to last years return, and looks like I will save a bit of taxes this year if we have the exact same income as last year

I also compared it to https://www.mortgagecalculator.org/calcs/1040-calculator.php and it matched up nicely, and your spreadsheet is a lot easier to use.

I did notice if I use the edge case of Wages/IRA $164,999 and LTCG $100,000 that the NIIT tax is invoked because total income is over $250,000 on the calculator site. (which was sad news to find out).
The calculator site also (IMHO) wrongly says this is in 24% tax bracket (Looks like it just uses the total taxable income to define the summary statement).

So the spreadsheet does do the same calculation as I expected of 22% on Wages/IRA and 15% on the LTCG. But does not do the NIIT tax.

I'm glad I accidentally found the NIITpicky tax on income over $250K as I was thinking of doing the IRA conversion, and then some massive LTCG prior to Medicare inspection of income, as those CCRC's require a large buy in.

 

[Sunset]

OP I do have a question, the State tax , why do we even put it in as I don't see where it is used ?

 

[Sandy & Shirley]

Alright, I'm starting to get a better picture. I'm still confused about that graph though

I don't know what those column Q, W, etc are. I know for brevity you probably don't want to explain it, but maybe in a key somewhere, or just tell us here rather than using a secret code.

And I see 2 bars. A green one that is apparently my total income. And a blue bar, that doesn't seem to match any number. It's a few thousand over AGI, and a couple thousand under "After Fed Tax". I inputted age 70, regular income (WST) 40,000, SS 37,000. No spouse.

I did just download the newest spreadsheet you put up.

Thanks for a good example to explain things in more detail.


I’m not sure why you are seeing Qs and Ws. Those are the data columns being displayed in the chart from the graph and graph2 excel tabs. Maybe you are using a different version of Excel! This is my legend:

The first thing that I notice is that you are ($13,025 To Hump) into your personal hump. That comes from a $7,041 withdraw from your IRA plus $5,984 now taxable SSB.


I am a computer geek, I have zero financial background, but this is what I might do.


Wait until next year to double up on your hump taxes. I added -7041 in the PLUS WST frame and got this picture:

Then I changed it to positive 7041 for doubling my hump taxes in 2019.

But, the hump taxes are now completely paid in 2019, why not take as much as possible out at the after the hump 22% and maybe some 24%. I took a SWAG (Scientific Wild Arithmetic Guess) at the end of the 22% bracket and entered $64,000 as the You withdraw for 2019.

Bottom Line: taking $7,041 out of your IRA should be and is taxed at the 22% federal bracket, $1,549 each year. But that amount also makes another $5,984 of you SSB taxable and at 22% that costs you $1,317 each year.

You can just do your thing and pay that extra $1,317 each year, or play games with your income stream to avoid some of it. What I did here was to not withdraw, not pay any of the $1,317 in 2018, then double up in 2019, take extra cash out at the normal 22%, maybe even some 24%, tax bracket so that you pay something like: zero, double, zero, zero, zero instead of half, half, half, half, etc.

 

[sengsational]

Your script didn't go high enough...., keep going and you can get to the 22% tax rate.

Plenty high for my purposes...No way am I traversing the mult-thousand percent marginal rate of the ACA cliff!

 

[RunningBum]

Thanks for a good example to explain things in more detail.


I’m not sure why you are seeing Qs and Ws. Those are the data columns being displayed in the chart from the graph and graph2 excel tabs. Maybe you are using a different version of Excel! This is my legend:

Thank you. I am using OpenOffice! It must be missing some functions! (why are we using so many !! ?) Anyway, I will add that legend to my copy.

The first thing that I notice is that you are ($13,025 To Hump) into your personal hump. That comes from a $7,041 withdraw from your IRA plus $5,984 now taxable SSB.


I am a computer geek, I have zero financial background, but this is what I might do.


Wait until next year to double up on your hump taxes. I added -7041 in the PLUS WST frame and got this picture:

This is not my actual situation, but a quick trial using a rough combination of what kind of income I have now, plus adding SS at age 70--13 years away. I have a lot of my money in taxable, and a certain amount of that will be dividends (some unqualified) and interest income. I am hoping to have all of my tIRA converted by then, but if I don't, MRDs will be unavoidable. It's doubtful I'll be able to "double up" much of anything unless I'm selling appreciated funds.

What I could do, is consider tax-exempt income. At 12% or 22% the numbers don't work, but if I'm in the hump paying a lot more on the last marginal income, they certainly can. I need to think about positioning my investments as I get closer to when I'll be taking SS, and probably not get into CDs that extend into when I start SS. That's actually a very helpful realization, thanks.

 

[rose]

The new version which handles all 7 tax brackets is:
https://drive.google.com/open?id=1ymGIu6Hk4N12iUkUXybeiEIrGWH-sw-l

My special thanks to rose for finding the error on the original spreadsheet.

I appreciate you looking at it again. Cross checking is helpful to validate my spreadsheet. I appreciate your worksheet and helping me pay attention to the "hump".

 

[SoReady]

Maybe I missed this question earlier, but when columns G3 or I3 in the MARGINAL TAB is "FALSE" or "TRUE", what is that indicating?

 

[Sandy & Shirley]

Maybe I missed this question earlier, but when columns G3 or I3 in the MARGINAL TAB is "FALSE" or "TRUE", what is that indicating?

the excel equation for G3 is IF(SUM(B4:B6),TRUE(),FALSE()),


if the sum of the currency values under the Spouse heading in column B, set G3 to TRUE else set it to false. I3 merely equals G3.


These binary (true/false) values are then used to determine which currency limits are used for your taxes and deductions.




FYI: Yes, I did extend the spreadsheet to include all tax brackets, but the purpose of the spreadsheet was to help retirees to avoid the 40.7% and 49.95% marginal tax brackets that occur around the beginning of the 22% federal bracket. If you are in the 24% bracket or higher, your income is well above the top end of these excessive marginal tax rates and there is probably little you can do to avoid paying taxes on the full 85% of your Social Security Benefits.

 

[ERD50]

I feel very dim, I don't understand how to use this spreadsheet at all! I did DL the latest.

From the OP: and then used the PLUS column to add in the amount that her house payments would drop when only making tax and insurance payments each year.

If the payments drop, wouldn't you show lower withdrawals from WST/IRA/401 and LTG? Wouldn't a drop be negative? Or is the PLUS the new value ($13,000 replaces$29,000? A $16,000 drop there, and a $1,000 drop in LTG?) Why do income and taxes go up w/o a mortgage?

And where did the money come from to pay the mortgage? Wouldn't there be some taxable event there (maybe ignored for simplicity, but you really cannot)?

WST/IRA/401K is at $29,000 PLUS $13,000
LTG is at $3,000 PLUS $2,000

So the $13K + $2K = $15K that you mention later, but I don't get it. What does this represent? I'm lost on the "PLUS"?

I also am just not getting that we enter discreet values, but then it shows a range of values on the X axis. What does it assume we are changing? Wouldn't is make a difference if it was SS that varied (if you are testing different scenarios of delay and survivor benefits), LTG or WST/IRA/401K?

The legend for SINGLE shows a solid thick red line, but on the graphs I see mostly a double red line with a white center - is that another line on top (the PLUS?)?


I'm sure there is value to this, but I'm blind to something (or maybe many things!).

-ERD50

 

[Sandy & Shirley]

I feel very dim, I don't understand how to use this spreadsheet at all! I did DL the latest.

From the OP: and then used the PLUS column to add in the amount that her house payments would drop when only making tax and insurance payments each year.

If the payments drop, wouldn't you show lower withdrawals from WST/IRA/401 and LTG? Wouldn't a drop be negative? Or is the PLUS the new value ($13,000 replaces$29,000? A $16,000 drop there, and a $1,000 drop in LTG?) Why do income and taxes go up w/o a mortgage?

And where did the money come from to pay the mortgage? Wouldn't there be some taxable event there (maybe ignored for simplicity, but you really cannot)?

WST/IRA/401K is at $29,000 PLUS $13,000
LTG is at $3,000 PLUS $2,000

So the $13K + $2K = $15K that you mention later, but I don't get it. What does this represent? I'm lost on the "PLUS"?

I also am just not getting that we enter discreet values, but then it shows a range of values on the X axis. What does it assume we are changing? Wouldn't is make a difference if it was SS that varied (if you are testing different scenarios of delay and survivor benefits), LTG or WST/IRA/401K?

The legend for SINGLE shows a solid thick red line, but on the graphs I see mostly a double red line with a white center - is that another line on top (the PLUS?)?


I'm sure there is value to this, but I'm blind to something (or maybe many things!).

-ERD50

This entire spreadsheet was designed to be used by individuals who’s larger SSB place them close to their own personal tax hump. It gives them a way to SEE what if situations.

Your personal choice if the thicker lines include the mortgage payment or not.

Where the money comes from is also your personal choice. If you planned ahead, did you convert some of your IRA to Roth? Do you have non-IRA investment? Etc.

Social Security is also once of the 3 extra/less cash values in the PLUS column, and yes, in her case we have other “examples” of the huge changes she will face when her SSB jumps from 79% survivor to 129% her own.

You see the double line because her SSB did not change in this example. The primary shape and size of your “personal” tax hump is defined by the size of your “personal” SSB. In this example SSB remains constant while LTCGs increase slightly. Pink line starts with about $2,000 of extra tax deferred income while the 49.95% marginal bracket also gets wider as you give those tax savings back to the IRS.

The value to this is the ability see what if situations displayed on a graph of your personal Tax Hump. Here is an example of how your personal SSB changes your personal tax hump.

When your SSB is only $20,000 you start paying taxes (the first blue line) when your gross income is about $33,000 and your personal 40.7% hump is small and will not cost you a lot to cross over it. The third $40,000 SSB example doesn’t start paying taxes until at about $50,000 and that hump is a lot wider so you can give, in both case, 85% of those tax savings back to the IRS. 85% of 20 is smaller than 85% of 40!

Every different SSB amount will give you a different marginal tax rate graph. My goal is to make everyone aware that this tax hump could exist for them, know where their personal income places them in respect to that hump, and help them to find “what if” ideas to avoid paying marginal tax rates that are higher than the highest federal tax bracket!

 

[ERD50]

This entire spreadsheet was designed to be used by individuals who’s larger SSB place them close to their own personal tax hump. It gives them a way to SEE what if situations. ...

OK, thanks. I've worked with this some more, and I think I'm starting to see it. I guess I'm really not affected, as my RMDs will be pretty large ( ~ 2/3rd of my NW is in IRA, and I am doing ROTH conversions to bring it down some), and I've got some pension coming. So I guess I'm pretty far beyond the hump?

A few things that threw me, that you might want to consider updating to make it clearer for others (or explain to me what I'm missing):

A) The label "SINGLE" on the graph? I guess this is just the actual marginal tax rate for that income on the x axis, but I'm entering as MFJ. So "SINGLE" is confusing to me (I kept thinking this shows me what my rates would be if I were single with that income)? Maybe just change that to "Marginal Tax Rate"?

B) Related to above, cell H3 displays "Married", regardless of whether there are spousal entries or not. I see that cells G3 and I3 change from TRUE to FALSE to reflect this, and are used by the calculations. But it was confusing to me to see "Married" there, even for a SINGLE entry. Further confusing this for me is, those cells seemed to be formatted as $, so they showed as either $1 or $0 - I changed the formatting on my sheet to "Boolean" (displays "True"/"False"), and set the text color to same as background to "hide" it. I also changed cell H3 to "=IF(G3,"File: MFJ","File: SINGLE")".

C) The "PLUS" column. Plus what? I've come to think of this as a "WHAT IF" column. IOW, What if I had an extra $1,000 LTGC, or WST / IRA / 401K - it shows me my marginal rate on those extra $, and my $ tax hit, right?

I think I have this right now, but the graph labels "+ TI" is showing "Taxable" value with the "plus" amounts added, and "+ AT" is showing the " After Fed Tax" value with the "plus" amounts added? It took me a while to make the connection between those terms and the abbreviations TI and AT. OK, I'm slow.

Does that make sense, or am I still misreading things?

-ERD50

 

[RunningBum]

C) The "PLUS" column. Plus what? I've come to think of this as a "WHAT IF" column. IOW, What if I had an extra $1,000 LTGC, or WST / IRA / 401K - it shows me my marginal rate on those extra $, and my $ tax hit, right?

That's how I see it. It shows the marginal rate you've been paying as you add income (ordinary income, I think, not SS or CGs), and what rate you'd pay if you kept adding. If you add $1000 of ordinary income, when you're in the hump it's 12% on that, PLUS you've pushed $850 of SS into being taxed at 12% (add 10.2% to your rate, 85% of 12%), PLUS you've pushed $1850 of QDivs or LTCGs into being taxed at 15% for another 27.75% for a total of 49.95% marginal rate.

I think I have this right now, but the graph labels "+ TI" is showing "Taxable" value with the "plus" amounts added, and "+ AT" is showing the " After Fed Tax" value with the "plus" amounts added? It took me a while to make the connection between those terms and the abbreviations TI and AT. OK, I'm slow.

If you're slow, what am I? I didn't understand what that was until you explained it. I'm relabeling things to make more sense to me as I understand them. I don't know how to relabel the figure. I just have my own legend outside of the graph figure.

I initially thought there wasn't anything I could do about this, but if I defer SS to 70, I've got a big hump I probably won't be all the way through. I could look at tax exempt investments rather than taxable CDs/MMs to reduce ordinary income a bit.

Another thing I'm looking at is the hump is smaller if I take SS early. I don't think it makes a big enough difference to offset getting an ACA subsidy but it might make sense to start at 65. I'm putting together my own spreadsheet to compare overall taxes taking SS at various points taking into account the hump, and also that I'd want to accelerate my Roth conversion if I take SS early. That's got it's own tax impact. I kind of doubt it makes enough difference to change my "when to take SS" philosophy, but I'll consider it.

One final thought, if you're in that hump, you really want to consider if a side job is worthwhile. You'd pay 50% in federal income tax alone, plus state, and FICA. The $10/hr job could easily turn into a $4/hr job until you've cleared the hump.

 

[Sunset]

Since others have contributed, in case anyone wants to know the NIIT effect

In H21 I put: "Extra NIIT tax"
In I21 I put : =IF( (I7-250000>0),(I7-250000) *0.038,0)

Then for a summary overall
In H22 I put: "Overall % Fed Taxes paid"
In I22 I put: =(I19+I21)/(I11+I16) and formatted it to percent

 

[GM Points]

If I have Itemized Deductions on Schedule A and a loss on Schedule E do I just combined the two and input the numbers into the Standard Deduction cell? For example my Schedule A is 29,000 and my Schedule E is a loss of 4,000 so put 33,000 in the Standard Deduction cell?

 

[GM Points]

If I have Itemized Deductions on Schedule A and a loss on Schedule E do I just combined the two and input the numbers into the Standard Deduction cell? For example my Schedule A is 29,000 and my Schedule E is a loss of 4,000 so put 33,000 in the Standard Deduction cell?

EDIT:Sorry, this is what I meant.

If I have Itemized Deductions on Schedule A and a loss on Schedule E do I input the Itemized Deduction numbers into the Standard Deduction cell and just lower the WST/IRA/401(k) number by the loss? What does WST mean?

Also, is there a reference I can read to understand this formula better?
=MIN(G6*0.85,IF(G7>G9,(G7-G9)*0.85+(G9-G8)*0.5,IF(G7>G8,(G7-G8)*0.5,0)))

 

[RunningBum]

EDIT:Sorry, this is what I meant.

If I have Itemized Deductions on Schedule A and a loss on Schedule E do I input the Itemized Deduction numbers into the Standard Deduction cell and just lower the WST/IRA/401(k) number by the loss? What does WST mean?

Also, is there a reference I can read to understand this formula better?
=MIN(G6*0.85,IF(G7>G9,(G7-G9)*0.85+(G9-G8)*0.5,IF(G7>G8,(G7-G8)*0.5,0)))

That's what I'd do. WST is Wages, Salary, Taxes (explained in an earlier post). That's line 7 of the old 1040. But it's really more than that. I just renamed it "Ordinary Income" for my purposes because I didn't know what WST is either, and even after I understood it, it just bugs me because most retirees don't receive any wages, salaries or tips, we have ordinary income form other sources like IRA distributions and interest. The OP has a way of using terms on the tax form that don't really match what he's doing. AGI is another prime example. AGI includes QDivs and LTCGs, but he doesn't. I understand why this cell doesn't include those for his calculations, but it isn't AGI, so that's just confusing and misleading to incorrectly use that term. Renaming fields to what they actually are, or at least terms that make sense to me, helped me a lot to understand the spreadsheet.

Regarding the formula, you can use your spreadsheet help to see the specific syntax. At a high level, MIN(A,B) takes the minimum of A and B. In this case, B is a complex IF statement that has to be calculated first. IF (A, B, C) means, if A is true, use value B, otherwise use value C. In this case C has a nested IF statement that has to be calculated if A is false. What it's doing is nicely condensing the complicated calculation to determine how much (0%, 50%, 85%, or a combination) of your SS benefit is taxable.

 

[audreyh1]

Since others have contributed, in case anyone wants to know the NIIT effect

In H21 I put: "Extra NIIT tax"
In I21 I put : =IF( (I7-250000>0),(I7-250000) *0.038,0)

Then for a summary overall
In H22 I put: "Overall % Fed Taxes paid"
In I22 I put: =(I19+I21)/(I11+I16) and formatted it to percent

Once you are paying NIIT aren’t you way past any hump?

 

[RunningBum]

Once you are paying NIIT aren’t you way past any hump?

Yeah, but if you're modeling things like seeing how well it works to take a bunch of income one year to stay out of the hump other years, it could be nice to use the same tool.