Tax cliff warning/reminder

[RunningBum]

Ah, right. That is a different situation, and setting fire to a small pile of money would make sense in your case.

You could perhaps start a business and possibly generate a business loss through depreciation or other expenses...?

Well, it's not my case now, but could be next year.

The option play seems like a lot less work than starting a business, and is more legit.

Another possibility, if I figure this out early enough in the year, is to break a CD or two and just stick the money in a checking account.

 

[zedd]

Limitations on loss deductions

The amount of gambling losses you can deduct can never exceed the winnings you report as income. For example, if you have $5,000 in winnings but $8,000 in losses, your deduction is limited to $5,000. You could not write off the remaining $3,000, or carry it forward to future years.

Oh blast! It would seem that the options option has an unfair advantage over a weekend of debauchery in Vegas.


Edited to add:

Only gambling losses

The IRS does not permit you to simply subtract your losses from your winnings and report your net profit or loss. And if you have a particularly unlucky year, you cannot just deduct your losses without reporting any winnings. If the IRS allowed this, then it's essentially subsidizing taxpayer gambling.

The tax code is like really messed up.

 

[rjsob58]

I've been teetering on the cliff since I retired almost 3 years ago. For me, it is a $19k hit if I go over. My problem has been my 2 college-attending boys. If their income goes over $12k for the year, it counts against household income for ACA subsidies. I ended up refinancing my house with cash out to manage cash flow vs income.

 

[Z3Dreamer]

We will do some last minute IRA distribution, but will get no closer than $5,000. Did I see that someone is getting within $100?

 

[RunningBum]

We will do some last minute IRA distribution, but will get no closer than $5,000. Did I see that someone is getting within $100?

Back when we could recharacterize Roth conversions, I think some people went to within $1, or at least $100.

Now, with no way to back out part of a conversion if I go over, I leave more buffer. The trickiest part for me is dividends for VTIAX (Vanguard International). You get the distribution itself before the end of the year, but that's after foreign taxes are paid. The actual taxable amount includes the foreign taxes. It's usually about 7%. As a buffer, I multiple my VTIAX dividends by 1.08, and also keep an additional buffer of $1000-2000.

I'm trying to figure out why VG can't report the foreign taxes paid when the dividend is paid. Aren't they already taking out the tax before distributing the dividend? Is that just an estimate? They don't come back to me for more money or refund the overpayment if it is off. Does that just get written off within the fund somehow? I expected a little more noise about this here and elsewhere since the conversion recharacterization went away last year, but didn't hear much.

 

[pb4uski]

I'm not in that situation but I wonder if one could use the 60 day rollover rule for fine tuning in a manner similar to the way we used to use Roth recharacterizations.

You take a tIRA distribution in late December that puts you just a tad over 400% FPL.... then you finalize your taxes in mid February... let's say that you are $500 over the cliff... you then put $600 back in your tIRA, putting you $100 under the cliff.

In TT under the Form 1099 you would enter the $600 on line B2... "If only part was rolled over, enter the amount of the partial rollover."

There is also a constraint in doing only one such rollover every 12 months so you'd have to keep close track of the dates and find out if the 12 months is based on the withdrawal date or the redeposit date.... if the latter you use this strategy every other year.

 

[pb4uski]

.... I'm trying to figure out why VG can't report the foreign taxes paid when the dividend is paid. ...

That is a mystery to me as well.

 

[zinger1457]

I'm not in that situation but I wonder if one could use the 60 day rollover rule for fine tuning in a manner similar to the way we used to use Roth recharacterizations.

You take a tIRA distribution in late December that puts you just a tad over 400% FPL.... then you finalize your taxes in mid February... let's say that you are $500 over the cliff... you then put $600 back in your tIRA, putting you $100 under the cliff.

In TT under the Form 1099 you would enter the $600 on line B2... "If only part was rolled over, enter the amount of the partial rollover."

There is also a constraint in doing only one such rollover every 12 months so you'd have to keep close track of the dates and find out if the 12 months is based on the withdrawal date or the redeposit date.... if the latter you use this strategy every other year.

That's an interesting idea and might be useful. Could someone take it a step further and take that end of year IRA distribution and within 60 days convert the amount that keeps you under the cliff to a ROTH and rollover the remainder (if any) to an IRA?

 

[RunningBum]

That's an interesting idea and might be useful. Could someone take it a step further and take that end of year IRA distribution and within 60 days convert the amount that keeps you under the cliff to a ROTH and rollover the remainder (if any) to an IRA?

So we're talking about taking a distribution in December, and then something else at just under 60 days, right? I'd think that a conversion in February would count toward the new year, not the old year.

 

[zinger1457]

So we're talking about taking a distribution in December, and then something else at just under 60 days, right? I'd think that a conversion in February would count toward the new year, not the old year.

I would think the 1099R would be issued based on the date the distribution is made from the IRA, not when the money is deposited in the Roth. Is there a rule that the ROTH conversion has to be competed in the same year the IRA distribution is made? That would kill this idea.

 

[SecondCor521]

I would think the 1099R would be issued based on the date the distribution is made from the IRA, not when the money is deposited in the Roth. Is there a rule that the ROTH conversion has to be competed in the same year the IRA distribution is made? That would kill this idea.

You can't do a Roth conversion in the manner you're describing. What you're describing is a traditional IRA distribution followed by a Roth contribution.

A Roth conversion has to be, as far as I'm aware, a direct transfer from a traditional IRA to a Roth IRA.

They're two different things.

...

@RunningBum, also, as far as I know, Roth conversions are always treated as being done in the same tax year as the calendar year. There is no overlap in years as exists for contributions, so yes, a February 2020 conversion would have to be for 2020.

 

[zinger1457]

You can't do a Roth conversion in the manner you're describing. What you're describing is a traditional IRA distribution followed by a Roth contribution.

A Roth conversion has to be, as far as I'm aware, a direct transfer from a traditional IRA to a Roth IRA.

They're two different things.

According to the IRS the 60 day rule applies to when converting from an IRA to Roth. From IRS.gov:

How do I convert my traditional IRA to a Roth IRA? You can convert your traditional IRA to a Roth IRA by:

• Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
• Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
• Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

 

[SecondCor521]

According to the IRS the 60 day rule applies to when converting from an IRA to Roth. From IRS.gov:

Thanks! I am now aware. ;-)

 

[BeachOrCity]

For my state and household the subsidized cost of a bronze plan is about the same as the unsubsidized cost of a catastrophic plan.

As such I just do the paperwork to get on the catastrophic plan and make the financial decisions that are right for us without worrying about the “cliff”.

 

[Sunset]

There is also Another cliff, similar to the NITT one.

If your MAGI, income is over the Medicare limit by $1.00 , you pay extra for Medicare pp for the entire year, which is about $792 extra at the first cliff level.

This affects people before they collect Medicare, it starts at age 62 since Medicare looks back a few years to figure out the cost when you are 65.

 

[teejayevans]

There is also Another cliff, similar to the NITT one.

If your MAGI, income is over the Medicare limit by $1.00 , you pay extra for Medicare pp for the entire year, which is about $792 extra at the first cliff level.

This affects people before they collect Medicare, it starts at age 62 since Medicare looks back a few years to figure out the cost when you are 65.

It’s 2 years, so by my math when 65 they look at 63 tax returns.

From the Medicare site:
“ Medicare uses the modified adjusted gross income reported on your IRS tax return from 2 years ago. This is the most recent tax return information provided to Social Security by the IRS.”

 

[Retireby45ish]

I have a related question. What counts towards income earned for the x00% of FPL under/over determination?



I’m guessing dividends and distributions.
Ordinary dividends?

Capital gains only? Or all proceeds from the sale of a stock/fund? (This is the big one I’m not sure of)
If you have a fund cost basis of $60 and sell it for $100, does $40 profit count or does it count $100?

 

[Fermion]

Capital gains, dividends, interest, taxable IRA distributions (including Roth conversions), things like that.

Selling a stock for $100 that you had $60 basis in would only count $40 in capital gains and only $40 toward your ACA reported income.

Taking money out of a Roth after retirement age or taking a contribution out of a Roth also would not count toward ACA reported income. After 5 years you could take a conversion out of the Roth without reported income.

So say you sold your house and banked $500,000, then invested it in SPY, which paid you $10,000 a year in dividends plus it went up 20% during the year (to $600,000). You could sell $50,000 of your investment, leaving you with $550,000 and you would only add $10,000 to your MAGI (because your basis was $40,000 of that).

Thus you would have $60,000 to spend and a MAGI for ACA of $20,000.

It is how people are getting $0 health insurance while buying a Tesla.

 

[Dtail]

I have a related question. What counts towards income earned for the x00% of FPL under/over determination?



I’m guessing dividends and distributions.
Ordinary dividends?

Capital gains only? Or all proceeds from the sale of a stock/fund? (This is the big one I’m not sure of)
If you have a fund cost basis of $60 and sell it for $100, does $40 profit count or does it count $100?

You can use the chart below as a guideline.

http://laborcenter.berkeley.edu/pdf/2019/magi.pdf

 

[pb4uski]

That's an interesting idea and might be useful. Could someone take it a step further and take that end of year IRA distribution and within 60 days convert the amount that keeps you under the cliff to a ROTH and rollover the remainder (if any) to an IRA?

Yes, under the cliff to a Roth and over the cliff back to a tIRA would work.

 

[Sunset]

It’s 2 years, so by my math when 65 they look at 63 tax returns.

From the Medicare site:
“ Medicare uses the modified adjusted gross income reported on your IRS tax return from 2 years ago. This is the most recent tax return information provided to Social Security by the IRS.”

Thanks for the correction.
Medicare says if the IRS does not provide the 2 yr old values, they will use the 3yr old values, but a person can update with the 2 yr old values.

 

[lemming]

I think I already made my capital gains too high and it will affect my medicare premiums.

 

[Z3Dreamer]

Thought I would revive this thread because it is on point. I am about as prepared as can be, but I want to obsess a little more before pulling the trigger.

I acquired Turbotax 2019 on Friday. Put the numbers in and it matches my spreadsheet, or close enough.

My last chunk of OMAGI will be an IRA distribution. If I do get some mystery income, I can always put the distribution back in using the 60 day rule. I have studied the "once every 12 months rule" to death.

If I do my IRA distribution as planned, I will be $5,000 away from the cliff.

Tell me about your obsessing and how close your cliff is.

 

[pb4uski]

I don't have the cliff to worry about but more the increase in the marginal tax rate if my taxable income exceeds the top of the 0% capital gains bracket... 12% vs 27%... if I end up just a little bit over I'll probably ignore it but if significantly over I'll use the 60 day rule as you are doing.

 

[Winemaker]

I'm about $1000 from the IRMAA cliff. But the 2019 Turbotax won't allow me to enter in new roof/windows to a rental, until January IRS guidelines come out. I also haven't entered actual mileage numbers for each of the 3 rentals, so expenses should rise, lowering Schedule E income. Still aiming to stay under 24%, but I have to reexamine, whether it's worth it to run taxable income up to $168k, staying in the 22%, or paying the IRMAA for DW next year, and paying the piper from there going forward.