ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I was tempted to title this thread something along the lines of "Tax Planning, Shmanning!", but I'll start with this:
So, anyone with a little tax smarts looks at those marginal tax brackets, and maybe even thinks they know what they mean. Well, I'm finding they mean far less than what they might indicate.
For example, say my income and other variables placed me in the 15% marginal bracket. Now, say I'm considering converting some IRA from Traditional to Roth (the conversion counts as income). One might think that as long as I stay within that magic 15% bracket that I would pay $15 in added tax for every $100 I convert. One might be very wrong.
As you increase your income, many other things can be affected. Medical is only deductible above 7.5% of AGI, so as your AGI increases, not only do you pay more tax on the dollars, but fewer dollars are deductible. Limits come into play on other things as well (college credits/deductions, and who knows what else). This raises the effective marginal rate that you pay.
I ran the preview version of TaxAct over the past two days, and found that I could stay in the 15% marginal bracket with an IRA conversion, but I would increase my taxes at a 22.5% rate for the money converted. Hmmm.... if I'm thinking in terms of a 25% tax rate in the future, that does not strike me as worthwhile, considering all the ifs/and/buts.
It could take dozens of runs in the tax program to figure out the optimum points, as there are so many interactions. With two kids in college, even the tax program could not find the optimum set of the three eduction credits/deductions to take for my scenario. I over-rode their automatic optimizer, and my tax bill dropped by over $900! Now, how many people are going to analyze the laws for that? How many paid tax preparers would bother? They would be more likely to say "Hey look - I saved you $2600 by running this deduction!", never mind that they could have spent a few more minutes to save you $3528 instead!
But they will brag to their friends - "my tax guy saved me $2,600!".
So, don't be fooled by simplistic tax planning based on static 'marginal rates' - reality may be very different.
Subtopic: taxes are far, far too complex. Sub-subtopic: the least Congress could do is have the laws for 2008 finalized on Jan 1 2008, so the tax software places had time to code this stuff so we could actually do 'tax planning' for the year. The AMT limits and a few other things were not finalized until, OCtober 2008! Sub-sub-subtopic: I'm gonna invite my Congressperson to sit down with me and do my taxes with me. I bet they have no idea what people go through.
-ERD50
So, anyone with a little tax smarts looks at those marginal tax brackets, and maybe even thinks they know what they mean. Well, I'm finding they mean far less than what they might indicate.
For example, say my income and other variables placed me in the 15% marginal bracket. Now, say I'm considering converting some IRA from Traditional to Roth (the conversion counts as income). One might think that as long as I stay within that magic 15% bracket that I would pay $15 in added tax for every $100 I convert. One might be very wrong.
As you increase your income, many other things can be affected. Medical is only deductible above 7.5% of AGI, so as your AGI increases, not only do you pay more tax on the dollars, but fewer dollars are deductible. Limits come into play on other things as well (college credits/deductions, and who knows what else). This raises the effective marginal rate that you pay.
I ran the preview version of TaxAct over the past two days, and found that I could stay in the 15% marginal bracket with an IRA conversion, but I would increase my taxes at a 22.5% rate for the money converted. Hmmm.... if I'm thinking in terms of a 25% tax rate in the future, that does not strike me as worthwhile, considering all the ifs/and/buts.
It could take dozens of runs in the tax program to figure out the optimum points, as there are so many interactions. With two kids in college, even the tax program could not find the optimum set of the three eduction credits/deductions to take for my scenario. I over-rode their automatic optimizer, and my tax bill dropped by over $900! Now, how many people are going to analyze the laws for that? How many paid tax preparers would bother? They would be more likely to say "Hey look - I saved you $2600 by running this deduction!", never mind that they could have spent a few more minutes to save you $3528 instead!
But they will brag to their friends - "my tax guy saved me $2,600!".
So, don't be fooled by simplistic tax planning based on static 'marginal rates' - reality may be very different.
Subtopic: taxes are far, far too complex. Sub-subtopic: the least Congress could do is have the laws for 2008 finalized on Jan 1 2008, so the tax software places had time to code this stuff so we could actually do 'tax planning' for the year. The AMT limits and a few other things were not finalized until, OCtober 2008! Sub-sub-subtopic: I'm gonna invite my Congressperson to sit down with me and do my taxes with me. I bet they have no idea what people go through.
-ERD50