First year retired-Tax Planning

Time2

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Oct 3, 2019
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Hi all,
This will be our first year to do taxes as a retired couple. One thing I want to get done is making Roth conversions up to the 22% bracket.
It looks like I will have a lot of room to do that at least this year.
The only income I have come up with is about $19k, mostly Vanguard fund
interest and dividends. My expenses were more, I started the year with a lump sum of cash, so didn't need to make any withdrawals to pay expenses.
I see the 12% bracket goes to $78,950, and I'm pretty sure that is after the $24,000 standard deduction.
So, my thinking is, I can Roth convert, $78,950 + $24,000 = $102,950 then $102,959 - $19,000 = $83,950. Meaning I can convert $83,950 and stay in the 12% bracket. Then I would have a tax liability of $9474.
Am I one the right track? Any caveats I need to be aware of?
I haven't been on this group long, Is the general consensus here that Roth conversion in a low tax bracket are a good idea?
 
Sounds right. One thing that holds some of us back is qualifying for an ACA subsidy. That puts a lot lower cap on conversions.

Do you have any capital gains? They would count in that total. If you go over, you start pushing them into being taxable, so that the incremental tax is 12% + 15% cap gains for 27% total on the amount over $78,750 (for some reason the 15% cap gains tax kicks in $200 below the 22% bracket).
 
Sounds right. One thing that holds some of us back is qualifying for an ACA subsidy. That puts a lot lower cap on conversions.

Do you have any capital gains? They would count in that total. If you go over, you start pushing them into being taxable, so that the incremental tax is 12% + 15% cap gains for 27% total on the amount over $78,750 (for some reason the 15% cap gains tax kicks in $200 below the 22% bracket).


Yes, I do, but they were included in the $19k I mentioned. And even some of that might be qualified dividends, so it's confusing. I don't think I'll know the break out of dividend vs qualified dividends until it's to late, I do think the cap gains are listed separately.



No ACA to worry about.
 
You have the right idea. The top of the 0% preferenced income bracket for 2019 for MFJ is $78,750 (the top of the 12% bracket is $78,950).

I think it is best to go to the top of the 0% preferenced income of $78,750.... add $24,400 in standard deduction and deduct the $19,000 of income that you already have and that is $84,150 of headroom for Roth conversion... your tax will be at a combination of 0%, 10% and 12% but should be between $6,782 and $9,062 deoending on homw much of that $19,000 is 0% preferenced income.

If you go to the top of the 12% bracket that last $200 of conversion would be taxed at 27% since the extra $200 of Roth conversion pushes $200 of 0% dividend income into the 15% bracket... so the $200 of additional Roth conversion is taxed at 12% and the $200 of dividend income pushed into the 15% bracket is taxed at 15%.
 
As mentioned, if you are attempting to keep the qualified dividends taxed at 0% you need to choose your Roth conversion amount accurately. For this, it's best to complete an estimated tax return in December after all expected income has been determined. Depending on your circumstances, such as the amounts to convert, your ages, and potential to face the “tax torpedo” later as a widow, you may decide it's beneficial to convert even more. If either of you is within 2 years of receiving Medicare, keep in mind that a large Roth conversion can trigger a higher Medicare premium known as IRMAA. If you have plans to move to or from a state with no income tax, this can also influence your decision. There is a discussion in another thread regarding large conversions.
 
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If either of you is within 2 years of receiving Medicare, keep in mind that a large Roth conversion can trigger a higher Medicare premium known as IRMAA. If you have plans to move to or from a state with no income tax, this can also influence your decision. There is a discussion in another thread regarding large conversions.


You have my attention!

I will go on medicare in Mar 2020.
What information do I need to avoid IRMAA?


Thanks
 
I will go on medicare in Mar 2020. What information do I need to avoid IRMAA?


Your Medicare part B and D premiums will be based on the most recently filed tax return, so in early 2020 they will have the 2018 return that you filed this year. The IRMAA amount depends on your MAGI. https://www.ssa.gov/pubs/EN-05-10536.pdf

If your income was high enough last year to trigger IRMAA, you can ask for an adjustment because you just retired and expected income will be lower than in 2018. Going forward with large Roth conversions, you'll want to figure IRMAA into your decision.

Also, if you will be starting Social Security soon, the amount of Social Security taxed depends on your income, so this is another factor to consider. In another thread, Midpack recently used online subscription software incomestrategy.com to help decide when large conversions make sense.
 
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OK, looks like we will be fine, we had $73K total income and $42K AGI. I expect MAGI somewhere between. I read that a MFJ couple will not run into this until they hit $170k.
 
OK, looks like we will be fine, we had $73K total income and $42K AGI. I expect MAGI somewhere between. I read that a MFJ couple will not run into this until they hit $170k.

Correct and in 2020 the cliff starts moving upwards as it will be adjusted for inflation.
 
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