Roth conversion impact on LTCG tax

[Ronstar]

Trying to calculate what (if any) amount I should do as a roth conversion.

The wrinkle is LTCG. We sold our snowbird condo which should amount to a $90k long term capital gain, if I can deduct all expenses on the closing statement. (have not accounted for new floors of $8k and appliances of $6k).

So the $90k LTCG is an estimate.

So far, DW and I have no 2019 IRA distributions or roth conversions. Income looks to be $66k or taxable income of $42k after standard deduction.

I ran this calculator https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/

The calculator shows that we will owe $0 in capital gains tax if we stay below $78,751 Taxable Income. And capital gains tax jumps to $13,650 if our income is above $78,751.

So not only does income tax rate jump from 12% to 22% at $78,951, but an add'l LTCG tax of $13.6k kicks in as well.

So my question is. How much roth conversion would be safe in making, given that I don't have final numbers? Or is there something that I'm missing?

I certainly don't want to pay the LTCG tax by overshooting the $78k income level, but I'd like to at least get in a little roth conversion. I'm running this by my accountant too, but I'd like thoughts of this esteemed group as well.

 

[RunningBum]

I don't think you did this right. The $90K LTCG condo sale counts towards the amount at which cap gains start being taxed. See the 3 posts starting here for an explanation: http://www.early-retirement.org/for...-conversion-this-year-100754.html#post2324695

The nerd wallet calculator you used doesn't handle this very well, or at least doesn't explain it well. Use your tax program to see how it really works. Use last years to the concept even if the numbers are a little different. There's also another simple online calculator lots of people here use, but I can't recall it right now. Someone will jump in.

 

[CardsFan]

Try this calculator: https://www.mortgagecalculator.org/calcs/1040-calculator.php

 

[niven]

So the $90k LTCG is an estimate.

So far, DW and I have no 2019 IRA distributions or roth conversions. Income looks to be $66k or taxable income of $42k after standard deduction.

If you have $42,000 of income taxed at ordinary rates after the standard deduction, you only have $78,750 - $42,000 = $36,750 left of 0% LTCG. The remaining $53,250 of $90,000 would be taxed at 15% already.

So from that I'd estimate your tax at $4,652 (ordinary) and $7,988 (LTCG) for a total of $12,640.

 

[Gumby]

I'm a little confused. Capital gains are not all or nothing. Your LTCG below $78,751 are taxed at 0%. Above that they are taxed at 15%, but only the amount above that. It works like marginal tax brackets, you don't pay the marginal rate on all your income, only the income above the threshold.



So your income looks like this

First, ordinary income = $66k - 24k standard deduction = $42k (19,400 @ 10% and 22,600 @12% => $4652
$90k capital gains => 78,750 - 42,000 = 36750 @ 0%; 90000-36750 = $53,250 @ 15% = $7988

total tax is about $12,640

If you take a Roth conversion, it adds in above your existing ordinary income but below your capital gains and serves to push more capital gains up into the 15% bracket.


Here is an article about how that works https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

 

[niven]

[-]If you have $42,000 of income taxed at ordinary rates after the standard deduction, you only have $78,750 - $42,000 = $36,750 left of 0% LTCG. The remaining $53,250 of $90,000 would be taxed at 15% already.

So from that I'd estimate your tax at $4,652 (ordinary) and $7,988 (LTCG) for a total of $12,640.[/-]

Sorry, brain seizure!

 

[Gumby]

Sorry, brain seizure!

I think you were right. You start on the bottom with ordinary income to ensure that it gets taxed at the lowest rates. You add the cap gains on top of that. I originally did it backwards.

 

[niven]

I think you were right. You start on the bottom with ordinary income to ensure that it gets taxed at the lowest rates. You add the cap gains on top of that. I originally did it backwards.

Yeah, I've now ran it through H&R Block and got the same. I've always looked at it as the LTCG brackets are reduced by the ordinary income amount, so eventually there's nothing left in the 0% bracket.

 

[pb4uski]

I'm a little confused. Capital gains are not all or nothing. Your LTCG below $78,751 are taxed at 0%. Above that they are taxed at 15%, but only the amount above that. It works like marginal tax brackets, you don't pay the marginal rate on all your income, only the income above the threshold.



So your income looks like this

First, ordinary income = $66k - 24k standard deduction = $42k (19,400 @ 10% and 22,600 @12% => $4652
$90k capital gains => 78,750 - 42,000 = 36750 @ 0%; 90000-36750 = $53,250 @ 15% = $7988

total tax is about $12,640

If you take a Roth conversion, it adds in above your existing ordinary income but below your capital gains and serves to push more capital gains up into the 15% bracket.


Here is an article about how that works https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

Spot on.

If he adds Roth converson, the first $36,750 of Roth conversions ($78,750-$42,000) is taxed at 27% (12% for the additional ordinary income and 15% for the capital gains pushed up from 0% to 15%) ... then at 12% for the next $200.... then at 22%.

 

[Ronstar]

Thanks everyone!

Somehow I went down the wrong path in my calculations. I didn’t understand the online examples and tax calculator that I used. I had a severe brain cramp.

But all of your posts and the calculations in your posts make it clear to me now. As does the Kitces link.

Thanks again!

 

[Corporateburnout]

This is a good calculator to use if you don't have access to TurboTax what ifs.

https://www.olt.com/main/home/taxestimator.asp