Tax Wackiness

[FLSUnFIRE]

Mostly sharing this because it is interesting to me and might be to some of you or lead to unexpected lively ER.org discussion or maybe some great advice to a question I haven't asked....

I've been trying to figure out my final money moves for the year. I rolled over a portion of my 401K as I expect to start a SEPP on the remainder sometime in 2026. I also intend to do a small ($20-25K Roth conversion this year) and realize about $20K in LTCG. I've earned a bit (high 4 figures, -could shift some to next year as Dec is looking quite busy) with my self-employed "fun jobs" so I have SE taxes on those. Also use ACA and eligible for subsidy. Single filer so thresholds are low.

I've been inputting various scenarios into FreeTaxUSA seeing how all the bits play rather than a simpler tax planner and I've noticed a few "cliffs" or bend points as the various factors (PTC, LTCG, income from Roth Conversion) impact where I fall in tax brackets. Basically, if my AGI gets over $60K, things get expensive fast with a near doubling of tax due with little increase in actual income. The other is when Taxable income crosses $40K. This is due to brackets and PTC as well as the types of income pushing LTCG into the 0% bracket. Definitely not linear and the same "income" can result in wilding different tax liabilities. This is something I think we all know but if you haven't played with various scenarios in actual planning software under current laws it is interesting. I made a little spreadsheet to compare scenarios and once i make my decisions (and have better fidelity on my earned income and year end distributions) I will fine tune within a few $100 before making my final money moves this year (the latest I've gone, will probably be after Christmas so hopefully all processes quickly.

Big insight to me is that every dollar I earned in my fun job costs me about 24% in taxes (net effect SE/PTC/Bumping other income into higher brackets) Mentally, it's always been the SE only but the tax man gets so much more due to impacts to PTC! The other interesting thing (good?) is that the Roth Conversion, will only cost about 13% marginal increase up to a certain threshold so easy to make that decision to pay 13% today on the most I can -it jumps to 26% if i cross that threshold. It's looking like, from a tax optimization standpoint, I'd be better to quit my fun jobs and convert that amount instead.... a disincentive to "work." (Ever dollar I earn costs 24¢ and also taxes away a dollar I could convert at 13¢) Of course, I don't need that money but it is fun to do (just don't like making commitments to "have" to work sometime) and it's fun to earn money... Small money, but I get a bit of pleasure when I'm paid. I think I'll get less pleasure knowing I'm giving nearly a quarter of it to Uncle Sam. Next year will likely be a different game depending what happens with PTC in Washington.

I guess I do have one question for you wise people: The last 3 years I've owed no taxes at filing (I owed SE taxes only but they were offset by PTC so I got a refund with no withholding or estimated payments having been made) but this year will have to pay SE, repay some PTC (due to forthcoming Roth conversion), and some income tax) and have made no estimated payments. Will safeharbor provisions cover me or will I need to make an estimated payment in January?

 

[cathy63]

The last 3 years I've owed no taxes at filing (I owed SE taxes only but they were offset by PTC so I got a refund with no withholding or estimated payments having been made) but this year will have to pay SE, repay some PTC (due to forthcoming Roth conversion), and some income tax) and have made no estimated payments. Will safeharbor provisions cover me or will I need to make an estimated payment in January?

Not enough info here to answer this question. You need to get out last year's tax return and look at the number on line 24. That is your minimum required payment for this year. If that number is $0, then you were not required to make estimated payments in 2025 and you are already in a safe harbor. (There are some other things that affect minimum req payment, but for most people it's the amount on line 24.)

The next safe harbor is owing less than $1000 in tax for this year. What do your estimates show your total tax bill to be for this year?

Otherwise if your minimum required pmt is greater than $0 and your taxes for this year will be over $1000, it's too late to reach the third safe harbor just by making estimated payments. To do that, you needed to make 4 equal payments on time throughout the year and you've already missed the first three.

The options left to you are:

• Take an additional withdrawal from your IRA for the amount of the minimum required payment and have 100% of it withheld. This will get you into the safe harbor of having withholding that covers the amount of last year's tax. Of course, that IRA withdrawal adds to your taxable income for this year.
• Make the minimum required payment now and accept that you might still owe a penalty. You can estimate how much it will be by multiplying .07 x .66 x required payment. That's likely to be a pretty small number, and you might just decide it's easier to go ahead and pay whatever your tax software calculates (which should be an even smaller number than this estimate since the Fed just lowered interest rates again).
• Wait and see if the IRS bothers to try to collect the very small penalty. They probably won't, but if they do, you can either pay it then or fill out Form 2210 and Schedule AI to show that most of your income was received as a Roth conversion in Q4, which will reduce the penalty further and may even eliminate it.

 

[FLSUnFIRE]

Not enough info here to answer this question. You need to get out last year's tax return and look at the number on line 24. That is your minimum required payment for this year. If that number is $0, then you were not required to make estimated payments in 2025 and you are already in a safe harbor. (There are some other things that affect minimum req payment, but for most people it's the amount on line 24.)

The next safe harbor is owing less than $1000 in tax for this year. What do your estimates show your total tax bill to be for this year?

Otherwise if your minimum required pmt is greater than $0 and your taxes for this year will be over $1000, it's too late to reach the third safe harbor just by making estimated payments. To do that, you needed to make 4 equal payments on time throughout the year and you've already missed the first three.

The options left to you are:

• Take an additional withdrawal from your IRA for the amount of the minimum required payment and have 100% of it withheld. This will get you into the safe harbor of having withholding that covers the amount of last year's tax. Of course, that IRA withdrawal adds to your taxable income for this year.
• Make the minimum required payment now and accept that you might still owe a penalty. You can estimate how much it will be by multiplying .07 x .66 x required payment. That's likely to be a pretty small number, and you might just decide it's easier to go ahead and pay whatever your tax software calculates (which should be an even smaller number than this estimate since the Fed just lowered interest rates again).
• Wait and see if the IRS bothers to try to collect the very small penalty. They probably won't, but if they do, you can either pay it then or fill out Form 2210 and Schedule AI to show that most of your income was received as a Roth conversion in Q4, which will reduce the penalty further and may even eliminate it.

I should be ok making the 4th qtr payment as the realized income causing the liability will occur this month with the Roth conversion/LTCG. Every year so far line 24 liability (<$1000) was more than offset by line 33 due to PTC but the additional income realized in Dec will cause the liability. If I don't sell and don't convert I'll owe no taxes again. I'm guessing I'd not get pinged but I'll make the estimated payment to cover my anticipated liability.

 

[junkanoo]

Big insight to me is that every dollar I earned in my fun job costs me about 24% in taxes (net effect SE/PTC/Bumping other income into higher brackets) Mentally, it's always been the SE only but the tax man gets so much more due to impacts to PTC! The other interesting thing (good?) is that the Roth Conversion, will only cost about 13% marginal increase up to a certain threshold so easy to make that decision to pay 13% today on the most I can -it jumps to 26% if i cross that threshold. snip ...

I follow how one dollar from your job might cost you 24% in taxes, as it is ordinary income ... however, Roth Conversions are also ordinary income so ... I'm not getting your point as to looking at that income any differently.

 

[cathy63]

I should be ok making the 4th qtr payment as the realized income causing the liability will occur this month with the Roth conversion/LTCG. Every year so far line 24 liability (<$1000) was more than offset by line 33 due to PTC but the additional income realized in Dec will cause the liability. If I don't sell and don't convert I'll owe no taxes again. I'm guessing I'd not get pinged but I'll make the estimated payment to cover my anticipated liability.

If you expect your liability to be under $1000 this year, then you are not required to make an estimated payment for Q4. You can just wait and make the payment in April. It doesn't hurt if you want to pay early, but you're not required to.

 

[FLSUnFIRE]

I follow how one dollar from your job might cost you 24% in taxes, as it is ordinary income ... however, Roth Conversions are also ordinary income so ... I'm not getting your point as to looking at that income any differently.

Yes but no. Earned $ is all 1099 so it incurs SE taxes, income tax, and PTC reduction so it costs me more. Roth Conversions only incur income tax and PTC reduction.

 

[Out-to-Lunch]

One other thought: Since you have earned income, you are eligible to contribute to an IRA, right? If you overconvert in 2025, and it causes you to go over a cliff or a bracket, you could make a traditional IRA contribution before April 2026 to get you back down below the cliff or bracket. I realize you are looking to take money OUT of deferred, but it could be a tool in case you overconvert.

 

[FLSUnFIRE]

One other thought: Since you have earned income, you are eligible to contribute to an IRA, right? If you overconvert in 2025, and it causes you to go over a cliff or a bracket, you could make a traditional IRA contribution before April 2026 to get you back down below the cliff or bracket. I realize you are looking to take money OUT of deferred, but it could be a tool in case you overconvert.

Yep! All (or $8K) of my earned income is planned to go into my Roth but the get out of jail card is to contribute to my tIRA. At my level of income I am flirting with a lot of transition points. One weird thing about FIREd life is that "income" is all largely discretionary so the amount/timing/and make-up of income involves lots of choice. W-2 left very little choice!

 

[SecondCor521]

You might play around with the Case Study Spreadsheet at:

Case Study Spreadsheet updates

Case Study Spreadsheet updates

forum.mrmoneymustache.com

The nice feature it has is a marginal rate graph that shows you all of the tax bumps and oddities for your specific situation. I use it for Roth conversion calculations but I believe you can also use it for LTCG realization calculations. You can effectively zoom in by changing the starting and step values for the graph.

It does require Real Microsoft Excel for the graph to work properly.

It is a bit of a learning curve to figure out where and how to put things in. I always suggest putting in your previous year tax return (2024 in your case) and make sure the tax liabilities match so you know you're putting in the data correctly. Then move on to 2025.

It sorta makes an effort to do state income taxes too, but those calculations are relatively rudimentary.

 

[Mr. Tightwad]

Not enough info here to answer this question. You need to get out last year's tax return and look at the number on line 24. That is your minimum required payment for this year. If that number is $0, then you were not required to make estimated payments in 2025 and you are already in a safe harbor. (There are some other things that affect minimum req payment, but for most people it's the amount on line 24.)

The next safe harbor is owing less than $1000 in tax for this year. What do your estimates show your total tax bill to be for this year?

Otherwise if your minimum required pmt is greater than $0 and your taxes for this year will be over $1000, it's too late to reach the third safe harbor just by making estimated payments. To do that, you needed to make 4 equal payments on time throughout the year and you've already missed the first three.

The options left to you are:

• Take an additional withdrawal from your IRA for the amount of the minimum required payment and have 100% of it withheld. This will get you into the safe harbor of having withholding that covers the amount of last year's tax. Of course, that IRA withdrawal adds to your taxable income for this year.
• Make the minimum required payment now and accept that you might still owe a penalty. You can estimate how much it will be by multiplying .07 x .66 x required payment. That's likely to be a pretty small number, and you might just decide it's easier to go ahead and pay whatever your tax software calculates (which should be an even smaller number than this estimate since the Fed just lowered interest rates again).
• Wait and see if the IRS bothers to try to collect the very small penalty. They probably won't, but if they do, you can either pay it then or fill out Form 2210 and Schedule AI to show that most of your income was received as a Roth conversion in Q4, which will reduce the penalty further and may even eliminate it.

Cathy deserves a giant thank you and a round of applause for all the wonderful tax help over the years.

 

[pb4uski]

Another thing to consider on your SE income is that not only are you paying SE tax, ordinary income tax and reduced PTC, but... to add insult to injury... you're probably getting little or no increase in your SS from those SE taxes.

 

[junkanoo]

Another thing to consider on your SE income is that not only are you paying SE tax, ordinary income tax and reduced PTC, but... to add insult to injury... you're probably getting little or no increase in your SS from those SE taxes.

Agreed. If that income doesn't replace one of the 35 years that SS computes toward your benefit, that SE tax didn't move the peanut forward. However, the problem with just looking at the tax consequences is that it ignores that his "fun job" hopefully provided positive income flow after taxes. Hopefully, the O.P. also took advantage of the deductions that self-employment brings and factored that into the true cost of his endeavor.

Whether that plus the fun of the job is worth it is not for anyone to say other than the O.P.

 

[FLSUnFIRE]

Another thing to consider on your SE income is that not only are you paying SE tax, ordinary income tax and reduced PTC, but... to add insult to injury... you're probably getting little or no increase in your SS from those SE taxes.

Very little... but keeps another zero out of the calculation!

 

[cathy63]

Yes but no. Earned $ is all 1099 so it incurs SE taxes, income tax, and PTC reduction so it costs me more. Roth Conversions only incur income tax and PTC reduction.

Do you take the Self Employed Health Insurance Deduction? If not, you should look at Form 7206. I'm not sure if FreeTaxUSA would include it automatically because the calculation is complicated when you have ACA insurance, but that deduction could potentially wipe out all the income tax on your SE income. It won't affect SE tax though.

 

[FLSUnFIRE]

Do you take the Self Employed Health Insurance Deduction? If not, you should look at Form 7206. I'm not sure if FreeTaxUSA would include it automatically because the calculation is complicated when you have ACA insurance, but that deduction could potentially wipe out all the income tax on your SE income. It won't affect SE tax though.

I'll need to look into that! My SE income is less than standard deduction, but interest, dividends and Roth conversion will put my regular income over it. This is the first year I'll pay actual income tax (not counting "paying" 0% rate on LTCG) since I retired.

ETA: I did put in my health insurance premiums as a business expense and it does process the deduction but, since the program isn't final, I cannot see the 7206 but the magnitude seems about right and they say they support it. I'd like to see the form to make sure it's accounting properly for my PTC (it should as the PTC is in there). Thanks for the heads up. This had been mentioned to me once before but I didn't pull the string.

 

[EastWest Gal]

Do you take the Self Employed Health Insurance Deduction? If not, you should look at Form 7206. I'm not sure if FreeTaxUSA would include it automatically because the calculation is complicated when you have ACA insurance, but that deduction could potentially wipe out all the income tax on your SE income. It won't affect SE tax though.

What cathy63 said. When we were on the ACA, my husband's self employment income made a nice dent into our income taxes. Also, if you have LTC insurance, a portion of that premium is also deductible.

 

[sengsational]

It it the finance buff that has a post that helps through the initial shock of opening the MMM Case Study Spreadsheet?

I was doing what that spreadsheet does manually with HR Block... increasing taxable withdrawals and plotting the results. There are a lot of strange wiggles due to things phasing in and out. I had to adjust the HRB output manually for the IRMAA effect.

 

[Out-to-Lunch]

In addition to "Tax Wackiness," there is also "Wax Tackiness." I am given to understand that this is important in surfing and skiing.

 

[SevenUp]

It it the finance buff that has a post that helps through the initial shock of opening the MMM Case Study Spreadsheet?

I was doing what that spreadsheet does manually with HR Block... increasing taxable withdrawals and plotting the results. There are a lot of strange wiggles due to things phasing in and out. I had to adjust the HRB output manually for the IRMAA effect.

Roth Conversion with Social Security and Medicare IRMAA and Roth Conversion with Social Security and Medicare IRMAA?

There is also the Using a spreadsheet section of the BH Roth conversion wiki.

Or you could cheat by reading the first dozen or so lines on the case study spreadsheet Instructions tab.

 

[FLSUnFIRE]

In addition to "Tax Wackiness," there is also "Wax Tackiness." I am given to understand that this is important in surfing and skiing.

Did Nords take over your account?!

 

[FLSUnFIRE]

For those following along on the SE Health Insurance deduction and use FreeTaxUSA, I found this article on how to calculate and enter into the system: https://community.freetaxusa.com/kb...loyed-health-insurance-when-you-have-a-1095-a A few steps but pretty easy to follow.

Glad I posed and cathy63 mentioned the health insurance deduction. Looks like it will save me $300-400 in tax liability. Unfortunately, I can only go so far putting in my projected return as the program isn't finalized so it won't generate forms yet for me to be 100% sure (and I still have to find out my EOY distributions and decide on my Conversion and LTCG amounts I'll realize).

 

[junkanoo]

Do you take the Self Employed Health Insurance Deduction? If not, you should look at Form 7206. I'm not sure if FreeTaxUSA would include it automatically because the calculation is complicated when you have ACA insurance, but that deduction could potentially wipe out all the income tax on your SE income. It won't affect SE tax though.

Indeed. Even if it's just for others surfing in, you can also deduct your family's healthcare costs as well. My wife is self-employed so it's the combination of her medical plan costs plus my Medicare costs.

These can be quite helpful as these are above-the-line offsets, meaning they reduce AGI whether you itemize or not.