2022 will be the first year I take some level of a withdrawal. In my prior (working) years, my tax returns were always done by an accountant and were much more complicated. While I will probably continue to use my accountant at least this year, I anticipate my return will be much simpler, but with plans to do Roth conversions into the 24% tax bracket until further notice. As part of some internal planning, I was playing around with the Turbo Tax Calculator. On first pass, I wanted to do a simple comparison of earned income vs. IRA withdrawal (both at the same amounts) with no other variables imputed, just standard deduction. To my surprise, the gross tax $$ were basically the same, within a couple hundred $$. My understanding is earned income should be taxed for SS/Medicare while IRA withdrawals (or Roth conversions) should not as it was previously taxed/addressed the past years of contributions? I realize in those tax years there was a cap on amounts actually taxed, but as I read it, IRA distributions are not subject to Social Security Tax? If that's the case, should I not have a higher tax amount using the tax calculator for earned income vs IRA distributions?
Using Tax Calculators for Planned Roth Conversions
- Thread starter DawgMan
- Start date
Well, not sure. I did not see an entry to address one way or the other using, https://turbotax.intuit.com/tax-tools/calculators/taxcaster/.
Is there a better/more accurate tax calculator people recommend? The goal is to eventually input more realistic values for capital gains/interest/dividends and back into a Roth conversion amount.
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I think the most realistic and perhaps easiest UI tax calculator is at https://sites.google.com/view/incometaxspreadsheet/home. There are others.
Earned income (from a W-2) does have SS/Medicare taxes withheld. However, those numbers won't be reflected in a tax calculator (usually) because they're payroll taxes taken at payroll time, not income taxes handled on an income tax return.
IRA distributions (and Roth conversions) created taxable ordinary income. You are correct that there are no SS/Medicare taxes due on this kind of income. The reason for the lack of SS/Medicare is that this income is called "unearned" income, whereas W-2 income is "earned" income. Only earned income (generally W-2 or Schedule C) is subject to SS/Medicare taxes.
If you put $X in for W-2 into a tax calculator and look at the taxes, and then delete that $X of W-2 income and put in an IRA withdrawal of $X, the taxes should come out exactly the same in both cases for middle-income levels of $X. I think there is an extra Medicare surcharge on W-2 income at some relatively high values of $X (like over six figures), which may be what you're seeing. This Medicare surcharge is in addition to regular SS/Medicare.
Earned income (from a W-2) does have SS/Medicare taxes withheld. However, those numbers won't be reflected in a tax calculator (usually) because they're payroll taxes taken at payroll time, not income taxes handled on an income tax return.
IRA distributions (and Roth conversions) created taxable ordinary income. You are correct that there are no SS/Medicare taxes due on this kind of income. The reason for the lack of SS/Medicare is that this income is called "unearned" income, whereas W-2 income is "earned" income. Only earned income (generally W-2 or Schedule C) is subject to SS/Medicare taxes.
If you put $X in for W-2 into a tax calculator and look at the taxes, and then delete that $X of W-2 income and put in an IRA withdrawal of $X, the taxes should come out exactly the same in both cases for middle-income levels of $X. I think there is an extra Medicare surcharge on W-2 income at some relatively high values of $X (like over six figures), which may be what you're seeing. This Medicare surcharge is in addition to regular SS/Medicare.
Thanks. That appears to explain it. I suppose I always underwrote SS/Medicare as part of the Fed take and lumped it in taxes. Is there away to see the affect of SS/Medicare taxes (i.e. manipulating some numbers) in any of the calculators or do I simply make note of a 6.2% added tax to any earned income under the approximate $142K?
I suppose for the purposes calculating potential Roth conversion amounts, the impact of SS/Medicare taxes is independent of that since it is the noted amount on earned income only?
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
For wages, you can see how much in SS or Medicare taxes you paid by looking at either your W-2 or your last paystub for the year (which you might receive in early January). (You could multiply the 6.2% by your wages, but there are some things that escape SS/Medicare taxation, such as HSA contributions and I think employer-provided healthcare, so the better way is by looking at the documents indicated.)
For self employment income, it's a bit trickier to follow, but if you look at your Schedule SE you should be able to figure it out from there.
And yes, you can ignore SS/Medicare taxes on Roth conversion amounts, because there will never, as far as I know, be any SS/Medicare taxes on Roth conversions.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
You might try out https://www.irscalculators.com/tax-calculator
You can elect to include SS and Medicare taxes if you want to.
You can elect to include SS and Medicare taxes if you want to.
The money you put into your 401k and IRA already had payroll taxes withheld from that amount in your paycheck. No need to re-tax for FICA. But you did not pay income tax on pre-tax contributions, so that is why you owe income taxes on Roth conversions.
