2017 tax planning help needed

[Pizzabrewer]

Hi:  Let me start by saying that I will consult with my tax professional before doing anything, but I'd like to get some feedback about (what is for me) an advanced tax strategy for this year.

First, our details.  Married filing jointly, no dependents. 
At year's end we should look like this:

INCOME:
$88,915 gross wages
$     750 bank signup bonuses, interest and dividends
$89,665 total income

ADJUSTMENTS:
$17,812 my t401k
$20,910 wife's t401k
$13,000 tIRAs (total for both of us, including catch-up)
$  3,800 wife's HSA
$         0 my HSA (became eligible this year, haven't contributed yet)
$55,522 total adjustments

So it looks like our AGI is $34,089 which qualifies us for the 50% savers' credit of up to $2,000. 

Am I right so far?

Now the fun begins:

CAPITAL GAIN/LOSS:
$10,446 Capital gains realized
$  9,000 Capital gains unrealized (obviously subject to change)
$  1,000 Capital loss unrealized (obviously subject to change)
$  9,819 Capital loss carry-forward from previous years
$  2,956 Investment Interest expense carry-forward from previous years

So the realized capital gains are already negated by the carry-forwards, with about $2300 in leftover credits.

So it appears we have some headroom to play with under the $37,000 savers credit income limit.  Specifically:
$2,911 from initial AGI figured above, plus
$2,300 leftover Cap Loss carryforwards, plus
$3,000 (or more?) in HSA funding I can do for myself (not sure of the limit, there's some complication involved with MFJs having 2 HSA accounts.  I need to look into this)
$1,000 in Cap Loss I could still realize

Total headroom to play with is around $9-10K (depending on HSA limit)

What would you do under these conditions?  The unrealized capital gains are all long-term, so at my marginal tax rate they'd be taxed at $0.  So it wouldn't make sense to realize that now, correct?  Except for the fact that I would need to sell some to finance my HSA should I do so.  Another option is to use the headroom to convert some IRA money to Roth. 

Also, does it make the most sense to stay under the $37k AGI for the savers credit?

I'm sure I'm missing some details/nuances here.  It would seem we have an opportunity here at a very low marginal tax rate, eligible for the savers credit, that shouldn't be wasted.

THanks for any input.

[terran]

Sounds about right. You should run it through some tax software to make sure everything plays out how you expect.

Do you expect to stay in the 0% capital gains bracket in the future? If so I would recharacterize some of your t.IRA contributions to use up whatever headroom you have.

Remember that the savers's tax credit is non-refundable, so at that income level it will reduce your tax liability to $0, but you won't be able to use up the whole credit.

[MDM]

What would you do under these conditions?

I'd take a spreadsheet, perhaps one very similar to the case study spreadsheet, and use the marginal rate chart to investigate how various options might play out.  If I trusted the spreadsheet, I'd stop there and take action.  If operating under "trust but verify" I'd use something like the "what if?" worksheets of TurboTax, TaxAct, etc. to verify specific results.

$3800 is an odd number for an individual HSA contribution.  The individual limit is $3400, the family limit is $6750, and each individual gets to contribute an additional $1000 if age 55 or older.

[Pizzabrewer]

I'm still trying to wrap my head around the various scenarios.

It seems that selling stock to realize the cap gains is/was a mistake.  It soaks up the cap loss carry-forwards which would be more valuable in future years if my long-term cap gains rate is above 0%.  Furthermore, once the carry-forwards are used up it would raise our AGI towards the $37k savers credit cliff without creating a tax burden the savers credit could offset.

So I'm thinking it makes more sense to do Roth conversions of existing tIRAs up to the $37k cliff (being careful not to go over).  I assume the conversions would have to take place in calendar year 2017?

The other factor is funding my HSA.  If I do that I'd create more headroom for Roth conversions.  I understand HSA funding for tax year 2017 can be done up until April 15 2018?  If so, I could hold off selling stock to finance the HSA until after Jan 1 and realize the gain next year.

My potential headroom for Roth conversions would then be:
$2911 (initial AGI calculation) plus
$2300 (remaining cap loss carryforward as income reduction) plus
$4400 HSA contribution
$9611 total

Am I thinking correctly here or am I completely missing something?

Thanks.

$3800 is an odd number for an individual HSA contribution.  The individual limit is $3400, the family limit is $6750, and each individual gets to contribute an additional $1000 if age 55 or older.

My wife's employer contributes up to $600 to an employee's HSA as "wellness credits" to encourage preventative care.  Thus, they limit employee contributions to $2800 (plus the $1000 catch-up in her case).

[Cheddar Stacker]

$20,910 wife's t401k

The limit is $18K unless over 50. So is she over 50 or is this a mistake? From your last post it looks like maybe she qualifies for catch-up?

$  2,956 Investment Interest expense carry-forward from previous years...
So the realized capital gains are already negated by the carry-forwards, with about $2300 in leftover credits.

Not quite. The investment interest carry forward can only be used on Schedule A (not pre AGI) and only against non-Qualified investment income. This means short-term capital gains and unqualified dividends. There is an election to use it against qualified investment income in exchange for treating them as unqualified for tax purposes, but either way it won't reduce your investment income until after the AGI which is crucial for the savers credit.


I'd max your HSA then convert some Traditional to Roth. The HSA is much more flexible and accessible earlier. Either way, you're doing great with the tax planning.

[Pizzabrewer]

$20,910 wife's t401k

The limit is $18K unless over 50. So is she over 50 or is this a mistake? From your last post it looks like maybe she qualifies for catch-up?

Yup, we both qualify for catch-ups in everything.  We're old farts.

Gonna have to read your carry-forward analysis a few times before it sinks in...

edited to add, we started too late in the year to max our 401(k)s at $24k.  I only became eligible for my company's plan in July.  When I signed up I got a call from HR saying "this is a mistake?  you want 6% withheld, not 60%, right?"  I said, yup, 60%.  I've since increased it to 70% but can't afford more.  In my wife's case she'd been withholding small amounts for years but by the time we realized it should be ramped up there wasn't enough time left in the year to get it all in.  Next year I'm hoping to do $24k times 2...

[Cheddar Stacker]

Gonna have to read your carry-forward analysis a few times before it sinks in...

Let me re-phrase then...

Investment interest expense does not offset capital gains. Therefore, you have about $600 in taxable capital gains right now which will increase your AGI.

If you have any qualifying investment income the investment interest expense will be allowed as a deduction, up to the qualifying investment income, if you can itemize your deductions on Schedule A.

Qualifying investment income includes interest, and dividends that are not qualified, and short-term capital gains.

[Pizzabrewer]

Gonna have to read your carry-forward analysis a few times before it sinks in...

Let me re-phrase then...

Investment interest expense does not offset capital gains. Therefore, you have about $600 in taxable capital gains right now which will increase your AGI.

If you have any qualifying investment income the investment interest expense will be allowed as a deduction, up to the qualifying investment income, if you can itemize your deductions on Schedule A.

Qualifying investment income includes interest, and dividends that are not qualified, and short-term capital gains.

OK, thanks I got it.  We are standard deduction all the way, it's not even close.  So I guess I should just ignore the interest expense carry-forwards.

Am I right on the timetables?  Roth conversion before Dec 31, HSA funding before April 15?  Any other flaws in my thinking?  I'm new to this stuff.

Many thanks.

[Cheddar Stacker]

Am I right on the timetables?  Roth conversion before Dec 31, HSA funding before April 15?  Any other flaws in my thinking?  I'm new to this stuff.

Yep. I don't see other flaws.

[terran]

Roth conversion before Dec 31, HSA funding before April 15?  Any other flaws in my thinking?  I'm new to this stuff.

Yes, I believe you're right that roth CONVERSIONS would have to happen in 2017, but you can RECHARACTERIZE some/all of your 2017 t.IRA contributions to r.IRA which would have the same effect, and this you can do any time up to your tax filing deadline.