Author Topic: Curious about my projected 2018 tax return  (Read 674 times)

browne497

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Curious about my projected 2018 tax return
« on: May 13, 2018, 05:55:05 PM »
Hello all,

This will be the first year I've really done anything significant to effect my taxes and I've done some math but I am by NO MEANS a professional, just trying to get an idea of what to expect when I file my taxes for this year. I'm active duty military. While my total income is around $60k (single), my taxable income is only just under $30k because half of my pay is non-taxable allowances I receive intended for housing, food and Cost of living for the area I am in. On top of this I will have contributed the max of $18,500 to my traditional TSP and $5500 to my traditional IRA when all is said and done which will reduce my taxable income to around $7k. Correct me if I'm wrong, but I'm pretty sure I will still qualify for the standard deduction on top of that which will be $12k this year reducing my taxable income to $0. My question is if I will simply get back the money I currently paid on the $5500 that went into my IRA or is there more to this? Should I look into the Saver's credit even though I will already have $0 taxable income? Any help is appreciated. If any more information is needed, feel free to ask.

Cheers,

Trey

terran

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Re: Curious about my projected 2018 tax return
« Reply #1 on: May 13, 2018, 08:54:27 PM »
You should consider recharacterizing some/all of your IRA contribution to Roth and maybe also switching some of your TSP contributions to Roth. You want to at least fill the standard deduction owe enough tax so the savers credit can reduce it back down to $0. That way you will never pay any tax on those Roth contributions. Right now you're deferring income from a time when you're paying no taxes to a time when you might pay some taxes.

MDM

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Re: Curious about my projected 2018 tax return
« Reply #2 on: May 13, 2018, 11:07:48 PM »
You should consider recharacterizing some/all of your IRA contribution to Roth and maybe also switching some of your TSP contributions to Roth.
+1

Chart below shows the marginal tax saving rate for traditional TSP contributions, assuming you have already put $5500 into a Roth IRA, for exactly $30K "form 1040 line 7" income.



If this were the start of the year, one could make a defensible case for doing all Roth, because the marginal rates at which one can save are not all that high.

Given that we are partway through the year, and any traditional TSP contributions already made can't be undone, it probably makes sense to reach the last tier of the saver's credit (AGI less than $19K),  but no lower.

Strick

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Re: Curious about my projected 2018 tax return
« Reply #3 on: May 14, 2018, 09:39:22 AM »
Unless the 2018 changes changed it, which I doubt it did, the Savers credit is a non-refundable credit.  If you're total tax amount ends up at $0 then its of no value, but do make sure that line is zero when you do a final look over.  Terran is dead about considering a Roth to get the advantage of that plus then being able to use this to get back to zero

browne497

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Re: Curious about my projected 2018 tax return
« Reply #4 on: May 15, 2018, 12:49:48 PM »
You should consider recharacterizing some/all of your IRA contribution to Roth and maybe also switching some of your TSP contributions to Roth. You want to at least fill the standard deduction owe enough tax so the savers credit can reduce it back down to $0. That way you will never pay any tax on those Roth contributions. Right now you're deferring income from a time when you're paying no taxes to a time when you might pay some taxes.

Ok, So I should be able to safely roll this years contributions from my traditional to Roth and the taxes on it should still be non-existent?

terran

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Re: Curious about my projected 2018 tax return
« Reply #5 on: May 15, 2018, 01:06:32 PM »
You want to recharacterize, not roll over (basically the same thing, but rolling over is a taxable event, while recharacterizing is making it as if you contributed to the roth in the first place). As long as you keep your AGI under $19k the saver's tax credit will reduce your tax back down to $0. Remember that the credit is non-refundable so it it can only be used up to the amount you owe (you won't reduce your tax liability below $0, though you may get money back depending on how much withholding you've paid).

As always, don't take the word of strangers on the internet for granted. Fill out the forms for yourself. Form 1040 and form 8880 should do it to see how it works.

browne497

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Re: Curious about my projected 2018 tax return
« Reply #6 on: May 16, 2018, 03:48:13 AM »
You want to recharacterize, not roll over (basically the same thing, but rolling over is a taxable event, while recharacterizing is making it as if you contributed to the roth in the first place). As long as you keep your AGI under $19k the saver's tax credit will reduce your tax back down to $0. Remember that the credit is non-refundable so it it can only be used up to the amount you owe (you won't reduce your tax liability below $0, though you may get money back depending on how much withholding you've paid).

As always, don't take the word of strangers on the internet for granted. Fill out the forms for yourself. Form 1040 and form 8880 should do it to see how it works.

Thanks. That may be the route I go but I ran some numbers (Lord help us all) and my traditional contributions (IRA and TSP) to this point in the year are approximately $14.2k. Leaving me with about $15.6k left in projected taxable income after my original 29K(ish). So if I choose the standard deduction of $12k for single I'm down to about $3.6k. And I believe the saver's tax would take me down $1k more (I'm assuming this because nothing I read about the saver's credit makes it any easier to understand) to $2.6k. So with 7 more months, if my math is correct, to try to hit zero I should lower my traditional to around $380 a month and throw the rest into the Roth TSP. How's my math?

terran

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Re: Curious about my projected 2018 tax return
« Reply #7 on: May 16, 2018, 08:03:02 AM »
The $3600 is your taxable income, so you'll owe 10% of that, or $360, in total tax. Deductions (like the standard deduction) are subtracted from your income before you calculate your tax. Credits (like the savers tax credit) are subtracted from the amount of tax you owe. Since you'll qualify for the full $1000 savers tax credit you actually subtract that from the $360, but since the Saver's tax credit is non-refundable it can't make your tax due negative, so you just end up owing $0. This is why I'm suggesting you switch some to Roth. You want to "use up" as much of the savers tax credit as you can without making yourself ineligible because otherwise you're deferring income (paying taxes on it when you withdraw later) that you would have paid no taxes on otherwise.

The ideal situation is to have an AGI (line 38, form 1040) of $19k because then you're still eligible for the full savers credit, so your taxable income would be $19k - $12k = $7k, so your tax due would be 10% of that, or $700 which would also be reduced to $0 by the $1000 savers credit. As you can see you can't actually maximize the savers credit because getting under the AGI limit makes your taxable income after the standard deduction too low, but still it's a pretty good deal.

Not to complicate things, but you could also look into the Earned Income Tax Credit. I don't qualify (need pretty low income when you don't have kids), but you might be able to. To qualify as a single filer without dependents you need to have both and AGI and an earned income below $15010 (in 2017, I don't know when they'll release the limits for 2018). The credit changes based on your earned income amount. I messed around a bit with the calculator found on in one of the links on that page I linked to and it looks like you don't get anything if you get JUST under the $15010 limit, but if you get down to $10.5k ($29k - $18.5k 401k contribution) you'd get $343. Unlike the savers credit, the EITC is refundable, so since you'd be below the standard deduction ($0 tax due) you'd actually get that money back.

Since you'll owe $0 either way, what I would do is consider that $343 the "tax" you would pay on the money you would put in Roth if you didn't try to get the EITC. Since you're comparing a $18.5k traditional TSP contribution to get as much EITC as you can to a 10k traditional TSP contribution to get the full savers credit that's $8.5k. $343/$8500 = 4.03%, which is a pretty low tax rate, so it seems to me that not trying for the EITC, and just putting enough in your TSP to get the full Savers Credit with the rest going to Roth is the way to go. It might be worth playing around with the EITC calculator yourself though. There were some things about combat pay that I didn't really understand since I don't know anything about how that works.

What I would do at this point is switch your TSP to Roth and just leave your IRA alone. Once the year is done you can do your taxes with your actual final numbers and see how things shake out. You can recharacterize IRA contributions between traditional and Roth (in either direction) any time up to the tax filing deadline for the tax year towards which your contributions were applied (so 2018 IRA contributions can be recharacterized any time until mid April 2019). This way you can fine tune your AGI to be very close to the $19k savers credit limit without going over.

Make sense?

browne497

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Re: Curious about my projected 2018 tax return
« Reply #8 on: May 16, 2018, 04:56:19 PM »

What I would do at this point is switch your TSP to Roth and just leave your IRA alone. Once the year is done you can do your taxes with your actual final numbers and see how things shake out. You can recharacterize IRA contributions between traditional and Roth (in either direction) any time up to the tax filing deadline for the tax year towards which your contributions were applied (so 2018 IRA contributions can be recharacterized any time until mid April 2019). This way you can fine tune your AGI to be very close to the $19k savers credit limit without going over.

Make sense?

I think so. Hault traditional TSP completely for the year and begin throwing as much as possible to Roth for the remainder of the year and recharacterize my IRA as needed based on my numbers come tax time to come as close to 19k AGI saver's credit limit. Sounds easy enough. I plan to keep 5% into traditional just to continue to get as much of a match as possible but that's only like $100 a month so I don't suspect that will mess up things too much. That was the gist of things, right?

terran

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Re: Curious about my projected 2018 tax return
« Reply #9 on: May 16, 2018, 05:37:58 PM »
Sounds like you've got it!

I could be wrong as I don't know how the TSP works in this regard, but I suspect they'll match Roth contributions just the same as they match traditional, but check with HR. The match will still go into a a tax deferred part of the account, but that doesn't count towards your W2 income or the $18.5k limit anyway.

browne497

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Re: Curious about my projected 2018 tax return
« Reply #10 on: May 16, 2018, 06:02:22 PM »
Sounds like you've got it!

I could be wrong as I don't know how the TSP works in this regard, but I suspect they'll match Roth contributions just the same as they match traditional, but check with HR. The match will still go into a a tax deferred part of the account, but that doesn't count towards your W2 income or the $18.5k limit anyway.

Yeah setting up TSP contributions in the military leaves a lot to be desired in my opinion. I don't have anything else to compare it to since it's my first job but anytime you deal with the roth it gets more confusing. Traditional contributions are pretty straight forward because it's basic percentage math, but once I elect to put 6% of my taxable income into traditional, it only let's me put 56% into the roth. I just wish I could see the dollar amount that will be going into the Roth portion when I do that. But I digress.

As far as how the match works, the DoD just introduced matching of TSP with the new "Blended Retirement System". It was optional to opt in since I've been in for 4 years (Mandatory for people who join after Jan. 1, 2018) but since I can't guarantee I'll stay 20 years and the match helps with my pursuit of FI, I felt it was the better choice despite a reduction in pension value if I do decide to do 20 years.

The only info I can find on how matching works when you go full roth is from a little Q&A pdf file. Here's the quote...

Q2.7. Can a service member put their contributions into the Roth TSP?
A2.7. Service members can elect to put their contributions into a traditional account, Roth
account, or both. Service members can contribute in any whole percentage they choose
subject to Internal Revenue Code (IRC) limits. Service members can make adjustments to their
TSP account online at any time. All government automatic and matching contributions are
based on the total amount of money (traditional and Roth) that the service member contributes
each pay period. All government contributions are deposited into the service memberís
traditional account.

Are employer matches to traditional taxable later? If so then I'll just switch traditional to 0% and bump roth to 60% (the most I'm allowed to do) like you said. My worry with going all roth is that I won't be putting in a dollar amount each month high enough even at that percent to hit the $18,500 max for the year.

MDM

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Re: Curious about my projected 2018 tax return
« Reply #11 on: May 16, 2018, 06:08:04 PM »
Are employer matches to traditional taxable later?
If by "later" you mean "when withdrawn" then yes.

Quote
If so then I'll just switch traditional to 0% and bump roth to 60% (the most I'm allowed to do) like you said. My worry with going all roth is that I won't be putting in a dollar amount each month high enough even at that percent to hit the $18,500 max for the year.
If you use some traditional and some Roth, what is your marginal tax saving rate on the tradtional amount?

The Q&A does seem to cover the issue.  Do you have a specific question about it?

browne497

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Re: Curious about my projected 2018 tax return
« Reply #12 on: May 16, 2018, 06:44:58 PM »

Quote
If so then I'll just switch traditional to 0% and bump roth to 60% (the most I'm allowed to do) like you said. My worry with going all roth is that I won't be putting in a dollar amount each month high enough even at that percent to hit the $18,500 max for the year.
If you use some traditional and some Roth, what is your marginal tax saving rate on the tradtional amount?

I'm not quite sure... But my total TSP contributions for 2018 so far are $8,848.50. That's including Traditional and Roth. What I meant was that I don't know if the 60% roth (again the most I'm allowed to do) for the rest of the year will get me to $18,500 annual contribution limit. I hope that makes sense.

terran

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Re: Curious about my projected 2018 tax return
« Reply #13 on: May 16, 2018, 07:11:50 PM »

Quote
If so then I'll just switch traditional to 0% and bump roth to 60% (the most I'm allowed to do) like you said. My worry with going all roth is that I won't be putting in a dollar amount each month high enough even at that percent to hit the $18,500 max for the year.
If you use some traditional and some Roth, what is your marginal tax saving rate on the tradtional amount?

I'm not quite sure... But my total TSP contributions for 2018 so far are $8,848.50. That's including Traditional and Roth. What I meant was that I don't know if the 60% roth (again the most I'm allowed to do) for the rest of the year will get me to $18,500 annual contribution limit. I hope that makes sense.

Gotcha, yeah seems like it might be kind of close if you're not allowed to go over 60%.

You might want to keep going with traditional enough to get to $10k since that's how much you should theoretically need to get to $19k AGI. 


browne497

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Re: Curious about my projected 2018 tax return
« Reply #14 on: May 16, 2018, 07:20:31 PM »

Quote
If so then I'll just switch traditional to 0% and bump roth to 60% (the most I'm allowed to do) like you said. My worry with going all roth is that I won't be putting in a dollar amount each month high enough even at that percent to hit the $18,500 max for the year.
If you use some traditional and some Roth, what is your marginal tax saving rate on the tradtional amount?

I'm not quite sure... But my total TSP contributions for 2018 so far are $8,848.50. That's including Traditional and Roth. What I meant was that I don't know if the 60% roth (again the most I'm allowed to do) for the rest of the year will get me to $18,500 annual contribution limit. I hope that makes sense.

Gotcha, yeah seems like it might be kind of close if you're not allowed to go over 60%.

You might want to keep going with traditional enough to get to $10k since that's how much you should theoretically need to get to $19k AGI. 


Thanks, guys. Taxes aren't my strongsuit so I appreciate it. As things stand, I went ahead and went with 60% to roth, 0% traditional. Once I see what dollar amount goes into the Roth, I'll probably come back to the thread and update you for help with any fine tuning if that's ok. It's easier for me to put a lot into traditional later if I have to because I can do over $2k a month if I only do traditional. So if need be I can do that.

MDM

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Re: Curious about my projected 2018 tax return
« Reply #15 on: May 16, 2018, 07:49:22 PM »
As things stand, I went ahead and went with 60% to roth, 0% traditional. Once I see what dollar amount goes into the Roth, I'll probably come back to the thread and update you for help with any fine tuning if that's ok. It's easier for me to put a lot into traditional later if I have to because I can do over $2k a month if I only do traditional. So if need be I can do that.
Seems a good plan, especially if it's not clear to you (as it isn't to me) whether the 60% is based on your $60K or $30K income.

It's common and reasonable for many employers to limit contributions to <100% of pay, because SS and Medicare taxes are due regardless.  Makes sense that a Roth contribution limit might be even lower than a traditional one, because income tax withholding might also be needed.

Getting familiar with taxes does take some time, but as the saying goes "it's a life skill".

You could plug your numbers into the case study spreadsheet and/or another tax estimation program of choice, then see how the real answer (when you file in 2019) compares with any estimate.

browne497

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Re: Curious about my projected 2018 tax return
« Reply #16 on: May 16, 2018, 08:28:16 PM »
As things stand, I went ahead and went with 60% to roth, 0% traditional. Once I see what dollar amount goes into the Roth, I'll probably come back to the thread and update you for help with any fine tuning if that's ok. It's easier for me to put a lot into traditional later if I have to because I can do over $2k a month if I only do traditional. So if need be I can do that.
Seems a good plan, especially if it's not clear to you (as it isn't to me) whether the 60% is based on your $60K or $30K income.


Oh I'm sure it's on the $30k. Apologies if I didn't specify. I thought I said early on in the thread. But yes, 60% on the $30k. Still though, with roth, I'm not sure of what the dollar amount will be. My instinct is that it would be that it would be like $1,315 a month ($2490.60, which is my monthly taxable income, multiplied by .60 with 12% subtracted). Which would be plenty but I feel it won't be nearly that much for some reason.
« Last Edit: May 16, 2018, 08:34:16 PM by browne497 »

MDM

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Re: Curious about my projected 2018 tax return
« Reply #17 on: May 16, 2018, 08:44:17 PM »
Oh I'm sure it's on the $30k. Apologies if I didn't specify. I thought I said early on in the thread. But yes, 60% on the $30k. Still though, with roth, I'm not sure of what the dollar amount will be. My instinct is that it would be that it would be like $1,315 a month ($2490.60, which is my monthly taxable income, multiplied by .60 with 12% subtracted). Which would be plenty but I feel it won't be nearly that much for some reason.
OK, that narrows it down.  Might even be a flat 60% of $2490.60, or $1494.36.  But that's speculation, and the payslip should tell the real tale.  Plenty of time to adjust as and if needed!