Author Topic: Need help figuring max income possible & keep AGI in 15% bracket  (Read 1945 times)

Recliner

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I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.

Due to available overtime I can easily manipulate my gross income and may be able to just barely exceed the 15% bracket. Can anyone double check what I'm assuming my deductions will be?

$12,700 (standard deduction) + $20,250 (personal exemptions for me, spouse, and 3 kids) + $18,000 (457 contributions) + $5,750 (hsa since my employer pays $1k)

So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?

MDM

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #1 on: September 22, 2017, 12:30:07 PM »
I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.
...
So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?
If you reach the top of the 15% bracket with ordinary income, there is no room for any 0% tax on capital gains.

Further, let's say you have $5K in capital gains and your total (after deductions) of ordinary plus capital gain income is $1700 (or whatever) above the top of the 15% bracket.  Any extra ordinary income will lose 30% to taxes, until the ordinary income alone (after deductions) is above the 15% bracket.

Use a copy of last year's tax software, or the case study spreadsheet to enter your numbers and verify.

SeattleCPA

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #2 on: September 22, 2017, 01:14:44 PM »
I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.
...
So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?
If you reach the top of the 15% bracket with ordinary income, there is no room for any 0% tax on capital gains.

Further, let's say you have $5K in capital gains and your total (after deductions) of ordinary plus capital gain income is $1700 (or whatever) above the top of the 15% bracket.  Any extra ordinary income will lose 30% to taxes, until the ordinary income alone (after deductions) is above the 15% bracket.

Use a copy of last year's tax software, or the case study spreadsheet to enter your numbers and verify.

Totally agree with the first part of MDM's answer... but I'm not sure I understand the second part which talks about a 30% rate.

Remember that tax brackets get filled with the highest taxed income first.

E.g., if you "fill up" your standard deduction, personal exemptions, 10% and 15% brackets with ordinary income, any additional capital gains income gets taxed at 15%.
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dandarc

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #3 on: September 22, 2017, 01:33:42 PM »
I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.
...
So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?
If you reach the top of the 15% bracket with ordinary income, there is no room for any 0% tax on capital gains.

Further, let's say you have $5K in capital gains and your total (after deductions) of ordinary plus capital gain income is $1700 (or whatever) above the top of the 15% bracket.  Any extra ordinary income will lose 30% to taxes, until the ordinary income alone (after deductions) is above the 15% bracket.

Use a copy of last year's tax software, or the case study spreadsheet to enter your numbers and verify.

Totally agree with the first part of MDM's answer... but I'm not sure I understand the second part which talks about a 30% rate.

Remember that tax brackets get filled with the highest taxed income first.

E.g., if you "fill up" your standard deduction, personal exemptions, 10% and 15% brackets with ordinary income, any additional capital gains income gets taxed at 15%.
Say you're right up to the limit of the 15% bracket with "Normal" ordinary income + long term capital gains.  An additional dollar of ordinary income hurts twice -

15% tax on the additional ordinary income + 15% on the amount of the capital gains that are now in the higher rate for that.

That holds until ordinary income alone fills the 15% bracket.  Then you've got a block where it is just the ordinary income rate (25%) until you reach the break-point for long-term capital gains.


dandarc

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #4 on: September 22, 2017, 01:41:35 PM »
Perhaps numbers would help -

The 15% tax bracket for MFJ goes up to 75,900

You have "planned" ordinary income that results in taxable income of $50,900.
You also have a long-term capital gain of $25,000.

So overall you have $75,900 in taxable income - the ordinary portion is taxed at ordinary rates.  The LTCG is taxed at 0% since that is the rate for that level of income.

You have an opportunity for overtime - that will net an additional $1,000 in ordinary income.  If you take it, now you have:

$51,900 ordinary
$25,000 LTCG
$76,900 total

So that $1000 gets ordinary income tax of 15% - $150.  But your total is now $1,000 into the LTCG 15% bracket, so you pay 15% on the portion of LTCG that are now in that bracket - another $150.  $300 on $1,000 of earnings - 30% marginal rate.  And that's without factoring payroll and state taxes.

This is a bit of an odd-duck since the LTCG has already been incurred and it is the ordinary income we're thinking about adjusting instead of the other way around.  Will also point out for OP - 55-70% is still way more than 0%.  The taxes might shift the calculus on whether you'd rather work overtime or not, but if you work the overtime, you have more money even after the taxes.
« Last Edit: September 22, 2017, 01:44:52 PM by dandarc »

Recliner

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #5 on: September 23, 2017, 07:50:59 AM »
I'll put some of the numbers I'm looking at here

Regular salary $80,000
Overtime $45,000
LTCG $15,000
So I add all that together and have $140,000 in total gross income? Subtract $56,700 because of standard deduction, personal exemptions for 5 people, my 457, and hsa. To give me an AGI of $83,300
I'd pay $12,302.50 in income tax plus an additional 15% on my $15k LTCG for a total of $14,552.50 in taxes.

However if I work less overtime...
Salary $80,000
Overtime $37,600
LTCG $15,000
Total gross income of $132,600 and an AGI of $75,900
Id pay a total of $10,452.50 and nothing on my LTCG since I'd be in the 15% bracket.

It would take me an extra 196 hours of overtime to hit the higher mark and after taxes it would only net me an extra $3,300 or $16.83/hour.

Yes, it'd be more money but I would not be willing to work overtime for just $17/hour
« Last Edit: September 23, 2017, 07:53:44 AM by Recliner »

terran

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #6 on: September 23, 2017, 09:00:29 AM »
Nope, doesn't work that way. The capital gains count towards income too, so only those that fall within the 15% bracket are taxed at 0%. Those that fall in the 25% or more bracket are taxed at 15% (or 20%).

dandarc

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #7 on: September 23, 2017, 10:57:33 AM »
I think you're computing your taxes incorrectly, or are you also factoring state taxes?  Here's what I get for federal only, assuming all 3 kids are under 17 for the "child tax credit" portion:

"Lots of Overtime"
Ordinary Income:              $125,000.00
Deductions/Exemptions:        $ 56,700.00
Taxable Income:               $ 68,300.00

10% on first $18,650:         $  1,865.00
15% on remaining $49,650:     $  7,447.50
Total Tax on Ordinary Income: $  9,312.50

Ordinary Taxable Income:      $ 68,300.00
Long Term Cap. Gain:          $ 15,000.00
Total Taxable Income:         $ 83,300.00

Less Top of 15% bracket:      $ 75,900.00
Portion of LTCG over:         $  7,400.00

15% on $7,400 of LTCG:        $  1,110.00
Tax on Ordinary Income:       $  9,312.50

Total Taxes:                  $ 10,422.50

Less Child Tax Credit:        $  2,650.00

Total Tax Owed:              $  7,772.50



"Less Overtime"
Ordinary Income:              $117,600.00
Deductions/Exemptions:        $ 56,700.00
Taxable Income:               $ 60,900.00

10% on first $18,650:         $  1,865.00
15% on remaining $42,250:     $  6,337.50
Total Tax on Ordinary Income: $  8,202.50

Ordinary Taxable Income:      $ 60,900.00
Long Term Cap. Gain:          $ 15,000.00
Total Taxable Income:         $ 75,900.00

Less Top of 15% bracket:      $ 75,900.00
Portion of LTCG over:         $      0.00

15% on $0 of LTCG:            $      0.00
Tax on Ordinary Income:       $  8,202.50

Total Taxes:                  $  8,202.50

Less Child Tax Credit:        $  3,000.00

Total Tax Owed:              $  5,202.50



So on your $7400 in additional earnings, you pay $2,570 in additional tax - netting you (ignoring payroll taxes and any state income taxes) $4,830 or $24.64 / hour for your 196 hours. 

But what you do with the extra money matters - you didn't mention any IRAs - if you fund an IRA for your spouse (this reads like a single-income scenario), that's another $5500 of ordinary income sheltered.  You have a 457 - do you also have access to a 403B or 401K?  You can do both a 457 and a 401K/403B in the same year - that's another $18K you could potentially shelter, and if you do, you'll likely be able to deduct a traditional IRA for yourself - another $5500.  Do you pay any health, dental, vision insurance or similar via your paycheck?  Maybe you have some sort of pension that gets deducted?  Those also shelter you from income tax.

SeattleCPA

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #8 on: September 23, 2017, 02:52:07 PM »
This might help with the concept:

https://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

P.S. I wrote this because people often get the tax bracket stuff goofed up...

P.P.S. The main things to remember are that you have essentially two flavors of income... highly taxed and not highly taxed... and you put this income into "deductions" and "brackets" in the way that minimizes your taxes. I.e., you put your highly taxed income into the lower rate brackets and the not highly taxed income into the higher brackets.
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MDM

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #9 on: September 23, 2017, 03:59:53 PM »
I think you're computing your taxes incorrectly, or are you also factoring state taxes?  Here's what I get for federal only, assuming all 3 kids are under 17 for the "child tax credit" portion:

"Lots of Overtime"
Ordinary Income:              $125,000.00
...
Total Tax Owed:              $  7,772.50


"Less Overtime"
Ordinary Income:              $117,600.00
...
Total Tax Owed:              $  5,202.50

+1 on exactly those results.

Smoothing the step changes in the child tax credit, one gets

for the federal tax rates paid as wage income (regular plus overtime) goes from $50K to $140K, based on the spreadsheet mentioned in reply #1.

dandarc

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #10 on: September 24, 2017, 02:52:20 PM »
This might help with the concept:

https://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

P.S. I wrote this because people often get the tax bracket stuff goofed up...

P.P.S. The main things to remember are that you have essentially two flavors of income... highly taxed and not highly taxed... and you put this income into "deductions" and "brackets" in the way that minimizes your taxes. I.e., you put your highly taxed income into the lower rate brackets and the not highly taxed income into the higher brackets.
A video should be made illustrating this - bunch of clear buckets with tax-rates written on them.  You could put water as "ordinary income" and some kind of oil as "qualified dividends / long term capital gains".  You could have a family where each parent brings a standard-deduction bucket and an exemption bucket, and each kid an exemption bucket, or something along those lines.

Buckets = a good visual of the concept.

DavidAnnArbor

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #11 on: September 24, 2017, 08:43:14 PM »
Very good work here from everyone. This is the kind of buckets information that will be needed when one retires and has to start figuring out where to withdraw from as well as incorporate rollovers into Roth.

SeattleCPA

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #12 on: September 25, 2017, 06:37:01 AM »
This might help with the concept:

https://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

P.S. I wrote this because people often get the tax bracket stuff goofed up...

P.P.S. The main things to remember are that you have essentially two flavors of income... highly taxed and not highly taxed... and you put this income into "deductions" and "brackets" in the way that minimizes your taxes. I.e., you put your highly taxed income into the lower rate brackets and the not highly taxed income into the higher brackets.
A video should be made illustrating this - bunch of clear buckets with tax-rates written on them.  You could put water as "ordinary income" and some kind of oil as "qualified dividends / long term capital gains".  You could have a family where each parent brings a standard-deduction bucket and an exemption bucket, and each kid an exemption bucket, or something along those lines.

Buckets = a good visual of the concept.

:-) ... a video would be a good idea.
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Acastus

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #13 on: October 04, 2017, 11:18:37 AM »
The health insurance premium you pay is also deducted from W-2 earnings.

retired?

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #14 on: October 08, 2017, 11:02:30 PM »
I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.
...
So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?
If you reach the top of the 15% bracket with ordinary income, there is no room for any 0% tax on capital gains.

Further, let's say you have $5K in capital gains and your total (after deductions) of ordinary plus capital gain income is $1700 (or whatever) above the top of the 15% bracket.  Any extra ordinary income will lose 30% to taxes, until the ordinary income alone (after deductions) is above the 15% bracket.

Use a copy of last year's tax software, or the case study spreadsheet to enter your numbers and verify.

Last weekend, I used last year's tax return to investigate this.  I started with Turbo Tax, but basically entered into an Excel spreadsheet the lines from 1040 form, schedule A and schedule D.  ie. included itemized deductions and the dividend and capital gains worksheet. 

The exercise was useful since it shows how adjusting LT gains and IRA distributions affect my total tax.

DavidAnnArbor

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #15 on: October 09, 2017, 12:06:45 PM »
I withdrew a significant amount from a taxable account and am wanting to stay in the 15% bracket to avoid paying tax on my long term capital gains.
...
So my total deductions would be $56,700 and so my total gross pay can be $132,600 and I'd still be in the 15% bracket right?
If you reach the top of the 15% bracket with ordinary income, there is no room for any 0% tax on capital gains.

Further, let's say you have $5K in capital gains and your total (after deductions) of ordinary plus capital gain income is $1700 (or whatever) above the top of the 15% bracket.  Any extra ordinary income will lose 30% to taxes, until the ordinary income alone (after deductions) is above the 15% bracket.

Use a copy of last year's tax software, or the case study spreadsheet to enter your numbers and verify.

Last weekend, I used last year's tax return to investigate this.  I started with Turbo Tax, but basically entered into an Excel spreadsheet the lines from 1040 form, schedule A and schedule D.  ie. included itemized deductions and the dividend and capital gains worksheet. 

The exercise was useful since it shows how adjusting LT gains and IRA distributions affect my total tax.

I definitely need to do this as an exercise.

MDM

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #16 on: October 09, 2017, 12:27:04 PM »
Last weekend, I used last year's tax return to investigate this.  I started with Turbo Tax, but basically entered into an Excel spreadsheet the lines from 1040 form, schedule A and schedule D.  ie. included itemized deductions and the dividend and capital gains worksheet. 

The exercise was useful since it shows how adjusting LT gains and IRA distributions affect my total tax.

I definitely need to do this as an exercise.
See the following threads for related discussions:
http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/
http://forum.mrmoneymustache.com/taxes/would-you-rather-owe-or-get-a-refund/
http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/
http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/

In particular, if you prefer to start with something other than a blank worksheet, https://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/msg539186/#msg539186.

Doing this has been helpful for us.


DavidAnnArbor

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Re: Need help figuring max income possible & keep AGI in 15% bracket
« Reply #17 on: October 09, 2017, 01:08:48 PM »
Thanks for those links. I have my work cut out for me.