Author Topic: Qualified Dividend Tax Cliff?  (Read 1745 times)

modulus

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Qualified Dividend Tax Cliff?
« on: November 16, 2016, 09:37:32 AM »
So I guess this could fall under the classification of "first world problems".  For 2016 I will be filing as single and as I am adding up all income, dividends, and bonuses for opening bank accounts, I realized I will be just over the cusp of the 25% federal tax bracket.  Am I interpreting this correctly as 48k (37650 + personal exemption + standard deduction)?  Also, would this mean that all of my qualified dividends would then be taxed at 15% instead of 0%?

I anticipated lower income for 2016, so I had previously contributed to my roth IRA. 

In order to avoid paying a couple hundred dollars in dividend taxes, is there a way in Vanguard to change over part of this contribution to a traditional IRA?  I have never opened a tIRA before, just roth.  Also, what is the deadline for making this conversion?  I won't know exactly how much December dividends will be until late next month, and it seems they can vary significantly between quarters.

Any other suggestions to avoid this tax cliff?  I work contingently, so I could also just cut back on one or two shifts next month and stay in the 15% tax bracket.

johnny847

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Re: Qualified Dividend Tax Cliff?
« Reply #1 on: November 16, 2016, 11:59:31 AM »
There's no cliff. Only the qualified dividends that are in the 25% income / 15% LTCG/QDI bracket are taxed at 15%. You can work through this worksheet to convince yourself. And yes the 25% bracket starts at $48k unless you itemize deductions.

You could recharacterize your Roth IRA contribution as a traditional. Deadline for this is 10/15/17. It's a lot easier though if you recharacterize before you file taxes - otherwise you'll have to file an amendment.

Mississippi Mudstache

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Re: Qualified Dividend Tax Cliff?
« Reply #2 on: November 16, 2016, 01:44:55 PM »
There's no cliff. Only the qualified dividends that are in the 25% income / 15% LTCG/QDI bracket are taxed at 15%. You can work through this worksheet to convince yourself. And yes the 25% bracket starts at $48k unless you itemize deductions.

You could recharacterize your Roth IRA contribution as a traditional. Deadline for this is 10/15/17. It's a lot easier though if you recharacterize before you file taxes - otherwise you'll have to file an amendment.

I would even go further to suggest that it would be best to perform the re-characterization before the end of the calendar year - that way, it'll show up appropriately on your 2016 Form 5498. The IRS has caused me headaches by not accurately categorizing the re-characterizations that I did after the end of the tax year and prior to filing my taxes.

johnny847

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Re: Qualified Dividend Tax Cliff?
« Reply #3 on: November 16, 2016, 03:08:29 PM »
There's no cliff. Only the qualified dividends that are in the 25% income / 15% LTCG/QDI bracket are taxed at 15%. You can work through this worksheet to convince yourself. And yes the 25% bracket starts at $48k unless you itemize deductions.

You could recharacterize your Roth IRA contribution as a traditional. Deadline for this is 10/15/17. It's a lot easier though if you recharacterize before you file taxes - otherwise you'll have to file an amendment.

I would even go further to suggest that it would be best to perform the re-characterization before the end of the calendar year - that way, it'll show up appropriately on your 2016 Form 5498. The IRS has caused me headaches by not accurately categorizing the re-characterizations that I did after the end of the tax year and prior to filing my taxes.

Oh yeah I saw your thread on this. What a headache.

MDM

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Re: Qualified Dividend Tax Cliff?
« Reply #4 on: November 16, 2016, 06:37:16 PM »
Am I interpreting this correctly as 48k (37650 + personal exemption + standard deduction)?  Also, would this mean that all of my qualified dividends would then be taxed at 15% instead of 0%?
As johnny847 noted, there is no "all or nothing" cliff in this situation.

There is, however, a 30% marginal rate that may apply to some of your ordinary income when you also have qualified dividends.  See Marginal tax rate - Bogleheads for more.


modulus

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Re: Qualified Dividend Tax Cliff?
« Reply #5 on: November 16, 2016, 08:58:57 PM »
Thanks for all the great advice all.  I will have to explore the Vanguard website and recharacterize some of the contributions in late December once I know final numbers.  Is there a way to do this online or through the phone?  The only thing I am finding is to fill out a form, sign it, and mail it to Vanguard.

Follow up question: Will I be able to turn the tIRA back into a Roth and pay taxes on the amount in 2017?  Can this be done in addition to doing a regular $5500 contribution for the 2017 Roth IRA?  I anticipate my income being lower in 2017 and 2018 than it was this year.

johnny847

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Re: Qualified Dividend Tax Cliff?
« Reply #6 on: November 16, 2016, 09:02:27 PM »
Thanks for all the great advice all.  I will have to explore the Vanguard website and recharacterize some of the contributions in late December once I know final numbers.  Is there a way to do this online or through the phone?  The only thing I am finding is to fill out a form, sign it, and mail it to Vanguard.

Follow up question: Will I be able to turn the tIRA back into a Roth and pay taxes on the amount in 2017?  Can this be done in addition to doing a regular $5500 contribution for the 2017 Roth IRA?  I anticipate my income being lower in 2017 and 2018 than it was this year.

Fairly certain at Vanguard you can only recharacterize via a form - no phone call or online method.

You can convert your tIRA (or any portion of it) at any time to a Roth. The conversion amount will become taxable income the year in which you do this. This conversion process does not count agains the $5500 limit.

terran

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Re: Qualified Dividend Tax Cliff?
« Reply #7 on: November 17, 2016, 09:10:15 AM »
Thanks for all the great advice all.  I will have to explore the Vanguard website and recharacterize some of the contributions in late December once I know final numbers.  Is there a way to do this online or through the phone?  The only thing I am finding is to fill out a form, sign it, and mail it to Vanguard.

Follow up question: Will I be able to turn the tIRA back into a Roth and pay taxes on the amount in 2017?  Can this be done in addition to doing a regular $5500 contribution for the 2017 Roth IRA?  I anticipate my income being lower in 2017 and 2018 than it was this year.

Fairly certain at Vanguard you can only recharacterize via a form - no phone call or online method.
[z/quote]

I've done it over the phone.