Author Topic: The Mustache Tax Guide (U.S. Version)  (Read 34738 times)

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #50 on: November 11, 2015, 12:02:57 PM »
Love the LC series, by the way :)

Thanks!

Johnny is correct on both fronts but I'll add a bit more info.

Your FSA is limited to $5K, and pre ALL tax. So you have to factor FICA into the mix. However, it might not be clear cut for you at 7.65%. You used 28% in your calculation, which indicates high income. If your wages exceed $118K/yr, you max out your Social Security at the top of that wage base. This means even if you get this deduction pre-tax, you might not benefit fully from the reduction in FICA tax. If your taxable wages > (118,000 + 5,000) or $123,000, you might only benefit as follows by using the FSA:

5,000
x 28% (Fed) x ?% (State/Local) x 1.45% (Medicare)

After that you should use the dependent care credit. As johnny mentioned, it's a credit not a deduction. You will receive 20% back below your income tax calculation (it's as if you paid in extra federal withholdings). Since you are already maxing out the FSA at $5,000, and the limit is $6,000, I would advise putting $1,000 on this form. You can claim expenses here that weren't reimbursed by an FSA.

It gets even more complex than that though, and this is the real reason why the FSA should be maxed: It lowers everything. FICA wages base, taxable wages on W-2, which in turn reduces your AGI, which in turn can increase other deductions/credits you aren't getting (like the child tax credit, although you may be phased out of that since you are in the 28% bracket, but with enough work you might be able to get this and other benefits). It also lowers any taxable income on a state or city tax return since your taxable wages (Box 1 on the W-2) will be lowered by the FSA withholding. The dependent care credit is a federal credit, and I know my state doesn't have a similar one.

Max out the FSA. It's worth it. If you are still unsure, send me a PM with the numbers and I'll let you know exactly how much it benefits you.
Indecision may or may not be my problem.

smoghat

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #51 on: November 12, 2015, 11:44:42 AM »
A really good CPA is worth his or her weight in gold. Now if you are retiring with an expected $38,000 a year of income, more power to you, but if you crack a million, a good CPA is an excellent resource. For my last three years of work, I paid about $1,000 a year to my CPA and about $3,000 a year to the IRS on $80,000 of traditional salaried income and $100k to $150k of earnings from my businesses.

Do YOU really know what are the red flags for an audit? If so, great, you are a superhero. Does a CPA with HR Block? Maybe not. But if you establish a relationship with someone who knows what he or she is doing and has been in the business for a long time, that info is invaluable and dirt cheap. The last time we saw our CPA he sat us down and talked to us about our financial plans (we just retired at 48, expected income between $160k and $250k for the first decade) for three hours. Charge? None. After 18 years we are valued customers. Oh, but since he works 120 miles away and it was our 30th high school reunion and we were hosting a party at a house we were renting for the weekend, we did get to deduct the hotel room as a tax plan on expense (IRS doesn't care how much we spent on the room, it makes sense to them and who cares where we went for dinner the next day). There's. 40% discount on the room.


deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #52 on: November 23, 2015, 08:32:45 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.

Can someone elaborate on how we came up with $20,600 as the available amount for the backdoor Roth in 2015?  I assume its standard deduction + contribution limits of Roth + ??? = 12,600 + 5,500 = 18,100.  What am I missing?  Thanks!

Oh, and thanks so much for this thread.  Really appreciate the succinct advice in one place.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #53 on: November 23, 2015, 08:35:27 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.

Can someone elaborate on how we came up with $20,600 as the available amount for the backdoor Roth in 2015?  I assume its standard deduction + contribution limits of Roth + ??? = 12,600 + 5,500 = 18,100.  What am I missing?  Thanks!

Oh, and thanks so much for this thread.  Really appreciate the succinct advice in one place.

A married couple can claim the standard deduction of $12600 and two exemptions of $4000 each. The Roth contribution limit has nothing to do with it, and neither does the backdoor Roth. A backdoor Roth is used when your income is too high to contribute to a Roth directly.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #54 on: November 23, 2015, 08:39:14 AM »
Johnny beat me to it but I'll post my reply anyway:

1) It's not a backdoor Roth (which is a contribution to a Roth when you are ineligible due to income), it's a conversion to a Roth as part of a Ladder or as part of proper tax planning during your drawdown.

2) It assumes a married couple, and uses 2015 tax rules which will be adjusted for inflation each year.

3) Standard deduction = 12,600

4) Personal exemption =   4,000 ( x 2 for a married couple)

If you have a big amount of itemized deductions you can increase that $12,600 accordingly. If you have 5 kids you can increase the exemptions accordingly.
Indecision may or may not be my problem.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #55 on: November 23, 2015, 10:19:42 AM »
Straightforward enough; thanks guys.

Penny Lane

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #56 on: December 02, 2015, 07:19:26 AM »
This is such a good thread; thanks to Cheddar for doing all this work to help us!

I have a Roth ?-- I have always made too much to have one, but now that I am mostly retired and consult I will be eligible this year.  Do I have until 4.15.16 to fund one?  Do I have to set up the actual account before 12.31.15?  I am also considering doing some Roth conversion as I have massive tIRA's/401K's; can I do that early in 2016 when I have a better idea of my tax situation?  I will still be in 25%ile and perhaps I should fill that?  I am in my early 60's-- would I still have to wait 5 yrs before accessing the Roth $ ( although I would not plan to touch it for a long time)?  I figured out about how much my required draws will be at 70.5--whoa!

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #57 on: December 02, 2015, 10:19:32 AM »
This is such a good thread; thanks to Cheddar for doing all this work to help us!

; )  Just doing my part, so many great resources around this place.

If I'm you I'd put together a spreadsheet detailing annual anticipated growth of the Traditional accounts and annual anticipated conversations from T to R. You must do the RMD's when the time comes, and if they will bump you into the 25% bracket on their own you might as well start pulling them out now and filling up all of the 15% bracket and maybe even continue into the 25% bracket.

Try to get the lowest effective tax rate over the next 30 years, don't worry about 2016 or 2017 alone.

You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out. You can open the Roth account (if you don't already have one) anytime before 4/15 each year. I'm unsure the answer on the 5 year waiting period on a Roth after you turn 59.5, but it seems like you should have immediate access to everything. Google should be able to answer that if someone else here doesn't.
Indecision may or may not be my problem.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #58 on: December 02, 2015, 10:30:48 AM »
You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out.

Penny Lane can certainly do a conversion in early 2016, however, that conversion will be counted towards the 2016 tax year, NOT 2015.

To do an "after the fact" conversion for the 2015 tax year, one must convert far more than one actually intends in 2015. Then in early 2016, before filing taxes, one can recharacterize a portion (or all if one desires) of the conversion amount. This would let one treat that portion of the conversion as if it never happened.
(Technically this can be done through 10/15 by amending one's taxes or filing for an extension, but it is much easier to just do it before one files one's tax return).
For more details, read here.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #59 on: December 02, 2015, 10:40:58 AM »
You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out.

Penny Lane can certainly do a conversion in early 2016, however, that conversion will be counted towards the 2016 tax year, NOT 2015.

To do an "after the fact" conversion for the 2015 tax year, one must convert far more than one actually intends in 2015. Then in early 2016, before filing taxes, one can recharacterize a portion (or all if one desires) of the conversion amount. This would let one treat that portion of the conversion as if it never happened.
(Technically this can be done through 10/15 by amending one's taxes or filing for an extension, but it is much easier to just do it before one files one's tax return).
For more details, read here.

Agree.

I was working under the mistaken assumption (shame on me) that Penny just retired after making a very high wage in 2015 . If that's the case, no reason to pile on more income in 2015, but after a re-read it's clear income is down in 2015. It's worth considering converting some in 2015 if the numbers work out in favor of that, and the conversion is included in income in the year it's initiated.
Indecision may or may not be my problem.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #60 on: December 02, 2015, 02:48:48 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k
California state income tax: ~$14k  (on income of $170k due to above)

If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct?  Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)

That seems like a fairly huge benefit to taking itemized deduction, but I might be figuring wrong. 
« Last Edit: December 02, 2015, 02:54:03 PM by grenzbegriff »

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #61 on: December 02, 2015, 02:58:53 PM »
Hi Cheddar Stacker, etc.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  But I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k



If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct? 
No. Because of a technicality. Your standard/itemized deduction does not affect your AGI.
Taxable income = AGI - std or itemized deduction - exemption(s).
This is an important distinction because your eligibility for other deductions and credits is dependent on your AGI, not your taxable income.

The exemption is $4k. So you will have $152k in federal taxable income.

Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)
No, your AGI would be
$200k - 18k = $182k in either case (standard or itemized deduction).

You would have a taxable income of $171,700 if you took the standard deduction instead of itemizing (remember, $4000 for personal exemption).

You said:
California state income tax: ~$14k  (on income of $170k due to above)
Does CA give you a deduction for charitable giving? Because you've made the same mistake again. Your Federal AGI is $182k. Not $170k. I assume that CA like most states taxes you based on your federal AGI (and with their own deductions and exemptions).

Make sure you've got documentation for that $12k in charitable giving.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #62 on: December 02, 2015, 03:01:00 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k
California state income tax: ~$14k  (on income of $170k due to above)

If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct?  Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)

That seems like a fairly huge benefit to taking itemized deduction, but I might be figuring wrong. 


Your adjusted gross income is the number on the bottom of the first page of your Form 1040. This includes the income reported on your W-2, other income from investments or other sources, and a select few deductions. It does not include the standard deduction, itemized deductions, or personal exemptions.

Your adjusted gross income would be $200k - $18k = $182k. The $156k number (actually $152k since you should also get a $4k personal exemption) is your taxable income if you choose to itemize deductions. Charitable giving and state tax are both itemized deductions. Your itemized deductions are much large than your standard deduction, so you're correct that you would probably benefit from itemizing. Given your high income and high state tax, you may be in AMT territory, so be aware of that possibility.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #63 on: December 02, 2015, 03:23:10 PM »
Thanks!

So for deciding whether to itemize, if your AGI is high enough that your state income tax is more than $6300, you probably should itemize.

For recording charitable giving, it's all through paycheck deduction or credit card, so that should be straightforward according to this IRS page.


One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)


johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #64 on: December 02, 2015, 03:32:46 PM »
One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)

No. You can do a backdoor Roth IRA. I'm sure it's been mentioned at some point earlier in this thread, but you can read about it here.

If you currently have a Traditional, SEP, or SIMPLE IRA, it's not always clear if you should use the backdoor. If this pertains to you, we can guide you on that - just tell us the balance of the aforementioned IRAs.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #65 on: December 02, 2015, 03:42:25 PM »
So for deciding whether to itemize, if your AGI is high enough that your state income tax is more than $6300, you probably should itemize.
There is a more direct way: "You should itemize deductions if your allowable itemized deductions are greater than your standard deduction" - see https://www.irs.gov/taxtopics/tc501.html.  See also https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/Tax-Deduction-Wisdom---Should-You-Itemize-/INF12061.html for even more details.

Quote
For recording charitable giving, it's all through paycheck deduction or credit card
That may be true for you.  In general, gifts via check, cash, property donation, etc. are also legitimate ways to have charitable giving.

Quote
Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.
Why not?
Have you compared your spendable income from a taxable account vs. a Roth account, starting with the same initial contribution?  Be sure to include any federal and state tax on the taxable account's annual earnings and the long term capital gains when sold.  Taxable could be "better" than Roth if you assume losses and Tax Loss Harvesting, but....

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #66 on: December 02, 2015, 03:43:41 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction. 

Johnny and Seattle have all your questions covered, but I'd consider posting some details here from your 2014 tax return, and 2013, and 2012. And do it quickly because the statute of limitations for 2012 will likely be running out within 4 months.

If your potential itemized deductions from those years exceeds the standard deduction (your state tax alone would if you made that much income) you can amend those tax returns and get refunds. You'd have to amend the California returns as well. It's not a terribly hard thing to do, but you might want to find a friend or a tax expert to help if you haven't done it before.

It could be worth a few thousand dollars, so paying someone a few hundred to do it is better than doing nothing if you're unsure how to do it.
Indecision may or may not be my problem.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #67 on: December 02, 2015, 03:54:25 PM »
One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)

You have to consider where else you would put the money. A deductible IRA is great if you can get one, but if that's not an option you'll often be better off putting your money in a Roth IRA than a taxable account. If you invest outside of your IRA you'll be paying taxes on dividends and capital gains every year, at least until you retire and go down into the 15% or lower tax bracket. If that money is in a Roth IRA instead, you'll never pay tax on it again as long as you wait until age 60 to remove the gains. You'll have to weigh the pros and cons for your particular situation, but you may find that a Roth IRA is a great option for part of your money.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #68 on: December 02, 2015, 04:19:05 PM »
Wow, thanks everyone!

Yes, Cheddar Stacker, in 2014 I paid $12k in california state income tax, so I might be able to get ~$2k back if I amend the tax return.  I think I'll try doing it myself, I may as well learn how this stuff works.

I only paid $3k state tax in 2013 and very little before that, so I don't think those years are worth investigating.  (No significant charitable giving or any sort of spending in those years either.)

seattlecyclone, thanks for the suggestion about the backdoor Roth IRA.  I don't have any IRAs right now.  The reason I brought this up now is so I have time to make changes before the year is up.  It looks like I can put $5500 into a traditional IRA and then move it to a Roth IRA.  I use vanguard, so I'll do it there. 

Edit: I'm reading this thread about withdrawing from the Roth IRA tax free.   Sorry for asking questions that are already answered.
« Last Edit: December 02, 2015, 04:22:46 PM by grenzbegriff »

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #69 on: December 02, 2015, 04:53:32 PM »
... in 2014 I paid $12k in california state income tax, so I might be able to get ~$2k back if I amend the tax return.  I think I'll try doing it myself, I may as well learn how this stuff works.
Just curious: how was the original 2014 return done - by a CPA, or by software (which?), or by yourself, or...?  And was there a conscious decision to take standard vs. itemized?

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #70 on: December 02, 2015, 05:08:32 PM »
I used TurboTax.  I made the decision to take standard deduction, not realizing that state income tax was deductible.  (So I thought my total itemized deduction would have been close to $0.)

It could be surprising that TurboTax didn't make it completely obvious to me that this was the wrong choice.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #71 on: December 02, 2015, 05:18:15 PM »
It could be surprising that TurboTax didn't make it completely obvious to me that this was the wrong choice.
Obviousness can be in the eye of the beholder.  If you go back through your 2014 TurboTax, do you get a screen similar to the one below?


grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #72 on: December 03, 2015, 08:56:30 AM »
Looking back at my tax return, it looks like I misremembered taking the standard deduction.  I did take the itemized deduction of $12k in 2014.  So there was no problem with turbotax -- just me remembering the wrong thing and not checking. 

TomTX

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #73 on: December 05, 2015, 05:30:28 AM »
Looking back at my tax return, it looks like I misremembered taking the standard deduction.  I did take the itemized deduction of $12k in 2014.  So there was no problem with turbotax -- just me remembering the wrong thing and not checking.

Go back and check 2012 now - you are getting close to the deadline for filing an amended return if you did take the standard deduction for that one. 2013 and 2014 have plenty of time left.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #74 on: December 09, 2015, 08:15:07 AM »
I don't want to start a new thread for this simple question, but it seemed apropos to ask here (and I received help with a n00b question early here).

In early retirement, with regards to qualified dividends, there's a lot of emphasis on keeping income in the 10/15% income tax bracket, so the qualified dividends are taxed at 0%.  As a single individual, that means if you have no other income, you can earn $37,450+6300+4000=$47,750 in qualified dividends annually and pay no taxes on them.  Pretty sweet.

My question is if you earn say 50k in qualified dividends (and move into the 25% income tax bracket), does all 50k of qualified dividends now get taxed at 15% or just (50,000-47,750) the $2250 above the threshold.  I would have to presume it's the latter, correct?

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #75 on: December 09, 2015, 08:26:59 AM »
I don't want to start a new thread for this simple question, but it seemed apropos to ask here (and I received help with a n00b question early here).

In early retirement, with regards to qualified dividends, there's a lot of emphasis on keeping income in the 10/15% income tax bracket, so the qualified dividends are taxed at 0%.  As a single individual, that means if you have no other income, you can earn $37,450+6300+4000=$47,750 in qualified dividends annually and pay no taxes on them.  Pretty sweet.

My question is if you earn say 50k in qualified dividends (and move into the 25% income tax bracket), does all 50k of qualified dividends now get taxed at 15% or just (50,000-47,750) the $2250 above the threshold.  I would have to presume it's the latter, correct?

The latter.

As a side note, to be even more efficient, if your only reported income is a tIRA conversion and ltcg /qdi you could convert $10300 from a traditional to a Roth and have $37450 in ltcg /qdi and pay nothing in tax.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #76 on: December 09, 2015, 03:42:53 PM »
Awesome, thanks johnny.  Your suggestion sounds like the golden goose, love it!

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #77 on: December 09, 2015, 08:51:58 PM »
Awesome, thanks johnny.  Your suggestion sounds like the golden goose, love it!

Haha I learned of the idea from Jeremy over at GoCurryCracker.

I'd wager that this has been linked before in this thread, but I'm too lazy to go back and check

freedom8991

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #78 on: January 23, 2016, 09:46:38 AM »
Thank you for putting this together!

NinetyFour

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #79 on: January 23, 2016, 10:02:48 AM »
Following.  Thanks, CS and others.
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JustGettingStarted1980

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #80 on: October 27, 2016, 10:35:13 AM »
Ok Tax Maestros, I got another quick question.

My wife makes $20000/year, she contributes $18000 directly to a 401K she has access to.
We contribute to Roth IRA's, and since she has worked less this year due to our childcare needs,  she has made less income. Together our income is over 200K.

My question is, how much can she contribute to a Backdoor Roth IRA in 2016? Is it the $2000 difference between W2 income and 401K contribution? Or can we contribute the max of $5500 for her?

It makes sense that it would only be the $2000, but I've been wrong too many times before to trust "common sense".

Thanks,

JGS
« Last Edit: October 27, 2016, 02:22:00 PM by JustGettingStarted1980 »

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #81 on: October 27, 2016, 11:26:42 AM »
Ok Tax Maestro's, I got another quick question.

My wife makes $20000/year, she contributes $18000 directly to a 401K she has access to.
We contribute to Roth IRA's, and since she has worked less this year due to our childcare needs,  she has made less income. Together our income is over 200K.

My question is, how much can she contribute to a Backdoor Roth IRA in 2016? Is it the $2000 difference between W2 income and 401K contribution? Or can we contribute the max of $5500 for her?

It makes sense that it would only be the $2000, but I've been wrong too many times before to trust "common sense".

Thanks,

JGS

Traditional 401(k) contributions are excluded from your income before the W-2 and therefore don't count toward your MAGI for IRA contribution purposes. Roth 401(k) contributions do count as compensation.

Do be aware that there's a "spousal IRA" rule that allows each spouse to make a full $5,500 IRA contribution if the sum of their countable compensation is at least $11,000. If you're still working and earned at least $9,000 that shows up on your W-2, you should both be able to make full IRA contributions.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

JustGettingStarted1980

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #82 on: October 27, 2016, 02:24:30 PM »
Thanks Seattle Cyclone, once again you've helped me out. Now I have to scrounge up the money to fund it!

brad0247

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #83 on: February 04, 2017, 10:46:31 PM »
In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.

Source: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #84 on: February 04, 2017, 11:58:29 PM »
I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.
That's correct, if you want to count them in that year.  But you need to put CS's suggestion in context:
Quote
If you are close to the top of the standard deduction, consider intentionally lumping expenses into one year. In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

E.g., take a single person paying $5150 in mortgage interest, with a summer property tax bill of $300 and a winter property tax bill (payable any time between Dec. and Feb.) of $500.  Charitable contributions are $250, usually made in a lump sum in December. 

If those are all done annually, the total of $6200 does not exceed the standard deduction (of $6300) so there is no point itemizing.

Instead, one could have a year in which the mortgage and summer tax bill ($5150 + $300) are the only payments.  The $6300 standard deduction is taken.  The next year, both winter tax bills are paid (e.g., one in Jan. and the other in Dec.), plus a "double" charitable contribution of $500 is made.  Now the itemized total is $5150 + $300 + 2*$500 + 2*$250 = $6950 and the itemized deduction is taken.

TomTX

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #85 on: February 05, 2017, 05:48:51 AM »
In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.

Source: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

Go re-read what he wrote. Pretend the writer normally gives to charity just after Christmas. All the charitable contributions are in 2016.  What would normally be the "2015" charitable contributions were actually given in January 2016. The "2016" contributions were given in December 2016.

From the charity's point of view, it's a 1-week shift in timing. To the IRS, the deductions are all lumped into the 2016 tax year.