Great post, Cheddar.
For future posts, I'd love to see targeted tax advice for people in high-income accumulation years, and/or small business owners (S corp/C corp/LLC decision tree, for example).
The tax loss harvesting link doesn't discuss an important aspect about the wash sale rule:
With respect to TLH you get the worst of both worlds in retirement accounts. You cannot TLH in a retirement account but you can cause wash sales in a taxable account.
So for example say I want to TLH VTSAX in my taxable account. I sell some shares at a loss. If I buy some shares of VTSAX in my IRA within 30 days then I incur a wash sale, reducing the losses that I claim.
Furthermore, that loss is now forever disallowed. What a wash sale really does is it changes the cost basis of the shares I just bought. But the cost basis is irrelevant in an IRA!
This is why I don't have auto reinvestment for any of my dividends - it can cause a wash sale. Just make sure if you do this in Vanguard you are aware of this quirk (http://forum.mrmoneymustache.com/investor-alley/quirk-about-vanguard-that-you-may-want-to-be-aware-of/)
The tax loss harvesting link doesn't discuss an important aspect about the wash sale rule:
With respect to TLH you get the worst of both worlds in retirement accounts. You cannot TLH in a retirement account but you can cause wash sales in a taxable account.
So for example say I want to TLH VTSAX in my taxable account. I sell some shares at a loss. If I buy some shares of VTSAX in my IRA within 30 days then I incur a wash sale, reducing the losses that I claim.
Furthermore, that loss is now forever disallowed. What a wash sale really does is it changes the cost basis of the shares I just bought. But the cost basis is irrelevant in an IRA!
This is why I don't have auto reinvestment for any of my dividends - it can cause a wash sale. Just make sure if you do this in Vanguard you are aware of this quirk (http://forum.mrmoneymustache.com/investor-alley/quirk-about-vanguard-that-you-may-want-to-be-aware-of/)
Many people put foreign mutual funds/ETFs in taxable because the taxes that they pay to foreign governments produce a credit. Bond funds can go into retirement accounts because the returns that they pay would otherwise be taxed as ordinary income.
If you plan your AA across accounts, you won't run into TLH problems nearly as much.
VTIAX | VTSAX | |
Dividend yield | 3.24% | 1.89% |
Dividends | $324 | $189 |
Foreign tax withholding | $38 | $0 |
Qualified dividends | $226.80 | $189 |
Unqualified dividends | $97.20 | $0 |
VTIAX in taxable | VTIAX in retirement | |
VTSAX dividend | $189 | $189 |
VTIAX dividend | $324 | $324 |
FTC received | $38 | $0 |
Foreign tax withheld | $38 | $38 |
Taxes on dividends | $92.47 | $44.98 |
Net Dividends | $420.53 | $430.02 |
VTIAX in taxable | VTIAX in retirement | |
VTSAX dividend | $189 | $189 |
VTIAX dividend | $324 | $324 |
FTC received | $38 | $0 |
Foreign tax withheld | $38 | $38 |
Taxes on dividends | $58.32 | $28.35 |
Net Dividends | $454.68 | $446.65 |
VTIAX in taxable | VTIAX in retirement | |
VTSAX dividend | $189 | $189 |
VTIAX dividend | $324 | $324 |
FTC received | $38 | $0 |
Foreign tax withheld | $38 | $38 |
Federal Taxes on dividends | $58.32 | $28.35 |
State taxes on dividends | 19.44 | 11.34 |
Net Dividends | $435.24 | $435.31 |
...But first let me explain how the FTC (foreign tax credit) and foreign tax withholding actually works:
Suppose you earn $1000 in dividends from VTIAX. Foreign countries will withhold some of that in taxes. Suppose it's $70.
Vanguard only pays you $930, not $1000. BUT, the US taxes you on $1000 in dividends, NOT $930. Then, if you held VTIAX in a taxable account, you qualify for the FTC (which if you d not have any other foreign income, is exactly equal to foreign tax withheld - otherwise this may not be true). This means you get the $70 back on your tax returns. ...
"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."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 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 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."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 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?
What should I use to prepare my tax return?
Pencil and Paper is a strategy recommended by some around here. I’ve never done that myself, but I can understand how it can be of great benefit to do this. You must learn the nuances of each line on the 1040 in order to do it properly, so it will certainly give you an edge.
Tax Loss Harvesting (http://www.madfientist.com/tax-loss-harvesting/) is a way to sell securities in a regular (taxable) brokerage account in order to reduce taxable income. Any losses will first offset any other Capital Gains in the current year, including capital gain distributions on your Schedule D. The result from Schedule D carries to your 1040 and you can use a $3,000 loss to offset other income reducing your AGI and taxable income accordingly.
A Traditional IRA contribution reduces your AGI and taxable income, a Roth contribution does not.
Student Loan Interest (http://www.irs.gov/taxtopics/tc456.html) is a Pre-AGI tax deduction unlike mortgage interest
Deductions/Exemptions:
The Standard Deduction (http://www.irs.gov/Credits-&-Deductions/Individuals/Standard-Deduction) is available to everyone, and can be particularly beneficial to a frugal early retiree. It doesn’t matter how much you spend, what city/state you live in, or what you ate for breakfast, you get $12,600 (MFJ for 2015). Some forum members barely exceed that amount in expenses each year.
The Itemized Deduction (http://www.irs.gov/uac/Schedule-A-(Form-1040),-Itemized-Deductions) is available for the spendypants members. If your deductible expenses from this form exceed the standard amount, use the itemized amount; you can’t use both. For many people this is very easy to reach. If you live in a state with an income tax, real estate tax, and personal property tax (see Cheddar Stacker – my deductible taxes in 2014 were $9,080) you will likely itemize. 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.
Personal Exemptions (http://www.irs.gov/publications/p17/ch03.html) are available for each person claimed on your tax return. Multiply the number claimed in box 6d times the personal exemption rate for any given year ($4,000 for 2015) and reduce your taxable income accordingly.
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.
The Child Tax Credit (http://www.irs.gov/pub/irs-pdf/p972.pdf) is awesome. Step 1, have a kid or 7. Step 2, pay less tax. Unfortunately it’s not quite that simple. The credit is up to $1,000 per child under age 17 at the end of the tax year, and it’s refundable through the additional child tax credit. Much like the student loan interest deduction, it has a phase out range. This credit is gradually phased out as your AGI grows from $110K-$150K (MFJ for 2014). So if you have 2 qualifying kids and a potential child tax credit of $2,000, but your AGI is $130K, you will receive a child tax credit of $1,000.
The Earned Income Credit (http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit) or EIC is also something to shoot for if you earn a low income, or you are able to reduce your AGI to an extremely low level via Pre-Tax Deductions. This credit becomes much easier to qualify for when you have a few children. Investment income must be no more than $3,350 for the year.
Is this legal? “Tax Loss Harvesting” sounds sketchy and the fact that it links to something that says “Tax Avoidance” seems concerning. I mean, I’m assuming you’re not suggesting anything illegal, but when does utilizing what’s there to your benefit become “tax evasion”? I’m ok with “playing their game” but I don’t want to do anything too sketchy.Yes, perfectly legal. As long as you "utilize what's there" (aka follow the tax laws) then avoidance never becomes evasion.
What does “securities” mean exactly? What is a Schedule D? I don’t really follow what this is saying.Think "stocks, mutual funds, etc." for securities. Schedule D is used for capital gains (e.g., when you sell some securities that you previously bought).
My husband and I have talked a lot about this and he’s explained it to me many times and I get it….except that I have to think through it every time. Traditional is taxed now, and Roth later….so why does traditional reduce your taxable income and Roth not? If Roth doesn’t then aren’t you getting taxed twice on it?Traditional is not taxed now, it is taxed later. Roth is taxed now, not later.
This part isn’t applicable to me but for the sake of learning: Pre-AGI tax deduction? What does that mean? I mean, I figured out the acronym, but what is the significance?It means that you can take this deduction in addition to the "standard deduction", vs. instead of the standard deduction if you itemized deductions. For that matter, pre-AGI deductions can be taken in addition to your itemized deductions if you choose to itemize.
So…dumb question, but a deduction means you don’t pay taxes on that amount, right? Why do these exist anyway? (Not complaining, knowing why helps with remembering.)The simple answer: because that is how the law is written. To know for sure on "why" one would need to poll the law writers. A reasonable guess here would be "to avoid taxing those with the lowest incomes."
What qualifies something as a deductible expense?The tax law. No two ways about it. E.g., see http://www.irs.gov/taxtopics/tc500.html.
Is this extra on top of the standard or itemized?Yes, either/both.
Is it the same no matter how you file?No, it depends on how many people are covered by the return.
And back everything up - I need some more explanation on pre/post-AGI. Are these deductions affecting your AGI? Is taxable income the same as AGI? What would it even mean for something to be a post-tax deduction?Without delving into details, you can think of pre-AGI deductions as those appearing on the front page of form 1040, while post-AGI deductions and exemptions appear on the back. No, taxable income is not the same as AGI - see form 1040.
create enough income? Is this because as a retired person you may actually not have that much income? But if you somehow don’t and are living fine without it, why do you want to “create” that income?"...not have that much taxable income." You may not need it now, but you might need it later.
What is the difference between a deduction and a credit?You subtract a deduction from your income on the way to calculating your taxable income. The tax you pay is some fraction of your taxable income. The deduction is "worth" (i.e., reduces your taxes by) your marginal rate times the deduction (e.g., 25% times the deduction). A credit is subtracted directly from the tax you owe, thus is "worth" 100% of the credit amount.
What does it mean that the credit is refundable?If your tax due is $100 and you have a $150 credit, with a "refundable " credit you get a $50 refund from the IRS. With a "non-refundable" credit you simply pay $0 tax and "lose" the extra $50.
Is investment income part of your AGI?Yes.
And a final global question - what happens if you mess up your taxes and file something wrong on accident?You pay (or get a refund of) the difference between what you did pay and what you should have paid. If you owe more, you also pay interest and possibly some flat fees in addition. If you get a refund, the IRS pays you no interest.
Going line by line through Form 1040 would be a lot more efficient than random googling.
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April. My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing." Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.Going line by line through Form 1040 would be a lot more efficient than random googling.Yeah, I think when my husband and I file taxes together for this year it will help a lot.
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April. My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing." Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April. My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing." Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.
My husband did his taxes himself the past couple years (with Turbotax a few years and has done his own spreadsheets for them, too.) And we're doing a pretty exhaustive budget. So I don't think we'll have any surprises. Might be worth the dry-run though just for helping me learn sooner.
Finally posted the Retirement Years strategy in reply #1. Sorry for the delay, I tend to procrastinate (http://waitbutwhy.com/2015/07/why-im-always-late.html) quite a bit.
Finally posted the Retirement Years strategy in reply #1. Sorry for the delay, I tend to procrastinate (http://waitbutwhy.com/2015/07/why-im-always-late.html) quite a bit.
Excellent write-up, Chedds. At the risk of looking a gift horse in the mouth, I have a couple of minor suggestions:
- the Ordinary Dividends and Qualified Dividends sections, when read in conjunction, make it sound like dividends received from a mutual fund (as opposed to directly held stock) can't be qualified -- perhaps tweak either or both of these sections to clarify that they can be?
- consider including a section on rental income, given that it is another common form of retirement income with its own 1040 line item
- the Ordinary Dividends and Qualified Dividends sections, when read in conjunction, make it sound like dividends received from a mutual fund (as opposed to directly held stock) can't be qualified -- perhaps tweak either or both of these sections to clarify that they can be?
Wages should be $0, so let’s skip that line. No more of that FICA guy.
but if you are MFJ you have to reach about $44K of income (including 50% of SS benefits) before anything related to SS benefits will become taxable.
QuoteWages should be $0, so let’s skip that line. No more of that FICA guy.
Not sure if this is the best place, but for many, a small amount of earned income in retirement can really pay off tax wise with refundable tax credits.
Quotebut if you are MFJ you have to reach about $44K of income (including 50% of SS benefits) before anything related to SS benefits will become taxable.
This isn't super clear to me, "including 50% of SS benefits" - do you mean if I have $50k SS income and $19k other income that means I have $19k+$25k = $44k? Or something else?
Honestly I'm not even sure reading the IRS page though what the implications are, so I can't really suggest alternate wordings - http://www.ssa.gov/planners/taxes.html - it looks like you only include 50% of your SS as "income" for tax purposes, until you hit $44k total taxable income?
thanks for assembling this!
Resources:
Key Facts and Figures (http://www.paychex.com/a/d/accounting/CCH_Fed_Facts_and_Figures_2015.pdf) is one of the best resources I’ve found online that summarizes a lot of data into just 2 pages. I keep a printed copy in my top desk drawer and refer to it often. You can get an updated version of this each year with this search: 2016 key facts and figures.
Wow, very cool stuff! I am working my way through the initial post.
Having just checked out the Key Facts and Figures link, I want to flag an error on that sheet:
In the 2015 MFJ table, the calculation for taxes in the $151,200-$230,450 taxable income range is incorrect. It shows the calculation as: 26,387.50 + 28% 151,200 but the correct calculation is 29,387.50 + 28% 151,200. IOW it's $3000 off.
I built a spreadsheet to calculate our taxes given various assumptions about income and deductions, so some months ago I looked up the 2015 tax tables - that's why I honed in on that part of the worksheet and noticed the error.
In the 2015 MFJ table, the calculation for taxes in the $151,200-$230,450 taxable income range is incorrect.
I built a spreadsheet to calculate our taxes given various assumptions about income and deductions
OK- this is great- but how does it play out for expatriates living in non-tax countries? Maybe think of it as the next step of information provision?
Thanks.
Hi Cheddar (or anyone else who knows the answer),
Love the LC series, by the way :)
Question on Dependent Care FSA's.
-so I get a Tax deduction of $6000 from the IRS for my childcare expenses (well over 6K)
-i have a workplace Dependent Care FSA that does a pretax deduction of 5K, and then reimburses this money later. But it's a pain, have to fill out reimbursement paperwork, and can't get the money back until after I already paid the Nanny anyway.
-my question is, which is better?
-per my crappy math:
IRS Tax Deduction = $6000 x .28 = $1680
Pretax Dependent Care FAS = $5000 x .28 = $1400 and more money out of circulation as well as more paperwork
Is my math right?
Thanks,
JGS
Love the LC series, by the way :)
"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."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 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 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."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 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?
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.
This is such a good thread; thanks to Cheddar for doing all this work to help us!
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 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 (https://www.bogleheads.org/wiki/IRA_recharacterization).
Hi Cheddar Stacker, etc.No. Because of a technicality. Your standard/itemized deduction does not affect your AGI.
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?
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
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).
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.
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.)
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.
For recording charitable giving, it's all through paycheck deduction or credit cardThat may be true for you. In general, gifts via check, cash, property donation, etc. are also legitimate ways to have charitable giving.
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?
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.
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.)
... 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?
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?
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.
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?
Awesome, thanks johnny. Your suggestion sounds like the golden goose, love it!
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
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.That's correct, if you want to count them in that year. But you need to put CS's suggestion in context:
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.
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
Pre-Tax Deductions: As you’ll see in the links provided above and below, there are many deductions you can take before income is ever taxed. These deductions can include 401(k)/403(b)/457(b) (https://en.wikipedia.org/wiki/401(k)), Health/Dental Insurance (https://en.wikipedia.org/wiki/Health_insurance), Cafeteria Plan (https://en.wikipedia.org/wiki/Cafeteria_plan), and Health Savings Account (https://en.wikipedia.org/wiki/Health_savings_account), among others. Some of these items reduce the FICA wage base as well, and they are the only available deductions against Social Security and Medicare Tax. All of these deductions reduce the income you are required to input on your tax return. Therefore, they all reduce your AGI, MAGI, taxable income, and tax, and they should be maximized whenever possible in most cases.
See Box 1—Wages, tips, other compensation (https://www.irs.gov/instructions/iw2w3/ch01.html) and Box 3 and Box 5 as well.Pre-Tax Deductions: As you’ll see in the links provided above and below, there are many deductions you can take before income is ever taxed. These deductions can include 401(k)/403(b)/457(b) (https://en.wikipedia.org/wiki/401(k)), Health/Dental Insurance (https://en.wikipedia.org/wiki/Health_insurance), Cafeteria Plan (https://en.wikipedia.org/wiki/Cafeteria_plan), and Health Savings Account (https://en.wikipedia.org/wiki/Health_savings_account), among others. Some of these items reduce the FICA wage base as well, and they are the only available deductions against Social Security and Medicare Tax. All of these deductions reduce the income you are required to input on your tax return. Therefore, they all reduce your AGI, MAGI, taxable income, and tax, and they should be maximized whenever possible in most cases.
Can you expand on this at all as it pertains to FICA? Specifically, how do you reduce the FICA wage base? In looking at my W2 from last year, I see that my S.S. (Box 3, I did not make more than 127k or whatever the upper limit was) and Medicare wages (Box 5) were the amounts you would get if you added back my traditional 401k contributions. That is to say, the SS Income/Medicare Income was higher than my wages reported in Box 1 and contributing to my 401k did not lower the FICA wage base.
I don't have a Cafeteria Plan or access to an HSA so maybe it is unattainable for me to lower my FICA wage base.
Side note: if there are ways to avoid income being in the FICA wage base, it would help high earners* reduce the amount of Additional Medicare tax (extra 0.9% on all wages past 200k) that would be deducted.
*-provided the Cafeteria Plan, if used, is not overly favorable toward highly compensated employees as then the CP bennies would be treated as income, defeating the whole purpose.
One side note on this credit – the instructions are very clear that if you have two kids, but only one of them is in daycare, you can claim both of the kids on this form opening up the full 6,000 in expenses and potentially doubling the credit.
To qualify for the credit, you must have one or more qualifying persons. You should show the expenses for each child in column (c) of line 2. However, it is possible a qualifying child could have no expenses and a second child could have expenses exceeding $3,000. You should list -0- for the one child and the actual amount for the second child. The $6,000 limit would still be used to compute your credit unless you have already excluded or deducted, in Part III, certain dependent care benefits paid to you (or on your behalf) by your employer.
Consider the following:
You are married, making 50K a year, with spouse at home with child.
You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.
Now, let's take this further:
Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.
So, after all is said and done, you have the following tax free (federal) space:
$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.
Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.
In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.
Hope this makes sense!
Was on reddit; wondering how some here thought on the following:QuoteConsider the following:
You are married, making 50K a year, with spouse at home with child.
You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.
Now, let's take this further:
Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.
So, after all is said and done, you have the following tax free (federal) space:
$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.
Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.
In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.
Hope this makes sense!
I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?
Was on reddit; wondering how some here thought on the following:Long story short - if your marginal tax rate is 0%, then Roth is the obvious choice.
. . . snip . . .
I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?
Was on reddit; wondering how some here thought on the following:QuoteConsider the following:
You are married, making 50K a year, with spouse at home with child.
You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.
Now, let's take this further:
Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.
So, after all is said and done, you have the following tax free (federal) space:
$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.
Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.
In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.
Hope this makes sense!
I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?
Traditional and Roth IRAs (http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs) are another great tool to consider utilizing, and they are both good. A Traditional IRA contribution reduces your AGI and taxable income, a Roth contribution does not. A lot is said about both of these accounts all over this forum and the interwebs including a great analysis from The Mad Fientist (http://www.madfientist.com/traditional-ira-vs-roth-ira/). What you need to know for tax planning purposes is this: If you believe you will pay a higher tax rate in the future, go with Roth, and if you believe you will pay a lower tax rate in the future, go with Traditional. When you clear out all the other noise, this is really the only thing that matters. Most early retirees will benefit more from Traditional if they qualify (see the links to the IRS or key facts and figures for qualification), but this must be a case by case analysis.
Great post Cheddar - I’m stuck on whether contributing to a non deductible IRA or Roth is better than a straight Vanguard taxable fund? I'm not eligible for deductible IRA but it still has benefits.For all three:
I have my other tax advantaged accounts maxed but I need more of my funds to use before 59.5 so figure I can’t touch the IRA’s till then right? Or can I still access the “contributions” at any time from either IRA and just not the gains?See How to withdraw funds from your IRA and 401k without penalty before age 59.5 (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/).
Great post Cheddar - I’m stuck on whether contributing to a non deductible IRA or Roth is better than a straight Vanguard taxable fund? I'm not eligible for deductible IRA but it still has benefits.For all three:
a) non-deductible tIRA
b) Roth IRA
c) taxable account
the contribution is made with after-tax dollars.
Assuming the investment grows in value, Roth is the only one with no (under current law) possibility of tax on earnings.
That was my initial thinking too (hence my converting the non deductible tIRA) last year, but then i read somewhere else that the non deductible IRA still had some benefits to make it better than the taxable account (dividends not taxed or something)?While the money stays within the IRA, gains are not taxed. But when gains are withdrawn, they are taxed at ordinary income rates. Ordinary income rates are higher than the Long Term Capital Gain and Qualified Dividend (LTCG & QD) rates that can apply to a taxable account.
Anyways, regardless of non deductible IRA vs taxable account, Roth is still the clear winner,Yes.
especially if doing a conversion ladder to use it before 59.5?Don't understand this part of the question.
especially if doing a conversion ladder to use it before 59.5?Don't understand this part of the question.
Roth contributions are withdrawable at any time, for any reason, without tax or penalty.
Yes, Roth earnings withdrawn prior to age 59.5 may be liable for both tax and penalty.
How exactly do you report whats a contribution and what's earnings in 10 year's time then? Each year you report your IRA base and then as long as you don't withdraw more than that before 59.5 it's never taxed?See part III of Form 8606 (https://www.irs.gov/forms-pubs/about-form-8606) and the instructions for it.
E.g - I contribute the max of $11, 000 a year (for both spouse and I) for 10 years = I can withdraw $110, 000 before 59.5 without penalty or tax attached?Yes and yes.
To get me to 59.5 I can also do the conversion ladder with a 401k/403B, and I can also use my 457b if i leave my employer (as you can use this penalty free before 59.5?
It would be great to have this post edited in light of the current tax code. It is still highly useful and informative, though personal exemptions, I believe, do not exist anymore.
Roth 401k accounts no longer having RMDs in 2024 and beyond could change the retirement/estate-planning calculus for some.The group impacted by this has to be quite small, no? Because the standard play has long been to simply move any Roth 401k or similar to a Roth IRA at separation (or earlier if your plan allows it) to avoid RMDs at least until the death of the account owner as well as to get more favorable treatment of any non-qualified withdrawals.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
"Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts."
Probably. This would have affected me a few years ago. As a fed, the TSP had some proportional withdrawal rules that they only recently got rid of. I.e. You couldn't pick only your traditional or Roth dollars to move, you could only move in accordance with the %. E.g. If your TSP balance was 70% traditional and 30% Roth, any withdrawal would have to be in that proportion. Once they changed the rules, then yes, I would've been on the "Roth 401k/TSP to Roth IRA at separation" train due to the Roth 401k RMDs that kicked in at 70 1/2 (now 73). But now I guess I'm happy to have the option to remain in TSP with my Roth dollars if I should desire. Hard to beat those fees since people who separate before they're vested help keep the costs down.Roth 401k accounts no longer having RMDs in 2024 and beyond could change the retirement/estate-planning calculus for some.The group impacted by this has to be quite small, no? Because the standard play has long been to simply move any Roth 401k or similar to a Roth IRA at separation (or earlier if your plan allows it) to avoid RMDs at least until the death of the account owner as well as to get more favorable treatment of any non-qualified withdrawals.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
"Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts."