Author Topic: Please check my tax assumptions  (Read 3293 times)

Lanthiriel

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Please check my tax assumptions
« on: June 05, 2015, 12:50:55 PM »
Hi MMMers--I am hoping you can help me figure out my taxes for 2015. I fully expect to receive face punches for why we're in this predicament (pulled money from IRAs to buy a house), but hopefully we can move past that. Mainly I am just hoping that someone can take a look at the assumptions I'm making for the taxes we will owe this year. Our withholdings so far this year have been very low, so almost regardless of the changes we make now, we will owe in April. My goal is to find a balance of retirement savings (to reduce our taxes) versus student loan payoff (for peace of mind). Here is our situation:
  • Married filing jointly
  • Deductible house expenses do not exceed standard deduction
  • No other notable itemized deductions
  • No kids
  • $21,000 remaining on federal student loans at 6.55%

This table illustrates some possible tax scenarios:



The sort of fundamental problem I'm trying to answer is whether it's worth it to leave more money in our pockets by investing less in retirement so that we can pay off the loans this year, or if at this point we're bleeding out in the 25% tax bracket and are better off taking advantage of the tax-deferred accounts. So far we've put $8,000 between the two of us into 401ks this year as we focused on paying down debt and getting into the house, but we have enough room in our budget to kick our 401ks into overdrive and max them out this year. Scenario 2 seems to be the most optimal to me, as we would reduce our tax burden by about $4k while getting student loans down to about $8,000 by the end of the year.

However, I do have some questions:
  • Did I do the math right??
  • Am I missing some obvious deduction that is going to reduce our tax bill even further?
  • As far as I can tell, we're still eligible for the student loan deduction at our income level, but I'm not 100% sure. Can someone clarify?
  • Are we eligible to contribute to Traditional IRAs at our income level?

I realize I just threw out a lot of numbers, but any ideas/help would be appreciated.
« Last Edit: June 05, 2015, 12:52:50 PM by Lanthiriel »

MDM

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Re: Please check my tax assumptions
« Reply #1 on: June 05, 2015, 01:05:04 PM »
No idea what a PFD is, but if it is not too exotic the reader case study spreadsheet might be a good double-check for you.

Also, something such as https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ might be useful.

mlipps

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Re: Please check my tax assumptions
« Reply #2 on: June 05, 2015, 01:12:24 PM »
As far as being eligible for the TIRA, your AGI before the IRA deduction needs to be below $98k. However, your AGI is BEFORE the standard deduction of $12,600, so you are only eligible for a partial deduction on the TIRA this year. It's probably not worth it; I would do a Roth over a partial deduction personally.

The student loan interest limit is $160k so you're fine there no matter what.

I think you forgot to subtract your personal exemptions before calculating the tax owed ($4k for 2015).

Your tax calculations are right I believe, but the 3rd scenario is not an option.
« Last Edit: June 05, 2015, 02:19:53 PM by mlipps »

Lanthiriel

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Re: Please check my tax assumptions
« Reply #3 on: June 05, 2015, 01:28:23 PM »
Thank you, mlipps! That is exactly the information I was looking for. I read and read and read on these topics, but sometimes it's hard to understand how they actually apply to my particular situation.

One more question, then. Say our income level stays the same (minus the IRA withdrawal) next year, and we've paid off our student loans in the first half of the year. We've got the cash in hand to fund IRAs--at that point we should choose ROTHs because on a traditional we're basically paying taxes at both ends?

Cheddar Stacker

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Re: Please check my tax assumptions
« Reply #4 on: June 05, 2015, 02:07:18 PM »
Thank you, mlipps! That is exactly the information I was looking for. I read and read and read on these topics, but sometimes it's hard to understand how they actually apply to my particular situation.

Unfortunately the SL interest information provided is incorrect. Getting accurate information is critical here. The rest is all good.

Some notes:

1) $21,000 * 6.55% = 1,375, not $2,500. Unless you have a lot of accrued, unpaid interest, or unless your balance was substantially higher during 2015, you won't reach the $2,500 allowed deduction.

2) The SL interest deduction is phased out between $125K-155K M.AGI. If your MAGI is $140K (exactly 50% into the phaseout) you will receive exactly 50% of the deduction. It's a sliding scale based on where you land in that range. So your deduction could be limited if you don't contribute the $20K you're currently on pace for in the 401k's because your AGI is in that range.

3) As mlipps correctly pointed out, the $12,600 standard deduction reduces taxable income, not AGI, so your AGI is higher than you listed in all cases.

4) What is the $6,000 PFD?

5) Unless you qualified for an exemption as a first time homebuyer or something, you will likely have to pay the 10% penalty on the IRA withdrawal which equals $2K. It looks like you may have included this already, but I'm unsure.

I calculate your tax in #1 to be $19,594 including penalty. AGI = 124,625
I calculate your tax in #2 to be $15,594 including penalty. AGI = 108,625
I calculate your tax in #3 to be ??. I don't want to bother with a partial IRA deduction, and I don't think you should either.

I would go with option #2.

One more question, then. Say our income level stays the same (minus the IRA withdrawal) next year, and we've paid off our student loans in the first half of the year. We've got the cash in hand to fund IRAs--at that point we should choose ROTHs because on a traditional we're basically paying taxes at both ends?

In 2016, assuming all else is the same other than IRA withdrawal, your AGI will be $89,500 ($126K - 36K - 500 SL interest guess). This means you are eligible for a full deduction of T.IRA's. You can make those contributions if you want, or Roth IRA's, or invest in taxable accounts. Once you get into this range it's a case by case basis. After the standard deduction and exemptions your taxable income would only be $68,900, so you're solidly in the 15% bracket and your tax would only be $9,413. At that point contributing to tax deferred accounts doesn't save you as much, but I think it's still worth it.

mlipps

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Re: Please check my tax assumptions
« Reply #5 on: June 05, 2015, 02:10:14 PM »
Sorry, thanks for catching my mistake there Cheddar Stacker! I skipped my morning coffee today, shouldn't have done that!!

Cheddar Stacker

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Re: Please check my tax assumptions
« Reply #6 on: June 05, 2015, 02:15:21 PM »
Sorry, thanks for catching my mistake there Cheddar Stacker! I skipped my morning coffee today, shouldn't have done that!!

No worries, I make mistakes all the time. Important to point them out though so we don't have people with mis-information.

Lanthiriel

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Re: Please check my tax assumptions
« Reply #7 on: June 05, 2015, 04:27:14 PM »
Thanks for the response, Cheddar! A few notes:

1 & 2) Good call on the student loan interest. At the start of last year it was $57,000, so you're right that it just didn't even occur to me that we would wind up paying less interest than was tax deductible. Sounds like this amount will wind up being almost negligible in terms of tax planning.

3) Thank you for the clarification on AGI. As I said, I get confused trying to figure out applies to what terms. I'll get there.

4) PFD is the Permanent Fund Dividend for all Alaska residents. This is the first year we are eligible. Word on the street is that it will be about $3000/person this year. It's based on returns on invested money, not oil prices, so they're thinking it'll be a banner year. My understanding is this comes to you without taxes withdrawn, so we will be responsible for those.

5) We are eligible on that money ($10k apiece) for the First Time Homebuyer's exemption. If I'm reading your final numbers correctly, I can take off $2,000 for the 10% penalty on the IRA deductions and assume my final tax bill next April would be about $13,600?

I cannot express how grateful I am to you for helping me figure this out. It seems like personal finance is sold in such general terms (spend less than you make), but when you're trying to make every dollar work for you, there is so much more to know. I find it all interesting, but very confusing. I'm hoping that by the time I figure out taxes, we'll have enough to invest in taxable accounts and then I can learn investing.

MDM

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Re: Please check my tax assumptions
« Reply #8 on: June 05, 2015, 04:59:32 PM »
Pretty much the same numbers CS got, with the $2K penalty waived.  Tables from the case study spreadsheet mentioned above.  For scenario #2:


CategoryMonthly
Comments
Annual
Salary/Wages$10,000$120,000
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$7,000$84,000
Other ordinary income$2,167$26,000
Federal Total Inc.$9,167$110,000
Federal tax$1,1342015 rates, MFJ, stand. ded., 2 exempt.$13,611
Soc. Sec.$620Assumes 2 earners paying$7,440
Medicare$145$1,740
Total income taxes$1,899$22,791
Income before other expenses  $7,267$87,209


Filing Status21=S, 2=MFJ
# of earners2
Total Income$110,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
SL int. (guess)$1,307
AGI$108,693
Taxable$88,093
Tax$13,611

Lanthiriel

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Re: Please check my tax assumptions
« Reply #9 on: June 05, 2015, 05:11:55 PM »
Awesome, thanks MDM! It's always nice when the numbers check out :)

Cheddar Stacker

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Re: Please check my tax assumptions
« Reply #10 on: June 05, 2015, 05:50:32 PM »
If I'm reading your final numbers correctly, I can take off $2,000 for the 10% penalty on the IRA deductions and assume my final tax bill next April would be about $13,600?

Yep. Same as MDM.

Thanks for the lesson on the PFD. Pretty cool. I'd heard of it before but didn't know what it was called. Nice little supplement.