Author Topic: Post-Layoff Strategy for the year  (Read 1321 times)

doneby35

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Post-Layoff Strategy for the year
« on: February 15, 2024, 12:58:04 PM »
Well I was planning to FIRE end of this year since I've reached my number already, but my employer beat me to it!
Got laid off and received a month of severance pay, which in total would put my gross pay for the year around $36,000.

I also have the following numbers for the year:
401k contributions: $3,600
HSA contributions: $1,200

So a rough estimate for 2024 taxable income should then be (assuming I don't go back to work):
Gross pay - 401k contributions - HSA contributions = $31,200
In addition, I'm estimating around $10,000 from dividends and interest, increasing taxable income to $41,200.
If I apply the 2024 standard deduction of $29,200 for MFJ, then my final taxable income would be $12,000

I'm assuming I'm calculating the above correctly. If not, please do correct me.

My questions are:
1. Having $12,000 of taxable income should put me in the 12% federal tax bracket (MFJ) for the year 2024, therefore I would owe $1,160 + $48 (12% of amount over $11,600, which would be 12% of $400) = $1,208 owed - $3,200 (federal amount withheld so far from my paychecks this year) = I should get a return of $1,992 from the IRS. Is this the right way of calculating things?

2.a. For calculating ACA subsidies, would it be $41,200 taxable income (which does not include 401k and HSA contributions) or would I need to add the contributions back in and get a taxable income of $46,000?
2.b. With $30k in yearly spending and $20k in a savings account, would I better off using the cash to max out IRAs for both me and spouse ($14,000 for 2024, leaving me with $6,000 in cash) and sell investments to cover expenses? or should I just use the cash to cover the yearly expenses and not worry about IRAs?

Thanks!

evanc

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Re: Post-Layoff Strategy for the year
« Reply #1 on: February 15, 2024, 04:30:36 PM »
When you mentioned the dividend income, my mind immediately wondered if all or part of that is qualified dividend income? Based on your other income sources, you would likely pay 0% on that portion.

Edit: ref, https://www.nerdwallet.com/article/taxes/dividend-tax-rate#:~:text=Nonqualified%20dividends%20are%20taxed%20as,to%20accurately%20report%20dividend%20income.
« Last Edit: February 15, 2024, 04:32:07 PM by evanc »

doneby35

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Re: Post-Layoff Strategy for the year
« Reply #2 on: February 15, 2024, 05:45:39 PM »
When you mentioned the dividend income, my mind immediately wondered if all or part of that is qualified dividend income? Based on your other income sources, you would likely pay 0% on that portion.

Edit: ref, https://www.nerdwallet.com/article/taxes/dividend-tax-rate#:~:text=Nonqualified%20dividends%20are%20taxed%20as,to%20accurately%20report%20dividend%20income.

Interesting point. Almost all of the dividends I receive throughout the year are qualified, except for a few hundred bucks. So then, does this mean that I would have to separate out the qualified dividends from the final taxable income of $12,000? meaning the actual taxable income subject to federal tax would be $2,000 and not $12,000?

And then the $10,000 worth of qualified dividends would be taxed at 0% rate since it's under the $94,050 limit for the year 2024)?

seattlecyclone

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Re: Post-Layoff Strategy for the year
« Reply #3 on: February 15, 2024, 05:54:44 PM »
1) You're thinking about it in generally the right way. As mentioned, it's likely that some/most of your dividend income will be subject to the 0% qualified dividend rate. You can get a good idea for what fraction this might be by looking at this year's 1099-DIV forms for your investments. So you can probably subtract much of the $10k from the taxable income before calculating your tax. There's of course a lot else that could go into the final tax calculation depending on your other financial and life circumstances. Some things that may apply to you would include credits for children or other dependents, saver's credit, and the foreign tax credit.

2a) ACA subsidies are based on your AGI, and do not have your HSA contributions or retirement contributions added back in. The dividends will count toward this income even if they have a 0% tax rate attached. Based on the information you've shared if it's just you and your spouse in your household your $41,200 of income would put you right around 209% of the poverty level. There can be some advantage to estimating an income just under 200% of the poverty level (you can get offered silver plan premiums with out-of-pocket costs close to what a platinum plan offers).

Of course there's always Medicaid to consider too. If you live in an expanded-Medicaid state, this uses a month-to-month income standard. Go for a month with income below 138% of the poverty line and you qualify for Medicaid. It sounds like you've already realized most of your planned income for the year so it's possible (even likely) that you would qualify for most/all of the remaining months of this year. People have strong feelings on either side of this issue about whether they should aim to be on this coverage or aim to avoid it. My main advice is that with income in these borderline regions, it's probably best to pick one side of the line and stick to it. That might require doing a small Roth conversion or capital gain harvest every month to be above the line for that month if that's the path you prefer. Because if your state health department finds out that you are eligible for Medicaid, they're likely to offer you that coverage, and once it has been offered you're ineligible for the Marketplace tax credits until such time as your state agrees your income is too high for Medicaid again.

2b) I think there's a lot of value in putting as much money as possible in retirement accounts instead of having it sitting in taxable form. In many cases this lets you have better control over what your taxable income will be in any given year. Especially with your income so close to that 200% boundary you could get significantly lower-cost health care if you make a bit of an IRA contribution. With your income already being pretty low this year, you might want to consider Roth contributions once you have gotten below whatever ACA threshold you're aiming for.

doneby35

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Re: Post-Layoff Strategy for the year
« Reply #4 on: February 15, 2024, 09:26:18 PM »
2a) ACA subsidies are based on your AGI, and do not have your HSA contributions or retirement contributions added back in. The dividends will count toward this income even if they have a 0% tax rate attached. Based on the information you've shared if it's just you and your spouse in your household your $41,200 of income would put you right around 209% of the poverty level. There can be some advantage to estimating an income just under 200% of the poverty level (you can get offered silver plan premiums with out-of-pocket costs close to what a platinum plan offers).

2b) I think there's a lot of value in putting as much money as possible in retirement accounts instead of having it sitting in taxable form. In many cases this lets you have better control over what your taxable income will be in any given year. Especially with your income so close to that 200% boundary you could get significantly lower-cost health care if you make a bit of an IRA contribution. With your income already being pretty low this year, you might want to consider Roth contributions once you have gotten below whatever ACA threshold you're aiming for.

For additional context, this is a 2 person household, no children.

For 2a, when you say "estimating an income just under 200% of FPL", does this mean estimating an income of $39,000 (200% FPL for a 2 person household for 2024 coverage is $39,440) instead of $41,000 when applying? if so, will this negatively impact me later when filing 2024's taxes?

For 2b, when you say I can get significantly lower-cost health care if I make a bit of an IRA contribution, you're talking about a traditional IRA contribution right? if so, does that mean if I contribute $12,000 to traditional IRA, that would be decrease my taxable income from $41,200 to 29,200 (which would put me at 150% FPL for 2 people)? and contribute the remaining $2,000 to Roth IRA?

seattlecyclone

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Re: Post-Layoff Strategy for the year
« Reply #5 on: February 15, 2024, 10:38:34 PM »
.
For 2a, when you say "estimating an income just under 200% of FPL", does this mean estimating an income of $39,000 (200% FPL for a 2 person household for 2024 coverage is $39,440) instead of $41,000 when applying? if so, will this negatively impact me later when filing 2024's taxes?

Yes I was suggesting you put in a number less than 200%. It should be an actual estimate, not with an intention to come in higher in the end. If that does happen once or twice, no big deal, you'll just pay the difference in subsidy between the estimated and actual income back when you file your taxes. Make a habit of wildly underestimating and they might stop believing you and giving you advance tax credits.



Quote
For 2b, when you say I can get significantly lower-cost health care if I make a bit of an IRA contribution, you're talking about a traditional IRA contribution right? if so, does that mean if I contribute $12,000 to traditional IRA, that would be decrease my taxable income from $41,200 to 29,200 (which would put me at 150% FPL for 2 people)? and contribute the remaining $2,000 to Roth IRA?

I was mostly thinking you'd do just enough traditional IRA to get below 200% FPL and Roth for the rest. I'm not sure you'd really save anything on tax or premiums by pushing your income lower than that. You'd get some more discount on out-of-pocket health costs at 150% vs. 200%, but I feel like you get most of the benefit at 200% already, and having a higher Roth balance is potentially more valuable in the long run. You'll have to weigh those tradeoffs for yourself though.

doneby35

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Re: Post-Layoff Strategy for the year
« Reply #6 on: February 16, 2024, 08:37:52 AM »
Quote
For 2b, when you say I can get significantly lower-cost health care if I make a bit of an IRA contribution, you're talking about a traditional IRA contribution right? if so, does that mean if I contribute $12,000 to traditional IRA, that would be decrease my taxable income from $41,200 to 29,200 (which would put me at 150% FPL for 2 people)? and contribute the remaining $2,000 to Roth IRA?

I was mostly thinking you'd do just enough traditional IRA to get below 200% FPL and Roth for the rest. I'm not sure you'd really save anything on tax or premiums by pushing your income lower than that. You'd get some more discount on out-of-pocket health costs at 150% vs. 200%, but I feel like you get most of the benefit at 200% already, and having a higher Roth balance is potentially more valuable in the long run. You'll have to weigh those tradeoffs for yourself though.

That's what I thought you meant. So in order for me to get to 150% FPL, I'll need to contribute $12,000 to traditional IRA to decrease my taxable income ($41,200 - $12,000 = $29,200). But then I would have to sell investments to cover my yearly living expenses, and the capital gains from the sale will again increase that number above 150% FPL no?

seattlecyclone

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Re: Post-Layoff Strategy for the year
« Reply #7 on: February 16, 2024, 09:24:28 AM »
Again, I'm not suggesting you get all the way down to 150%. I think the traditional vs. Roth math likely favors the Roth after you get below that 200% FPL threshold. You're right that selling shares to pay the bills will have some capital gains and you'll need to account for that. The thing to remember there is your cost basis. Suppose you bought shares for $200 that are now worth $300. That means you can sell a share, transfer $300 to your checking account, and only add $100 to your income. You'd then perhaps want to put $100 in a traditional IRA to offset that income, leaving you with $200 to spend on your bills.

doneby35

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Re: Post-Layoff Strategy for the year
« Reply #8 on: February 16, 2024, 10:02:52 AM »
Yep that makes sense. Thanks for all the input. First things first, stop the auto reinvestment of dividends in the taxable account!!

bacchi

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Re: Post-Layoff Strategy for the year
« Reply #9 on: February 16, 2024, 11:22:33 AM »
At that low of an income, you'd also receive the Saver's Credit. There are some wrinkles about 401k and IRA withdrawals but, if you can manage those, it's a nice bonus.

Quote from: https://www.irs.gov/pub/irs-drop/a-01-106.pdf
The annual contribution eligible for the credit may have to be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse receive during the year you claim the credit, during the 2 preceding years, or during the period after the end of the year for which you claim the
credit and before the due date for filing your return for that year.

- tax year withdrawal
- 2 year withdrawal lookback
- tax filing year withdrawal until 4/15

seattlecyclone

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Re: Post-Layoff Strategy for the year
« Reply #10 on: February 16, 2024, 12:16:26 PM »
Of course the saver's credit is non-refundable, so it only applies up to the amount of tax owed. Looks like it would take a pretty small pre-tax IRA contribution indeed to wipe out all tax owed, making the saver's credit moot.

doneby35

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Re: Post-Layoff Strategy for the year
« Reply #11 on: February 16, 2024, 12:53:40 PM »
Good suggestion for the saver's credit. First time I've heard of it so good to know. I'm not expecting to owe anything, I should be receiving return dollars instead, because of the federal amount withheld from my paychecks for the year.