Author Topic: How the child tax credit changes for tax year 2021 affect Roth Conversion plans  (Read 223 times)

johnhenry

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Does anyone here have multiple children young enough so the child tax credit is in play, while also doing Roth Conversions or planning to do Roth Conversions while children are in that range?

If so I'm wondering if anyone knows of anything already written, or cares to comment, on the effect of the new 2021 tax rules regarding Roth conversions.  I'm still playing catch up on what all has changed, but I think that the CTC went from $2K per child (also allowing up to 18 instead of under 17) to $3K per child and is now always refundable, up to certain income thresholds/phaseouts.

I'm looking for comments specifically regarding what seems to be a big loss of "space" at the 0% marginal rate incurred for early retirees (under the threshold) doing Roth Conversions while having little/no other income, but kids under 17.  Before the 2021 changes, 3,2,1 kids provided space of $74360, $61,600, $49,060 at a 0% rate.  Under the new rules, the space at 0% is only ~ $21,500 and is not effected by number of children (since the credit is always refundable).

I know it's a first world problem to have and the increased credit amounts themselves are a boon.  I'm just wondering if any early retirees here had been planning on converting big chunks under the old rules? If so, what are your plans now?

As the tax rules are written now, will the CTC and it's refundable nature revert to old rules after 2021? Or 2022?


seattlecyclone

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I'm looking for comments specifically regarding what seems to be a big loss of "space" at the 0% marginal rate incurred for early retirees (under the threshold) doing Roth Conversions while having little/no other income, but kids under 17.  Before the 2021 changes, 3,2,1 kids provided space of $74360, $61,600, $49,060 at a 0% rate.  Under the new rules, the space at 0% is only ~ $21,500 and is not effected by number of children (since the credit is always refundable).

Yes I think you've captured the main difference from a planning perspective. Before, someone without any earned income to unlock the refundable portion of the child tax credit would have quite a bit of room to realize tax-free regular income, as the child tax credit would increase in lockstep with your pre-credit tax. Now that's no longer the case. You get the full child tax credit right away with no income at all, and your tax will eat away at that as your income increases. Therefore this year you may find it more advantageous to have more income from capital gains/dividends than Roth conversions, if you have a choice between the two.

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As the tax rules are written now, will the CTC and it's refundable nature revert to old rules after 2021? Or 2022?

The new rule is currently only in place for 2021, will revert to the old rules for 2022. Top Democrats are on the record saying they want to extend the 2021 rules indefinitely. Will they have the votes to make that happen? Remains to be seen.

MDM

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I'm just wondering if any early retirees here had been planning on converting big chunks under the old rules?
Yes.
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If so, what are your plans now?
Too late - converted before the new law passed. ;)

Probably wouldn't have changed anything anyway.

fuzzy math

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I'm looking for comments specifically regarding what seems to be a big loss of "space" at the 0% marginal rate incurred for early retirees (under the threshold) doing Roth Conversions while having little/no other income, but kids under 17.  Before the 2021 changes, 3,2,1 kids provided space of $74360, $61,600, $49,060 at a 0% rate.  Under the new rules, the space at 0% is only ~ $21,500 and is not effected by number of children (since the credit is always refundable).


I am having trouble understanding this concept. Is the lower 0% rate something set out in the new laws (link please?) or you're saying effectively because the child tax credit is fully refundable?

johnhenry

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or you're saying effectively because the child tax credit is fully refundable?

Yes, it's because the child tax credit is (for 2021) fully refundable.

less4success

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So the problem is that instead of trying to stay within the 0% (effective) tax bracket, now you're trying to stay in a negative (effective) tax bracket?
« Last Edit: Today at 02:14:44 PM by less4success »