Author Topic: Roth Income Limits  (Read 5168 times)

ahawkchick

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Roth Income Limits
« on: August 13, 2015, 09:12:41 PM »
Hi All,
I'm hoping someone might know the answer to this.  For 2014, DH and I were about 10k under the income limits to be able to contribute to our Roth accounts.  We got raises early in the year this year and I think we'll probably be over limit for 2015.  However, we purchased a foreclosed home for about 45k and have put about 30k (so far) into it for repairs/rennovation.  Our intent is to rent it out for around $1000 a month when it's finished (September).  My question is, will the home costs and renovation expenses that we've incurred related to this house reduce our adjusted gross income?  I'm hoping that will help keep us under the income limits to still be able to contribute.  Thanks!

forummm

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Re: Roth Income Limits
« Reply #1 on: August 14, 2015, 06:47:55 AM »
Renovations are generally considered capital costs so they could adjust your basis upwards (reducing capital gains when you sell) but are not immediate deductions to your income. You can take depreciation of those renovations as part of your annual depreciation claims for the rental property.

ahawkchick

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Re: Roth Income Limits
« Reply #2 on: August 14, 2015, 02:53:24 PM »
Darn, I was afraid that might be the answer!  We are maxing both 401ks already, but not sure on HSA, I will have to look into that.  Can you take a loss on stock you sell inside a Roth account?  That is currently the only place I have any losing stocks (that were put there at the advise of my financial adviser who I came upon prior to meeting MMM and I'm planning to break up with)

dandarc

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Re: Roth Income Limits
« Reply #3 on: August 14, 2015, 03:29:36 PM »
You might want to search on the back-door Roth IRA.  Simply put, the income limits on Roth IRAs are easily circumvented.

sol

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Re: Roth Income Limits
« Reply #4 on: August 14, 2015, 03:50:39 PM »
No, you can't tax loss harvest in a Roth.

Also keep in mind that once the place is rented gross rents count as income on top of your salary for most purposes.  Even after depreciation and deductions like mortgage interest, rentals often push people over those tax thresholds.

brooklynguy

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Re: Roth Income Limits
« Reply #5 on: August 14, 2015, 06:23:15 PM »
Also keep in mind that once the place is rented gross rents count as income on top of your salary for most purposes. 

Why gross rents?  Isn't it rental income net of expenses (including mortgage interest and depreciation) that matters for tax thresholds like this (as suggested by your second sentence)?

MDM

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Re: Roth Income Limits
« Reply #6 on: August 14, 2015, 06:30:23 PM »
Isn't it rental income net of expenses (including mortgage interest and depreciation) that matters for tax thresholds like this...?
Yes.  See Form 1040 line 17 and Schedule E.

sol

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Re: Roth Income Limits
« Reply #7 on: August 14, 2015, 07:01:37 PM »
Also keep in mind that once the place is rented gross rents count as income on top of your salary for most purposes. 

Why gross rents?  Isn't it rental income net of expenses (including mortgage interest and depreciation) that matters for tax thresholds like this (as suggested by your second sentence)?

Technically, gross rents are all income, and rental deductions are all deductions, for figuring your tax liability.  For some other purposes, like EITC, reduced lunch, and Medicaid, gross rents count as income before deductions. I'm not sure about the FAFSA or the Roth cutoff.

Gin1984

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Re: Roth Income Limits
« Reply #8 on: August 14, 2015, 07:21:54 PM »
Also keep in mind that once the place is rented gross rents count as income on top of your salary for most purposes. 

Why gross rents?  Isn't it rental income net of expenses (including mortgage interest and depreciation) that matters for tax thresholds like this (as suggested by your second sentence)?

Technically, gross rents are all income, and rental deductions are all deductions, for figuring your tax liability.  For some other purposes, like EITC, reduced lunch, and Medicaid, gross rents count as income before deductions. I'm not sure about the FAFSA or the Roth cutoff.
That is not true.

MDM

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Re: Roth Income Limits
« Reply #9 on: August 14, 2015, 07:26:38 PM »
Technically, gross rents are all income, and rental deductions are all deductions, for figuring your tax liability.  For some other purposes, like EITC, reduced lunch, and Medicaid, gross rents count as income before deductions. I'm not sure about the FAFSA or the Roth cutoff.
That is not true.

Based on lines 11-13 in http://www.irs.gov/pub/irs-pdf/p596.pdf, and line 26 in http://www.irs.gov/pub/irs-pdf/f1040se.pdf it appears Gin1984 is correct: net, not gross, is used.

Cathy

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Re: Roth Income Limits
« Reply #10 on: August 14, 2015, 07:39:08 PM »
For ... EITC ... gross rents count as income before deductions ...

This statement is vague, but whatever was meant, it's not correct, as Gin1984 and MDM say.

I will assume that you are talking about the provision that no earned income tax credit ("EITC") is available if the taxpayer has too much "disqualifying income". 26 USC § 32(i). There are three possible ways that rents can be handled under this statute:

  • If the rents were "not derived in the ordinary course of a trade or business", then "disqualifying income" includes gross rents minus "deductions (other than interest) which are clearly and directly allocable to such gross income, plus ... interest deductions properly allocable to such gross income". 26 USC § 32(i)(2)(C).
  • If the rents were derived in the ordinary course of a trade or business and the business is a passive activity, then "disqualifying income" includes "the excess of ... the aggregate income from all passive activities for the taxable year ... over ... the aggregate losses from all passive activities for the taxable year". 26 USC § 32(i)(2)(E).
  • If the rents were derived in the ordinary course of a trade or business and the business is not a passive activity (as defined in 26 USC § 469(c)), then the rents are not included in "disqualifying income" at all.

It's not clear what scenario sol intended to talk about, but in any case, none of the possibilities work as he suggested.
« Last Edit: August 14, 2015, 07:51:20 PM by Cathy »

sol

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Re: Roth Income Limits
« Reply #11 on: August 14, 2015, 08:02:15 PM »
It's not clear what scenario sol intended to talk about, but in any case, none of the possibilities work as he suggested.

I'm always happy to learn new things.  Sounds like I misunderstood the EITC rules?

How about rules for medicare and free and reduced lunch programs, anyone want to double check me on those?

Gin1984

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Re: Roth Income Limits
« Reply #12 on: August 14, 2015, 08:18:01 PM »
It's not clear what scenario sol intended to talk about, but in any case, none of the possibilities work as he suggested.

I'm always happy to learn new things.  Sounds like I misunderstood the EITC rules?

How about rules for medicare and free and reduced lunch programs, anyone want to double check me on those?
Medicaid is state dependent so I can't speak for all but my state: http://www.wnylc.com/health/afile/113/1/
Not gross but not net, lol.

TomTX

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Re: Roth Income Limits
« Reply #13 on: August 14, 2015, 08:44:27 PM »
Darn, I was afraid that might be the answer!  We are maxing both 401ks already, but not sure on HSA, I will have to look into that.  Can you take a loss on stock you sell inside a Roth account?  That is currently the only place I have any losing stocks (that were put there at the advise of my financial adviser who I came upon prior to meeting MMM and I'm planning to break up with)

So make a nondeductible Traditional IRA contribution, then convert it into a Roth. You only pay conversion taxes on any gain you had in the meantime. Backdoor Roth.

Cathy

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Re: Roth Income Limits
« Reply #14 on: August 14, 2015, 08:44:31 PM »
...How about rules for ... free and reduced lunch programs, anyone want to double check me on those?

Regarding "free and reduced price meals and free milk in school", 42 USC § 1758(b)(1)(A) says that the Secretary shall prescribe income eligibility guidelines each year. The Secretary has made such a regulation in 7 CFR 245.3, which says that each state agency or regional office "shall by July 1 of each year announce family-size income standards to be used by local educational agencies". In other words, the Secretary has further delegated this power to state agencies and regional offices, subject only to the fact that the further delegated regulations must be "in accordance with Income Eligibility Guidelines published by the Department by notice in the Federal Register". 7 CFR 245.3(a).

The aforementioned Income Eligibility Guidelines for July 1, 2015 through June 30, 2016 are published at 80 Fed Reg 17026 (March 31, 2015). Under the heading "Definition of Income", the Guidelines say that "income" includes "net rental income". The term "net rental income" is not defined or further explained, which means that each state agency or regional office can adopt its own definition of this term. That said, the clear intent appears to be to allow some expenses. If a state agency or regional office did not allow any expenses to be deducted from rental income, their local regulations would not be "in accordance with" the Guidelines published in the Federal Register and the local regulations would be invalid to the extent of the conflict.
« Last Edit: August 14, 2015, 08:54:22 PM by Cathy »

 

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