After the recent article about maximizing after-tax dollars (as opposed to minimizing taxes), several people wrote in to ask about Roth conversions — specifically, when does it make sense to do one? The answer depends significantly on how you are going to pay the tax on the conversion: would you be using money from the traditional IRA, or would you be using money from a taxable account? For example, compare the two following scenarios, each of which involves a conversion at a 20% anticipated marginal tax rate. Example #1: Charlie takes $50,000 out of his traditional IRA and moves $40,000 of it to a Roth IRA. The remaining $10,000 will be used to pay the tax on the conversion. Example #2: Kiara takes $50,000 out of … [Read More...]
Marginal Tax Rate: Not (Necessarily) The Same As Your Tax Bracket
News note: The American Rescue Plan Act of 2021 that was passed last week covers a lot of ground. If you’re interested in a summary, I’d recommend this one from Alistair Nevius or this more thorough write-up from Jeffrey Levine. A reader writes in, asking: “I wonder if you can write about the ‘marginal tax rate is not necessarily the same thing as your tax bracket’ concept for people who are still working. My spouse and I got caught in this situation for the first time in the tax year 2020 because we will be subjected to the ‘Investment income tax’. We will be addressing this by changing part of our Roth 403b contribution to regular 403b contribution for 2021 and beyond (i.e. … [Read More...]
American Rescue Plan Act of 2021: New 3rd Stimulus Chart, Child-Related Tax Credits, COBRA, Dependent Care FSA Limits
The American Rescue Plan Act of 2021 became effective March 11th, 2021 and there is a lot to unpack in the $1.9 trillion economic stimulus bill. Besides the headline $1,400 stimulus checks, there are many other items that could be worth over a thousand dollars each – expanded child and childcare tax credits, subsidized ACA/COBRA health insurance premiums, and increased pre-tax contributions to Dependent Care FSAs. After reading the NY Times, Tax Foundation, Wikipedia, and Kitces round-ups, here again are my minimalist highlights so that you can research further if it applies to your situation. 3rd Stimulus checks / Recovery rebates. $1,400 for each eligible recipient. This includes $1,400 for each child and adult dependent, including college students claimed as dependents. Income phase-out starts at AGI … [Read More...]
What To Do if a Tax Document Arrives After You File
In early 2019, I thought all of my tax documents had arrived in the mail, so I sat down to file my taxes in early March. Everything looked great, so I submitted my return to the IRS and went on about my merry business. In early April, however, an unexpected document popped up in the […] The post What To Do if a Tax Document Arrives After You File appeared first on The Simple Dollar. [Read More...]
Minimizing Taxes Isn’t the Goal of Tax Planning
When done properly, the goal of tax planning is not to minimize your taxes. Instead, the goal is to maximize the money that is left after taxes. That may sound like a trivial distinction — like I’m just playing games with words here. But it makes a real difference in the analysis. Let’s look at two common examples, starting with the more obvious one. Mortgage Interest You have a $300,000 mortgage with a 3% interest rate. You itemize your deductions every year, and you are able to fully deduct the interest you pay on your mortgage. You have a 25% marginal tax rate, when both federal and state income taxes are considered. You have $50,000 in a checking account, which you don’t really need … [Read More...]
Predicting Tax Legislation is Harder Than Timing the Market
Timing the stock market is hard. It’s so hard, in fact, that there’s a reasonably broad consensus that it’s unwise to even try. And that’s in spite of the fact that, when attempting to time the stock market, you’re really only trying to predict one thing: what will the market do next? And there are only three possible outcomes: go up, stay flat, or go down. Trying to predict specific changes to our tax law in any way that is useful for tax planning is far, far harder than trying to time the stock market. Take one example: will distributions from Roth IRAs be made taxable in the future? And how should a person adjust their tax planning based on that possibility? … [Read More...]