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Perhaps what we should be debating is which is the most important line on the tax return. I can tell you that most would say line 34, “this is the amount you overpaid, or line 37, “this is the amount you owe. I contend line 24 matters most, “this is your total tax”. Rarely, and I mean well under 1% of the time, did a client ask me how much tax they paid. As a matter of fact, if you ask the average person receiving a refund “how much tax did you pay”, their response will be that they did not pay any tax.
Of course, good arguments can also be made for lines 9 or 11, total income and adjusted gross income, because those lines can push you over a couple different cliffs if you stand too close to the edge.
I’m a ‘line 24’ kinda gal. You know it’s going to be a good day when you come to HD and they’re talking 1040 lines.
I start my tax prep by determining what my total income can be and still stay in the 12% bracket. 2025 Standard deductions are:
standard deduction (MFJ) 31,500 (OBBBA)
65+ std deduction (2) 3,200
senior bonus (2) * 12,000 (OBBBA)
Total deductions (MFJ) 46,700
*full senior bonus if MAGI is <= $150K (MFJ)
So, if you jump into the 22% bracket by $50,000, you don’t want the extra money even though you pay 10% more on the additional money?
If your salary goes up by $50K of course you take it and pay the extra 10%. However, if you have the ability to time when the income hits, like Roth IRA conversions or say deferred compensation plans then paying attention to the marginal rate and spreading income out over time is of course very advantageous.
As with many things, finance and tax decisions depend on the details – there aren’t many hard and fast rules because of the complex nature of our tax code. (Spreadsheets help here)
I’m not required to take RMDs yet and don’t need to for monthly expenses. I also don’t need/want to sell any investments or real estate. So, in a normal year, I don’t jump into the 22% tax bracket. I manage my Roth conversions to keep within the 12% bracket, and in 2025 to stay under the MAGI $150K limit. When I do start taking RMDs, I will jump into the 22% tax bracket.
Dan – I assume that folks who do their own taxes pay attention to all those lines. I think it’s the folks who go to tax preparers who are likely less aware of their overall tax status. Rick Connor probably can speak to that.
Jeff, Dan and you are correct. Many people focus on their refund, or how much they owe on 4/15. When we review a client’s return we usually go line by line, by most just want the bottom line.
I try to avoid line 24
Agree, I would add line 15 – taxable income. As that determines your cap gains/qualified dividends tax rate. We are currently in our late 50’s and retired and currently living off taxable investments, so I try to keep us in the 0% cap gains rate and do cap gains harvesting.
The three tax rates we pay attention to are- cap gains rate, marginal rate, and effective rate (defined as total tax/total income, i.e. line 24/line9)
Currently at 0% cap gains, 10% marginal and 1.4% effective.
You really can’t ignore 15 if you want the best possible result on 24. So Schedule 1, Part 2, Adjustments to Income shouldn’t be ignored.
Jeez, this post could comfortably fit into Dick Quinn’s puzzle analogy.
Very true, and it confuses me why most people define the effective tax rate as total tax/taxable income. It ignores that you can increase your total income while maintaining the same taxable income with judicious use of deductions.
And yup – ya gotta be detail oriented here.
Or tax free income.