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As John Yeigh points out in his article this morning, https://humbledollar.com/2024/07/driven-by-taxes/ taxes dive a lot (too much?) of our behavior.
What do people do for mid-year tax planning? I’m currently doing a version of the |”spend from taxable to keep income low to qualify for ACA credits but fretting about whether I should be doing Roth conversions and/or geting out of positions in highly appreciated individual stocks that comprise too much of my portfolio” dance. I’ve got a spreadsheet going, and probably going to start punching numbers into last years TurboTax.
Thoughts?
We have some withholding taken out of our SS and pension. I am doing a Roth conversion towards the end of each year, but I make sure it doesn’t trigger an IRMAA adjustment for both of us. (I mail in the estimated tax on the Roth conversion by Jan 15th to avoid an underpayment penalty.)
Turbo Tax has a ‘What-If Worksheet’ which makes estimating your taxes a little easier. Here’s an article on how to use it:
https://thefinancebuff.com/turbotax-what-if-planning-roth-conversion.html
Note: On my Turbo Tax version, I have to navigate to VIEW->FORMS and then OPEN FORMS. Then type in ‘What-If’ to display the ‘What-If Worksheet’.
And you must include the “-” in the What-If. Just typing “What” doesn’t seem to work.
Just typing “wha” worked for me.
Cheryl – thanks. I have the same issue with y version of TT.
I anticipate total income for the year and start to think about what room there is to do Roth conversion or realize some capital gains. But, I wait until December before taking serious action that cuts it close to my desired income ceiling, as it’s next to impossible to get right at mid-year. If the market were to take a serious drop earlier then I might do some Roth conversion earlier, but would leave some buffer.
Just did a Roth conversion today to work on filling up my low tax bracket now that I’m retired and my wife is maxing out her traditional 401(k). Too bad I waited until now to start this year’s conversions or I’d have more tax-free growth with the stock market’s performance.
I update my estimated dividends from my latest Vanguard statement and check to make sure my tax spreadsheet agrees with the TurboTax What-If worksheet at various intervals.
But being your Trad IRA is a higher starting value than the converted Roth would be, your gross value grew even higher.
We focused our efforts on keeping our taxable income low enough to get essentially free health insurance from the ACA (never paid more that $16/month-then I figured out how to play the game by changing my taxable income level in the calculator when signing up to the point of paying nothing for premiums). Worry about Roth conversions from 65-70 or 73.
I’ve at least filled up our 0% cap gains buckets even if it meant higher ACA payments.
Same here. Keeping an eye on our current income to plan for cap gains harvesting to reset our basis.
A few months back I wrote an article about the difference between avoiding or evading taxes. I try to avoid taxes wherever I can, but I never evade them!
There is no statue-of-limitations for income tax fraud.
Stellea99, actually there is.
From one of a number of legal website with similar information……
How Far Back Does the Tax Fraud Statute of Limitations Go?In some instances of civil tax fraud, the IRS may go back as many years as they would like to enforce the laws against you.
Unlike other IRS Statutes of Limitations which typically expire after three years (example: failure to file an informational return) or possibly six years (example: willful failure to pay tax), there is no statute of limitations for Civil Tax Fraud. As with all tax matters, there are exceptions, exclusions, and limitations to be aware of.
Here is a link to the IRS position. There are a lot of It depends.
https://www.irs.gov/filing/time-irs-can-assess-tax
If the contact starts with the IRS representatives coming in pairs and reading you your rights you have likely moved from having your CPA represent to engaging an attorney that practices in that area.
Isn’t it a bit ironic that Americans seem to widely criticize the wealthy for trying to avoid taxes and yet we all do the same thing on a smaller scale.
Nothing wrong with honestly paying the least possible, but while the amounts involved may be different the process is the same – avoid taxes or the loss of tax credits, subsidies, etc.
Of course who is “wealthy” is relative. *I’m* obviously not “wealthy” ….
Wait till you are on Medicare and see the cost of health benefits.
If you are fortunate to live in a state, as I do, that has community rating for Medicare Supplements, the costs are not as dramatic as in states with age-banded rates. At 78, we pay about the same as we did at age 65.
You are absolutely correct Dick, the key word in your comment is “honestly”. Sadly, when given the opportunity, certain types of filers will lie, cheat, and steal to illegally avoid taxes.
According to the IRS the greatest tax evaders are small businesses that deal in cash and 40% of tips supposedly go unreported.
I’d like to see the budget of the IRS to be doubled if focused on tax cheats
I don’t know if it’s still true today with our monstrous Federal deficits. Ten or so years ago, according to the IRS, if those filers didn’t evade taxes there would not have been a deficit.
I get a laugh out of the notion to make tips non taxable; never once in my career did a waiter client ever claim their cash tips.
I suggested to my son that he claim his cash tips for delivery driving so that he could put more into his Roth IRA, which was being matched by his parents.
Absolutely punch those numbers into turbo tax. I had a tax client whose income exceeded the ACA cliff by only about $1000 and it caused them to loose about 10k in premium credits.
There was a solution for them that might work for you as well. I had them go to the bank and open a traditional IRA for $1100 to get their income back down below that cliff, saving them from paying back the credits.
There is no ACA cliff. It gets trued up when filing your return.
Form 8962
LOL, money to the IRA is dumb if your doing a Roth, Duh.
However, contributing to a Health Savings Account would accomplish the same thing.
If you have the desktop version of TurboTax, it is very easy to let it help you with tax planning. Choose the Forms option and open up a form called What-if. It will allow you to create up to 3 scenarios for the current tax year. It is fairly easy to use. Once you have at least one scenario, you can come back at any time to change your income predictions and see the impact on tax.
Great post – the What if feature is very useful.
Except that Intuit hasn’t yet updated the qualified dividends & capital gains brackets for 2024, so its calculation of your taxes may be incorrect.
We are part way through the year and in our situation, the tax planning continues to be what I have mentioned before about keeping our taxable income low so we can avoid capital gains on a stock sale. So far things are going ok. Chris
And also, thanks to all of you who mentioned spreadsheets for tax planning, our finances are pretty simple this year, but this may help going forward. Chris
I have a spreadsheet that I use to track our federal and state taxes throughout the year. I started this when I began to consult and was responsible for paying estimated taxes. I wasn’t familiar with that, and my consulting income was irregular and I needed to figure out what estimated payments were required.
I now use the same spreadsheet to assess the impact of Roth Conversions, and/or IRA withdrawals.
Due to Roth conversion taxes, we end every year in a perpetual state of being wiped-out and cash-broke within taxable accounts. In December, we calculate how much Roth we can afford within one of the large Medicare IRMAA brackets. We don’t plan mid-year other than to pay ongoing estimated taxes for dividends, interest and social security. More here:
https://humbledollar.com/2023/04/that-28000000-tax/
I never pay estimated taxes. We have income taxes deducted from SS checks and I take sufficient taxes from each RMD to cover the rest. Get a tax refund every year- not 100% efficient but simple.
Some of us haven’t reached your esteemed age for SS or RMD requirements. But something to keep in mind if I don’t forget- haha.
Of course the efficient way is to owe the maximum in April so that you’re not penalized (Google “safe harbor tax rules”), earning interest along the way instead of letting Uncle Sam earn it.
I don’t want pay estimated taxes and how much interest could I lose on a few thousand dollars?
I think a lot depends on a persons age and the years before assets will be used for income.
One thing for sure, given the fiscal state of the country I would bet on taxes going up fairly significantly in the next ten years and squirrel away in tax free investments as much as possible.
My tax planning primarily consists of maintaining a spreadsheet to ensure that withholdings are adjusted to make our Federal tax return payment come out close to zero. Every other year we balloon our charitable contributions and itemize. That’s about it. I’ve thought about Roth conversions, but that’s all the further it’s gone. I still fund our Roth IRAs from earned income.
If you’ve got a low tax bracket to fill, do it with Roth conversions!