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Mid-year tax planning?

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AUTHOR: eludom on 7/17/2024

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?

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Cheryl Low
4 months ago

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’.

Jeff Bond
4 months ago
Reply to  Cheryl Low

And you must include the “-” in the What-If. Just typing “What” doesn’t seem to work.

parkslope
4 months ago
Reply to  Jeff Bond

Just typing “wha” worked for me.

Rick Connor
4 months ago
Reply to  Cheryl Low

Cheryl – thanks. I have the same issue with y version of TT.

Michael1
4 months ago

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.

Randy Dobkin
4 months ago

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.

Last edited 4 months ago by Randy Dobkin
Doug Kaufman
4 months ago
Reply to  Randy Dobkin

But being your Trad IRA is a higher starting value than the converted Roth would be, your gross value grew even higher.

David Lancaster
4 months ago

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.

Doug Kaufman
4 months ago

I’ve at least filled up our 0% cap gains buckets even if it meant higher ACA payments.

Adam Starry
4 months ago
Reply to  Doug Kaufman

Same here. Keeping an eye on our current income to plan for cap gains harvesting to reset our basis.

Rick Connor
4 months ago

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!

stelea99
4 months ago
Reply to  Rick Connor

There is no statue-of-limitations for income tax fraud.

mjflack
4 months ago
Reply to  stelea99

Stellea99, actually there is.

stelea99
4 months ago
Reply to  mjflack

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.

William Perry
4 months ago
Reply to  mjflack

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.

R Quinn
4 months ago

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.

R Quinn
4 months ago
Reply to  eludom

Wait till you are on Medicare and see the cost of health benefits.

stelea99
4 months ago
Reply to  R Quinn

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.

Dan Smith
4 months ago
Reply to  R Quinn

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.

R Quinn
4 months ago
Reply to  Dan Smith

According to the IRS the greatest tax evaders are small businesses that deal in cash and 40% of tips supposedly go unreported.

Doug Kaufman
4 months ago
Reply to  R Quinn

I’d like to see the budget of the IRS to be doubled if focused on tax cheats

Dan Smith
4 months ago
Reply to  R Quinn

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.

Randy Dobkin
4 months ago
Reply to  Dan Smith

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.

Dan Smith
4 months ago

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.

Doug Kaufman
4 months ago
Reply to  Dan Smith

There is no ACA cliff. It gets trued up when filing your return.

Doug Kaufman
4 months ago
Reply to  Doug Kaufman

Form 8962

Dan Smith
4 months ago
Reply to  Dan Smith

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.

stelea99
4 months ago

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.

Rick Connor
4 months ago
Reply to  stelea99

Great post – the What if feature is very useful.

Randy Dobkin
4 months ago
Reply to  Rick Connor

Except that Intuit hasn’t yet updated the qualified dividends & capital gains brackets for 2024, so its calculation of your taxes may be incorrect.

baldscreen
4 months ago

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

baldscreen
4 months ago
Reply to  baldscreen

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

Rick Connor
4 months ago

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.

John Yeigh
4 months ago

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/

R Quinn
4 months ago
Reply to  John Yeigh

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.

Doug Kaufman
4 months ago
Reply to  R Quinn

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.

Randy Dobkin
4 months ago
Reply to  R Quinn

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.

Last edited 4 months ago by Randy Dobkin
R Quinn
4 months ago
Reply to  Randy Dobkin

I don’t want pay estimated taxes and how much interest could I lose on a few thousand dollars?

R Quinn
4 months ago

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.

Nuke Ken
4 months ago

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.

Last edited 4 months ago by Nuke Ken
Randy Dobkin
4 months ago
Reply to  Nuke Ken

If you’ve got a low tax bracket to fill, do it with Roth conversions!

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