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As a compulsive list maker, I’m updating my list of finance-related
action items and analysis to do around year-end. Here are a few things on my list:
– Estimate taxes
– Consider year-end contributions
– Target income levels to maximize ACA credits
– Consider Roth conversions
– Assess prior year’s returns
– Analyze last year’s spending
– Project “safe spending” for the coming year
– Re-balance investments if needed
What’s on your list?
I like your list items for near term taxes.
For intermediate term tax planning I have been thinking a lot about the currently scheduled sun-setting of the provisions of the Tax Cuts and Jobs Act for years after 2025. I don’t mind paying a little more in 2024 and 2025 if doing so can help reduce my expected higher rate taxes in 2026 and going forward. I am trying to smooth my current and future tax rates and amounts using the currently available and my best guess of uncertain future tax rates and rules.
For longer term tax planning I am trying to incorporate the likely tax impact on the survivor after either my wife or I die. My conclusions currently cause me to consider Roth contributions (I hope to continue to work seasonally during my un-retirement and this additional earned income is eligible to allow me to contribute to a Roth, at least 2024) or I can also consider Roth conversions if done before the end of the current tax year. Tax rate smoothing is again my main criteria. My current taxable income level is such that each additional ordinary income taxable dollar causes an additional $0.85 of our social security benefit to become taxable.
Fortunately one of the changes from the SECURE act may allow those with current year earned income to make post age 70 deductible traditional IRA contributions. I am thus eligible to make a post year end traditional IRA contribution in an amount necessary to target the taxable income I want to hit.
Best, Bill
I am in the process of converting enough of my wife’s IRA to fill one tax bracket above our normal bracket for this year and next. Her’s has the smaller IRA balance. The overall goal is to have her IRA all converted before she turns 70, the year we both claim Social Security. This is under the assumption that when are both receiving Social Security, and I have to take RMDs our tax bracket will bump up at least 1 if not two levels when rates in the future are most likely significantly higher. Since the odds are good that my wife will live to 100 based on her family history the children will inherit her Roth’s tax free after at least 30 years being invested in Vanguard’s Total World stock fund. Should be a very large “kitty”.
Yeah, that’s about right. The main thing is to estimate taxes for 2024, and pay them. I do that by taking withdrawals from inherited IRAs and withholding 100%, usually I have to take slightly over the RMDs.
Spending for the currently year is analyzed on a continuous basis. I’m a little over budget right now, but since my budget is 30% of income, that is not really a problem.
One thing to do is check for IRMAA cliffs. Right now, I’m kind of close to the third cliff, although it’s hard to predict what the number might be in 2026.
I had a client who over withheld from one distribution in order to cover the tax bill. Then one year her situation changed and she was due an 8k refund. The IRS thought the withholding amount was a typo on her 1099R and held up her refund for 3 years. Thankfully the client didn’t need the money. The delay caused the IRS to owe her over 1k of interest; our tax dollars at work.
Our tax person (a former IRS Special Agent) made a blatant error on our 2023 taxes and we ended up overpaying. A corrected form was electronically filed months ago, I doubt I’ll see that refund for several years.
The IRS might surprise you with a timely refund. At least you will receive interest for your trouble.
I’ve come across a handful of ex-IRS employees turned tax preparer. They contend that makes them special, but I haven’t seen any evidence that.
Contrary to the myth, tax prep isn’t rocket science. I have no credentials but rarely made mistakes. The CPA/tax attorney who bought my practice is a mistake machine. He’s probably lost half his client base.
Good list. For ours off the top of my head I’d add to consider harvesting capital gains.
I assume you mean harvesting capital losses….
Losses as well, but no, I meant harvesting capital gains. In the same vein as Roth conversion, choosing to realize capital gains in low income years.
https://humbledollar.com/2021/10/getting-to-zero/
Edit – losses could be harvested anytime, but harvesting gains should be a year end decision as you need a better sense of your full year income.
Got it!
Only one item from your list. Consider Qualified Charitable Contributions (QCD).
Exactly what is safe spending?
I’m running a modified version of the “Spend Safely in Retirement Strategy” outlined in https://www.amazon.com/Dont-Go-Broke-Retirement-Lifetime/dp/0985384662 , basically a bridge to social security. His twist is that your discretionary spending is based on RMD tables, even before you’re required to take them. I recommend giving it a read. The strategy is fairly simple and, I think, would be applicable to people with even modest levels of retirement assets.
I don’t think eludom is old enough to qualify for QCDs.
Eludom, pretty comprehensive list. Thanks for providing. I guess my only additional item is setting up time with our financial advisor to discuss some of these things in more detail. For example our “re-balance” discussion will include selecting indexes or fixed rate options for certain investments we hold based on time frames for expected use.
In the past, the discussion would include timing for retirement, but I pulled that cord 13 months ago.
Now, one additional item is about timing of when to start Social Security. We both reached FRA in the past year so timing is flexible based on a few of the other factors on your list.
Good luck with your planning.
How do you balance Roth conversions against maximizing ACA credits? Do you have a maximum income you target and, if so, what is it?
I target the top of the 12% tax bracket. Each dollar of taxable income reduces the ACA credit by 8%. This brings the combined marginal rate to 20%, a number I’m ok with. Doing any Roth conversions that push me into the 22% bracket means the combined marginal rate would be 30%, which is more than I can justify.
How do you calculate the per-dollar reduction in ACA credit?
I used the blunt instrument David Lancaster suggested below and have what the web site spits out for four different income levels. It also looks like the Turbo-tax what-if sheets are doing that calculation, but how its doing it opaque.
During the pandemic, the premium tax credit was extended to help those earning more than 400% of the poverty level ($78,880 for two people). It requires households to pay 8.5% of household income toward ACA premiums. Thus, for every dollar of income you earn above $78,880, your contribution toward ACA premiums increases by 8.5%. This is accomplished by reducing your premium tax credit by 8.5%.
Per the Kaiser Foundation,
What amount of premium tax credit is available?The premium tax credit works by limiting the amount an individual must contribute toward the premium for the “benchmark” plan – or the second-lowest cost silver plan available to the individual in their Marketplace. This “required individual contribution” is set on a sliding income scale. In 2024, for individuals with income up to 150 percent FPL, the required contribution is zero, while at an income of 400 percent FPL or above, the required contribution is 8.5 percent of household income (Table 2).
These contribution amounts were set by the Inflation Reduction Act, which temporarily extends American Rescue Plan Act (ARPA) subsidies through the end of 2025. Prior to the ARPA, the required contribution percentages ranged from about two percent of household income for people with poverty level income to nearly 10 percent for people with income from 300 to 400 percent FPL. In addition, prior to the ARPA, people with incomes above 400 percent FPL were not eligible for premium tax credits.
You can insert different incomes into the ACA website to either minimize or completely eliminate having to pay premiums if you have non taxable funds. We never paid more than $16/month for a bronze plan, as we are both healthy, and that was the first year before I was more savvy.
I did have one ER visit which resulted in a rather large bill, but paid that with HSA.
My brother was complaining about how high his ACA premiums are, but I know he has cash from an inheritance he could have used to pay living expenses, but he is not financially inclined.
Bronze? The research I did before signing up earlier this year all pointed to Silver as the path to max tax credit, cost sharing, etc.
Roth conversions are actually not likely to happen until I turn 65 in 2 years.
Ditto for moving out of some highly-appreciated individual stocks.
Target is not fixed. I’ve just started playing with the “What-If” calculator in TurboTax (thanks to people here cluing me in). Will probably crunch several scenarios with that to arrive at target.
Embarrassed to ask here but…….
I use the previous years TurboTax software in estimating my quarterly tax status in the current tax year and trying different scenarios such as conversions, additional long term gain distributions, etc. For me, this third period (“quarter”) estimate is important to set final plans in motion well before the year ends. Yes, I do understand that the software is using outdated brackets, limits and the like but I’m not seeking perfect results, just keeping refunds as small as possible without getting penalized for underpayment. Occasionally, there is a lone event like a small state tax rate change (MI) for a given year but I do stay aware of such through various publications. So basically, I simply update the income entries each time I run the program, like I will next week for the Q3 round. Regrettably, I cannot for the life of me find the “What if….” section, tab within TurboTax you and others here have referenced. I use the Mac version. Guidance please? Thank you.
I’m using the Windows version (reluctantly … I’m a Linux die hard), and there you go into the forms view, and it shows up in the list of forms on the left side. It was hard to find.
From the horses mouth: “Using the TurboTax desktop EDITIONS, click on Forms. When in Forms mode click on Open Form at the to left of the Forms mode screen. Type in what-if. Click on the result to open the What-If Worksheet.”
https://ttlc.intuit.com/community/taxes/discussion/what-if-worksheet/00/3112351#:~:text=Using%20the%20TurboTax%20desktop%20editions,open%20the%20What%2DIf%20Worksheet.
Many thanks! I’ll give this a try. I should have perhaps mentioned that I called their customer services group two times regarding this. Amazingly, I was told that they do not have great depth on the Mac side of their software.
Why are you waiting til age 65 for both of those?
Capital gains and money from converting to Roth both count as income when determining ACA credits. Money from, say, taxable checking/savings does not. I can meet living expenses for a while with, in theory, $0 income. It’s a balancing act.
Jonathan spelled out a lot of it very well in https://humbledollar.com/2023/01/juggling-for-retirees/