How to calculate the top of the 15% bracket?

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gweezer
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How to calculate the top of the 15% bracket?

Post by gweezer » Thu May 25, 2017 2:33 pm

What are the steps to figure this out for a single filer? Do I just use TaxCaster and input my personal info and then try various amounts of income until I get the tax liability as close as possible to $5,226.25 without exceeding? A quick pass at that gave $48,145 resulting in $5,215 tax owed.

Or do I just take the top of the 15% bracket and add the standard deduction & personal exemption to it? Using 2017 rates that gives $37,950 + 6,350 + 4,050 = $48,350 as the income ceiling to remain in the 15% bracket.

Either way gives pretty much the same number, so unless I’ve got this wrong I can “make” approx $48K and still stay in the 15% bracket…correct?

livesoft
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Re: How to calculate the top of the 15% bracket?

Post by livesoft » Thu May 25, 2017 2:35 pm

If you go over, what happens?
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gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Thu May 25, 2017 2:45 pm

Umm...I have to pay more tax? This was the start of the planning for how much to convert from a 401K to a Roth during retirement. I've read numerous places that one strategy is "convert to the top of the 15% bracket". I wasn't quite sure where the top was, so I'm trying to figure that out.

livesoft
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Re: How to calculate the top of the 15% bracket?

Post by livesoft » Thu May 25, 2017 2:52 pm

My recommendation is not to convert from a 401(k) directly into a Roth IRA. Instead, first convert to a traditional IRA. Then convert the tIRA to a Roth IRA. I think this will make it easier to recharacterize the amount(s) needed to back to the traditional IRA in case you overshoot. That's what I do.

Since most people do not know their exact tax situation for a year until March of the next year, I find that over-converting, then recharacterizing back the excess is the way to go for me. See also: viewtopic.php?t=162635
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Exodus
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Re: How to calculate the top of the 15% bracket?

Post by Exodus » Thu May 25, 2017 2:54 pm

You are correct. If you make more money or have a bonus you will need a way to defer tax to get back down into the 15% bracket. Also, remember taxes are calculated marginally.
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delamer
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Re: How to calculate the top of the 15% bracket?

Post by delamer » Thu May 25, 2017 2:56 pm

Are you making any contributions to a tax-deferred account like a 401(k)? If so, that lowers your taxable income.

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One Ping
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Re: How to calculate the top of the 15% bracket?

Post by One Ping » Thu May 25, 2017 3:19 pm

livesoft wrote:If you go over, what happens?
Exactly. Not that serious ...

If your taxable income goes over the top of the 15% bracket by $100 you only end up paying $10 more in tax because you ended up in the 25% bracket instead of being ending up in the 15% bracket.
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gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Thu May 25, 2017 3:23 pm

Thanks for the replies. My significant other will be doing this first, retiring at the end of this year. I will continue working and support the household and she will not work at all so she will have $0 income for 2018...at least that's the plan. Since her income will be zero, she can convert the entire $48K that I estimated earlier and remain in the 15% bracket...once again, if I have this figured out right.

A potential complication for the whole process though is that she will be using the "rule of 55" to get the 401K money. I know if the money is already in a tIRA you can't get it using the rule, but not sure if will stop a conversion from the 401K straight into a Roth....

ved
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Re: How to calculate the top of the 15% bracket?

Post by ved » Thu May 25, 2017 6:03 pm

Are you filing your taxes as Married Filing Separately (MFS), and not Married Filing Jointly (MFJ)?

If you file MFS, then you can separate her income and expenses from yours - but generally this results in higher combined taxes than doing MFJ.
If you are doing MFJ, then you need to combine your income with hers, and the taxable income limit for 15% will be $75,900.

gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Thu May 25, 2017 6:46 pm

We are not married, which is why her income for 2018 will be $0 if things play out as we have planned and she can convert the whole 15% tax bracket amount.

skatterZ
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Re: How to calculate the top of the 15% bracket?

Post by skatterZ » Thu May 25, 2017 7:59 pm

Breaking the 15% rate can cost a lot. If you are in the 15% bracket your long term capital gains are taxed at 0%. Also qualified dividends.

2retire
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Re: How to calculate the top of the 15% bracket?

Post by 2retire » Thu May 25, 2017 8:12 pm

Also, remember that she needs to pay taxes on the conversion, so that money needs to come from somewhere and will count against the 15% limit.

Katietsu
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Re: How to calculate the top of the 15% bracket?

Post by Katietsu » Thu May 25, 2017 8:48 pm

Breaking the 15% rate can cost a lot. If you are in the 15% bracket your long term capital gains are taxed at 0%. Also qualified dividends.
Not exactly true. If your total income breaks the 15% bracket by a small amount, then only that small part of the long term capital gains would be taxed at the higher rate. If you have more significant capital gains, exceeding the income allowed for the 15% does not mean that all you capital gains are now at the higher rate. So if you go over by $100, you only pay an extra $15 dollars in taxes.

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Re: How to calculate the top of the 15% bracket?

Post by oldcomputerguy » Thu May 25, 2017 9:01 pm

Katietsu wrote:
Breaking the 15% rate can cost a lot. If you are in the 15% bracket your long term capital gains are taxed at 0%. Also qualified dividends.
Not exactly true. If your total income breaks the 15% bracket by a small amount, then only that small part of the long term capital gains would be taxed at the higher rate. If you have more significant capital gains, exceeding the income allowed for the 15% does not mean that all you capital gains are now at the higher rate. So if you go over by $100, you only pay an extra $15 dollars in taxes.
This seems to be the widely-held position, but I have not been able to find any government source that would confirm it. Could you direct me to some information from the IRS confirming the proposition that only a portion of capital gains become taxed once the filer exceeds the 15% bracket? Thanks.
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Lars_2013
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Re: How to calculate the top of the 15% bracket?

Post by Lars_2013 » Thu May 25, 2017 9:24 pm

oldcomputerguy wrote:
Katietsu wrote:
Breaking the 15% rate can cost a lot. If you are in the 15% bracket your long term capital gains are taxed at 0%. Also qualified dividends.
Not exactly true. If your total income breaks the 15% bracket by a small amount, then only that small part of the long term capital gains would be taxed at the higher rate. If you have more significant capital gains, exceeding the income allowed for the 15% does not mean that all you capital gains are now at the higher rate. So if you go over by $100, you only pay an extra $15 dollars in taxes.
This seems to be the widely-held position, but I have not been able to find any government source that would confirm it. Could you direct me to some information from the IRS confirming the proposition that only a portion of capital gains become taxed once the filer exceeds the 15% bracket? Thanks.
If you print out and play with the IRS instructions for Line 44 of the 1040 (https://apps.irs.gov/app/vita/content/g ... _1040i.pdf), you can see that what Katietsu stated is correct.

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dodecahedron
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Re: How to calculate the top of the 15% bracket?

Post by dodecahedron » Thu May 25, 2017 9:31 pm

Lars_2013 wrote:
If you print out and play with the IRS instructions for Line 44 of the 1040 (https://apps.irs.gov/app/vita/content/g ... _1040i.pdf), you can see that what Katietsu stated is correct.
Like most IRS worksheets and instructions, this is pretty inscrutable. (For a fun parody of IRS inscrutability, see If the IRS had discovered the quadratic formula.)

Kitces has a very nice exposition of what is going on with capital gains or other income surpassing the 15% threshold with helpful graphics here:

https://www.kitces.com/blog/understandi ... -in-basis/

kaneohe
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Re: How to calculate the top of the 15% bracket?

Post by kaneohe » Thu May 25, 2017 9:38 pm

oldcomputerguy wrote:
Katietsu wrote:
Breaking the 15% rate can cost a lot. If you are in the 15% bracket your long term capital gains are taxed at 0%. Also qualified dividends.
Not exactly true. If your total income breaks the 15% bracket by a small amount, then only that small part of the long term capital gains would be taxed at the higher rate. If you have more significant capital gains, exceeding the income allowed for the 15% does not mean that all you capital gains are now at the higher rate. So if you go over by $100, you only pay an extra $15 dollars in taxes.
This seems to be the widely-held position, but I have not been able to find any government source that would confirm it. Could you direct me to some information from the IRS confirming the proposition that only a portion of capital gains become taxed once the filer exceeds the 15% bracket? Thanks.
as Dodecahedron noted, that wksht can be like a mysterious code, better understood if you accept the basic idea or learn about the stacked bar charts
first. Another (also non-IRS) source if you believe that Taxcaster or other tax calculators or tax software are correct, is to simply input various situations and see how the tax changes.

gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Thu May 25, 2017 10:24 pm

2retire wrote:Also, remember that she needs to pay taxes on the conversion, so that money needs to come from somewhere and will count against the 15% limit.
Not sure I follow the "count against the 15% limit" part? I haven't researched the whole process yet, but I thought she would just write a check (from cash we already have on hand) for whatever the tax ends up being on the actual amount converted and send it in to the IRS...is that not the case?

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Re: How to calculate the top of the 15% bracket?

Post by curmudgeon » Thu May 25, 2017 10:40 pm

gweezer wrote:
2retire wrote:Also, remember that she needs to pay taxes on the conversion, so that money needs to come from somewhere and will count against the 15% limit.
Not sure I follow the "count against the 15% limit" part? I haven't researched the whole process yet, but I thought she would just write a check (from cash we already have on hand) for whatever the tax ends up being on the actual amount converted and send it in to the IRS...is that not the case?
The point being that many folks who have most of their retirement funds in tax-deferred accounts, might have to withdraw additional money from their 401K/IRA to pay the taxes on their conversion, which generate *more* taxable income (and tax). If you have other funds available to pay the tax, then it's a lot simpler (as long as there are no tax consequences, such as capital gains, to drawing on those funds).

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celia
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Re: How to calculate the top of the 15% bracket?

Post by celia » Fri May 26, 2017 2:31 am

curmudgeon wrote:The point being that many folks who have most of their retirement funds in tax-deferred accounts, might have to withdraw additional money from their 401K/IRA to pay the taxes on their conversion, which generate *more* taxable income (and tax). If you have other funds available to pay the tax, then it's a lot simpler (as long as there are no tax consequences, such as capital gains, to drawing on those funds).
Or, it might be better to withdraw to the top of the bracket and pay the taxes out of that withdrawal, although that leaves a little less for spending or converting.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

livesoft
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Re: How to calculate the top of the 15% bracket?

Post by livesoft » Fri May 26, 2017 9:07 am

gweezer wrote:Not sure I follow the "count against the 15% limit" part? I haven't researched the whole process yet, but I thought she would just write a check (from cash we already have on hand) for whatever the tax ends up being on the actual amount converted and send it in to the IRS...is that not the case?
That is the case, but where does this "cash on hand" come from? ;)
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teen persuasion
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Re: How to calculate the top of the 15% bracket?

Post by teen persuasion » Fri May 26, 2017 11:04 am

gweezer wrote:Thanks for the replies. My significant other will be doing this first, retiring at the end of this year. I will continue working and support the household and she will not work at all so she will have $0 income for 2018...at least that's the plan. Since her income will be zero, she can convert the entire $48K that I estimated earlier and remain in the 15% bracket...once again, if I have this figured out right.

A potential complication for the whole process though is that she will be using the "rule of 55" to get the 401K money. I know if the money is already in a tIRA you can't get it using the rule, but not sure if will stop a conversion from the 401K straight into a Roth....
Is she converting, or withdrawing? I thought the rule of 55 was for withdrawals. Conversions can be done at any age AFAIK.

gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Fri May 26, 2017 12:20 pm

livesoft wrote:
gweezer wrote:Not sure I follow the "count against the 15% limit" part? I haven't researched the whole process yet, but I thought she would just write a check (from cash we already have on hand) for whatever the tax ends up being on the actual amount converted and send it in to the IRS...is that not the case?
That is the case, but where does this "cash on hand" come from? ;)
It's non-invested money that's sitting/will be sitting in Ally waiting for this event to occur...just plain ol' money in a savings account.

gweezer
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Re: How to calculate the top of the 15% bracket?

Post by gweezer » Fri May 26, 2017 12:29 pm

teen persuasion wrote:
gweezer wrote:Thanks for the replies. My significant other will be doing this first, retiring at the end of this year. I will continue working and support the household and she will not work at all so she will have $0 income for 2018...at least that's the plan. Since her income will be zero, she can convert the entire $48K that I estimated earlier and remain in the 15% bracket...once again, if I have this figured out right.

A potential complication for the whole process though is that she will be using the "rule of 55" to get the 401K money. I know if the money is already in a tIRA you can't get it using the rule, but not sure if will stop a conversion from the 401K straight into a Roth....
Is she converting, or withdrawing? I thought the rule of 55 was for withdrawals. Conversions can be done at any age AFAIK.
The plan is for a conversion, we don't need the money now. If that can happen any time then we are good to go...I was getting a little depressed by the constant references to "penalty!...penalty!...penalty!" when you read about accessing your money before 59.5 until I found out about the rule...no need to worry I guess.

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