2017 tax help

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Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

2017 tax help

I put my figures in hrblock.com and came up with a tax amount. I have been trying to figure out how they came up with this amount by looking at the tax schedule but can't figure it out. Can anyone explain how it was done or where I can find out how to do it? These are my amounts for 2017 so far.
Married filing jointly 0 dependents
\$ 33100.......pension
14363....... 1 social security
221.......interest
10203........ordinary dividends
5209.......qualified dividends
127293.......LTCG
I put this in hrblock.com and it showed \$16225 tax owed. I was trying to figure out what bracket it put me in. Any explanations would be appreciated.

Thanks, KPG

delamer
Posts: 6706
Joined: Tue Feb 08, 2011 6:13 pm

Re: 2017 tax help

The qualified dividends and LTCG are taxed at the 15% capital gains rate, while the rest of your income (after deductions and exemptions) are taxes at ordinary income tax rates. You are also not taxed on all of your SS income.

Does any of that help?

EDIT: You can try the TaxCaster app as a check against H&R Block. When I did both, my taxes were the same to the dollar.
Last edited by delamer on Fri Dec 15, 2017 6:34 pm, edited 1 time in total.

jebmke
Posts: 8531
Joined: Thu Apr 05, 2007 2:44 pm

Re: 2017 tax help

With dividends you need to follow the bouncing ball through the capital gains worksheet. The brackets are not the total picture. If you print that out, you should be able to walk it through step by step and see how the calculation works.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

Re: 2017 tax help

Napkin Math

Income
\$ 33,100.......pension
\$ 14,363....... 1 social security @85%
\$ 221.......interest
\$ 10,203........ordinary dividends
-------------------------------------------------
\$ 55,732
\$-12,700 .... standard deduction MFJ
\$ -8,100 ..... Exemption 2@4050
-------------------------------------------------
\$ 34,932 Net Income

18,650@10%=1865
16,282@15%=2442
-------------------------------------
Tax on Income Total = \$4,307

Investments Income
5,209.......qualified dividends
127,293.......LTCG
-------------------------------------------------
\$ 132,502

40,967@0%=0 (fill the 15% bracket with 0% LTCG)
91,535@15%=13,730

Tax on LTCG = \$13,730

Total Tax
LTCG = \$13,730
Income = \$4,307
-------------------------------------------------
\$18,037

A few details missing in my napkin math or your post details to make up the remainder of the difference.

You did not provide enough detail about your situation but you should consider if you can spread your LTCG across multiple years to get more 0% rate.

Edit: in checking my math, this maybe to total divs, 10203........ordinary dividends, not non qualified. That would change my napkin math to 16,474, very close to your online calc.

kaneohe
Posts: 5307
Joined: Mon Sep 22, 2008 12:38 pm

Re: 2017 tax help

I think J3 has it.....redo his calc w/ the later assumption about ord div/qdiv:

ord inc. =pension 33100, 85% SS 12209, interest 221, total div minus QDIV =4994 = 50524
QDIV/LTCG= 5209 QDIV, 127293 LTCG = 132502

subtract std ded 12700, exemptions 8100 =20800
from ordinary income of 50524 to yield net ordinary income of 29724
Tax on this ordinary income =3529

Top of 15 % bracket =75900
To fill to top of bracket requires 75900 - net ordinary income 29724 = 46176 of QDIV/LTCG which are taxed at 0%
The remaining QDIV/LTCG of 132502 - 46176 = 86326 which are in the >25% tax bracket are taxed at 15% = 12949

The ordinary income tax 3529 and the QDIV/LTCG tax 12949 added together 16478 which is close to the 16474 by J3
and the HR Block calculator (not sure what difference is but could be the tax table vs the tax rate schedule for the ordinary income.
The tax table has discrete values while the tax rate schedule has a formula that is continuous.

Anyway.....looks like your taxable income is in the 28% income bracket(so part of QDIV/LTCG is taxed at 15% but your ordinary income is in the 15% bracket (so part taxed at 10% and part at 15%).

Kevin M
Posts: 10387
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: 2017 tax help

What is more important to me than tax bracket is my effective marginal tax rate. If you are in the 15% tax bracket with ordinary income but qualified dividends and LTCG pushes you into the 25% bracket, your effective marginal tax rate is 30%, since every extra dollar of income is taxed at 15%, but also pushes more QD/LTCG from 0% to 15%. You can see this by increasing your income by \$1,000, which increases your tax by \$300.

It's always a good idea to try increasing or decreasing your income by \$1,000 with your tax software to see how much your tax changes, since there can be other effects, like pushing more social security income into the 85% tax rate or losing credits, that also can effect your effective marginal tax rate.

Kevin
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Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

Re: 2017 tax help

Thanks everyone so far. After reviewing your posts I did go back on the internet and found some more info and worksheets and came up with the same amount as H&R block and learned more on how this is figured out. I'm taking all those gains this year because I am trying to consolidate my portfolio. Those gains were from a stock I had. I started selling it late last year and managed to stay in the 15% tax rate for 2016. But the stock kept going up and I sold some the first of 2017 and the rest in Oct. 2017.You know that pigs get slaughtered thing and I sold. I wanted to do some Roth conversions this year because I have to take RMD in about 6 years but at 28% tax bracket I don't think it would be worth it.

Thanks again, KPG

sometimesinvestor
Posts: 1210
Joined: Wed May 13, 2009 6:54 am

Re: 2017 tax help

whether Roth conversions at the 28% level is worth it probably depends on how big your tax deferred accounts are or to put it another way what will your RMD be be in 6 years assuming a modest return 5-7% annually

kaneohe
Posts: 5307
Joined: Mon Sep 22, 2008 12:38 pm

Re: 2017 tax help

KPG wrote:
Fri Dec 15, 2017 10:04 pm
........................................... I wanted to do some Roth conversions this year because I have to take RMD in about 6 years but at 28% tax bracket I don't think it would be worth it.

Thanks again, KPG
You should do the calculation that Kevin suggested for your Roth conversion. You will find the marginal tax rate is more like 30% , not 28%.
But before you think that makes the conversion even more unattractive, you should do the exercise that sometimesinvestor suggests: calculate what your marginal rate would be if you don't do Roth conversion when you take the RMDs. Perhaps you are avoiding 30% now , only to end up with an even higher rate.........doesn't seem likely but worth thinking about.

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

Re: 2017 tax help

kaneohe wrote:
Fri Dec 15, 2017 11:18 pm
KPG wrote:
Fri Dec 15, 2017 10:04 pm
RMD in about 6 years but at 28% tax bracket
You will find the marginal tax rate is more like 30% , not 28%.
I agree with the principle of this but think you need to look more closely at my napkin math. You said the LTCG of 127K was a 1 time event. This suggests that in future years, you should likely be doing Roth conversions to the top of the 15% bracket including adjustments.

75,900 (15% bracket top) + 12,700 (Standard ded) + 8,100 (Exemptions) - 47,684 (income recurring) - 10,203 (dividends). This would have you doing about 39,000 Roth conversions that would be taxed at 15% rate and avoid walking off the cliff others are talking about where you would pay both 15% on the qDivs/LTCG and 15% on income.

This plan makes some assumptions:

First that you can live from your pensions (33.1K), SS (14.4K), dividends (10.4K) and any after tax accounts available to you. Until IRA RMDs start at 70.5 or Roth money becomes available to you (see 3 below).

Second, that you future tax years look a lot like the current one you described to us. Any adjustments up or down would need to be factored in. The tax rules are changing although the they are looking more and more like the old rules. You would of course need to stay current with the changes as they become law. [edited: to be more in alignment with our rules]

Third, that the rules Roths have about distributions, are acceptable to you. Assuming you are at least 60 YO, you will be exposed to the 5 year rule.

FiveK
Posts: 5979
Joined: Sun Mar 16, 2014 2:43 pm

Re: 2017 tax help

Your age also matters. If both are <65, and assuming \$10203 is total dividends of which \$5209 is qualified, ~\$16,475 looks correct. If one of you is 65 or older, the extra standard deduction drops that to ~\$16,100. Not sure how to get to \$16,225.

As others have noted, the first ~\$47K of tIRA withdrawals would be taxed at 30%, the next ~\$20K at 25%, etc.

See the personal finance toolbox spreadsheet for the marginal rates in chart form (picture below assumes one filer age 65+ and \$10203 is total dividends of which \$5209 is qualified, etc.):

Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

Re: 2017 tax help

Married filing jointly
0 dependents
husband 70 - me 64 Nov.2017
401k rollover for RMD \$850000. (80% in bonds, 20% one stock) Calculated RMD @ 3% return is \$39500.
Is the RMD treated as ordinary income?

Projected income @ 70
33100 pension
14363 his ss
28488 my ss if started at 70
221 interest
10203 ordinary dividends
5209 qualified dividends
39500 RMD @ 70

Expenses are covered by current income. Interest and dividends have remained pretty consistent the past 5 years. Know more after Vanguard distributions next week. Mutual funds LTCG were \$6500 in 2016 and \$6900 in 2015. Any other LTCG would come from selling more stocks or mutual funds to simplify portfolio. Now, after what I learned , I'm going to try and figure out if Roth conversions would be worth it. This is so overwhelming to me. Thanks everyone for your help, it is very much appreciated. Of course any comments or insight are very welcomed.

Thanks again, KPG

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

Re: 2017 tax help

KPG wrote:
Sat Dec 16, 2017 7:29 am
Married filing jointly
husband 70 - me 64 Nov.2017
401k rollover for RMD \$850000. (80% in bonds, 20% one stock) Calculated RMD @ 3% return is \$39500.
Is the RMD treated as ordinary income?
Yes RMDs from traditional tax defered IRAs is considered income.
KPG wrote:
Sat Dec 16, 2017 7:29 am
Projected income @ 70
33100 pension
14363 his ss
28488 my ss if started at 70
221 interest
10203 ordinary dividends
5209 qualified dividends
39500 RMD @ 70
Look at what happens in each year. Is the list above for 2017 when your DH is 70 or 2023 when you are 70?

RMDs are pretty straightforward worksheet. See:
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

If you are deferring your DH first RMD because his birthday is in the second half of the year, then you will need to take two RMDs next year. Only the first payment/RMD can be deferred like this. Subsequent payments must be made by 12/31 of that year.

Your DH RMD for this year would be the account balance on 12/31/2016 divided by 27.4. If DH birthday is after 7/1 then the distribution can be made as late as 4/1/2018 and thus taxable in 2018. In this case, a second distribution must be made by 12/31/2018 of balance on 12/31/2017 divided by 26.5 also taxable in 2018.
KPG wrote:
Sat Dec 16, 2017 7:29 am
if Roth conversions would be worth it.
You are doing great. Based on the data we have discussed, no, Roth conversions would not be worth it.

You want to make sure you fill up the 15% bracket in the manner I described in my previous post. You can use LTCG, IRA distributions or Roth conversions to do this. It appears starting next year, your IRA distributions will do so. You do not want to put any extra money in the current 25% tax bracket.

I make this statement because you are likely to have \$850000 / 27.4 age 70 RMD deferred into 2018 of ~31,000 plus likely another RMD of about 31,000 age 71 RMD in 2018. These RMDs are likely to fill the 15% bracket going forward.

cas
Posts: 443
Joined: Wed Apr 26, 2017 8:41 am

Re: 2017 tax help

I lost track somewhere along the thread on whether you are still considering Roth conversions for 2017, in addition to all the other income.

If so ... careful: For 2017, you look like you are already very close to the \$170,000 (MFJ) income threshold where your Medicare Part B and D premiums (for 2019) will increase due to the Income Related Medicare Adjustment Amount (IRMAA). (I hope the upcoming December distributions from your funds don't push you over the threshhold ... not sure if those were included in the income you listed in your first post or not.)

IRMAA isn't an IRS tax, so it won't show up in the HR Block estimate.

"Medicare Premiums: Rules for Higher Income Beneficiaries" https://www.ssa.gov/pubs/EN-05-10536.pdf

Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

Re: 2017 tax help

Juice3......Sorry for the confusion. This \$850000. IRA is mine. I am 64 now and the RMD will be mine when I'm 70 in Nov. of 2023.

Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

Re: 2017 tax help

cas.........Thanks for the info. I think I'm screwed! It's going to be close.

FiveK
Posts: 5979
Joined: Sun Mar 16, 2014 2:43 pm

Re: 2017 tax help

In short,
- yes, this year's LTCG means that in two years, for one year, your combined Medicare premiums will be ~\$1300 higher than they would have been.
- Withdrawals from tIRAs this year would suffer 30% loss due to federal tax
- Extra withdrawals from tIRAs (above RMD) when you are both >70 would be taxed at least 25%
- Some tIRA withdrawals for 2018 to 2022 could be managed to suffer only 15% loss due to federal tax

In any case, it appears you are in great shape - enjoy!

cas
Posts: 443
Joined: Wed Apr 26, 2017 8:41 am

Re: 2017 tax help

FiveK wrote:
Sat Dec 16, 2017 11:05 am
- yes, this year's LTCG means that in two years, for one year, your combined Medicare premiums will be ~\$1300 higher than they would have been.
Just to correct myself, I was looking at the wrong numbers from the "napkin math" post when I initially wrote about you being near the \$170,000 threshold for the first IRMAA tier.

Corrected numbers (using numbers from napkin math post):

IRMAA MAGI is Form 1040 Line 37 AGI plus tax-exempt interest.

From the napkin-math post, line 37 AGI = 55,732 + 132,502 = \$188,234

So, the \$170,000 IRMAA threshold for the first IRMAA tier has already been passed. The IRMAA threshold that is now the concern is the one for the 2nd IRMAA tier, which is \$214,000.

Even with the additional December distributions, you should still be under \$214,000. Unless you also have a significant amount of tax-exempt interest income.

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

Re: 2017 tax help

KPG wrote:
Sat Dec 16, 2017 9:41 am
Sorry for the confusion. This \$850000. IRA is mine. I am 64 now and the RMD will be mine when I'm 70 in Nov. of 2023.
In this case, future tax years you may want to do actual IRA distributions or Roth conversions depending on your overall tax (and Medicare as 5k and cas covered) picture. This year, you likely do not want to do this because of the large LTCG you have already realized. I would guess that often additional considerations enter this type of discussion, Bucket lists, health, longevity, desired legacy (inheritance or giving). If giving is on your list, you might want to look into Donor Advised Fund (DAFs) now or in the future.

If you have decided to delay your SS to age 70, then you will have a few more years of lower income that you might want increase with IRA distributions or rollovers. At age 70, both your SS and RMD will be added to your income. This will create a higher income (from a tax perspective) than you have now or for the next 5 years. Typically this analysis comes down to filling tax brackets as I have outlined earlier and also looking at other thresholds like Medicare or IRS phase outs.

With a November birthday (happy belated birthday!), you will be able to decide if you take your first RMD in 2023 or 2 RMDs in calendar 2024. This should be considered as part of the analysis.

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

Re: 2017 tax help

KPG wrote:
Sat Dec 16, 2017 10:12 am
cas.........Thanks for the info. I think I'm screwed! It's going to be close.
lol, we can not undo the past. I always try and focus on the future ... meaning those things that I have still have some level of control over.

Topic Author
KPG
Posts: 49
Joined: Mon Nov 25, 2013 10:38 am

Re: 2017 tax help

Thanks to everyone who took the time to answer my post. I now have a better understanding on how the taxes are calculated and new info to make decisions in the future. KPG