Tax related questions

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ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Tax related questions

Post by ThisJustIn » Thu May 17, 2018 11:04 pm

I have some tax related questions regarding investments:

1) 401K:

a. After the age of 59.5, when I withdraw money from my 401K, how is that money taxed? Is it taxed using ordinary income tax? If this is the case, then, would the amount I withdraw from my 401K be considered as taxable income (most likely yes, but just to confirm)? Are withdrawals from 401K subject to state tax? If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?

b. After age 70, 401K is subject to required minimum distributions (RMD). What is the percentage / amount we have to withdraw every year after age 70? In this case, if the amount we withdraw from 401K is considered as taxable income, then would it make sense to leave less money in 401K after age 70, in order to prevent ending up in higher tax brackets due to RMD? What are some methods we can use to avoid this, using a combination of money from 401K and Roth IRA?


2) Taxable accounts:

a. When we withdraw money from taxable account, are the gains subject to STCG or LTCG, depending on whether we keep the initial investment less or more than 1 year? Is there any other tax these gains are subject to (e.g. state tax)? Any other taxes I should be aware of? If this is the case, do you withdraw money from your taxable accounts using “specificID” option, and make sure you only withdraw money that was invested more than 1 year ago.


3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? And is state tax added on top of your ordinary income tax, when calculating STCG?

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm).


4) Starting a side business:

a. One can start a business and deduct the earnings of this business from taxable income. Is this a reasonable method to use for someone in high-tax bracket, in order to reduce the taxable income?

User avatar
FiveK
Posts: 5409
Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax related questions

Post by FiveK » Fri May 18, 2018 2:20 am

ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

1) 401K:

a. After the age of 59.5, when I withdraw money from my 401K, how is that money taxed? Is it taxed using ordinary income tax? Yes.
If this is the case, then, would the amount I withdraw from my 401K be considered as taxable income (most likely yes, but just to confirm)? Yes.
Are withdrawals from 401K subject to state tax? Varies by state.
If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?No idea.

b. After age 70, 401K is subject to required minimum distributions (RMD). What is the percentage / amount we have to withdraw every year after age 70? Google "RMD table"
In this case, if the amount we withdraw from 401K is considered as taxable income, then would it make sense to leave less money in 401K after age 70, in order to prevent ending up in higher tax brackets due to RMD? Yes.
What are some methods we can use to avoid this, using a combination of money from 401K and Roth IRA? Converting traditional funds to Roth when your tax bracket is relatively low.


2) Taxable accounts:

a. When we withdraw money from taxable account, are the gains subject to STCG or LTCG, depending on whether we keep the initial investment less or more than 1 year? Yes.
Is there any other tax these gains are subject to (e.g. state tax)? Yes, most states tax capital gains the same as ordinary income.
Any other taxes I should be aware of? Net Investment Income Tax (NIIT) if your AGI is >$250K.
If this is the case, do you withdraw money from your taxable accounts using “specificID” option, and make sure you only withdraw money that was invested more than 1 year ago. Yes. Or, make sure you withdraw losses first, followed by minimum long term gains, etc.


3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? STCGs are taxed the same as ordinary income. I don't think "Robinhood = STCG" is necessarily true.
And is state tax added on top of your ordinary income tax, when calculating STCG? You calculate STCG using (money received when sold) minus (money paid when bought). Then your STCGs go into the federal and state tax calculations and are taxed accordingly.

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm). No comment here.


4) Starting a side business:

a. One can start a business and deduct the earnings of this business from taxable income. Not earnings, but if you mean "legitimate business expenses" then yes.
Is this a reasonable method to use for someone in high-tax bracket, in order to reduce the taxable income? Sorry, but this reminds me of Zits Comic Strip for May 17, 2018. You may need to elaborate on your business plan here. ;)
See answers in blue above.

bradpevans
Posts: 315
Joined: Sun Apr 08, 2018 1:09 pm

Re: Tax related questions

Post by bradpevans » Fri May 18, 2018 7:44 am

ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? And is state tax added on top of your ordinary income tax, when calculating STCG?

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm).
RSUs (at my company) are immediately converted (to me) at the time they vest, typically around 39% tax
So 100 shares becomes 61 shares, and value of the 39 shares is sent to the government and shows on my W2.
You might think of it this way: here is $10,000 of income, so you get to keep $6100 and the $3900 is paid in taxes.
Also, the $6100 is now in company stock, and $6100 is your basis. You could sell immediately with no cap gains.
If you sell a month later at 6200, you have $100 short term cap gain
If you sell a year or more later at 7000, you have $800 long term cap gain

dbdavidson
Posts: 13
Joined: Tue Apr 09, 2013 9:11 am

Re: Tax related questions

Post by dbdavidson » Fri May 18, 2018 8:52 am

ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

1) 401K:

a. After the age of 59.5, when I withdraw money from my 401K, how is that money taxed? Is it taxed using ordinary income tax? If this is the case, then, would the amount I withdraw from my 401K be considered as taxable income (most likely yes, but just to confirm)?
401k withdrawals should be taxed as: Ordinary Income
Look at "Requirement Distribution" row in this:
https://patefacio.github.io/plusauri.gi ... _true.html
You should see it kicking in at age 70 and being tagged ordinary income.

If you withdraw not at behest of uncle same it is still ordinary income - just not "required".
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
b. After age 70, 401K is subject to required minimum distributions (RMD). What is the percentage / amount we have to withdraw every year after age 70? In this case, if the amount we withdraw from 401K is considered as taxable income, then would it make sense to leave less money in 401K after age 70, in order to prevent ending up in higher tax brackets due to RMD? What are some methods we can use to avoid this, using a combination of money from 401K and Roth IRA?

IRS provides a table. Below is what is used to determine the amount to pull out by age.

Code: Select all

-- from https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
-- Applicable to:
-- ira, sep ira, simple ira, traditional ira
-- NOT APPLICABLE to Roth IRA
insert into required_minimum_distribution (tax_regime_id, rmd_spec)
select tr.id, v.rmd_spec
from (VALUES
('FED', '
{ 
  "penalty_percent": 0.5, 
  "uniform_lifetime_table": [ 
    { "age": 70, "distribution_divisor": 27.4 },  
    { "age": 71, "distribution_divisor": 26.5 },
    { "age": 72, "distribution_divisor": 25.6 },
    { "age": 73, "distribution_divisor": 24.7 },
    { "age": 74, "distribution_divisor": 23.8 },
    { "age": 75, "distribution_divisor": 22.9 },
    { "age": 76, "distribution_divisor": 22.0 },
    { "age": 77, "distribution_divisor": 21.2 },
    { "age": 78, "distribution_divisor": 20.3 },
    { "age": 79, "distribution_divisor": 19.5 },
    { "age": 80, "distribution_divisor": 18.7 },
    { "age": 81, "distribution_divisor": 17.9 },
    { "age": 82, "distribution_divisor": 17.1 },
    { "age": 83, "distribution_divisor": 16.3 },
    { "age": 84, "distribution_divisor": 15.5 },
    { "age": 85, "distribution_divisor": 14.8 },
    { "age": 86, "distribution_divisor": 14.1 },
    { "age": 87, "distribution_divisor": 13.4 },
    { "age": 88, "distribution_divisor": 12.7 },
    { "age": 89, "distribution_divisor": 12.0 },
    { "age": 90, "distribution_divisor": 11.4 },
    { "age": 91, "distribution_divisor": 10.8},
    { "age": 92, "distribution_divisor": 10.2},
    { "age": 93, "distribution_divisor": 9.6 },
    { "age": 94, "distribution_divisor": 9.1 },
    { "age": 95, "distribution_divisor": 8.6 },
    { "age": 96, "distribution_divisor": 8.1 },
    { "age": 97, "distribution_divisor": 7.6 },
    { "age": 98, "distribution_divisor": 7.1 },
    { "age": 99, "distribution_divisor": 6.7 },
    { "age": 100, "distribution_divisor": 6.3 },
    { "age": 101, "distribution_divisor": 5.9 },
    { "age": 102, "distribution_divisor": 5.5 },
    { "age": 103, "distribution_divisor": 5.2 },
    { "age": 104, "distribution_divisor": 4.9 },
    { "age": 105, "distribution_divisor": 4.5 },
    { "age": 106, "distribution_divisor": 4.2 },
    { "age": 107, "distribution_divisor": 3.9 },
    { "age": 108, "distribution_divisor": 3.7 },
    { "age": 109, "distribution_divisor": 3.4 },
    { "age": 110, "distribution_divisor": 3.1 },
    { "age": 111, "distribution_divisor": 2.9 },
    { "age": 112, "distribution_divisor": 2.6 },
    { "age": 113, "distribution_divisor": 2.4 },
    { "age": 114, "distribution_divisor": 2.1 },
    { "age": 115, "distribution_divisor": 1.9 }
  ] 
}
'::jsonb)
) v(tax_regime_name,  rmd_spec)
left join tax_regime tr on (tr.name = tax_regime_name);
An obvious way to avoid 401K getting really large is to use the money earlier. As another suggested conversions can also help. This is why if you look at the forecast with you leaving work early and starting a business (https://patefacio.github.io/plusauri.gi ... _true.html) you do not see the RMD. Because you needed that money to live before reaching 70.

livesoft
Posts: 62361
Joined: Thu Mar 01, 2007 8:00 pm

Re: Tax related questions

Post by livesoft » Fri May 18, 2018 9:17 am

It is time to read IRS Publication 550 and IRS Publication 590B.

Do you fill out your own Form 1040 each year? If not, time to start doing that, too.

The above will do wonders for your tax knowledge base.
Wiki This signature message sponsored by sscritic: Learn to fish.

senex
Posts: 66
Joined: Wed Dec 13, 2017 4:38 pm

Re: Tax related questions

Post by senex » Fri May 18, 2018 9:24 am

ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
Are withdrawals from 401K subject to state tax? If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?
I would guess that most states tax 401k withdrawals as ordinary income.

Your last state of residency before you leave the USA will consider you a resident and continue taxing your income while you are overseas. (This is true for US citizens; not sure how it applies to non-citizens). Thus some people move to a no-tax state for a year before moving overseas.

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 10:05 pm

FiveK wrote:
Fri May 18, 2018 2:20 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

1) 401K:

a. After the age of 59.5, when I withdraw money from my 401K, how is that money taxed? Is it taxed using ordinary income tax? Yes.
If this is the case, then, would the amount I withdraw from my 401K be considered as taxable income (most likely yes, but just to confirm)? Yes.
Are withdrawals from 401K subject to state tax? Varies by state.
If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?No idea.

b. After age 70, 401K is subject to required minimum distributions (RMD). What is the percentage / amount we have to withdraw every year after age 70? Google "RMD table"
In this case, if the amount we withdraw from 401K is considered as taxable income, then would it make sense to leave less money in 401K after age 70, in order to prevent ending up in higher tax brackets due to RMD? Yes.
What are some methods we can use to avoid this, using a combination of money from 401K and Roth IRA? Converting traditional funds to Roth when your tax bracket is relatively low.


2) Taxable accounts:

a. When we withdraw money from taxable account, are the gains subject to STCG or LTCG, depending on whether we keep the initial investment less or more than 1 year? Yes.
Is there any other tax these gains are subject to (e.g. state tax)? Yes, most states tax capital gains the same as ordinary income.
Any other taxes I should be aware of? Net Investment Income Tax (NIIT) if your AGI is >$250K.
If this is the case, do you withdraw money from your taxable accounts using “specificID” option, and make sure you only withdraw money that was invested more than 1 year ago. Yes. Or, make sure you withdraw losses first, followed by minimum long term gains, etc.


3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? STCGs are taxed the same as ordinary income. I don't think "Robinhood = STCG" is necessarily true.
And is state tax added on top of your ordinary income tax, when calculating STCG? You calculate STCG using (money received when sold) minus (money paid when bought). Then your STCGs go into the federal and state tax calculations and are taxed accordingly.

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm). No comment here.


4) Starting a side business:

a. One can start a business and deduct the earnings of this business from taxable income. Not earnings, but if you mean "legitimate business expenses" then yes.
Is this a reasonable method to use for someone in high-tax bracket, in order to reduce the taxable income? Sorry, but this reminds me of Zits Comic Strip for May 17, 2018. You may need to elaborate on your business plan here. ;)
See answers in blue above.
Thank you for your answers, very helpful.

Net Investment Income Tax (NIIT) if your AGI is >$250K => This is interesting, I didn't know about this.

For side business questions => Right, I meant deducting business expenses from taxes.

Regarding business plan => Yes, it needs some time :) And I have about 5-10 years before I can actually start my own business :)

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 10:23 pm

bradpevans wrote:
Fri May 18, 2018 7:44 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? And is state tax added on top of your ordinary income tax, when calculating STCG?

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm).
RSUs (at my company) are immediately converted (to me) at the time they vest, typically around 39% tax
So 100 shares becomes 61 shares, and value of the 39 shares is sent to the government and shows on my W2.
You might think of it this way: here is $10,000 of income, so you get to keep $6100 and the $3900 is paid in taxes.
Also, the $6100 is now in company stock, and $6100 is your basis. You could sell immediately with no cap gains.
If you sell a month later at 6200, you have $100 short term cap gain
If you sell a year or more later at 7000, you have $800 long term cap gain
This is interesting. I know number of RSUs drop at vesting time due to taxes, but I didn't know that taxed amount, 39 in your example, shown up in my W2. What is the implication of this number showing up in my W2?

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 10:28 pm

dbdavidson wrote:
Fri May 18, 2018 8:52 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

1) 401K:

a. After the age of 59.5, when I withdraw money from my 401K, how is that money taxed? Is it taxed using ordinary income tax? If this is the case, then, would the amount I withdraw from my 401K be considered as taxable income (most likely yes, but just to confirm)?
401k withdrawals should be taxed as: Ordinary Income
Look at "Requirement Distribution" row in this:
https://patefacio.github.io/plusauri.gi ... _true.html
You should see it kicking in at age 70 and being tagged ordinary income.

If you withdraw not at behest of uncle same it is still ordinary income - just not "required".
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
b. After age 70, 401K is subject to required minimum distributions (RMD). What is the percentage / amount we have to withdraw every year after age 70? In this case, if the amount we withdraw from 401K is considered as taxable income, then would it make sense to leave less money in 401K after age 70, in order to prevent ending up in higher tax brackets due to RMD? What are some methods we can use to avoid this, using a combination of money from 401K and Roth IRA?

IRS provides a table. Below is what is used to determine the amount to pull out by age.

Code: Select all

-- from https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
-- Applicable to:
-- ira, sep ira, simple ira, traditional ira
-- NOT APPLICABLE to Roth IRA
insert into required_minimum_distribution (tax_regime_id, rmd_spec)
select tr.id, v.rmd_spec
from (VALUES
('FED', '
{ 
  "penalty_percent": 0.5, 
  "uniform_lifetime_table": [ 
    { "age": 70, "distribution_divisor": 27.4 },  
    { "age": 71, "distribution_divisor": 26.5 },
    { "age": 72, "distribution_divisor": 25.6 },
    { "age": 73, "distribution_divisor": 24.7 },
    { "age": 74, "distribution_divisor": 23.8 },
    { "age": 75, "distribution_divisor": 22.9 },
    { "age": 76, "distribution_divisor": 22.0 },
    { "age": 77, "distribution_divisor": 21.2 },
    { "age": 78, "distribution_divisor": 20.3 },
    { "age": 79, "distribution_divisor": 19.5 },
    { "age": 80, "distribution_divisor": 18.7 },
    { "age": 81, "distribution_divisor": 17.9 },
    { "age": 82, "distribution_divisor": 17.1 },
    { "age": 83, "distribution_divisor": 16.3 },
    { "age": 84, "distribution_divisor": 15.5 },
    { "age": 85, "distribution_divisor": 14.8 },
    { "age": 86, "distribution_divisor": 14.1 },
    { "age": 87, "distribution_divisor": 13.4 },
    { "age": 88, "distribution_divisor": 12.7 },
    { "age": 89, "distribution_divisor": 12.0 },
    { "age": 90, "distribution_divisor": 11.4 },
    { "age": 91, "distribution_divisor": 10.8},
    { "age": 92, "distribution_divisor": 10.2},
    { "age": 93, "distribution_divisor": 9.6 },
    { "age": 94, "distribution_divisor": 9.1 },
    { "age": 95, "distribution_divisor": 8.6 },
    { "age": 96, "distribution_divisor": 8.1 },
    { "age": 97, "distribution_divisor": 7.6 },
    { "age": 98, "distribution_divisor": 7.1 },
    { "age": 99, "distribution_divisor": 6.7 },
    { "age": 100, "distribution_divisor": 6.3 },
    { "age": 101, "distribution_divisor": 5.9 },
    { "age": 102, "distribution_divisor": 5.5 },
    { "age": 103, "distribution_divisor": 5.2 },
    { "age": 104, "distribution_divisor": 4.9 },
    { "age": 105, "distribution_divisor": 4.5 },
    { "age": 106, "distribution_divisor": 4.2 },
    { "age": 107, "distribution_divisor": 3.9 },
    { "age": 108, "distribution_divisor": 3.7 },
    { "age": 109, "distribution_divisor": 3.4 },
    { "age": 110, "distribution_divisor": 3.1 },
    { "age": 111, "distribution_divisor": 2.9 },
    { "age": 112, "distribution_divisor": 2.6 },
    { "age": 113, "distribution_divisor": 2.4 },
    { "age": 114, "distribution_divisor": 2.1 },
    { "age": 115, "distribution_divisor": 1.9 }
  ] 
}
'::jsonb)
) v(tax_regime_name,  rmd_spec)
left join tax_regime tr on (tr.name = tax_regime_name);
An obvious way to avoid 401K getting really large is to use the money earlier. As another suggested conversions can also help. This is why if you look at the forecast with you leaving work early and starting a business (https://patefacio.github.io/plusauri.gi ... _true.html) you do not see the RMD. Because you needed that money to live before reaching 70.
Thank you for this personalized feedback Dan. Starting this year, I'm maxing out my Roth IRA (~27.5K), and I will make sure I will have this tax-free money in my retirement. As you said, retiring at the age of 50 may be tough, but I live way below my means, and I don't see my expense becoming very high during retirement.

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 10:31 pm

livesoft wrote:
Fri May 18, 2018 9:17 am
It is time to read IRS Publication 550 and IRS Publication 590B.

Do you fill out your own Form 1040 each year? If not, time to start doing that, too.

The above will do wonders for your tax knowledge base.
This is a good suggestion. I knew the answers to more than half of the questions I had in this thread, but I still wanted to make sure.

"IRS Publication 550 and 590B" was the keyword I was looking for. I will read them. Thanks.

I don't fill out my 1040. I will start filing my taxes myself this year (I used to use Turbotax or H&R Block until now.)

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 10:33 pm

senex wrote:
Fri May 18, 2018 9:24 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
Are withdrawals from 401K subject to state tax? If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?
I would guess that most states tax 401k withdrawals as ordinary income.

Your last state of residency before you leave the USA will consider you a resident and continue taxing your income while you are overseas. (This is true for US citizens; not sure how it applies to non-citizens). Thus some people move to a no-tax state for a year before moving overseas.
This is a very important information. I will become a US citizen in 5 years, and make sure I leave back to my home country after that. In which case, this rule applies to me as well. This is good to know, thanks.

User avatar
Peter Foley
Posts: 4501
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Tax related questions

Post by Peter Foley » Fri May 18, 2018 11:00 pm

Regarding RMD's: For most individuals RMD's start at a little over 3.6% and increase a bit every year. For me, that's overly precise and hard to remember so when talking about RMD's I just try to keep in mind that they average about 4% over the first 5 years of retirement. That is close enough for pre-retirement planning.

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Fri May 18, 2018 11:09 pm

Peter Foley wrote:
Fri May 18, 2018 11:00 pm
Regarding RMD's: For most individuals RMD's start at a little over 3.6% and increase a bit every year. For me, that's overly precise and hard to remember so when talking about RMD's I just try to keep in mind that they average about 4% over the first 5 years of retirement. That is close enough for pre-retirement planning.
I see, thanks, that's a good estimation to have. 4% is not that bad at all.

bradpevans
Posts: 315
Joined: Sun Apr 08, 2018 1:09 pm

Re: Tax related questions

Post by bradpevans » Sat May 19, 2018 8:22 am

ThisJustIn wrote:
Fri May 18, 2018 10:23 pm
bradpevans wrote:
Fri May 18, 2018 7:44 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? And is state tax added on top of your ordinary income tax, when calculating STCG?

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm).
RSUs (at my company) are immediately converted (to me) at the time they vest, typically around 39% tax
So 100 shares becomes 61 shares, and value of the 39 shares is sent to the government and shows on my W2.
You might think of it this way: here is $10,000 of income, so you get to keep $6100 and the $3900 is paid in taxes.
Also, the $6100 is now in company stock, and $6100 is your basis. You could sell immediately with no cap gains.
If you sell a month later at 6200, you have $100 short term cap gain
If you sell a year or more later at 7000, you have $800 long term cap gain
This is interesting. I know number of RSUs drop at vesting time due to taxes, but I didn't know that taxed amount, 39 in your example, shown up in my W2. What is the implication of this number showing up in my W2?
It means the taxes are paid direct to the gov't at the time of vesting. Different plans may take out different %; some plans may allow you
to "set" the withholding percentage (maybe). I wish the paperwork and documentation were more obvious - it took me several iterations to figure out what exactly transpires.

Additionally, you may need to be diligent about tracking your true basis. The vesting event has # shares * share price,
while the actual pre-tax value is # shares * (Sale price - option price). So it could be $60,000 for the former
and just $10,000 for the later. (100 shares at 600 with option price at 500)

In my example you might think of it like this:
here is a 10,000 bonus from your employer
your "take-home" from the bonus is 6,100, with 3900 paid in taxes.
BUT, the 6100 is in fact in stock, stock that is worth $6100

If you then immediately sell the shares at $6100 there is NO tax implication (because the $3900)
in reality there might be a few dollars gain or loss due to the vesting price vs. your sell price + commission cost to sell

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Sun May 20, 2018 2:01 pm

bradpevans wrote:
Sat May 19, 2018 8:22 am
ThisJustIn wrote:
Fri May 18, 2018 10:23 pm
bradpevans wrote:
Fri May 18, 2018 7:44 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
I have some tax related questions regarding investments:

3) Stocks / RSUs:

a. If you have stocks in Robinhood, or RSU from your company, your gains are taxed using STCG. Is this equivalent to ordinary income tax? And is state tax added on top of your ordinary income tax, when calculating STCG?

b. Stocks and RSUs are taxed differently. Just to confirm, when RSUs vest, actual amount of RSUs are taxed and the number decreases, but you don’t pay tax on it (please confirm). But you pay tax on capital gains / losses when you sell your stock, where the gain is the different between the selling price and the price on the vesting date (FMV). So, after the RSUs vest, their taxing rules are the same as those of stocks (please confirm).
RSUs (at my company) are immediately converted (to me) at the time they vest, typically around 39% tax
So 100 shares becomes 61 shares, and value of the 39 shares is sent to the government and shows on my W2.
You might think of it this way: here is $10,000 of income, so you get to keep $6100 and the $3900 is paid in taxes.
Also, the $6100 is now in company stock, and $6100 is your basis. You could sell immediately with no cap gains.
If you sell a month later at 6200, you have $100 short term cap gain
If you sell a year or more later at 7000, you have $800 long term cap gain
This is interesting. I know number of RSUs drop at vesting time due to taxes, but I didn't know that taxed amount, 39 in your example, shown up in my W2. What is the implication of this number showing up in my W2?
It means the taxes are paid direct to the gov't at the time of vesting. Different plans may take out different %; some plans may allow you
to "set" the withholding percentage (maybe). I wish the paperwork and documentation were more obvious - it took me several iterations to figure out what exactly transpires.

Additionally, you may need to be diligent about tracking your true basis. The vesting event has # shares * share price,
while the actual pre-tax value is # shares * (Sale price - option price). So it could be $60,000 for the former
and just $10,000 for the later. (100 shares at 600 with option price at 500)

In my example you might think of it like this:
here is a 10,000 bonus from your employer
your "take-home" from the bonus is 6,100, with 3900 paid in taxes.
BUT, the 6100 is in fact in stock, stock that is worth $6100

If you then immediately sell the shares at $6100 there is NO tax implication (because the $3900)
in reality there might be a few dollars gain or loss due to the vesting price vs. your sell price + commission cost to sell
Thank you for clarification, this is very helpful.

MarkNYC
Posts: 1364
Joined: Mon May 05, 2008 7:58 pm

Re: Tax related questions

Post by MarkNYC » Sun May 20, 2018 6:21 pm

senex wrote:
Fri May 18, 2018 9:24 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
Are withdrawals from 401K subject to state tax? If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?
Your last state of residency before you leave the USA will consider you a resident and continue taxing your income while you are overseas. (This is true for US citizens; not sure how it applies to non-citizens). Thus some people move to a no-tax state for a year before moving overseas.
I have not checked the rules for every state, but this statement is not correct for NY, NJ, CT or CA, and I would be surprised if it is correct for any state.

Federal law provides that retirement income can only be taxed by a resident state. If a US citizen or US resident permanently relocates to a foreign country and no longer maintains a residence in the US, then there is no basis for the state that was last lived in to continue to tax the person as a resident.

ThisJustIn
Posts: 147
Joined: Sun Mar 11, 2018 10:53 pm

Re: Tax related questions

Post by ThisJustIn » Sun May 20, 2018 7:02 pm

MarkNYC wrote:
Sun May 20, 2018 6:21 pm
senex wrote:
Fri May 18, 2018 9:24 am
ThisJustIn wrote:
Thu May 17, 2018 11:04 pm
Are withdrawals from 401K subject to state tax? If so, how is taxed if I end up living in my home country after age 59.5 (in which case I will not be tied to any state)?
Your last state of residency before you leave the USA will consider you a resident and continue taxing your income while you are overseas. (This is true for US citizens; not sure how it applies to non-citizens). Thus some people move to a no-tax state for a year before moving overseas.
I have not checked the rules for every state, but this statement is not correct for NY, NJ, CT or CA, and I would be surprised if it is correct for any state.

Federal law provides that retirement income can only be taxed by a resident state. If a US citizen or US resident permanently relocates to a foreign country and no longer maintains a residence in the US, then there is no basis for the state that was last lived in to continue to tax the person as a resident.
This is even better, in which case I won't have to move out to another state from CA, before deciding to move out of states. Thanks.

senex
Posts: 66
Joined: Wed Dec 13, 2017 4:38 pm

Re: Tax related questions

Post by senex » Tue May 29, 2018 1:54 pm

MarkNYC wrote:
Sun May 20, 2018 6:21 pm
I have not checked the rules for every state, but this statement is not correct for NY, NJ, CT or CA, and I would be surprised if it is correct for any state.

Federal law provides that retirement income can only be taxed by a resident state. If a US citizen or US resident permanently relocates to a foreign country and no longer maintains a residence in the US, then there is no basis for the state that was last lived in to continue to tax the person as a resident.
Thanks to Mark for the corrections. The complexity, which I muddled in my first message, is related to residency and domicile.

If you leave the US permanently, close all US bank accounts, sell all US real estate, sell or move all your physical possessions, and never again visit the United States, California won't tax you.

If you maintain a home in California, you visit it regularly, you go to the doctor while there, you still have family there, you renew your CA driver's license, etc, California may deem you to be domiciled in California, even if you truly live overseas for many years. In that case, California would tax your income as a resident. (See FTB Publication 1031). (The law depends on your "intention" to return to California, which is hard to prove; see the articles at the bottom for more explanation).

(My original claim about citizenship appears to be wrong -- upon further study, citizenship seems irrelevant -- except that citizens perhaps are more likely to have intent to return to the US).

If you're in between those extremes, you should do more research.

California Publication 1031: https://www.ftb.ca.gov/forms/2011/11_1031.pdf.

Some other related articles are:
* "Leaving California and Its Taxes? Be Careful" - https://www.forbes.com/sites/robertwood ... 587364e1ac
* "US State Tax Residency (Domicile)" - http://intltax.typepad.com/intltax_blog ... icile.html

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