Tax avoidance help needed.

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J G Bankerton
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Tax avoidance help needed.

Post by J G Bankerton » Thu Feb 07, 2019 4:06 pm

I need tax avoidance help. I’m in a Social Security “hump” zone with a 51% marginal rate according to TurboTax. I’m all stock except for a sufficient emergency fund in a MM. I have a 401k and subject to RMD.

I now have some control over my income as I realized a huge loss on paper in January 2019, VTI to VOO. I’m over 70, single and take the standard deduction. What is my target AGI to avoid the SS hump tax? :confused

livesoft
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Re: Tax avoidance help needed.

Post by livesoft » Thu Feb 07, 2019 4:08 pm

Since you apparently have TT, why not just use the tax prep software and lower your income until you get to where you want to be.

I'll suggest how you can do that easily: QCD. Look it up.
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Peter Foley
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Re: Tax avoidance help needed.

Post by Peter Foley » Thu Feb 07, 2019 4:15 pm

See the wiki topic taxation of SS benefits. From the wiki:
Single taxpayers:

If you are single and receive $20,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $15,000.
For every dollar between $15,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $38,706, which makes the maximum $17,000 taxable.
There are a couple of humps. The worst is at non SS income above about $37,400 if I am reading it correctly. Note that you can make your RMD a qualified charitable distribution and knock a few thousand off your MAGI. That might help.

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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Thu Feb 07, 2019 4:23 pm

livesoft wrote:
Thu Feb 07, 2019 4:08 pm
Since you apparently have TT, why not just use the tax prep software and lower your income until you get to where you want to be.

I'll suggest how you can do that easily: QCD. Look it up.
"QCD" came up as "quantum chromodynamics".
https://en.wikipedia.org/wiki/Quantum_chromodynamics

My 401k is all company stock so I'm considering a Net Unrealized Appreciation - NUA move. Should I go big or go small in 2019? :confused
Peter Foley wrote:
Thu Feb 07, 2019 4:15 pm
There are a couple of humps. The worst is at non SS income above about $37,400 if I am reading it correctly. Note that you can make your RMD a qualified charitable distribution and knock a few thousand off your MAGI. That might help.
I don't do charities, I gave at the office.

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Re: Tax avoidance help needed.

Post by jebmke » Thu Feb 07, 2019 4:31 pm

J G Bankerton wrote:
Thu Feb 07, 2019 4:23 pm
I don't do charities, I gave at the office.
Then QCDs (Qualified Charitable Distributions) won't help you.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Watty
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Re: Tax avoidance help needed.

Post by Watty » Thu Feb 07, 2019 4:41 pm

J G Bankerton wrote:
Thu Feb 07, 2019 4:06 pm
What is my target AGI to avoid the SS hump tax?
Be sure to look at this as a multi year plan. You could come up with a good tax plan this year but it could make your taxes worse in future years especially if you hit IRMAA costs then.

One thing to look at is how much income you would need to have the maximum amount of your Social Security to be taxed to get past the hump. Once you get to that point it might make sense to do something like a massive Roth conversions or capital gain harvesting to get a lot of the income out of the way so that you will have lower taxes in future years. That might trigger IRMAA but then it might go away in a year or two.

Broken Man 1999
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Re: Tax avoidance help needed.

Post by Broken Man 1999 » Thu Feb 07, 2019 4:43 pm

A QLAC could delay some portion of your RMDs until age 85.

Might be good for you, might not be good.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Thu Feb 07, 2019 5:00 pm

Watty wrote:
Thu Feb 07, 2019 4:41 pm
J G Bankerton wrote:
Thu Feb 07, 2019 4:06 pm
What is my target AGI to avoid the SS hump tax?
Be sure to look at this as a multi year plan.
I am planning up to 2025, that is when the old tax law returns. I have $14,000 in realized losses for 2019, losses that have been now been found but not yet realized.

I have so many options and taxes are hard.

I planned so carefully for 2018 and wound up in a 51% marginal tax bracket. I did that wrong.

livesoft
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Re: Tax avoidance help needed.

Post by livesoft » Thu Feb 07, 2019 5:01 pm

Just go the other way and have more taxable income.

I was asked to tell the OP to take more out of the 401(k) than the required minimum each year, enough so that 85% of his SS is taxable. Once one gets to 85% taxable, there is no hump.
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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Thu Feb 07, 2019 5:06 pm

Broken Man 1999 wrote:
Thu Feb 07, 2019 4:43 pm
A QLAC could delay some portion of your RMDs until age 85.

Might be good for you, might not be good.

Broken Man 1999
Interesting but I have enough annuities, some stock in my 401k has appreciated 300%. A tax hit now might be the way to go. It would get me out of the 51% bracket for sure. It would also max out SS tax for a year and the extra would be mine.

rkhusky
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Re: Tax avoidance help needed.

Post by rkhusky » Thu Feb 07, 2019 9:15 pm

J G Bankerton wrote:
Thu Feb 07, 2019 5:00 pm
I planned so carefully for 2018 and wound up in a 51% marginal tax bracket. I did that wrong.
A large marginal tax is not a big deal if it only applies to a small amount of income. How wide is the "hump" that you are in?

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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Fri Feb 08, 2019 10:40 am

rkhusky wrote:
Thu Feb 07, 2019 9:15 pm
J G Bankerton wrote:
Thu Feb 07, 2019 5:00 pm
I planned so carefully for 2018 and wound up in a 51% marginal tax bracket. I did that wrong.
A large marginal tax is not a big deal if it only applies to a small amount of income. How wide is the "hump" that you are in?
The "hump" lasts for a few thousand dollars but at up to a 57% tax it adds up. A thousand here and a thousand there and soon it becomes real money.

I have so many options; I will ether go big or go small but I will not stay on the hump. I may go big and convert my 401k to stock. They can only tax 85% of my SS after the max I keep much more of the income. It will also give me more control of my income going forward.

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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Sun Feb 10, 2019 12:47 pm

There is a spread sheet in the WiKi that runs the numbers. It is the amount of LTCG that become taxable that put me in the 51% marginal bracket.

This is my marginal tax rate for 2019, if my regular income is between $26,000 and $31,500 I pay from 49% to 51% marginal rate. Then I pay a 40% marginal rate up to $37,500, then I max out and return to 22% It could be as much as $3,000 a year in extra tax, every year for life. The "hump" is not inflation adjusted so more and more Bogleheads will be hitting the "hump".

Perfect timing to coincide with forced withdrawals from 401Ks as regular income. Somebody put a lot of thought into this.

The Wizard
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Re: Tax avoidance help needed.

Post by The Wizard » Sun Feb 10, 2019 1:08 pm

J G Bankerton wrote:
Sun Feb 10, 2019 12:47 pm
...The "hump" is not inflation adjusted so more and more Bogleheads will be hitting the "hump".
Actually, I think we'll see more Bogleheads coming out the other side of the Hump and having 85% of SS taxed.
This is important, to maintain current SS trust fund projections.

I was going to say that after the Hump is over, folks can begin worrying more about IRMAA tiers. But IRMAA will indeed be inflation adjusted again before long, so less of a problem than would be otherwise...
Attempted new signature...

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Re: Tax avoidance help needed.

Post by grabiner » Mon Feb 11, 2019 3:11 pm

The Wizard wrote:
Sun Feb 10, 2019 1:08 pm
J G Bankerton wrote:
Sun Feb 10, 2019 12:47 pm
...The "hump" is not inflation adjusted so more and more Bogleheads will be hitting the "hump".
Actually, I think we'll see more Bogleheads coming out the other side of the Hump and having 85% of SS taxed.
This is important, to maintain current SS trust fund projections.
In the example on the wiki, the hump disappeared several years ago for married couples. When the wiki page was first created, a married couple with $40K in SS hit the 25% tax bracket before reaching 85% of SS taxable, and thus had a small hump with a marginal tax rate of 46.25% (40.7% with the rate now 22%). But since the SS taxation thresholds are not adjusted for inflation, the married couple is now still in the 12%bracket when the full 85% of SS is taxed.
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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Tue Feb 12, 2019 9:09 am

I have been playing what-if with the spread sheet, it is much easer than TurboTax what-if. I can get a double hump depending on LTCG taken. I wish I had the spread sheet back in December.

I now remember hearing about a SS "hump" when the tax was introduced. I didn't pay much attention because they were taxing old people and it didn't concern me.

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WoodSpinner
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Re: Tax avoidance help needed.

Post by WoodSpinner » Tue Feb 12, 2019 9:38 am

J G Bankerton wrote:
Thu Feb 07, 2019 4:23 pm

My 401k is all company stock so I'm considering a Net Unrealized Appreciation - NUA move. Should I go big or go small in 2019? :confused
I am wondering if you have a much bigger probl m that hasn’t been focused on?

How big a percentage of your assets are tied up with your companies stock in the 401K?

My approach was to never exceed 5% — anything more represented way to big a risk for my financial future.

Just something to consider, hope it helps.

WoodSpinner

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Re: Tax avoidance help needed.

Post by The Wizard » Tue Feb 12, 2019 9:44 am

J G Bankerton wrote:
Tue Feb 12, 2019 9:09 am
...I didn't pay much attention because they were taxing old people and it didn't concern me.
Hahaha!
We Old People are an easy target, that's for sure...
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J G Bankerton
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Re: Tax avoidance help needed.

Post by J G Bankerton » Tue Feb 12, 2019 12:21 pm

WoodSpinner wrote:
Tue Feb 12, 2019 9:38 am
How big a percentage of your assets are tied up with your companies stock in the 401K
My liquid investments are about 10% company stock. It is in a special "poison pill" fund. It was set up for employee back when the barbarians were at the gate. Most of my 401k got QDROed but I hung on to my poison pill stock.

It is worth about three times my cost basis so I'm looking into a NUA tax avoidance scheme that requires transfering the entire 401k in stock to my taxable brokerage account.
https://www.investopedia.com/investing/ ... any-stock/
The Wizard wrote:
Tue Feb 12, 2019 9:44 am
J G Bankerton wrote:
Tue Feb 12, 2019 9:09 am
...I didn't pay much attention because they were taxing old people and it didn't concern me.
Hahaha!
We Old People are an easy target, that's for sure...
We don't move as fast as we once did. It may be time to invest in "Soylent Green". :greedy

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