Income Tax Questions

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TheAnalyzer08
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Joined: Thu Oct 25, 2018 6:21 pm

Income Tax Questions

Post by TheAnalyzer08 » Wed Nov 06, 2019 12:52 am

Long time lurker...would greatly appreciate some feedback on the two questions below.

For some reason can’t wrap my head around the fact if this makes sense or not...

1. We file our income taxes MJF and are squarely in the 24% federal marginal tax bracket. If or I should say when the tax rates go back to the pre-Trump tax cuts and we are squarely in the 28% federal marginal tax bracket, would simply increasing our tax deferred 401k contributions by 4% give us a net result of even Steven? What am I missing?

2. We also live in the state of California and are squarely in the 9.3% state marginal tax bracket. I am able to and am considering doing in-service 401k to Roth IRA conversions (paying taxes from a separate liquid account). Even after the conversion, we would squarely remain in the 24% and 9.3% marginal tax brackets. Should I proceed with the conversion? I don’t know if we will retire in California or a no-state income tax state. [Comment removed by moderator oldcomputerguy]

Any suggestions or recommendations would be greatly appreciated.

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

Re: Income Tax Questions

Post by FiveK » Wed Nov 06, 2019 3:23 am

TheAnalyzer08 wrote:
Wed Nov 06, 2019 12:52 am
1. We file our income taxes MJF and are squarely in the 24% federal marginal tax bracket. If or I should say when the tax rates go back to the pre-Trump tax cuts and we are squarely in the 28% federal marginal tax bracket, would simply increasing our tax deferred 401k contributions by 4% give us a net result of even Steven? What am I missing?
No, that's apples v. oranges.

Assuming your AGI is $240K with no special deductions, contributions, etc., 2019 federal tax will be $40,093, state tax might be somewhere near $16K, and there would be FICA taxes also, giving you some net income.

The only part of your income on which you are paying 24% is the $47,200 taxable amount (taxable = AGI minus deductions) above the $168,400 start of the 24% bracket. If you contribute $20K between the two of you to 401k plans, your federal tax will decrease by $4800 to $35,293.

The same $240K AGI using 2017 tax law would incur 28% only on the $66,100 above the $153,100 start of the 28% bracket. If you contribute $20K between the two of you to 401k plans, your federal tax will decrease by $5600 from $48,261 to $42,661.

Are things becoming more - or less - clear?
2. We also live in the state of California and are squarely in the 9.3% state marginal tax bracket. I am able to and am considering doing in-service 401k to Roth IRA conversions (paying taxes from a separate liquid account). Even after the conversion, we would squarely remain in the 24% and 9.3% marginal tax brackets. Should I proceed with the conversion? I don’t know if we will retire in California or a no-state income tax state. What I am certain about, is that taxes will be going up to pay down our ridiculous deficit.

Any suggestions or recommendations would be greatly appreciated.
See Traditional versus Roth - Bogleheads for more, but in short the outcome of the choice to convert now or later depends on your specific tax rates now and later. Those will be affected by both federal and state tax law, and your individual situation.

Topic Author
TheAnalyzer08
Posts: 9
Joined: Thu Oct 25, 2018 6:21 pm

Re: Income Tax Questions

Post by TheAnalyzer08 » Wed Nov 06, 2019 3:53 pm

Thank you for your input and suggestions.

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grabiner
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Re: Income Tax Questions

Post by grabiner » Wed Nov 06, 2019 8:49 pm

TheAnalyzer08 wrote:
Wed Nov 06, 2019 12:52 am
1. We file our income taxes MJF and are squarely in the 24% federal marginal tax bracket. If or I should say when the tax rates go back to the pre-Trump tax cuts and we are squarely in the 28% federal marginal tax bracket, would simply increasing our tax deferred 401k contributions by 4% give us a net result of even Steven? What am I missing?
Besides the point that has been made about this being the wrong base, your marginal tax rate won't change by the full 4%. If you are in CA and in the 24% federal tax bracket, you are paying more than $10,000 in state taxes. Therefore, either you are taking the standard deduction or a change in state taxes won't affect your itemized deductions. When the tax laws revert in 2026, you will probably itemize deductions and be able to deduct the 9.3% state tax from the federal tax at 28%, so your combined tax rate will go from 24%+9.3%=33.3% to 28%+9.3%-(9.3%*28%)=34.7%.
Wiki David Grabiner

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