Tax Optimization

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weekfree
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Joined: Fri Nov 15, 2019 4:43 pm

Tax Optimization

Post by weekfree » Fri Nov 15, 2019 4:59 pm

Forgive me if this has been asked/discussed before. I searched, but did not find an answer.

I am searching for a on-line calculator/spreadsheet that will help with tax optimization.
Specifically, one that would help me/us determine the optimal amount of capital gains (from taxable accounts) and income (from deferred accounts, ie. IRA/401k) to be taken and optimize the lowest amount of taxes paid. For example, I could take a IRA distribution, which will impact my capital gains and total taxes … and/or I could sell some taxable and increase capital gains, or any combination of each. Essentially, I am looking for a way to calculate the lowest amount of taxes with the largest increase in cash (without regard to what I would do with that cash, ie. hold/invest/put in a Roth, etc.).

Ideally, one that also includes state taxation (as I live in a VERY high tax state)?

retired@50
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Joined: Tue Oct 01, 2019 2:36 pm

Re: Tax Optimization

Post by retired@50 » Fri Nov 15, 2019 6:47 pm

This sounds awfully tricky, given the number of variables you'd like to incorporate into your strategy... I'll be curious how this thread turns out...

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Tax Optimization

Post by dbr » Fri Nov 15, 2019 6:49 pm

If it is a question of comparing a set of scenarios probably the best approach is to actually run dummy tax returns for everything. If you are talking about your taxes for 2019, tax software should be out with year 2019 computations. Something more sophisticated such as an actual Solver routine or something I am not so sure about.

Someone may suggest some more generic spreadsheet code.

MattE
Posts: 136
Joined: Sun Mar 04, 2012 8:44 pm

Re: Tax Optimization

Post by MattE » Fri Nov 15, 2019 10:22 pm

https://www.i-orp.com/ Probably closest you're going to get

Topic Author
weekfree
Posts: 2
Joined: Fri Nov 15, 2019 4:43 pm

Re: Tax Optimization

Post by weekfree » Sat Nov 16, 2019 11:56 am

Thank you for your replies.

I have (and do) run numerous scenarios through turbotax, and while I use I-orp, I do not use it for this purpose, and am not sure how I could.

Indeed, I am looking for a "solver" routine and do understand the complexity of it.
That's why I am trying to avoid writing it myself :D

LocusCoeruleus
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Joined: Wed May 24, 2017 10:00 pm

Re: Tax Optimization

Post by LocusCoeruleus » Sat Nov 16, 2019 12:34 pm

Instead of trying to figure out what each container should have going forward, consider going backwards. Assume you have already retired and if you were to do taxes, what would be lowest tax way to pull contributions. Say you took the standard deduction. You could withdraw $24k from your 401k/IRA and for the rest upto say around $100k tap the taxable with long term capital gains and qualified dividends - tax rate would be 0%!

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grabiner
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Re: Tax Optimization

Post by grabiner » Sat Nov 16, 2019 5:19 pm

If you intend to sell your taxable stock, it is usually desirable to sell that stock in preference to IRA withdrawals (other than RMDs, of course). The reason is that the fraction of your IRA withdrawal lost to taxes depends only on the tax bracket, not on when you take the withdrawal. However, the fraction of your taxable stock account lost to taxes increases the longer you hold the stock; you will pay tax on dividends every year, and if the market rises, you will also have a larger percentage to pay in capital gains.

If you don't expect you will need to sell your taxable stock with large capital gains (you expect to leave that stock to your heirs or charity), then it is better not to sell that stock. The fraction of your taxable stock account lost to taxes is lower if you never sell it than if you sell it now for a large capital gain.

For example, suppose that your current stock value is twice the basis, and you pay 15% tax on a 2% qualified dividend yield. If you sell the stock now, you will lose 7.5% to tax on the capital gain. If you wait ten years to sell the stock, you will lose 3% to tax on the dividends, and probably more than 7.5% to tax on the capital gain. If you die in twenty years and never sell the stock, you will lose 6% to tax on the dividends, and no tax on the capital gain.

One exception, noted above, is that you should make use of the lower tax brackets, as this reduces the cost of your IRA withdrawals. If you expect that most of your IRA withdrawals will be in the 12% bracket, you should withdraw enough from the IRA every year to use up the standard deduction and 10% bracket, reducing future withdrawals taxed at 12%. (You might also sell stock at a 0% capital-gains tax rate to convert some of the IRA to a Roth at 10% or 12%.)
Wiki David Grabiner

MathIsMyWayr
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Location: CA

Re: Tax Optimization

Post by MathIsMyWayr » Sat Nov 16, 2019 5:31 pm

If it is not a deterministic problem such as a future planning, there is no single answer. However, if it is a deterministic problem, e.g., the best solution for today or this year, you may better write a simple computer program. Spreadsheet is too clumsy for this kind of problem.

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FiveK
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Re: Tax Optimization

Post by FiveK » Sun Nov 17, 2019 2:40 am

weekfree wrote:
Fri Nov 15, 2019 4:59 pm
Essentially, I am looking for a way to calculate the lowest amount of taxes with the largest increase in cash (without regard to what I would do with that cash, ie. hold/invest/put in a Roth, etc.).
The answer will likely be "as much capital gain as possible" because there will be no tax on the basis, and lower tax rates on the gains than on ordinary income.

If you are at all familiar with the Excel Solver, the personal finance toolbox spreadsheet should help you do exactly what you want.

MathWizard
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Joined: Tue Jul 26, 2011 1:35 pm

Re: Tax Optimization

Post by MathWizard » Sun Nov 17, 2019 5:22 am

weekfree wrote:
Sat Nov 16, 2019 11:56 am
Thank you for your replies.

I have (and do) run numerous scenarios through turbotax, and while I use I-orp, I do not use it for this purpose, and am not sure how I could.

Indeed, I am looking for a "solver" routine and do understand the complexity of it.
That's why I am trying to avoid writing it myself :D
If you can write it yourself, I would encourage that.

When you trust the results of an existing silver you assume that the programmer understood your scenario. I've debugged too many programs for other people to trust my life savings to that.
You know your situation the best and the most to lose if it is wrong.

I use several solvers, but only as a check to programs I wrote.

I even wrote multiple programs as a check on myself. Backups to the backups when you can't afford a failure.

Now I have done programming and debugging as a consultant, so I do have expertise in complicated programs.

student
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Joined: Fri Apr 03, 2015 6:58 am

Re: Tax Optimization

Post by student » Sun Nov 17, 2019 7:34 am

MattE wrote:
Fri Nov 15, 2019 10:22 pm
https://www.i-orp.com/ Probably closest you're going to get
+1.

NewMoneyMustBeSmart
Posts: 159
Joined: Sat Jun 01, 2019 10:28 pm

Re: Tax Optimization

Post by NewMoneyMustBeSmart » Sun Nov 17, 2019 9:37 am

weekfree wrote:
Fri Nov 15, 2019 4:59 pm
Forgive me if this has been asked/discussed before. I searched, but did not find an answer.

I am searching for a on-line calculator/spreadsheet that will help with tax optimization.
Specifically, one that would help me/us determine the optimal amount of capital gains (from taxable accounts) and income (from deferred accounts, ie. IRA/401k) to be taken and optimize the lowest amount of taxes paid. For example, I could take a IRA distribution, which will impact my capital gains and total taxes … and/or I could sell some taxable and increase capital gains, or any combination of each. Essentially, I am looking for a way to calculate the lowest amount of taxes with the largest increase in cash (without regard to what I would do with that cash, ie. hold/invest/put in a Roth, etc.).

Ideally, one that also includes state taxation (as I live in a VERY high tax state)?
In my field there are a number of tasks we do a few times a year, that many other companies do, and we write programs or scripts to do it.

You may want to do the same thing. If you aren't proficient at programming, you could consider putting an ad for work on Upwork. Perhaps list your requirements and ask for someone proficient in financial optimization programming, multi variable optimization, or linear algebra.

For a few hundred bucks you can likely find someone who can write a program for you that does what you want.

I don't know of anything off the shelf.

Separately, you might hire someone to do the same in excel.

jmk
Posts: 577
Joined: Tue Nov 01, 2011 7:48 pm

Re: Tax Optimization

Post by jmk » Sun Nov 17, 2019 12:24 pm

Wouldn't you want to optimize your total after-tax return rather than minimize taxes in themselves?

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