Limit 2020 Roth conversion - 22% becomes 27% with Stimulus phase-out

[sawdust60]

I had concerns that I had effectively paid 27% on part of my 2018 Roth conversion, as my stimulus payment fell in the phase-out range when calculated from my 2018 AGI.

But the stimulus payment is an advance refund of a 2020 tax credit. So the reduction in my stimulus payment will be made up when I file my 2020 return; the 2020 tax credit will be calculated from 2020 AGI.

Plans include limiting my Roth conversion to avoid IRMAA, but for 2020 I will limit it to keep AGI below 150k MFJ.

Do I understand this correctly?

[FiveK]

Yes, if you have $1200 or more left on the table from the 2018 AGI (and assuming the 2018 AGI is what has been or will be used for your advance payment).

If you have less than $1200 remaining, your marginal rate to convert the extra $24K from $150K to $174K is
(0.22 * $24K + X)/$24K
where X is the amount you have left to claim. E.g., if you receive $1800 in advance, X = $600 and converting from $150K up to the IRMAA $174K limit will incur a 24.5% marginal rate.

[sawdust60]

Thanks for pointing out how the cost to convert in 2020 is dependent on how much is left on the table.

At 150k AGI, I could get the full amount left on the table. From that point, the 5% reduction exists until 2020 AGI exceeds 2018 AGI (presumably used to calculate my advance refund stimulus payment).

I am happy for the opportunity to claim the full tax credit. For me, it is a Roth conversion question. But it could impact other decisions for those with money on the table.

[Sandi_k]

So, am I understanding correctly?

If we are estimating a $150k AGI, and plan to convert - in addition - $25k in 2020 - we will pay 24.5% on that $25k, instead of the 22% on the marginal tax tables?

[FiveK]

So, am I understanding correctly?

If we are estimating a $150k AGI, and plan to convert - in addition - $25k in 2020 - we will pay 24.5% on that $25k, instead of the 22% on the marginal tax tables?

The 24.5% is for the very specific situation described in that post, not a general truth.

[sawdust60]

So, am I understanding correctly?

If we are estimating a $150k AGI, and plan to convert - in addition - $25k in 2020 - we will pay 24.5% on that $25k, instead of the 22% on the marginal tax tables?

It is not that the rate is higher, but the marginal rate can be higher if the additional AGI results in reducing the tax credit.

FiveK pointed out that the marginal tax rate is dependent on how much the advance refund stimulus payment was reduced due to the phase-out when based on 2018 or 2019 AGI. If you got the full stimulus amount in the advance payment, you get to keep it -- so your marginal rate for 2020 could be 22%.

When I looked at my numbers and the phase-out, I received a lower stimulus payment at 5% of the amount my 2018 Roth conversion pushed me above 150k AGI. But by keeping my 2020 AGI to 150k, I will get the difference when I file my 2020 tax return.

You will need to look at your numbers. How much stimulus payment did you get? How much more will you get if you keep 2020 AGI to 150k?

[classicjazzfan]

Because a large Roth conversion brought our 2019 AGI (MFJ) to $172,525, our 2020 stimulus payment was reduced from $2400 to $1274. We’ve been planning another Roth conversion for 2020 large enough to bring our AGI to near $174K (so as to avoid the first IRMAA threshold). However, if we limit the 2020 Roth conversion enough to keep 2020 AGI under $150K, we could receive via the tax credit the balance of the $2400 stimulus payment ($1126).

Question: would the long-term value of doing an additional $24K of Roth conversion be worth forgoing the one-time credit of $1126?

Thank you.