Limiting Income to <$250K for tax purposes

[Bacchus01]

I'm doing some tax planning for 2018. I have access to a NQ deferred comp plan and am trying to do some tax planning. Barring any changes to the tax code (yeah, I know), I believe I have some benefit to try to get under $250K in AGI. I believe there are two levels I want to try to get under, the first is $300K in order to get under the phase-out level for married filing jointly.

The second is to get under $250K to avoid paying the 3.8% investment tax on investment income or the amount over the $250K threshold (whichever is lower).

I calculate my estimated AGI before any NQ deferred comp, including all estimated itemized deductions and exemptions, to be $281K - $293K. I should be safely below the $300K number.

But I'm considering putting ~$50K in my NQ deferred comp plan to get safely below the $250K level.

Is this sound thinking? I understand the risks of the NQ plan, investment costs, etc. so I'm not looking for a review of that plan. I'm looking for thoughts on the tax planning side and whether these income thresholds still make sense. Thanks!

[euroswiss]

Yes, I think this is a good use of an NQDC plan. With the caveats (stability of employer, likelihood of you long-term employment there) that you say you already understand

[Wagnerjb]

Yes, I think this is a good use of an NQDC plan. With the caveats (stability of employer, likelihood of you long-term employment there) that you say you already understand

I agree with this.

In your situation - with the potential to face a different tax structure in 2018 - I would wait as long as possible to make my election for the NQDC plan. At my employer we had to make the election much earlier than this, but if you have the flexibility....use it to your advantage.

Best wishes.

[randomguy]

If there wasn't the 3.8% tax, would you do anything different? It seems like a minor amount compared to the income taxes (40%+ if you are in a high tax state). In general unless you expect to be in a higher tax bracket in retirement, pushing off taxes makes sense.

[kaneohe]

..................................

I calculate my estimated AGI before any NQ deferred comp, including all estimated itemized deductions and exemptions, to be $281K - $293K. I should be safely below the $300K number.

.........................................!

I find this statement confusing...........are you including estimated deductions/exemptions in your 281-293K number? If so that would mean that you AGI > 301-313K if using std. ded. and more if you itemize. The 250K/300K limits are based on AGI, not taxable income which your statement above seems to be talking about.

[Bacchus01]

Yes, I think this is a good use of an NQDC plan. With the caveats (stability of employer, likelihood of you long-term employment there) that you say you already understand

I agree with this.

In your situation - with the potential to face a different tax structure in 2018 - I would wait as long as possible to make my election for the NQDC plan. At my employer we had to make the election much earlier than this, but if you have the flexibility....use it to your advantage.

Best wishes.

I have until Dec 15th.

[Bacchus01]

..................................

I calculate my estimated AGI before any NQ deferred comp, including all estimated itemized deductions and exemptions, to be $281K - $293K. I should be safely below the $300K number.

.........................................!

I find this statement confusing...........are you including estimated deductions/exemptions in your 281-293K number? If so that would mean that you AGI > 301-313K if using std. ded. and more if you itemize. The 250K/300K limits are based on AGI, not taxable income which your statement above seems to be talking about.

Yeah, that's why I was asking about the math too I guess.

That 280K number includes estimated deductions/exemptions. My itemized deductions, for example, are ~$50K.

Basic math

Gross Income $360K
Investment income (qualified dividends) - $15K
401K $18,500
HSA $6,900
Sec 125 Ded $3000
Itemized deductions (mortgage interest, state tax, property tax) $50K

So, to get to AGI, I just remove 401K and HSA/Sec 125? Is that right? I probably just need to run this through Tax software to be sure, but general direction is helpful.

[Bacchus01]

If there wasn't the 3.8% tax, would you do anything different? It seems like a minor amount compared to the income taxes (40%+ if you are in a high tax state). In general unless you expect to be in a higher tax bracket in retirement, pushing off taxes makes sense.

If there was not a 3.8% tax, no, I wouldn't try to get to $250K.

I do expect to be in a lower tax bracket in retirement. But that alone is not enough for me to push off more for a couple reasons:
- Risk of the NQ plan
- Higher fees in NQ plan and requirement of 50% sitting in a bond fund which I don't like
- The high probability that I will NOT make it to early retirement age (55) with current employer and it will all be paid as a lump sum. Because of that I see it as a tax push as I expect the lump sum plus partial year pay to keep me in the same marginal band. However, if I can save at the $300K and $250K levels, I see it as a gain overall.

[kaneohe]

...................................
I find this statement confusing...........are you including estimated deductions/exemptions in your 281-293K number? If so that would mean that you AGI > 301-313K if using std. ded. and more if you itemize. The 250K/300K limits are based on AGI, not taxable income which your statement above seems to be talking about.

Yeah, that's why I was asking about the math too I guess.

That 280K number includes estimated deductions/exemptions. My itemized deductions, for example, are ~$50K.

Basic math

Gross Income $360K
Investment income (qualified dividends) - $15K
401K $18,500
HSA $6,900
Sec 125 Ded $3000
Itemized deductions (mortgage interest, state tax, property tax) $50K

So, to get to AGI, I just remove 401K and HSA/Sec 125? Is that right? I probably just need to run this through Tax software to be sure, but general direction is helpful.

That's clearer now..........I think you can combine all those numbers including the Sec 125 "deduction" too but don't include deduction/exemption.
The 401K/HSA/Sec 125 reduce your federal gross income rather than being true "below the line" . deductions. I get about 346K+ for AGI.

[Bacchus01]

...................................
I find this statement confusing...........are you including estimated deductions/exemptions in your 281-293K number? If so that would mean that you AGI > 301-313K if using std. ded. and more if you itemize. The 250K/300K limits are based on AGI, not taxable income which your statement above seems to be talking about.

Yeah, that's why I was asking about the math too I guess.

That 280K number includes estimated deductions/exemptions. My itemized deductions, for example, are ~$50K.

Basic math

Gross Income $360K
Investment income (qualified dividends) - $15K
401K $18,500
HSA $6,900
Sec 125 Ded $3000
Itemized deductions (mortgage interest, state tax, property tax) $50K

So, to get to AGI, I just remove 401K and HSA/Sec 125? Is that right? I probably just need to run this through Tax software to be sure, but general direction is helpful.

That's clearer now..........I think you can combine all those numbers including the Sec 125 "deduction" too but don't include deduction/exemption.
The 401K/HSA/Sec 125 reduce your federal gross income rather than being true "below the line" . deductions. I get about 346K+ for AGI.

Thanks. I double counted the investment income, so drop $15K off that and I get $331. I probably have no real chance to get under $250 based on these new numbers, but should be able to get under the $300k and will target that.

[Bacchus01]

The Pease/PEP phase out for 2018 begins at $320K for married filing jointly, not $300K. Right?

[White Coat Investor]

There are two nice things about making a lot of money. The first is that, well, you have a lot of money to spend even after paying all those taxes. First world problem.

But the second that I've really come to appreciate is not having to game the tax system like in this post. You're phased out of everything. Just look at the highest bracket and that's what you're paying. No credits, no exemptions, any deduction with a phaseout is gone (well, except Pease but that's really just a 1% additional tax bracket), AMT is gone etc. Really simplifies tax planning.

[Bacchus01]

There are two nice things about making a lot of money. The first is that, well, you have a lot of money to spend even after paying all those taxes. First world problem.

But the second that I've really come to appreciate is not having to game the tax system like in this post. You're phased out of everything. Just look at the highest bracket and that's what you're paying. No credits, no exemptions, any deduction with a phaseout is gone (well, except Pease but that's really just a 1% additional tax bracket), AMT is gone etc. Really simplifies tax planning.

I'm confused. What is the point?

[inbox788]

I'm confused. What is the point?

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

[Bacchus01]

I'm confused. What is the point?

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

Time spent? It's probably 10 minutes of my day. And I am never a fan of leaving money on the table.

The actual math in this scenario is more like $3-$4k dollars.

[TimeRunner]

I model using Turbotax and it makes very clear the impact of the increased tax when going above $250K MFJ. This can be a concern for retirees who are not yet collecting SS and are using the gap years to do Roth IRA conversions.

[White Coat Investor]

There are two nice things about making a lot of money. The first is that, well, you have a lot of money to spend even after paying all those taxes. First world problem.

But the second that I've really come to appreciate is not having to game the tax system like in this post. You're phased out of everything. Just look at the highest bracket and that's what you're paying. No credits, no exemptions, any deduction with a phaseout is gone (well, except Pease but that's really just a 1% additional tax bracket), AMT is gone etc. Really simplifies tax planning.

I'm confused. What is the point?

It's just an observation. I've been lucky enough to have paid taxes in every tax bracket. The process was really straightforward in the lower tax brackets, then got pretty complicated in the middle, and then became very simple in the top ones.

I don't know that it is particularly actionable for you.

If you want actionable information, defer income, accelerate deductible expenses, put off income to next year, work less etc

[MarkNYC]

I'm confused. What is the point?

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

Time spent? It's probably 10 minutes of my day. And I am never a fan of leaving money on the table.

The actual math in this scenario is more like $3-$4k dollars.

You correctly indicated in your original post that the 3.8% tax is applied against net investment income or the amount that AGI exceeds $250K (whichever is lower).

$15,000 investment income x 3.8% = $570. So how did you get $3K- $4K?

[Bacchus01]

I'm confused. What is the point?

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

Time spent? It's probably 10 minutes of my day. And I am never a fan of leaving money on the table.

The actual math in this scenario is more like $3-$4k dollars.

You correctly indicated in your original post that the 3.8% tax is applied against net investment income or the amount that AGI exceeds $250K (whichever is lower).

$15,000 investment income x 3.8% = $570. So how did you get $3K- $4K?

That was only one piece of it. Pease/PEP is a bigger piece.

[MarkNYC]

I'm confused. What is the point?

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

Time spent? It's probably 10 minutes of my day. And I am never a fan of leaving money on the table.

The actual math in this scenario is more like $3-$4k dollars.

You correctly indicated in your original post that the 3.8% tax is applied against net investment income or the amount that AGI exceeds $250K (whichever is lower).

$15,000 investment income x 3.8% = $570. So how did you get $3K- $4K?

That was only one piece of it. Pease/PEP is a bigger piece.

Filing jointly, the phaseouts in 2018 start at $320K AGI. So if your AGI remains at $331K, under current law the additional tax caused by the phaseouts would be approximately:

1. Pease phaseout: $11,000 x 3% x 33% marginal rate = $ 108
2. PEP (exemption) phaseout: $8,300 x 10% x 33% marginal = $273. Another $137 for each dependent exemption.

[Bacchus01]

I infer from the post that your time may be better spent going out there and making more money and not worrying about marginal tax changes. If you top off all the marginal tax rates, you know you're paying the top rate so none of the tweaking is going to do any good. For the rest of us, shifting $10k here or there for a 4% marginal benefit looks like about $400. Just be sure it's a tax benefit and not a tax deferment that means you pay it back later anyway (and sometimes more).

Have you tried using last year tax software to run what-if scenarios?

Time spent? It's probably 10 minutes of my day. And I am never a fan of leaving money on the table.

The actual math in this scenario is more like $3-$4k dollars.

You correctly indicated in your original post that the 3.8% tax is applied against net investment income or the amount that AGI exceeds $250K (whichever is lower).

$15,000 investment income x 3.8% = $570. So how did you get $3K- $4K?

That was only one piece of it. Pease/PEP is a bigger piece.

Filing jointly, the phaseouts in 2018 start at $320K AGI. So if your AGI remains at $331K, under current law the additional tax caused by the phaseouts would be approximately:

1. Pease phaseout: $11,000 x 3% x 33% marginal rate = $ 108
2. PEP (exemption) phaseout: $8,300 x 10% x 33% marginal = $273. Another $137 for each dependent exemption.

You are right. I think I was counting the tax savings (deferral) as well. If it's delayed long enough, I suppose it could got to 0, but of course it's more likely to just drop down to 28%, so that's 5% savings as well.