Explain the new tax bill 12% bracket to me

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AntsOnTheMarch
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Explain the new tax bill 12% bracket to me

Post by AntsOnTheMarch » Sun Dec 24, 2017 6:43 am

Self-employed and setting up my 2018 spreadsheets. I’m not as familiar with tax prep as many here because I don’t do my own taxes, but I have a spreadsheet that pulls numbers from my accounts ledger and keeps me posted close enough to the actual tax numbers (for estimated taxes, ACA and for planning).

Married filing jointly
I’m confused about the 12% bracket ($19,050-$77,400). I see it listed as 12% (replacing the 15% bracket) but in other places it’s listed as 15%. It seems to be taxed as follows:

$1,905 + 15% of the amount over $19,050

Is this correct? If so, why is it referred to as the 12% tax bracket?

neilpilot
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Re: Explain the new tax bill 12% bracket to me

Post by neilpilot » Sun Dec 24, 2017 7:01 am

Incorrect; it's $1,905 + 12% of the amount over $19,050

Dantes
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Re: Explain the new tax bill 12% bracket to me

Post by Dantes » Sun Dec 24, 2017 7:03 am

$1,905 + 15% of the amount over $19,050 is from the former brackets. There are lots of web sites still up with outdated information.

Oblivious Invester has a nice simple 2018 bracket listing at https://obliviousinvestor.com

AntsOnTheMarch
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Re: Explain the new tax bill 12% bracket to me

Post by AntsOnTheMarch » Sun Dec 24, 2017 7:09 am

neilpilot wrote:
Sun Dec 24, 2017 7:01 am
Incorrect; it's $1,905 + 12% of the amount over $19,050
That makes sense. This is where I found the confusing info.
https://taxfoundation.org/2018-tax-brackets/

Dantes, I see that you are correct. It’s a post from Nov-2017 that seems to show what the 2018 rates would have been based on the old tax plan. So I was just confused.

Thanks to both of you.
Last edited by AntsOnTheMarch on Sun Dec 24, 2017 7:25 am, edited 2 times in total.

neilpilot
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Re: Explain the new tax bill 12% bracket to me

Post by neilpilot » Sun Dec 24, 2017 7:23 am

AntsOnTheMarch wrote:
Sun Dec 24, 2017 7:09 am
neilpilot wrote:
Sun Dec 24, 2017 7:01 am
Incorrect; it's $1,905 + 12% of the amount over $19,050
That makes sense. This is where I found the confusing info.
https://taxfoundation.org/2018-tax-brackets/

Image
Well the link was correct when it was created on Nov 20. Those were the 2018 brackets BEFORE the tax law was drafted & passed.

AntsOnTheMarch
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Re: Explain the new tax bill 12% bracket to me

Post by AntsOnTheMarch » Sun Dec 24, 2017 7:25 am

neilpilot wrote:
Sun Dec 24, 2017 7:23 am
AntsOnTheMarch wrote:
Sun Dec 24, 2017 7:09 am
neilpilot wrote:
Sun Dec 24, 2017 7:01 am
Incorrect; it's $1,905 + 12% of the amount over $19,050
That makes sense. This is where I found the confusing info.
https://taxfoundation.org/2018-tax-brackets/

Image
Well the link was correct when it was created on Nov 20. Those were the 2018 brackets BEFORE the tax law was drafted & passed.
I noticed that just as you posted and was editing my comment. Thank you! :sharebeer

AlmstRtrd
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Re: Explain the new tax bill 12% bracket to me

Post by AlmstRtrd » Sun Dec 24, 2017 7:52 am

I hadn't heard about the 12% bracket yet. I'll be retiring in 2018 and also hitting age 59.5 so I'll be able to start doing Roth conversions. iORP suggests that I should be rather aggressive with my conversions (don't know if it's been updated with the new brackets yet) and I've been unsure as to whether or not I should really be converting a lot of my tIRA funds if much of that conversion is happening at 15%. 12% sounds MUCH better. Am I thinking about this correctly? Did the conversion question just get a lot easier? Thanks.

CULater
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Re: Explain the new tax bill 12% bracket to me

Post by CULater » Sun Dec 24, 2017 2:50 pm

Here's a simple interactive tax calculator that shows you the breakdown for a given income figure across the new brackets.

https://www.marketwatch.com/story/the-n ... 2017-10-26
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

Silk McCue
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Re: Explain the new tax bill 12% bracket to me

Post by Silk McCue » Sun Dec 24, 2017 3:29 pm

AlmstRtrd wrote:
Sun Dec 24, 2017 7:52 am
I hadn't heard about the 12% bracket yet. I'll be retiring in 2018 and also hitting age 59.5 so I'll be able to start doing Roth conversions. iORP suggests that I should be rather aggressive with my conversions (don't know if it's been updated with the new brackets yet) and I've been unsure as to whether or not I should really be converting a lot of my tIRA funds if much of that conversion is happening at 15%. 12% sounds MUCH better. Am I thinking about this correctly? Did the conversion question just get a lot easier? Thanks.
Paying 12% versus 15% is much better. However, the rate change doesn't make what iORP is proposing any better than what it already proposes as the entire rate structure has changed. You need to decide if you agree with what iORP is proposing for your individual financial circumstances. If you do, then carry on. I converted a chunk last December and will be converting again this week. I have spent a fair amount of time with iORP and Firecalc but will use there results as guidance rather than gospel. iORP can come in pretty hot on conversions depending on the data you enter in.

EDIT: BTW if you have room in the 15% bracket now to make a conversion you should seriously consider doing that now based upon your circumstances. 15% is more that 12% but both may be lower than what you will pay in future years depending upon your circumstances.

AlmstRtrd
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Re: Explain the new tax bill 12% bracket to me

Post by AlmstRtrd » Sun Dec 24, 2017 4:51 pm

Silk McCue wrote:
Sun Dec 24, 2017 3:29 pm
AlmstRtrd wrote:
Sun Dec 24, 2017 7:52 am
I hadn't heard about the 12% bracket yet. I'll be retiring in 2018 and also hitting age 59.5 so I'll be able to start doing Roth conversions. iORP suggests that I should be rather aggressive with my conversions (don't know if it's been updated with the new brackets yet) and I've been unsure as to whether or not I should really be converting a lot of my tIRA funds if much of that conversion is happening at 15%. 12% sounds MUCH better. Am I thinking about this correctly? Did the conversion question just get a lot easier? Thanks.
Paying 12% versus 15% is much better. However, the rate change doesn't make what iORP is proposing any better than what it already proposes as the entire rate structure has changed. You need to decide if you agree with what iORP is proposing for your individual financial circumstances. If you do, then carry on. I converted a chunk last December and will be converting again this week. I have spent a fair amount of time with iORP and Firecalc but will use there results as guidance rather than gospel. iORP can come in pretty hot on conversions depending on the data you enter in.

EDIT: BTW if you have room in the 15% bracket now to make a conversion you should seriously consider doing that now based upon your circumstances. 15% is more that 12% but both may be lower than what you will pay in future years depending upon your circumstances.
Thanks for the response. I actually can't do a conversion this year (won't reach age 59.5 for another three months). Yeah, my DW will still be working next year and that will limit possible conversions as well (not that I am complaining!).

Can you please explain what you mean when you say, "However, the rate change doesn't make what iORP is proposing any better than what it already proposes as the entire rate structure has changed."? Isn't the new 12% bracket essentially the old 15% bracket?

AntsOnTheMarch
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Re: Explain the new tax bill 12% bracket to me

Post by AntsOnTheMarch » Sun Dec 24, 2017 5:03 pm

CULater wrote:
Sun Dec 24, 2017 2:50 pm
Here's a simple interactive tax calculator that shows you the breakdown for a given income figure across the new brackets.

https://www.marketwatch.com/story/the-n ... 2017-10-26
Nice! I used it to run some tests against my spreadsheet and it checks out! That’s one less thing...

retiredjg
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Re: Explain the new tax bill 12% bracket to me

Post by retiredjg » Sun Dec 24, 2017 5:27 pm

AlmstRtrd wrote:
Sun Dec 24, 2017 4:51 pm
Silk McCue wrote:
Sun Dec 24, 2017 3:29 pm
AlmstRtrd wrote:
Sun Dec 24, 2017 7:52 am
I hadn't heard about the 12% bracket yet. I'll be retiring in 2018 and also hitting age 59.5 so I'll be able to start doing Roth conversions. iORP suggests that I should be rather aggressive with my conversions (don't know if it's been updated with the new brackets yet) and I've been unsure as to whether or not I should really be converting a lot of my tIRA funds if much of that conversion is happening at 15%. 12% sounds MUCH better. Am I thinking about this correctly? Did the conversion question just get a lot easier? Thanks.
Paying 12% versus 15% is much better. However, the rate change doesn't make what iORP is proposing any better than what it already proposes as the entire rate structure has changed. You need to decide if you agree with what iORP is proposing for your individual financial circumstances. If you do, then carry on. I converted a chunk last December and will be converting again this week. I have spent a fair amount of time with iORP and Firecalc but will use there results as guidance rather than gospel. iORP can come in pretty hot on conversions depending on the data you enter in.

EDIT: BTW if you have room in the 15% bracket now to make a conversion you should seriously consider doing that now based upon your circumstances. 15% is more that 12% but both may be lower than what you will pay in future years depending upon your circumstances.
Thanks for the response. I actually can't do a conversion this year (won't reach age 59.5 for another three months). Yeah, my DW will still be working next year and that will limit possible conversions as well (not that I am complaining!).
You do not need to be 59.5 to do conversions. Start as soon as you are in what you think will be a low tax bracket for you. If you are in the 15% bracket now, convert up to just under the top of that bracket assuming there is no negative consequence somewhere else.

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BigFoot48
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Re: Explain the new tax bill 12% bracket to me

Post by BigFoot48 » Sun Dec 24, 2017 6:05 pm

AlmstRtrd wrote:
Sun Dec 24, 2017 7:52 am
... I've been unsure as to whether or not I should really be converting a lot of my tIRA funds if much of that conversion is happening at 15%. 12% sounds MUCH better. Am I thinking about this correctly? Did the conversion question just get a lot easier? Thanks.
I have been updating the Retiree Portfolio Model with the new rates and brackets for the 2018 version. Using the same example data the 2017 Roth conversion total from maximizing at the 15% bracket for 8 years was $282,000. Using the 2018 rates and maximizing the 12% bracket the total converted is $265,000, so not a big difference. RPM also provides the average tax rate so if someone wants to still hit 15% its easy to see how much conversions it takes do that.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

AlmstRtrd
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Re: Explain the new tax bill 12% bracket to me

Post by AlmstRtrd » Sun Dec 24, 2017 7:11 pm

retiredjg wrote:
Sun Dec 24, 2017 5:27 pm
You do not need to be 59.5 to do conversions. Start as soon as you are in what you think will be a low tax bracket for you. If you are in the 15% bracket now, convert up to just under the top of that bracket assuming there is no negative consequence somewhere else.
But I would get hit with a 10% early withdrawal penalty if I do a conversion before age 59.5, correct?

OnTrack
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Re: Explain the new tax bill 12% bracket to me

Post by OnTrack » Sun Dec 24, 2017 7:15 pm

Dantes wrote:
Sun Dec 24, 2017 7:03 am
$1,905 + 15% of the amount over $19,050 is from the former brackets. There are lots of web sites still up with outdated information.

Oblivious Invester has a nice simple 2018 bracket listing at https://obliviousinvestor.com
Can someone please clarify the capital gains info; per above link "... 0% tax rate if they fall below $77,200 ...". However, $77,200 and other boundaries don't line up with the new brackets (e.g. $77,400 for married filing jointly); is this correct?

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BigFoot48
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Re: Explain the new tax bill 12% bracket to me

Post by BigFoot48 » Sun Dec 24, 2017 7:35 pm

OnTrack wrote:
Sun Dec 24, 2017 7:15 pm
Can someone please clarify the capital gains info; per above link "... 0% tax rate if they fall below $77,200 ...". However, $77,200 and other boundaries don't line up with the new brackets (e.g. $77,400 for married filing jointly); is this correct?
That's correct. The long-term capital gains and qualified dividends will continue to use the old brackets. We don't want to simplify things too much, do we? :wink:
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

TG2
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Re: Explain the new tax bill 12% bracket to me

Post by TG2 » Sun Dec 24, 2017 7:57 pm

AlmstRtrd wrote:
Sun Dec 24, 2017 7:11 pm
retiredjg wrote:
Sun Dec 24, 2017 5:27 pm
You do not need to be 59.5 to do conversions. Start as soon as you are in what you think will be a low tax bracket for you. If you are in the 15% bracket now, convert up to just under the top of that bracket assuming there is no negative consequence somewhere else.
But I would get hit with a 10% early withdrawal penalty if I do a conversion before age 59.5, correct?
No. Non-qualified withdrawals are penalized before age 59.5. Conversions are not. You need to pay the taxes on the conversion from other monies. If you pay the taxes out of the conversion then you do create a problem. Any part used to pay the taxes would not be converted, so would effectively be a distribution and thus subject to penalty.

One thing to consider is how large your tIRA is, how much you eventually want to convert, and whether you will have sufficient room in the 12% bracket over the next few years to do all that you want to do. If so, you could probably bypass this year at 15%. If not, it is still a good deal at that rate. I did $35,000 about three weeks ago and don't regret it a bit.

retiredjg
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Re: Explain the new tax bill 12% bracket to me

Post by retiredjg » Sun Dec 24, 2017 10:04 pm

AlmstRtrd wrote:
Sun Dec 24, 2017 7:11 pm
retiredjg wrote:
Sun Dec 24, 2017 5:27 pm
You do not need to be 59.5 to do conversions. Start as soon as you are in what you think will be a low tax bracket for you. If you are in the 15% bracket now, convert up to just under the top of that bracket assuming there is no negative consequence somewhere else.
But I would get hit with a 10% early withdrawal penalty if I do a conversion before age 59.5, correct?
No. A conversion is not a withdrawal. No penalty. But you do have to pay tax. :happy And the money to pay the tax can't come from the IRA or that part would have a 10% penalty (as an early withdrawal).

AlmstRtrd
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Re: Explain the new tax bill 12% bracket to me

Post by AlmstRtrd » Mon Dec 25, 2017 8:01 am

TG2 wrote:
Sun Dec 24, 2017 7:57 pm
One thing to consider is how large your tIRA is, how much you eventually want to convert, and whether you will have sufficient room in the 12% bracket over the next few years to do all that you want to do. If so, you could probably bypass this year at 15%. If not, it is still a good deal at that rate. I did $35,000 about three weeks ago and don't regret it a bit.
Thanks TG2 and retiredjg for your help! Without going into too many details, it looks like it will make sense to wait until 2018 to start the conversions. For 2017 I think we can get most of the desired result by just contributing more to Roth accounts this year (DW and I are both self-employed so we can pile funds into solo 401K Roth accounts). It's hitting the sweet spot on ACA subsidies that messes us up as well but I realize that is a first-world problem. Many thanks for your help in this thread. With DW being 8.5 years younger than I, we can likely use the info gleaned from this thread in the coming eight years or so.

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