Question about 2018 tax scenario--Roth conversion and capital gain in 2018

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footballfan82
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Joined: Sun May 02, 2010 10:34 pm

Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by footballfan82 »

Hello everyone,

Here's my situation:

1. I will have no income from a job for the 2018 tax year.
2. Aside from a potential Roth conversion or potential mutual fund sale, my only other income for tax year 2018 would be some interest (1099-INT) income.

Having done a little research, it seems like for the 2018 tax year that my standard deduction would be $12,000 for a single filer of my age. So if my only other income source for 2018 was interest income of say $1000, then I should be able to convert about $11,000 from a traditional IRA to a Roth IRA in 2018 with no federal tax due on the conversion amount, right? The standard deduction (less my interest income) would hopefully cover the federal tax liability of the conversion?

My real question is how it would work in the above scenario if, in addition to the interest income and Roth conversion, I ALSO sold some shares of a mutual fund that generated a long-term capital gain? So let's say that I also now have a long-term capital gain of maybe $5,000 to report in 2018 as well. If my understanding is correct, I would be below the 2018 threshold for a single filer to receive a tax rate of 0% on the long-term capital gain, right? But if my scenario has $1,000 of interest income, $11,000 in Roth conversions, and $5000 of long-term capital gains all to report for 2018, am I still able to do the Roth conversion with no federal tax liability? Does bringing a long-term capital gain into the picture in any way alter the plan of using what remains of my standard deduction to cover the tax liability for a Roth conversion?

Thank you in advance to anyone who might be able to provide some clarification! :happy

Dave
kaneohe
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by kaneohe »

https://www.mortgagecalculator.org/calc ... ulator.php

Stick your numbers in the linked calculator and you should find out no tax?
Then look down further to see the tax tables. The 12% tax bracket for singles goes to 38+K . If your taxable income including CG is less than that, your CG are taxed at 0%
kaneohe
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by kaneohe »

similar thread here viewtopic.php?f=1&t=261916
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FiveK
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by FiveK »

A single filer could have $12K ordinary income and $38,600 LTCG and still pay $0 tax. Go more than a few dollars (due to rounding) above either of those numbers and $1 is owed, etc.
chemocean
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by chemocean »

Before you take any action, I would suggest you run the numbers through the Schedule D worksheet in the Schedule D instructions. Unfortunately, the draft 2018 Schedule D instructions have not be released yet. I'm waiting for the draft to be released before I make any year end decisions.
kaneohe
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by kaneohe »

https://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf

is this what you're looking for? see p.40
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FiveK
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by FiveK »

chemocean wrote: Sun Oct 21, 2018 11:41 pm ... I'm waiting for the draft to be released before I make any year end decisions.
As noted in the "similar thread here" kaneohe linked, cells Calculations!K3:M33 on the personal finance toolbox spreadsheet match the current 2018 draft for the QD&LTCG tax worksheet, if you want a worked example. Other 2018 tax estimation packages probably get this part correct also.
MikeG62
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Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by MikeG62 »

beautifulsong wrote: Sun Oct 21, 2018 2:33 pm
...My real question is how it would work in the above scenario if, in addition to the interest income and Roth conversion, I ALSO sold some shares of a mutual fund that generated a long-term capital gain? So let's say that I also now have a long-term capital gain of maybe $5,000 to report in 2018 as well. If my understanding is correct, I would be below the 2018 threshold for a single filer to receive a tax rate of 0% on the long-term capital gain, right? But if my scenario has $1,000 of interest income, $11,000 in Roth conversions, and $5000 of long-term capital gains all to report for 2018, am I still able to do the Roth conversion with no federal tax liability? Does bringing a long-term capital gain into the picture in any way alter the plan of using what remains of my standard deduction to cover the tax liability for a Roth conversion?

Thank you in advance to anyone who might be able to provide some clarification! :happy

Dave
Dave, what Federal income tax rate do you expect to be in in future years? Reason I ask is that it might not be a bad idea to ROTH convert more of your t-IRA if you are only going to pay Federal income tax at 12% (i.e., if it is likely that your tax rate when you ultimately begin drawing on your t-IRA and SS will be higher than 12%). I mean, the goal may not be to just pay zero tax. Locking in low tax rates is a good idea too. Just make sure that you keep your taxable income below the level where capital gains tax would kick in.

FWIW, I am Roth converting my t-IRA up to the top of the 12% income tax bracket (because I think it highly likely our tax rate when we are taking RMD's from my t-IRA and drawing SS will be higher than 12%). DW and I are early retired (I am 56 and she is 53).
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Topic Author
footballfan82
Posts: 25
Joined: Sun May 02, 2010 10:34 pm

Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by footballfan82 »

kaneohe wrote: Sun Oct 21, 2018 3:37 pm similar thread here viewtopic.php?f=1&t=261916
Kaneohe,

Thank you! That thread had a link that was very helpful to my situation, and I wish I'd discovered it before I posted my question. :happy

Dave
Topic Author
footballfan82
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Joined: Sun May 02, 2010 10:34 pm

Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by footballfan82 »

FiveK wrote: Sun Oct 21, 2018 10:16 pm A single filer could have $12K ordinary income and $38,600 LTCG and still pay $0 tax. Go more than a few dollars (due to rounding) above either of those numbers and $1 is owed, etc.
FiveK, thank you very much for the clarification! I had assumed it would work this way, but I always feel better getting confirmation from knowledgeable people on this forum...

Dave
Topic Author
footballfan82
Posts: 25
Joined: Sun May 02, 2010 10:34 pm

Re: Question about 2018 tax scenario--Roth conversion and capital gain in 2018

Post by footballfan82 »

MikeG62 wrote: Mon Oct 22, 2018 7:08 am
Dave, what Federal income tax rate do you expect to be in in future years? Reason I ask is that it might not be a bad idea to ROTH convert more of your t-IRA if you are only going to pay Federal income tax at 12% (i.e., if it is likely that your tax rate when you ultimately begin drawing on your t-IRA and SS will be higher than 12%). I mean, the goal may not be to just pay zero tax. Locking in low tax rates is a good idea too. Just make sure that you keep your taxable income below the level where capital gains tax would kick in.

FWIW, I am Roth converting my t-IRA up to the top of the 12% income tax bracket (because I think it highly likely our tax rate when we are taking RMD's from my t-IRA and drawing SS will be higher than 12%). DW and I are early retired (I am 56 and she is 53).
Hi Mike,

I did consider the possibility of converting a little bit more. In my case, it probably makes the most sense for me to convert just enough to take advantage of the standard deduction. But your point is very well taken, and in the past I have done some larger conversions using similar reasoning. As you said, it is always wise to consider future income and future tax brackets! :happy

Dave
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