Going from marginal tax rate 12% to 37% with only $13K more income

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livesoft
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Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 11:54 am

This morning I was doing a series of "What if?" tax returns in order to figure out how much of Roth conversion to do for tax year 2019.

I discovered empirically a very steep increase in marginal income tax rate going from AGI about $101K to AGI $114K for my MFJ tax return where we would have a marginal rate of 12% on a Roth conversion keeping us below $101K and 37% on a Roth conversion going above about $114K.

We do not get any SS income. Our income consists of wages and mostly qualified dividend income plus any Roth conversions. We have no net realized capital gains (no long, no short).

Actionable: You might be surprised when you do some "What if?" tax returns for your personal specific situation. One cannot go by published tax bracket info. I was totally surprised.
Last edited by livesoft on Sat Nov 23, 2019 12:32 pm, edited 1 time in total.
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MrBobcat
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Re: Going from marginal tax rate to 12% to 37% with only $13K more income

Post by MrBobcat » Sat Nov 23, 2019 12:02 pm

I've seen some really weird things when people hit the 400% ACA limit. Some of those cliffs are brutal.

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Re: Going from marginal tax rate to 12% to 37% with only $13K more income

Post by MotoTrojan » Sat Nov 23, 2019 12:03 pm

Mind helping me understand how $114K AGI gets such a high marginal rate?

RubyTuesday
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Re: Going from marginal tax rate to 12% to 37% with only $13K more income

Post by RubyTuesday » Sat Nov 23, 2019 12:04 pm

Yeah, it shocked me to see the marginal rates jump when modeling same. Obviously comes from ordinary income from Roth conversion being taxed added to taxes from cap gain moving from zero to 15 or 20%. Kitces and our own wiki have articles on this I believe.

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Re: Going from marginal tax rate to 12% to 37% with only $13K more income

Post by FrugalProfessor » Sat Nov 23, 2019 12:19 pm

I've modeled effective marginal rates vs labor income here: https://www.frugalprofessor.com/2019-tax-calculator/.

The intent of the spreadsheet is to capture exactly what livesoft is mentioning. It should help people make more informed decisions on Roth vs Trad.

I don't model social security taxation, since that's a whole new can of worms. If you need that added complexity, check out MDM's spreadsheet which is a lot more comprehensive than mine: https://forum.mrmoneymustache.com/forum ... t-updates/.
I blog. Taxes are the lowest hanging source of alpha. I eat tax alpha for breakfast.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by Lalamimi » Sat Nov 23, 2019 12:57 pm

This is scary. About to do our first Roth conversion this week, and want to stay under $105K to be under threshold for 22% bracket- both are over 65, so $27000 standard deduction. Only income is one month of unemployment, small pension and our interest on MM and savings accounts, about 10K.
did you use TurboTax? We plan to start Social Security in January so need the max into the Roth. Thanks.

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 1:07 pm

I used HRBlock tax prep software. I just took my 2018 return filed last month and changed the Roth conversion amounts in a few $5,000 increments, then in a few $1,000 increments, then in a few $100 increments to dial in the AGI and tax changes. It was pretty straightforward looking at Form 1040 line 7 and line 15.
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EdNorton
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by EdNorton » Sat Nov 23, 2019 1:37 pm

The reason you are in the 37% tax bracket is your ordinary income tax rate went to 22% and each dollar your income increases, it decreases by $1, the amount of dividends and LTCG's taxed at zero %. If you only have $100 of dividends, your marginal rate would go back to 22% once the dividends are taxed.
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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 1:43 pm

EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 2:05 pm

livesoft wrote:
Sat Nov 23, 2019 11:54 am
This morning I was doing a series of "What if?" tax returns in order to figure out how much of Roth conversion to do for tax year 2019.

I discovered empirically a very steep increase in marginal income tax rate going from AGI about $101K to AGI $114K for my MFJ tax return where we would have a marginal rate of 12% on a Roth conversion keeping us below $101K and 37% on a Roth conversion going above about $114K.

We do not get any SS income. Our income consists of wages and mostly qualified dividend income plus any Roth conversions. We have no net realized capital gains (no long, no short).

Actionable: You might be surprised when you do some "What if?" tax returns for your personal specific situation. One cannot go by published tax bracket info. I was totally surprised.
You seem surprised by this.

I am surprised that you are surprised.

This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 2:17 pm

marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
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marcopolo
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 2:30 pm

livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by LilyFleur » Sat Nov 23, 2019 3:05 pm

livesoft,
what is the different in your effective tax rate give the two scenarios?

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 3:09 pm

LilyFleur wrote:
Sat Nov 23, 2019 3:05 pm
what is the different in your effective tax rate give the two scenarios?
Looking at only Line 15 divided by Line 7:
2.6% vs 5.6%,so a more than 100% increase!
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by MrDrinkingWater » Sat Nov 23, 2019 3:19 pm

livesoft wrote:
Sat Nov 23, 2019 11:54 am
<SNIP>

I discovered empirically a very steep increase in marginal income tax rate going from AGI about $101K to AGI $114K for my MFJ tax return where we would have a marginal rate of 12% on a Roth conversion keeping us below $101K and 37% on a Roth conversion going above about $114K.

<SNIP>
I like that you posted this.

Those who might be thinking about doing a series of small Roth Conversions over several years should consider if doing one larger Roth Conversion is better for them tax-wise while also increasing their amount of spendable money. We've had quite a few threads on that subject.

Your test case shows that for those whose anticipated AGI without doing Roth conversions is around $101K, it might be better for them to add in doing one $52K Roth conversion for one year, rather than doing a a series of four $13K Roth conversions once per year over four years. They just need the resources in their taxable account to pay a larger tax bill that first year.
Last edited by MrDrinkingWater on Sat Nov 23, 2019 7:04 pm, edited 1 time in total.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by LilyFleur » Sat Nov 23, 2019 3:23 pm

livesoft wrote:
Sat Nov 23, 2019 3:09 pm
LilyFleur wrote:
Sat Nov 23, 2019 3:05 pm
what is the different in your effective tax rate give the two scenarios?
Looking at only Line 15 divided by Line 7:
2.6% vs 5.6%,so a more than 100% increase!
I would be extremely happy with 5.6%. :mrgreen:

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by the way » Sat Nov 23, 2019 3:25 pm

marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
Is this right? I thought the 12-22% ordinary crossover was higher than the 0-15% cap gains crossover. So the marginal on each extra ordinary dollar goes 27%...12%...22% - never hits 37% on tax brackets alone.

And actually, at under 100k, you are supposed to use the tax table so taxes jump in $50 income increments. That means the marginal tax on an extra dollar would be 0% for $49 and then suddenly jump $6 or $11, for a marginal tax of 600% or 1100% (on that dollar)!

btw, the thread's title might be misleading. We aren't talking 37% marginal on the whole 13k I assume. Maybe 37% marginal on a few hundred dollars at most?

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 3:30 pm

^I tested marginal on the highest $100 of additional Roth conversion income.
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 3:44 pm

marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
livesoft wrote:
Sat Nov 23, 2019 11:54 am
This morning I was doing a series of "What if?" tax returns in order to figure out how much of Roth conversion to do for tax year 2019.

I discovered empirically a very steep increase in marginal income tax rate going from AGI about $101K to AGI $114K for my MFJ tax return where we would have a marginal rate of 12% on a Roth conversion keeping us below $101K and 37% on a Roth conversion going above about $114K.

We do not get any SS income. Our income consists of wages and mostly qualified dividend income plus any Roth conversions. We have no net realized capital gains (no long, no short).

Actionable: You might be surprised when you do some "What if?" tax returns for your personal specific situation. One cannot go by published tax bracket info. I was totally surprised.
You seem surprised by this.

I am surprised that you are surprised.

This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
I am also surprised that livesoft (of all people! :wink: ) is surprised by this particular phenomenon.

Seems like the much-discussed proximity of the 12%/22% ordinary income transition to the 0%/15% qualified divs & LTCG transition highlights the issue. (As a single filer, I face a similar issue at a much lower income than livesoft does.*)

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dodecahedron
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 3:46 pm

livesoft wrote:
Sat Nov 23, 2019 3:30 pm
^I tested marginal on the highest $100 of additional Roth conversion income.
But to build on that question: the width of the income interval over which the 37% effective marginal tax rate applies is an interesting issue to explore.

Obviously, for some someone with only a small amount of qualified divs & LTCG, the interval will not be very wide. On the other hand, I am guessing livesoft has a substantial portion of qualified divs (edited to add: but on further thought, that´s beside the point. Leaving aside the education credits, I think the critical factor here is the $200 distance between taxable income of $78,750 and $78,950.)
Last edited by dodecahedron on Sat Nov 23, 2019 4:26 pm, edited 1 time in total.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by MathIsMyWayr » Sat Nov 23, 2019 3:47 pm

marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
No, it cannot be true. It is 27%, not 37%. This is so called a numerical accident. The higher rate 37% is from the loss of credit as livesoft showed below.
livesoft wrote:
Sat Nov 23, 2019 1:43 pm
EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
Last edited by MathIsMyWayr on Sat Nov 23, 2019 3:51 pm, edited 1 time in total.

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dodecahedron
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 3:48 pm

livesoft wrote:
Sat Nov 23, 2019 3:09 pm
LilyFleur wrote:
Sat Nov 23, 2019 3:05 pm
what is the different in your effective tax rate give the two scenarios?
Looking at only Line 15 divided by Line 7:
2.6% vs 5.6%,so a more than 100% increase!
To extend the question: you have long liked to tell us about how you pay zero taxes on $100K of income. With *that* point as your baseline, it works to be an infinite increase in your tax liability. :twisted:

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 3:50 pm

Well, tax laws changed.

ERN Now has a recent blog article that is showing up in a few places on the subject:
https://earlyretirementnow.com/2019/11/ ... ome-taxes/
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by Prokofiev » Sat Nov 23, 2019 3:59 pm

Edited

Too late for my snarky comment . . .

Edited #2

I definitely need to type faster . . .
Last edited by Prokofiev on Sat Nov 23, 2019 4:22 pm, edited 1 time in total.
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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 4:02 pm

Prokofiev wrote:
Sat Nov 23, 2019 3:59 pm
What happened to paying 0% in retirement??
My spouse made more W-2 money this year and tax laws changed.

(In any event AGI is above $100,000, too.)
Last edited by livesoft on Sat Nov 23, 2019 4:11 pm, edited 1 time in total.
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by JBTX » Sat Nov 23, 2019 4:02 pm

I find it ironic livesoft posted this, as he has been a big proponent of traditional vs Roth, yet was surprised that come time to do Roth conversions if not careful you may hit even high marginal rates. I have no doubt livesoft is savvy enough to navigate this minefield, but if he can be surprised by this imagine what may happen to others that aren't doing proactive tax planning on an annual basis come Roth conversion time.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by JBTX » Sat Nov 23, 2019 4:02 pm

Prokofiev wrote:
Sat Nov 23, 2019 3:59 pm
Edited

Too late for my snarky comment . . .
Best laid plans....

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livesoft
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 4:05 pm

JBTX wrote:
Sat Nov 23, 2019 4:02 pm
I find it ironic livesoft posted this, ....
Yes, that's one reason that I posted this ... I think folks enjoy it when I have to pay income taxes, so I wanted to give them a thrill.

Watch for a "financial milestone" post next week from me. :)
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by retiredjg » Sat Nov 23, 2019 4:07 pm

the way wrote:
Sat Nov 23, 2019 3:25 pm
Is this right? I thought the 12-22% ordinary crossover was higher than the 0-15% cap gains crossover.
It is $200 higher for a couple and $100 higher for a single person.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 5:06 pm

MathIsMyWayr wrote:
Sat Nov 23, 2019 3:47 pm
marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
No, it cannot be true. It is 27%, not 37%. This is so called a numerical accident. The higher rate 37% is from the loss of credit as livesoft showed below.
livesoft wrote:
Sat Nov 23, 2019 1:43 pm
EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

EDIT: THE ANALYSIS BELOW IS INCORRECT. I HAD A FLAW IN MY LOGIC WHICH HAS BEEN POINTED OUT BY "THE WAY" AND "RHUSKY" AMONG OTHERS. PLEASE SEE THEIR CORRECT ANALYSIS BELOW. SORRY FOR THE CONFUSION.

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
Last edited by marcopolo on Sat Nov 23, 2019 8:20 pm, edited 1 time in total.
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 5:08 pm

the way wrote:
Sat Nov 23, 2019 3:25 pm
marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
Is this right? I thought the 12-22% ordinary crossover was higher than the 0-15% cap gains crossover. So the marginal on each extra ordinary dollar goes 27%...12%...22% - never hits 37% on tax brackets alone.

And actually, at under 100k, you are supposed to use the tax table so taxes jump in $50 income increments. That means the marginal tax on an extra dollar would be 0% for $49 and then suddenly jump $6 or $11, for a marginal tax of 600% or 1100% (on that dollar)!

btw, the thread's title might be misleading. We aren't talking 37% marginal on the whole 13k I assume. Maybe 37% marginal on a few hundred dollars at most?
For, married filing jointly, they are $200 apart in 2019. They used to be the same, until the new tax laws introduced a small delta.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by MathIsMyWayr » Sat Nov 23, 2019 6:23 pm

marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
Sorry, I got it wrong. I never realized that there is a small difference between the two numbers, $78,950 and $78,750. I always thought that no fed. tax on qualified dividends and LCG for tax bracket 12% and lower. Has the gap been there all the time or is a typo in the law/rule?

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 6:30 pm

MathIsMyWayr wrote:
Sat Nov 23, 2019 6:23 pm
Sorry, I got it wrong. I never realized that there is a small difference between the two numbers, $78,950 and $78,750. I always thought that no fed. tax on qualified dividends and LCG for tax bracket 12% and lower. Has the gap been there all the time or is a typo in the law/rule?
The misalignment was an (unintentional?) artifact introduced in Tax Cut and Jobs Act (TCJA) of 2017.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 6:31 pm

MathIsMyWayr wrote:
Sat Nov 23, 2019 6:23 pm
marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
Sorry, I got it wrong. I never realized that there is a small difference between the two numbers, $78,950 and $78,750. I always thought that no fed. tax on qualified dividends and LCG for tax bracket 12% and lower. Has the gap been there all the time or is a typo in the law/rule?
The small gap was introduced in the new tax laws that were passed a year or so ago.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by retiredjg » Sat Nov 23, 2019 6:36 pm

MathIsMyWayr wrote:
Sat Nov 23, 2019 6:23 pm
Sorry, I got it wrong. I never realized that there is a small difference between the two numbers, $78,950 and $78,750. I always thought that no fed. tax on qualified dividends and LCG for tax bracket 12% and lower. Has the gap been there all the time or is a typo in the law/rule?
This happened with the new tax law which became effective in 2018. The limits had been the same under previous tax lax.

One of the limits got set without an update for the next year and the other got updated to the next year.

It's a glitch. Some interesting things happen in that gap. Somebody should have fixed it, but that did not happen. It is mentioned in this very long article, about 1/3 of the way down.

https://www.kitces.com/blog/final-gop-t ... trategies/

However, I'm still not sure that explains the 37%. Need to pencil and paper it before I'm convinced :shock:

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by the way » Sat Nov 23, 2019 6:41 pm

marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
MathIsMyWayr wrote:
Sat Nov 23, 2019 3:47 pm
marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm
marcopolo wrote:
Sat Nov 23, 2019 2:05 pm
This seems like a pretty well known phenomenon when additional income pushes capital gains/dividends out of the 0% rate.
Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
No, it cannot be true. It is 27%, not 37%. This is so called a numerical accident. The higher rate 37% is from the loss of credit as livesoft showed below.
livesoft wrote:
Sat Nov 23, 2019 1:43 pm
EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
you might want to double check this. I believe what I said in my post is true - marginal goes 27...12...22%, not 27...37...22% because the LTCG threshold is lower than the ordinary.

Think of it this way, each addl dollar of ordinary pushes the LTCG over the lower threshold till it's all the way into 15%. Then there's still $200 left until the ordinary threshold crosses from 12-22%, so in that sliver, the marginal is only 12%!

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 6:50 pm

retiredjg wrote:
Sat Nov 23, 2019 6:36 pm
However, I'm still not sure that explains the 37%. Need to pencil and paper it before I'm convinced :shock:
Yeah, I have not been able to recreate the 37% either.

Because of the way income stacking works, we know that by the time even one dollar of livesoft´s ordinary income is taxed at 22%, we know that ALL of his qualified dividends have already been already taxed at 15%. So it can´t be a simple matter of adding 15% and 22%.

It is easy to come up with examples of 27% effective tax rate. Not easy to come up with 37% given the parameters livesoft listed. I think it must be a very small window interval anomaly.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 6:55 pm

From IRS Publication 970
Modified adjusted gross income (MAGI) limits. For 2018, the amount of your lifetime learning credit is gradually reduced (phased out) if your MAGI is between $57,000 and $67,000 ($114,000 and $134,000 if you file a joint return). You can't claim the credit if your MAGI is $67,000 or more ($134,000 or more if you file a joint return). ....
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by niceguy7376 » Sat Nov 23, 2019 6:56 pm

For those that are still learning to do their own taxes, it would be great if some made up numbers of income, dividends, roth conversion are given. Please also mention the educational credits that OP mentioned about losing.
We are low income the past few years and I would love to do roth conversions to stay in the 12% bracket. we will have 3 digit dividends.

Appreciate a learning course with numerical examples on this.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by MathIsMyWayr » Sat Nov 23, 2019 6:56 pm

the way wrote:
Sat Nov 23, 2019 6:41 pm
marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
MathIsMyWayr wrote:
Sat Nov 23, 2019 3:47 pm
marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm

Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
No, it cannot be true. It is 27%, not 37%. This is so called a numerical accident. The higher rate 37% is from the loss of credit as livesoft showed below.
livesoft wrote:
Sat Nov 23, 2019 1:43 pm
EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
you might want to double check this. I believe what I said in my post is true - marginal goes 27...12...22%, not 27...37...22% because the LTCG threshold is lower than the ordinary.

Think of it this way, each addl dollar of ordinary pushes the LTCG over the lower threshold till it's all the way into 15%. Then there's still $200 left until the ordinary threshold crosses from 12-22%, so in that sliver, the marginal is only 12%!
It is a simple math, a linear math - there should be only one answer. Any way, since the gap is only $200, we are talking about a small amount of additional tax absent a cliff. The difference between 27% and 37% over $200, about 5-6 gal of gas where I live.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 6:57 pm

the way wrote:
Sat Nov 23, 2019 6:41 pm
marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
MathIsMyWayr wrote:
Sat Nov 23, 2019 3:47 pm
marcopolo wrote:
Sat Nov 23, 2019 2:30 pm
livesoft wrote:
Sat Nov 23, 2019 2:17 pm

Yes, the phenomenon is known. I expected a marginal rate of 27% or so. I did not expect 37% with such a low "extra" amount.
Yeah, the cap gains transition from 0 to 15 (responsible for 27% marginal) happens very close to the same income where the ordinary rate goes from 12 to 22. Adding the two together gets the total from 12% to 37% in a pretty narrow window. Tax planning is a good excersize.
No, it cannot be true. It is 27%, not 37%. This is so called a numerical accident. The higher rate 37% is from the loss of credit as livesoft showed below.
livesoft wrote:
Sat Nov 23, 2019 1:43 pm
EdNorton wrote:
Sat Nov 23, 2019 1:37 pm
The reason you are in the 37% tax bracket is ....
Exactly right with the extra bit also creating a reduction in some education tax credits that we get if our income didn't increase.
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
you might want to double check this. I believe what I said in my post is true - marginal goes 27...12...22%, not 27...37...22% because the LTCG threshold is lower than the ordinary.

Think of it this way, each addl dollar of ordinary pushes the LTCG over the lower threshold till it's all the way into 15%. Then there's still $200 left until the ordinary threshold crosses from 12-22%, so in that sliver, the marginal is only 12%!
Hmmm.
I think I see your point. I was thinking the gap was in the other direction I will have to give this a try with some tax software. Thanks.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 6:58 pm

the way wrote:
Sat Nov 23, 2019 6:41 pm
marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
you might want to double check this. I believe what I said in my post is true - marginal goes 27...12...22%, not 27...37...22% because the LTCG threshold is lower than the ordinary.

Think of it this way, each addl dollar of ordinary pushes the LTCG over the lower threshold till it's all the way into 15%. Then there's still $200 left until the ordinary threshold crosses from 12-22%, so in that sliver, the marginal is only 12%!
I believe the way has the analysis correct. I agree with him that there is some other anomaly driving the 37% livesoft found. I have not been able to recreate it myself, but as the way suggested above, it could be due to the kinds of discrete boxed approximations the IRS forces taxpayers to use if their taxable income is less than $100K. That accords with livesoft´s repeated statement that he had to zoom down to increments of $100 to see the phenomenon.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 7:07 pm

livesoft wrote:
Sat Nov 23, 2019 6:55 pm
From IRS Publication 970
Modified adjusted gross income (MAGI) limits. For 2018, the amount of your lifetime learning credit is gradually reduced (phased out) if your MAGI is between $57,000 and $67,000 ($114,000 and $134,000 if you file a joint return). You can't claim the credit if your MAGI is $67,000 or more ($134,000 or more if you file a joint return). ....
But those limits have been increased for 2019. The Lifetime Learning Credit phaseout ranges are $116K to $136K for MFJ and $58K to $68K for everyone else. (Source: page J-3 here.)

So if your issue is LLC phaseout related, it will not hit at $114K.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by livesoft » Sat Nov 23, 2019 7:10 pm

dodecahedron wrote:
Sat Nov 23, 2019 7:07 pm
So if your issue is LLC phaseout related, it will not hit at $114K.
Very true. It hits above $114K. I used words like "about" in my previous postings as in the OP:
... 37% on a Roth conversion going above about $114K.
Note that I have not used 2019 tax prep software. I am using 2018 tax prep software.
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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by rkhusky » Sat Nov 23, 2019 7:32 pm

marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
Above does not look right to me.

Define regular taxable income = total taxable income - (LTCG + QD) = (wages, Roth conversion, tIRA withdrawal, interest, non-qualified dividend, etc)

The transition from 12% to 22% bracket is at regular taxable income of $78,950.
The transition from 0% to 15% cap gains rate is at total taxable income of $78,750

Assuming one has a combo of regular taxable income and LTCG/QD, the total of which is less than $78,750.
Marginal rate for adding regular taxable income such that:

Total taxable income under $78,750: 12%
Regular taxable income < $78,750 and total taxable income between $78,750 and $78,950: 27%
Regular taxable income < $78,750 and total taxable income > $78,950: 27%
Regular taxable income between $78,750 and $78,950 and total taxable income between $78,750 and $78,950: 12%
Regular taxable income between $78,750 and $78,950 and total taxable income > $78,950: 12%
Regular taxable income> $78,950: 22%

I am not seeing a situation where an added dollar of regular taxable income is taxed at 22% and also pushes a dollar of LTCG/QD from 0% to 15%.
Last edited by rkhusky on Sat Nov 23, 2019 7:59 pm, edited 5 times in total.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by the way » Sat Nov 23, 2019 7:41 pm

dodecahedron wrote:
Sat Nov 23, 2019 7:07 pm
livesoft wrote:
Sat Nov 23, 2019 6:55 pm
From IRS Publication 970
Modified adjusted gross income (MAGI) limits. For 2018, the amount of your lifetime learning credit is gradually reduced (phased out) if your MAGI is between $57,000 and $67,000 ($114,000 and $134,000 if you file a joint return). You can't claim the credit if your MAGI is $67,000 or more ($134,000 or more if you file a joint return). ....
But those limits have been increased for 2019. The Lifetime Learning Credit phaseout ranges are $116K to $136K for MFJ and $58K to $68K for everyone else. (Source: page J-3 here.)

So if your issue is LLC phaseout related, it will not hit at $114K.
This title was kind of click-baity. ;-) I'm gonna start a new thread: Getting hit with 100 million percent marginal tax!

How? Say I received 10k obamacare subsidies. But my income is at xxxxx.49 right below the cliff and then I earned 1 penny more in interest. I then have to pay back $10k on $0.01 income, ie 100,000,000% marginal tax (on the 1 cent)!

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 7:53 pm

livesoft wrote:
Sat Nov 23, 2019 7:10 pm
dodecahedron wrote:
Sat Nov 23, 2019 7:07 pm
So if your issue is LLC phaseout related, it will not hit at $114K.
Very true. It hits above $114K. I used words like "about" in my previous postings as in the OP:
... 37% on a Roth conversion going above about $114K.
Note that I have not used 2019 tax prep software. I am using 2018 tax prep software.
I assume you will be redoing this exercise after you buy 2019 tax prep software during the expected upcoming Black Friday sale? Please advise us whether this curious anomaly survives the COLA indexing of tax parameters.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by Ron Ronnerson » Sat Nov 23, 2019 8:16 pm

I think it’s definitely a good idea to run numbers. My family gets the premium tax credit for health insurance and we need to keep our income under $66,100 for our family of three to get the credit (our cliff is different from that of most people due to the particularities of the Affordable Care Act). Since I don’t want to risk coming so close to the edge, we were thinking of bringing MAGI down to $65k.

However, our taxes would be $638.64 higher on an income of $65,000 vs. $63,999. Here is the breakdown if income was at the higher number:
$98.64 less would be received for the premium tax credit
$120 more paid for federal income taxes (12% bracket)
$20 more paid for California income taxes (2% bracket)
$200 loss of Saver’s Credit for me
$200 loss of Saver’s Credit for wife
the way wrote:
Sat Nov 23, 2019 7:41 pm
I'm gonna start a new thread: Getting hit with 100 million percent marginal tax!

How? Say I received 10k obamacare subsidies. But my income is at xxxxx.49 right below the cliff and then I earned 1 penny more in interest. I then have to pay back $10k on $0.01 income, ie 100,000,000% marginal tax (on the 1 cent)!
I can relate to this. If our income goes a penny above $66,100, we’d have to pay back $15k for going over the ACA Cliff. That’s one seriously nasty rate but again goes to show that running the numbers is a very good idea.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by dodecahedron » Sat Nov 23, 2019 8:20 pm

livesoft wrote:
Sat Nov 23, 2019 4:05 pm
JBTX wrote:
Sat Nov 23, 2019 4:02 pm
I find it ironic livesoft posted this, ....
Yes, that's one reason that I posted this ... I think folks enjoy it when I have to pay income taxes, so I wanted to give them a thrill.

Watch for a "financial milestone" post next week from me. :)
Waiting with baited breath for the financial milestone post. I am wondering if you are waiting for the expected Black Friday price drop in Block tax software to fine tune your analysis before making this pronouncement. :)

Meanwhile, we can all have fun guessing as to the nature of this upcoming post. The possibilities are endless.

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Re: Going from marginal tax rate 12% to 37% with only $13K more income

Post by marcopolo » Sat Nov 23, 2019 8:21 pm

rkhusky wrote:
Sat Nov 23, 2019 7:32 pm
marcopolo wrote:
Sat Nov 23, 2019 5:06 pm
The transition from 12% to 22% bracket is at AGI of $78,950.
The transition from 0% to 15% cap gains rate is $78,750

Marginal rates around these transitions

Under $78,750: 12%
between $78,750 and $78,950: 27%
Above $78,950 until you run out of cap gain that got pushed to higher rate: 37%
After pushed capital gains are exhausted (up to next set of thresholds): 22%

I think any loss of credits would be in addition to that.
Above does not look right to me.

Define regular taxable income = total taxable income - (LTCG + QD) = (wages, Roth conversion, tIRA withdrawal, interest, non-qualified dividend, etc)

The transition from 12% to 22% bracket is at regular taxable income of $78,950.
The transition from 0% to 15% cap gains rate is at total taxable income of $78,750

Assuming one has a combo of regular taxable income and LTCG/QD, the total of which is less than $78,750.
Marginal rate for adding regular taxable income such that:

Total taxable income under $78,750: 12%
Regular taxable income < $78,750 and total taxable income between $78,750 and $78,950: 27%
Regular taxable income < $78,750 and total taxable income > $78,950: 27%
Regular taxable income between $78,750 and $78,950 and total taxable income between $78,750 and $78,950: 12%
Regular taxable income between $78,750 and $78,950 and total taxable income > $78,950: 12%
Regular taxable income> $78,950: 22%

I am not seeing a situation where an added dollar of regular taxable income is taxed at 22% and also pushes a dollar of LTCG/QD from 0% to 15%.
You are correct. I had a flaw in how i was thinking about it. I have added a note to my post above. Thanks for the clarification.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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