Muni Money Market funds starting to look good!

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zzz
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Re: Muni Money Market funds starting to look good!

Post by zzz » Sun Apr 15, 2018 11:27 pm

I was talking about money markets which would be taxed as ordinary income at your ordinary income rate. Interest or dividend rates would not be added to ordinary income rates. If you were in the 12% ordinary income bracket and 15% in the qualified dividend bracket you would not pay 27% on ordinary income, interest or dividends. $100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
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ofckrupke
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Re: Muni Money Market funds starting to look good!

Post by ofckrupke » Mon Apr 16, 2018 12:00 am

zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.

zzz
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Re: Muni Money Market funds starting to look good!

Post by zzz » Mon Apr 16, 2018 12:16 am

Thanks for responding. Our tax system is even more insidious than I imagined.
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Kevin M
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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Mon Apr 16, 2018 5:17 pm

ofckrupke wrote:
Mon Apr 16, 2018 12:00 am
zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.
Hmm, I thought that's basically what I said, but I guess you did a better job of explaining it in a way that zzz understood.

For anyone who wants to see this effect without understanding exactly how it works, run TaxCaster, enter MFJ filing status, ages 30,30, enter 0 for everything until you get to the "Select from all that apply to you ..." screen, select "Have investments" then continue, then enter 0's until you get to Taxable Interest. Enter 50,000 for taxable interest, then 50,000 for qualified dividends (but don't leave this screen). You will see tax of 3,946. Now click Back and enter 51,000 for taxable interest, and your tax will increase to 4,246, which is 300 more. So you added 1,000 of ordinary income, and you were taxed 300 more, which is 30%. This is 15% tax on the interest and 15% of additional QD taxed at 15%. In 2018 the ordinary income will be taxed at 12% instead.

Of course there are other ways you could enter data into TaxCaster to see the effect, but I just choose the quickest and easiest with minimal data entry.

Kevin
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zzz
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Re: Muni Money Market funds starting to look good!

Post by zzz » Tue Apr 17, 2018 12:02 pm

It is what you said, I just had trouble believing it actually was that bad.
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Riley15
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Re: Muni Money Market funds starting to look good!

Post by Riley15 » Tue Apr 17, 2018 1:09 pm

Kevin M wrote:
Mon Apr 16, 2018 5:17 pm
ofckrupke wrote:
Mon Apr 16, 2018 12:00 am
zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.
Hmm, I thought that's basically what I said, but I guess you did a better job of explaining it in a way that zzz understood.

For anyone who wants to see this effect without understanding exactly how it works, run TaxCaster, enter MFJ filing status, ages 30,30, enter 0 for everything until you get to the "Select from all that apply to you ..." screen, select "Have investments" then continue, then enter 0's until you get to Taxable Interest. Enter 50,000 for taxable interest, then 50,000 for qualified dividends (but don't leave this screen). You will see tax of 3,946. Now click Back and enter 51,000 for taxable interest, and your tax will increase to 4,246, which is 300 more. So you added 1,000 of ordinary income, and you were taxed 300 more, which is 30%. This is 15% tax on the interest and 15% of additional QD taxed at 15%. In 2018 the ordinary income will be taxed at 12% instead.

Of course there are other ways you could enter data into TaxCaster to see the effect, but I just choose the quickest and easiest with minimal data entry.

Kevin
I am not sure if I am still understanding this correctly. If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k. If you add another $100 to your ordinary income and still stay in the 12% tax bracket, I don't see why this should affect the QDIV/LTCP tax rate?

mega317
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Re: Muni Money Market funds starting to look good!

Post by mega317 » Tue Apr 17, 2018 2:35 pm

Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k.
That is not true. Work through a dummy 1040 line 44 and schedule D.

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Kevin M
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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Tue Apr 17, 2018 3:45 pm

mega317 wrote:
Tue Apr 17, 2018 2:35 pm
Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k.
That is not true. Work through a dummy 1040 line 44 and schedule D.
Yes, using the Schedule D worksheet is a good way to see how the calculation works. This is a deeper dive than simply using TaxCaster to prove to yourself that it actually does work this way--you should at least try the latter if you don't believe it.

Using the 2017 forms and worksheets the bracket we're discussing is 15%, which will be 12% in 2018, but the QD/LTCG rate we're discussing remains at 15% for 2018. Also, the dividing line between 12% and 22% ordinary income brackets and 0% and 15% QD/LTCG brackets is slightly different, but for conceptual purposes we can ignore it. The principal works basically the same for 2018 as for 2017, keeping these differences in mind.

I'll use the numbers I threw out earlier and run it through a dummy 2017 tax return using HRBlock software. I enter 50,000 of interest income and 50,000 of qualified dividends. This is an adjusted gross income (AGI) of $100K.

For two married 30-year olds filing a joint return (MFJ), standard deduction is 12,700 and exemption amount is 8,100, leaving 79,200 of taxable income. This is entered on Line 1 of the Schedule D Tax Worksheet, which is used to calculate your tax if you have QD and/or LTCG and no depreciation recapture.

Subtracting the 50,000 of QD leaves 29,200 of income taxed at ordinary rates. Next, subtract 29,200 from 75,900 (top of 15% bracket for MFJ) to get 46,700 of QD that is taxed at 0%. This leaves 3,300 of QD taxed at 15%. Since 29,200 is above the top of the 2017 10% bracket, 18,650, your marginal tax rate on ordinary income is 15%.

You can visualize this as the QD/LTCG stacked on top of the ordinary income. Whatever part of the QD/LTCG stack is above the top of the 15% bracket is taxed at 15%, and whatever is below is taxed at 0%. Every extra dollar of ordinary income pushes a dollar of LTCG/QD above the top of the 15% bracket, and thus an extra dollar of LTCG/QD is taxed at 15% instead of 0%, and the extra dollar of ordinary income is taxed at 15%, for total marginal tax rate of 30% (27% in 2018).

Kevin
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kaneohe
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Re: Muni Money Market funds starting to look good!

Post by kaneohe » Tue Apr 17, 2018 4:01 pm

Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
........................................................

I am not sure if I am still understanding this correctly. If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k. If you add another $100 to your ordinary income and still stay in the 12% tax bracket, I don't see why this should affect the QDIV/LTCP tax rate?
Kevin has written a very detailed explanation of this. The stacked bar chart is a very nice way of visualizing things. For a real picture, see tfb's chart here posted 12/11/11 viewtopic.php?t=86849

Your misconception is fairly common when reading just words.....it could be either the words
or the reader's misunderstanding of the words. The basic concept is that the determination
of the QDIV/LTCG rate is determined by the tax bracket of the taxable income INCLUDING the QDIV/LTCG, not just the ordinary income. The misconception is that if ordinary income is in the 12% bracket, QDIV/LTCG rate is 0% regardless of how large the QDIV/LTCG gain . This is not true because the QDIV/LTCG raises the tax bracket of the taxable income even tho the ordinary income may remain in the lower bracket.

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neurosphere
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Re: Muni Money Market funds starting to look good!

Post by neurosphere » Thu Apr 19, 2018 9:23 am

Just for fun, I plotted the SEC yields for the Vanguard NY Municipal bond fund vs those for the Limited and Short Term Tax Exempt bond funds. I converted the yields into taxable equivalent yields for the highest tax brackets for IRS and NYS/NYC (I used 37% federal and 12% NYS/NYC). I did not take into account any additional medicare tax or net investment income tax. I also did not attempt to deal with any NY income in the national funds which would be tax free to a NY/NYC resident.

I'm curious how long this small yield spread between muni MM funds and other funds will persist.

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Voltron
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Re: Muni Money Market funds starting to look good!

Post by Voltron » Thu Apr 19, 2018 12:51 pm

I always see posters create nice graphs. What resource do use to create the graph? Visualization is helpful.

What I want to do is create a graph for example a California resident in different federal tax brackets. It might help me decide my goals.

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neurosphere
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Re: Muni Money Market funds starting to look good!

Post by neurosphere » Thu Apr 19, 2018 12:58 pm

Voltron wrote:
Thu Apr 19, 2018 12:51 pm
I always see posters create nice graphs. What resource do use to create the graph? Visualization is helpful.

What I want to do is create a graph for example a California resident in different federal tax brackets. It might help me decide my goals.
I used excel 2016.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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