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Mytwocents
Level 1

Managing IRA distributions

A brief background for context, I'm retired and my income is a combination of interest, dividends, social security, annuity, IRA distributions and brokerage mutual fund investments including capital gains.  With Turbotax before the tax reform, I was able to calculate the IRA distributions so I maxed out the 15% tax bracket and then drew other income from selling brokerage account mutual funds with capital gains also taxed at 15%.  Now, the Tax Worksheet is so complicated, I actually can't figure out how to manage my income sources to minimize my taxes as I did before.  Do any of you have any suggestions for calculating IRA distributions to minimize taxes with the 2019 Turbotax?  Thanks. 

12 Replies
NCperson
Level 15

Managing IRA distributions

here is how I do it: 

 

in forms view (I use the desktop version), there is a form called "qual div / cap gain".... look for line 7 - THAT is the income subject to ordinary taxes (if you follow closely, the form is subtracting out capital gains and qualified dividends, etc. to get to line 7)..... so if that line goes above $78,950, you've exceeded the 12% ordinarily tax bracket and have entered into 22% tax bracket (I assumed married joint).

 

is that what you are trying to figure out? 

dmertz
Level 15

Managing IRA distributions

If your tax is calculated using the Schedule D Tax Worksheet instead of the Qualified Dividends and Capital Gain Tax Worksheet, it's line 21 you need to look at rather than line 7.

Mytwocents
Level 1

Managing IRA distributions

While I agree with your suggestion in theory, in reality it doesn't seem to work that way.  I made a duplicate tax return and changed only the IRA distributions in small increments.  With income on Line 7 well below the limit, the additional Fed tax is 20% of the $10K.  For $20K, the additional Fed tax is 24% of the $20K and so on .  My suspicion is there's more going on in the calculations than a simple 12% of ordinary income, which is why I posted the question if anyone else managed their IRA distributions with similar results.

NCperson
Level 15

Managing IRA distributions

would you mind posting the actual numbers you are plugging in and what the result is on line 7 of the worksheet.  

 

If you add $10,000 to the 1099R, how much does line 7 go up?  Should be the same $10,000......unless......

 

I wonder if what is occurring has to do with social security.  Remember that

  • up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.
  • up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple). 

 

So i if you added $10,000 on a 1099-R you would expect federal taxes to go up by $1200 if you were in the 12% tax bracket.  But it is possible that it bumps up to 85% of your social security into the taxable category, so a $10,000 addition on the 1099-R could add up to $18500 of taxable income and in a 12% tax bracket,could add up to $2,220 of additional tax or 22% percent tax on a $10,000 rollover!!!!!!

 

Line 7 really should work...... I do it all the time to determine what tax bracket I am in and how much to rollover to my Roth. 

 

 

dmertz
Level 15

Managing IRA distributions

The line on the worksheet used to calculate the tax (line 7 or 21 depending on which worksheet is used) tells you what tax bracket your ordinary income is falling in but does not necessarily tell you your marginal tax rate due to side effects that can change your AGI by more than the amount of the incremental income, particularly Social Security income as NCperson mentioned.  The way Social Security income is taxed, for a certain range of income you'll find that your marginal tax rate is 1.85 times your tax-bracket rate due to the increase in taxable Social Security income.  Once you get to the point where a full 85% of your Social Security income is taxed your marginal tax rate will drop back down.  There is really nothing new about this, it's been this way since Social Security income became taxable in 1984.  You need to map out your marginal tax rate by testing incremental amounts of income and find the sweet spot for the amount of your IRA distributions, and you might find that it is beneficial to go higher to a range where your marginal tax rate drops back down.  Of course you'll want to convert to Roth any of those additional amounts distributed from your traditional IRA that you don't need to spend on living expenses.

Mytwocents
Level 1

Managing IRA distributions

1.  My social security is already at 85%.  That doesn't change in any scenario.

2.  Hypothetical data points:

     Line 7 - $11,334; Tax - $1170

     Line 7 - $21, 334; Tax - $3140, Difference = $1,970 or 20%

3.  I agree that some other income source or limit or qualification or something is changing the tax calculations, but it isn't social security.

4.  I'll probably have to just experiment with ranges to identify the "sweet spot", but that really isn't what I wanted.  My goal was to find that sweet spot without trial and error and Line 7 doesn't do it.

Thanks for the responses.

 

 

 

NCperson
Level 15

Managing IRA distributions

I appreciate you provided hypothetical datapoints, but if the real numbers are near what you provided as the hypothetical, then the social security numbers are what is impacting this. 

 

before you change anything, look at each number on the Form 1040, lines 1-11b.  write them ALL down.

 

then add your $10,000 in 

 

then check Form 1040, lines 1-11b again.  what changed unexpectedly? i bet it's line 5b 

 

let me know what you find! 

Mytwocents
Level 1

Managing IRA distributions

Just did a quick check and no, Line 5b doesn't change.  Thanks for trying but the swamp wins again.

NCperson
Level 15

Managing IRA distributions

what line did change (other than where you put the $10,000)? 

dmertz
Level 15

Managing IRA distributions

There can also be an additive effect on your tax bracket rate if additional ordinary income pushes long-term capital gains from the 0% long-term capital gains rate to the 15% rate, increasing your marginal tax rate to 15% more than your tax bracket rate.  That will happen until all of your long-term capital gains are taxed at 15%.  This happens again at a much higher AGI (somewhere over $400,000 depending on your filing status) where the long-term capital capital gains rate transitions to 20%.

Mytwocents
Level 1

Managing IRA distributions

No other line changes.  AGI and taxable income up by $10K and tax up by $1970 or 20%.

 

Again, thanks for the suggestions but this is exactly the kind of trial and error searching for stealth taxes that I was trying to avoid.  I can play with all the different scenarios, but I just get more angry at the moron bureaucrats stealing my money.

 

NCperson
Level 15

Managing IRA distributions

then it has to be the long term capital gains tax

 

suggest googling "long term capital gains tax rate" to understand how it works.

 

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