Tips on using 2020 TT to calculate the Roth conversion max for staying in the 12% bracket for the deadline on 12/31/20

[davej]

Any advice is appreciated on Roth conversions modeling with TT?  I also am confused about MAGI. Some websearching says SS does not affect the amount for ROTH and others say only the non taxable part. Below is a screen of what I want to do. SD is standard deduction. Zero capital gains.   Thank-you !!roth

[Critter-3]

The taxable portion of the SS benefits IS INCLUDED in the AGI so it needs to be taken into consideration for the situation you are considering.  Also the attachment has 2 people under the age of 65 so no SS benefits were in the mix.  

Since you have the downloaded program try playing with the what if tool :  

This is my mini version of  a tutorial  that should be in the downloaded program: 

What is Forms Mode?

Forms Mode lets you view and make changes to your tax forms "behind the scenes."

If you're adventurous, you can even prepare your return in Forms Mode, but we don't recommend it. You may miss obscure credits and deductions you qualify for, and you may forget to report things that will come back and haunt you later.

Forms Mode is exclusively available in the TurboTax CD/Download software. It is not available in TurboTax Online.

Related Information:

• Why would I use Forms Mode?
• How do I switch to Forms Mode in the TurboTax for Windows software?
• How do I switch to Forms Mode in the TurboTax for Mac software?

If you want to play around with different figures and tax scenarios without affecting your original return you can ….

• >>>In the TurboTax CD/Download software by creating a test copy: 
• 1.  Open your return in TurboTax. 
• 2.  From the File menu, choose Save As. 
• 3.  Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name). 
• 4. Click  Save. You are now safely working in the test copy and anything you do here will not affect the original. 
•  https://ttlc.intuit.com/questions/1900642-how-to-make-a-test-copy-of-your-return

• >>  use the WHAT IF tool: 
• - Click Forms Icon (upper right of screen) or Ctrl 2 (forms view) 
• - Click on the Open Form Icon 
• - In the “Type a form name.” area type What-If (with the dash), click on the name of the worksheet - click on Open Form 
• - You will see the worksheet on the right side of the screen; enter the information right into the form 
• - To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

It's always a good idea to make a backup copy of your tax data file, in case your original gets lost or corrupted. Here's how:

1. From the File menu in the upper-left corner of TurboTax, choose Save As (Windows) or Save (Mac).
2. Browse to where you want to save your backup.
   • Tip: If you're saving to a portable device, save it to your computer first to prevent data corruption. Then, after completing Step 4, copy or move the backup file to your device.
3. In the File name field, enter a name that will distinguish it from the original tax file (for example, add "Backup" or "Copy" to the file name)
4. Click Save and then close TurboTax.
5. Restart TurboTax and open the backup copy to make sure it's not corrupted. If you get an error, delete the backup and repeat these steps.

If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.

Related Information:                             

• Retrieve a Tax File from a Portable Device
• What's the difference between the tax data file and the PDF file?

AND save it as a PDF so you have access to a copy even if you don’t have the program still installed and operational :

• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?

AND protect the files :

• How can I protect the tax files on my computer?

Always remember to shut off the auto update function once you have filed your returns and do not do any updates unless you have safeguarded the PDF & .taxfiles to a removable storage unit for safekeeping.  Click on ONLINE then Update Preferences.... don't be afraid to click on all the  menu headings to find all the goodies that are hiding. 

Here's how you can see a list of all your overrides (if any). On the Tools menu select My Tax Data. A window will open that lists all the entries in your return. Any entry that was overridden will say Overridden in the Source column. You can click on the heading of the Source column to sort on that column, so that any Overridden entries will be together. If there are Details or Import entries at the top of the list after you sort it, scroll down to see if there are any Overridden entries after the Details and Import entries. The item in the My Tax Data list tells you the form and line number that has the override. You can click on an overridden item in the list, then click the Go To Form button at the bottom of the list to go to the form that has the override.

What's the meaning of all the different colors in Forms Mode?

When you look at an onscreen tax form using Forms Mode, you might wonder why one figure is blue and the one next to it is red or black.

These colors indicate the source of that data.

Color	Meaning
Blue	You entered this data, either in the interview or Forms Mode.
Black	The program entered this data or calculated this amount.
Red	This data has either been overridden or is invalid (for example, a ZIP code that doesn't exist).
Red italics	You marked this amount as estimated.
Black italics	The program calculated this amount from an amount you marked as estimated.
Purple	This information has supporting details.
Aquamarine	This data was transferred over from last year.
Green	This data was imported from Quicken or QuickBooks.
Yellow fields (Windows)	Yellow fields allow user input. Anything you enter here shows up in blue.

https://ttlc.intuit.com/replies/3302127

[davej]

Thanks Critter3.  I really appreciate it !  I have seen the what if but never tried it. Once I just did a new return and it mess up the current return I was working on. Will give it a try. 

[Critter-3]

Never ever play in the real return before or after you file as it can get very messy   ... always use a test return which is the best thing about the downloaded program as it has many tools you can use year round. 

[macuser_22]

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@davej wrote:

Any advice is appreciated on Roth conversions modeling with TT?  I also am confused about MAGI. Some websearching says SS does not affect the amount for ROTH and others say only the non taxable part. Below is a screen of what I want to do. SD is standard deduction. Zero capital gains.   Thank-

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2020 is over.   Why are you asking about 2020?

MAGI for IRA's is only used for new *contributions* and has nothing to do with conversions.  There are no "capital gains" on IRA distributions whether you take it in cash or convert it to a Roth.    Traditional IRA distributions are taxed as ordinary income at your margional tax rate which depends on your total taxable income which is your AGI minus deductions (1040 line 15).   If you have non-deductible contributions  basis) in the IRA then the tax can be less.

[Opus 17]

Sometimes, you can make late contributions to an IRA, that count for the previous tax year.

This rule does not apply to conversions (which are a special type of rollover).  The conversion is reported and you owe the tax as of the date it actually happens.  A Roth conversion you make now will be taxed in 2021.

A rollover or Roth conversion also has nothing to do with capital gains, the conversion is taxed as ordinary income, so the picture you posted is irrelevant and confusing.

You simply owe regular income tax on the converted amount, the same as if you withdrew it and spent it.  Depending on your other income, the Roth conversion might also increase the taxability of your social security, but this is complicated and you don't give any indication of your age, social security benefit, other income, or the amount you want to convert.

Finally, let me remind you that if you get to the next tax bracket, you don't pay the higher rate (22%) on all your income, just the amount over the threshold.  For example, the 12% tax bracket for singles for 2021 ends at $40,525.  Since you get a $12,550 standard deduction, that means the first $53,075 of your income is taxed at 12% or less.  Suppose you did a conversion and your resulting income is $55,000.  That doesn't mean you pay 22% on all your income, you only pay the 22% on the top $1925.

[macuser_22]

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@Opus 17 wrote:

Sometimes, you can make late contributions to an IRA, that count for the previous tax year.

Correct, but only up to the filing date for the tax year that the contribution is for.  For 2020 that was extended to May 17, 2021.     Any contribution after that can only be a 2021 contribution.

[davej]

I am doing this now because I may not have the time in December when 2021 comes out. The example in my first post is what I want to do. The result of taking just 10K extra (in post 1) results in long term capital gains tax in addition and causes the bump in taxes.

Below is what I do not want to do. In the example, in post 1, if the couple had taken the additional 10K from a Roth or savings, they would not be subject to LTCG. 

[Opus 17]

The Turbotax TaxCaster will also work although it's a bit sloppy.  You need to check the box for "other taxable income" to be able to enter IRA withdrawals and social security.

I did a quick test of the following situation:

• Single, age 67, $18000 in social security, $22,000 in IRA withdrawals for living expenses. Tax $1120
• Withdraw an additional $10,000 from the IRA to do a Roth conversion, tax is $3214 ($2094 increase).  The effective tax on the conversion is 20.9%, not because you're in a higher tax bracket, but because you are paying 12% on the conversion plus 12% on more of your social security benefit. 

However, once your other income plus half your social security is more than about $60,000, you will be at the max amount of social security taxation (85% of your benefit is taxable) so adding more income in the form of a Roth conversion only results in paying tax on the Roth conversion, it won't create the same double-hit that occurs at lower income. 

[macuser_22]

We don't know where you figures are coming from, but as stated before, IRA distributions or conversions have NO capital gains whatsoever.    The conversion is entered in the 1099-R section, not as a sale of investments.  It will add to your AGI and if you have other schedule D investment sales and capital gains from them, the increased AGI can affect the cap gains tax.

[Opus 17]

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@davej wrote:

I am doing this now because I may not have the time in December when 2021 comes out. The example in my first post is what I want to do. The result of taking just 10K extra (in post 1) results in long term capital gains tax in addition and causes the bump in taxes.

Below is what I do not want to do. In the example, in post 1, if the couple had taken the additional 10K from a Roth or savings, they would not be subject to LTCG. 

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I have no idea what that video is talking about, it sounds like bullshit.  Is he trying to sell you his investment book or investment plan?  

There is no such thing as "additional capital gains tax" on IRA withdrawals.  Someone might pay capital gains tax unexpectedly for other reasons, but you said you had no capital gains.  So you are watching the wrong thing and really confusing yourself.

Here's an example.

John is 67, and receives $1500 per month in social security ($18,000 per year).  John also withdraws $15,000 per year from an IRA for additional living expenses.  In this case, John's social security is non-taxable (because half his benefit plus his other income is less than $25,000).  After the $12,550 standard deduction, John pays 10% income tax on $2450, or only $245.  Pretty sweet.

John sells some stocks that originally cost $1,000  for $11,000 and has a $10,000 capital gain.  The capital gains tax rate on this money is zero, because of John's income tax bracket.  However, this income will cause part of John's social security to be taxable, so even though the gain is tax-free, John's income tax still goes up $500, due to the tax on part of his social security benefits.

Now, suppose John withdraws an extra $10,000 from his IRA.  It doesn't matter the reason, it could be for a Roth conversion or to buy a car or any other reason.  John gets hit with a triple tax whammy, his tax goes up by $2100 (equivalent to 21% on the IRA withdrawal) even though he is only in the 12% bracket.  This is because 3 things happen:

• he pays income tax on the withdrawal
• he pays income tax on a larger part of his social security 
• he pays 15% capital gains tax part of his stock sale because his total income bumped him out of the 0% capital gains bracket.

This last item is probably what your video is talking about.  If your ordinary income is less than $40,000, then part or all of a capital gains transaction might be tax-free.  If you add income from another source, then that income becomes taxable AND the capital gain becomes taxable because you move from the 0% bracket to the 15% bracket. 

But, you said you had no capital gains, you were only trying to figure out how much tax you would pay on a Roth conversion.

As I already explained, taking extra for a Roth conversion might result in a double tax hit (tax on the IRA withdrawal plus additional tax on social security) but it would never result in a "capital gains" tax bump because you don't pay capital gains tax. 

[davej]

Thanks for the response. I do not want to pay the capital gains tax and have been doing this for the last 5 years. In this case I wanted to get near the max roth conversion, stay in the 12% bracket.  I took the suggestion from critter-3 and opened a test return of my 2020 return. This worked great. Not sure how I missed that before but Thanks again critter-3 !!

As you said, "

This last item is probably what your video is talking about.  If your ordinary income is less than $40,000, then part or all of a capital gains transaction might be tax-free.  If you add income from another source, then that income becomes taxable AND the capital gain becomes taxable because you move from the 0% bracket to the 15% bracket. "

The vid screenshot is talking about a couple. The magic number to avoid LTCG for 2020 was an AGI of 105,900 for them. After the standard deduction they were not subject to 10K of LTCG. I just ran this and you could see the tax increase 2,700 to take out 10K more on the first screen.

Appreciate your time!  

[fanfare]

Yes when you do a Roth conversion your AGI goes up, and this can affect your tax on other line items.

That's all it is.

If you do a Roth conversion in New Jersey, depending on the amounts it may cost you your NJ Retirement Exclusion deduction which can be huge,

[Opus 17]

@davej 

I can’t emphasize strong enough that there is NO CAPITAL GAINS TAX ON IRA WITHDRAWALS.  EVER.  Period, end of story, full stop.  

Sometime you can get in a situation where, if your have OTHER capital gains income, taking a higher IRA withdrawal will also raise your capital gains tax rate on the capital gains income only.  You could withdraw $1 million from an IRA and never pay additional capital gains on the IRA.  

You said you have no other capital gains income.  I’m just going by what you said.  There is never a case where taking an IRA withdrawal will magically create schedule D capital gains income.  

[Serge]

I am not getting your actual occurence of the $1500 capital gain. where from? The conversion is just regular income from a simple IRA. there is no concept of capital gain for tax purpose when converting