I've studied how the effect of taxation of Social Security benefits can create a phantom 46.25% 'bracket' for a single who would otherwise be at
25%. And I think that for those who are at a taxable income in that sweat spot, a bit of maneuvering pre-retirement and just after can help mitigate the lifetime tax bill of a retiree.I am now in the midst of an analysis in which three phaseouts are all in play and am trying to understand the best outcome. This is for 2013, and the variability is based on a Roth conversion which will be partially undone to achieve the desired taxable income for 2013.
By way of introduction, this is a joint return, the couple has Schedule E real estate losses that were carried forward until now, nearly $100K accumulated. Also $8000 worth of AMT that shows as forwarded from 2012.
Now for the numbers -
A $14,000 conversion results in a taxable $65,164 and tax bill of $3822. AMT credit $4062, Child Tax Credit $1000.
A $28,000 conversion results in a taxable $86,164 and tax bill of $9282. AMT credit $4119, Child Tax Credit $0.
You see that the taxable number crossed the 25% bracket, but I did this in $1000 increments, and the change was the same. I understood the real estate loss phaseout as AGI was over $100K, so this incremental $14,000 was a delta of $21,000 in taxable income. The AMT and Child Credit drop as well over this range.
In trying to decide on the optimum number, I note that the AMT and Real Estate loss carry forward. But the Child Tax Credit is lost any year it's not taken. So my gut says to stop exactly at the pint where the child credit is left in tact, at $1000. Absent the other two phaseouts this $1000 over the $14 range is a 7% marginal tax I can help avoid for the remaining year the child helps the couple qualify (i.e. it's 2013 &
14, child will turn 17 in '15, so this issue evaporates.)Once the Child Tax credit is gone and AMT is 'used up' the yearly analysis should get much simpler.