determining tax rates

I will help. Since the link is to a page that goes on and on, I'll ask you to scroll down to " Table 1-2. Effect of Modified AGI 1 on Deduction if You Are Covered by a Retirement Plan at Work"

It states the $83K-$103K Phaseout.

And confirms my point that the retirement rules are so convoluted, that otherwise bright people are not able to wade through the mess. TAD's point on AMT needs to be noted though. I missed that, not realizing you may very well be in AMT land, welcome to our nightmare. JOE

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Jim, I think I'll play the lottery today...my guesses were 105k and 28k. =)

That's all I entered really and with that, under current tax law, you owed ~$1250 in AMT. If the 105k is lowered to around 88k, there's no more AMT, if you have 4 exemptions. Increased 401k deferrals could do that if you both have active plans, but that might leave you strapped for cash which is probably worse than paying some AMT.

But you'd said "20k in mortgage interest" so I split the 28k in deductions into 20k in interest, 8k in state income + property taxes. This matters, how your itemized deductions break down...the higher your state taxes, the higher AMT would be.

Again, if the AMT scheme is changed to that of last year's "patch", there's no AMT whether you're at 105k or 88k. It's a little early to do AMT planning for 2008, but something to keep in mind to revisit later in the year. E.g. if it looks like AMT won't change you might decide to increase your 401k contributions and skip an 08 Roth IRA contribution.

-Tad

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Tad- the detailed post is teaching me how little I know about taxes. I appreciate the assistance.

Our property taxes are escrowed. I also have more than enough in the bank to pay them early (12k in emergency fund, property taxes are 5k, paid 2X a year at 2.5k each).

I am somewhat confused how paying more taxes triggers the amt, but I don't need to change the tax code, just know how it works.

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But the lines which state "if covered by a plan at work" should trump the section you referred to, correct? My understanding is my section trumps yours. I will re-read that after I get some sleep.

If anything this would help the AMT situation, as we can afford to put more into 401ks and less into Roths (we have 10k going into Roths which could be redirected to good 401k plans).

Outside of fact I have made more than half my Roth contributions for

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Sleep is good, after June you won't remember what sleep was. If you are NOT covered by the plan at work, there is no income limit for IRA deductibility. If you are covered, the above phaseout applies. And you can use the rules to make some decisions now for 07, by using the deductible IRA if you are in AMT land (which I think you're not, but you should see that pretty easily on the tax summary.)

If your income is going to drop (you are correct - AGI must be under $100K), and since your exemptions go up, the conversion from any IRAs to Roth is up for consideration in 08. JOE

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Say a tax return has 100k in salary, 20k mortgage interest, 8k state taxes, and you're married w/2 kids. Nothing else on it. Law says essentially "compute regular tax and AMT, pay whichever is higher."

Regular tax: take 100k, deduct 4 exemptions @ $3500 = 14k, and 28k in itemized deductions, leaving 58k in taxable income. Tax is ~$7900.

AMT: take 100k, deduct 20k mortgage interest, and the AMT exemption of $45,000 (for MFJ), leaving 35k in taxable income (no deduction for state taxes, no added exemptions for 2 kids). The AMT tax rate, at this income level, is a flat 26%, so tax is .26 x 35k = $9100. That's higher than $7900 so you'll see the $1200 difference added to your return for AMT.

The "AMT patches" increase that $45,000 exemption. Last year it was raised to $66,250 (MFJ). With that patch, in the example above, AMTI is

You can see why it's hard to say why someone's in AMT. It's a combination of things...here it's having 4 exemptions, and state taxes as itemized deductions, plus that low $45k AMT exemption level. And the variations that can get you into AMT get much more complex as you add in different types & levels of income and deductions. Huge mess!

-Tad

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Joe good call.

"married filing jointly or qualifying widow(er) $83,000 or less a full deduction. more than $83,000 but less than $103,000 a partial deduction. $103,000 or more no deduction. "

So the question changes to

Roth or deductable?

If in 15% bracket, Roth makes sense (because withdraws will probably be in 25% bracket). If in AMT territory, deducatable IRA makes sense If in 25% bracket, deductable IRA should be considered (and convert to Roth if I am ever in 15% tax bracket again).

Then the next question is How to determine how much traditional/rollover IRA I would want to convert to a Roth? I think if this is on the table, would I want the deductable IRA not commingled with the rollover for one reason or another?

With the planning issue of I want some assets to 72(t) in about 18 years (early retirement) kept in mind.

And an aside question- can Roth contributions be recharatorized to a DEDUCTABLE ira contribution? If I run my taxes in Feb of 09 (with 5k of Roth contributions from Jan-Aug 08), and find the AMT nightmare is real, can I file a form with T Rowe Price to convert to a deductable IRA and redo the tax return for 2008 FY in Feb of 09?

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The above is how I would approach it.

I'd convert enough each year to "top off" the 15% bracket but not go higher. Keep in mind - if you have post-tax (non-deducted) IRA money, you have to pro-rate the conversion, you can't choose all pre-tax.

Well, the Roth can be used for the early withdrawals, so that may help. You may find the paperwork easier to take a Roth withdrawal, and covert the amount you intended to 72t. Think about that.

Hmmm, I am not 100%, but I think it's a 2 step process, recharacterize, then do the IRA you want.

I hope this continues to help. JOE

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can I do a conversion in February for the prior tax year? If NO, then how do I figure out in December what the top of my tax bracket is?

Feb of 09 I am doing 2008 taxes. Can I convert some of my rollover (no taxes paid on it yet) to a Roth for 2008 tax return?

Please elaborate- why is the Roth deposit easier and better?

My plan was this:

Then convert a portion of the account the 72(t) was made from to a Roth (capping out tax bracket).

More than likely this 72(t) thing would be from age 50-59.5 (that's the rule -right?-withdraws must be taken for 5 years or until age

huge help, taxes are not my strong suit by any means.

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TurboTax come out in November. You'll be very close to knowing where you stand. I say convert to that level, and if you go over, use deductible IRA to go back under in March.

This is just my avoidance of things that can get more complex. 15 years hence you will have money in both places. You will be able to take Roth money out with no year to year need to track minimum withdrawals. You then use the IRA to convert to Roth, some early in the year, the rest in December to top off bracket. This is my special trademarked strategy for avoiding the need for 72t. If in the second year, you get an inheritance or have a bag of money fall on you, you don't have to continue the withdrawals. 72t is a commitment.

JOE

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So I assume you suggest (for tax planning purposes) to get the paystubs, mortgage statements and similar around Dec 5, plug into TT, and see where things sit tax wise. If it looks like I have room to do a Roth conversion, then do a partial conversion with my rollover.

Did not think of this. 72(t) is a commitment, where as a Roth deposit is optional. I like flexibility.

thx

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"TB" wrote

I wonder whether that $45,000 figure is somewhat misleading. To clarify for the thread, every year since 2001 Congress has issued what is popularly called a "one year patch" to alter the AMT exemption. For MFJ, the AMT exemption amounts have been as follows:

If tax law reform ends up being major for any given tax year, then AMT exemption amount and related parameters could change radically. But if here is major tax law reform, all bets are off anyway. Regardless, what we hear most about these days is not major reform. Instead, we often hear of how the AMT's parameters need appropriate indexing to inflation, for one. So I would expect the trend above to continue.

I think the focus for Jim's case should be more on the following facts:

1. He does not owe AMT for this year. How far is he from owing it? Using the IRS calculator at
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   MFJ, two kids, and k of deductions (= formortgage interest and k for state and property taxes), it seems jIM would not have to pay the Alternative Minimum tax until his and his wife's AGI income was north of 0,000.

1. He expects his income to drop next year, due to a change in his wife's work status. (I am sorry, jIM.)

Congress prepares and passes into law the aforementioned patches with a view of keeping X taxpayers paying the AMT. If jIM's income does not do anything extraordinary, I would expect he would remain out of the AMT zone next year. Besides, with enough experimenting with AMT figures, and assuming no radical change in circumstances, far more than anything else what will be key to whether jIM owes the AMT is taxes paid to state and local entities (be they income, real estate, sales, property, or other state and local taxes). If he does not expect these to change much, then I would not worry about the AMT.

As always, a second check or more of the above is welcome.

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Elle, it's not misleading, it's the current tax code, and almost every post in this thread has mentioned the patch. My point in using the current figure is to illustrate both why jIM is currently in AMT, and why a patch would take him out of it.

It is a good point to address though -- will the patch pass again? Last year was the first where it seemed possible that it wouldn't. It got hung up on pay-go and only passed in December because the Democrats caved on that (too many hedge fund managers are donors I guess).

It seems likely that a lame-duck administration will pass some tax legislation, but BushCo doesn't exactly love the electorate in the top AMT states (CA, MA, NY, CT). They've seemed focused on extending the 15% rates, changing the estate tax, and reinforcing some of the oil/gas tax preferences. AMT reform might not be high on their list (it wasn't in

Back to jIM - that side business gives you flexibility to do late-in-year tax planning around AMT, which you can't do with a 401k at work. If the patch doesn't pass and you end up in AMT you might be able to defer most of the coaching income into a solo-401k. With a patch, maybe you prefer the Roth. As long as you have the 401k set up by

-Tad

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Yes, it is the default number if Congress fails to act each year. I thought the way the point ended up being presented was somewhat unclear, as though the actual AMT exclusion suddenly jumped from $45k to $66,250. It did not.

Re another AMT patch being passed:

The vote on the latest patch was Senate 88-5 and House

As you know, the AMT is controversial, with much pressure on to reduce the number snared by it. Senator McCain among others wants to eliminate it altogether. (Not faulting him; just trying to point out that far more seem to either oppose it or want it indexed more to inflation than those who want it to stay at $45k.) The trend for several years now is for it to rise or stay the same as the previous year.

Just trying to balance the tenor of your posts with a different viewpoint, one I think is supported by the numbers in a few ways, before anyone goes to a lot of extra effort to re-arrange their financial plans. I could be missing something, but so far I have doubts jIM is going to face AMT soon, based on the info he gave us and the recent history of the AMT.

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"Elle" wrote

Add two others:

1. For 2007, I estimate jIM could have up to nine kids and still not owe AMT. It's true the exemptions (himself, wife, kids * 00 each) lower his regular income tax. But the

1. jIM and wife are contributing 11% and 6% respectively of their wages to to 401(k)s. This will help keep him out of AMT territory, though even if he did not contribute to the 401(k) nor to a Traditional IRA, he would still be well out of AMT territory.

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Elle- can you elaborate on this with a combined gross income of around

Thx.

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"jIM" wrote On gross income etc. triggering AMT:

Is that after 401(k) contributions have been subtracted? If so, then I am computing as follows, using the 2007 online calculators at the IRS site and Turbotax and my own AMT spreadsheet (based on Form 6251). All yield the same result regarding AMT.

Input for Form 1040: Line 38 = 120,000 = AGI Line 40 = 28,000 = Itemized Deductions Line 41 = 92,000 = AGI - Item'd Deductions Line 42 = 20,400 = 6 Exemptions * 3400 (using next year's kids) Line 43 = 71,600 = Taxable income Line 44 = 10,748 = Regular Income Tax

Input for Schedule A: Line 9 = 8,000 = "taxes you paid" (property and/or sales taxes) Line 15 = 20,000 = home mortgage interest in this case

Output: No AMT owed.

Repeating this with higher Line 7 incomes shows your income can rise to at least $156,400 before things start to get messy. Albeit it's only a tad messy.

For 2008, and as long as there are no major changes to the basic data you provided, and assuming Congress again passes a one-year AMT patch with an AMT exemption of around $66k, then you are far from having to owe the AMT.

One reason you are so far from being in AMT territory with these assumptions is that the AMT tax rate is large but with a large exemption amount ($66,250), whereas your regular income tax rate is small but with a much smaller exemption ($20,400 for six people in the family). The taxes computed using either are very close at higher incomes.

As a check on the discussion here, I would consider repeating some of your questions at misc.tax.moderated.

Tad's right that you do have to roll the dice on what Congress does next year. But if history is any guide, and based on all else you say, I would expect it to be unlikely you will land in AMT territory. We are rolling the dice on a lot of other aspects of tax law, besides.

Two cents.

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