Taxcaster for Future Years?
In an analysis I’m trying to do involving Roth conversions versus RMDs for future years, can I use a tool like Taxcaster, currently setup for 2015 at the latest? Or can anyone suggest some simple/straightforward methods?
In an analysis I’m trying to do involving Roth conversions versus RMDs for future years, can I use a tool like Taxcaster, currently setup for 2015 at the latest? Or can anyone suggest some simple/straightforward methods?
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 04:55
As long as your return is not complex, taxcaster or any off the shelf tax program is fine for determining the cost of various conversion amounts in the current year. For longer term projections on what the conversion will save you in the future, you could use the current program also but the assumptions you make about what to enter are subject to error the farther out you go. A conversion in theory saves you a little every year thereafter by reducing RMDs, but other variables in those years could be significant.
Permalink Submitted by Amar Patel on Fri, 2015-12-04 15:29
So, if I’m understanding you correctly, the calculation is something like “what does a conversion of $4000 cost now in terms of taxes, and what would it cost to reduce the IRA by $4000 next year, but through a combination of RMD first and then converting the rest”? The tax cost is roughly the same right? (I say “roughly” because I don’t know what the standard deduction, exemptions, marginal brackets, etc. will be for 2016, and then for future years beyond 2017. That’s where I was hoping a tool like Taxcaster is close enough for 2016, and even usable for years beyond but with increasing accuracy issues/errors to be assumed.)
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 17:17
You could use a current tax program for future year projections and assume that inflation will raise certain income like SS payments at about the same rate as the exemptions and deductions would increase. Then assume a rate of increase for your IRA and reduction for both RMDs and removal of the converted dollars. Even without the conversions, RMDs that you do not spend will go into your taxable account and generate around the same return they would have in the IRA. Since these returns in taxable may be currently taxable or produce deferred cap gains, you have to factor that in as well. As your IRA in later years eventually gets smaller, your taxable account assets should get larger and some portion of them will produce current taxable income. You also have to factor in the chance of receiving an inheritance which increases your income producing assets or making donations or gifts that reduce it. These individual variations will probably have more affect than changes to tax laws, exemptions etc. Having LT care insurance is another factor that should be considered. If you have adequate LT care insurance you would generally convert a little more, if you don’t a little less. If you don’t carry the coverage there could be some years with massive deductible health care expenses you would pay from your TIRA. You would not want to pay them from your Roth since a Roth withdrawal will not produce any taxable income from which to deduct the expenses.
Permalink Submitted by Amar Patel on Fri, 2015-12-04 21:19
While Googling for what a “deductible heathcare expense” is, I found this on the IRS website: “Payments for insurance premiums you paid for policies that cover medical care or for a qualified long-term care insurance policy covering qualified long-term care services.” Does this cover Medicare premiums and Medicare supplement premiums? And if so, does that mean the taxes incurred by RMDs and/or TIRA distributions can be offset by such expenses, to the extent that Schedule A allows? Seems like expenses would have to be significant for Schedule A to be better than the standard deduction, though.
Permalink Submitted by Alan - IRA critic on Sat, 2015-12-05 00:35
Yes, itemized deductions must be significant, but LTC expenses are very high. Taxpayer must be able to itemize and with respect to medical expenses, the first 7.5% is not counted, and that goes to 10% for everyone around 2018. Of course, mortgage interest and contributions are other expenses that can be itemized with all amounts counting from dollar one. Medical expenses include Medicare and Med Supplement and Part D premiums, dental expenses, medical mileage travel, lab fees etc. Nursing home expenses are almost always fully deductible or 95% + deductible. But if the standard deduction amount is not exceeded, itemizing would not apply.
Permalink Submitted by fairira on Sat, 2015-12-12 15:57
For seniors the medical expense exclusion is 7.5% through 2016, then 10% in and after 2017.