You need a spreadsheet for your 2024 tax plan.
Posted on August 9, 2024
I complete my first draft of my tax plan for 2024 this time of year. This post provides a spreadsheet for your tax plan. You want an estimate of your 2024 tax return for three reasons:
1) You want to know how much taxes to withhold when you take your 2024 RMD, which I assume you take each December, like I do: I withhold all federal and state taxes then. I am effectively getting an 11-month tax-free loan; on average I’m earning about 6% real return per year on the average amount that I borrowed in the year.
2) You want to know if you are close to an IRMAA tripwire that you could otherwise avoid. IRMAA triggers Medicare premium surcharges: it’s costly if you accidentally cross one that would be simple to avoid.
3) If you are not near an IRMAA tripwire, you know how much traditional IRA you can convert to Roth; when you convert, you are slowing the growth of your RMD and the crawl toward an IRMAA tripwire. You never lose when you convert traditional to Roth; you will always have the same after-tax amount when you sell securities for your spending; you come out ahead if you are able to use Roth in the future to avoid an IRMAA tripwire.
== You need a spreadsheet ==
A spreadsheet will get darn close to your 1040 tax return. I enclose two spreadsheets: one for a single filer and one for married, joint filers.
I made some assumptions that you may want to change: you (or both of you) are over age 65 and on Medicare, 85% of your Social Security is taxable, and you are in the 22% marginal tax bracket for ordinary income. I hope the notes on the spreadsheet make it clear as to how I use it and how you can change it to better fit your situation.
== A straightforward estimate ==
You’ll enter your RMD and assume the balance of your security sales are from taxable securities. If you like the answer – e.g., you are not close to an IRMAA tripwire – you now know the amount that you should withhold for taxes when you take your RMD in early December. You also know how much traditional IRA you might convert to Roth without hitting a tripwire.
== A more difficult task ==
You have to adjust to lower taxable income and MAGI if you do not like the answer – e.g., you are across a nearby IRMAA tripwire. You may not be able to make or chose to make the actions that allow you to lower MAGI and taxes: the only way you are going to lower your MAGI and taxable income is to use less of your RMD and more of taxable securities or Roth to get your cash for your spending.
1. You first have to decide if you will lower the taxable portion of your RMD by using QCD for donations. QCD directly lowers taxable income of your RMD.
Since you’re donating, you will have less for your spending. You’ll sell more securities – roughly the amount that you donate – from taxable securities and/or Roth. You have to do that to wind up with the same amount of cash to spend after taxes relative to not using QCD.
This is an easy decision for Patti and me. We started our plan ten years ago. Our SSA has increased in real spending power by 46% over the last 10 years. (The detail of changes in our SSA over the last 10 years is here.) I calculate that we have “More than Enough” for our desired amount of spending. (See Nest Egg Care, Chapter 5.) We want to make meaningful charitable contributions each year out the “More than Enough.” The amount I’ve budget for QCD over the next five years means I have the flexibility to use enough QCD in a year to lower the taxable portion of our RMDs by a meaningful amount.
2. You can sell securities from your Roth rather than selling taxable securities. You obviously must have to have some Roth do to this. I had none when we started on our plan a decade ago, but I’ve converted enough traditional IRA – and its grown – to have this in my toolbox.
I try to use a limited amount of Roth to offset sales of taxable securities to get the most bang for the buck: I’ll try to use the amount that keeps us below an IRMAA tripwire. I’m really getting a big bang from $10,000 of my Roth when I effectively save 22% in ordinary tax and avoid an IRMAA tripwire that would cost us $2,000.
Conclusion. You need a tax plan. 1) You need know the amount of taxes to withhold when you take your RMD, If you withhold all taxes at the end of the year, you get a tax-free loan from the IRS for essentially 11 months of the year. 2) You need to know if you are near an IRMAA tripwire you could avoid. 3) You need to know how much traditional IRA you could convert to Roth without crossing an IRMAA tripwire.
I provide the spreadsheets for your 2024 tax return similar to the one that I use for our tax planning. One is for a single filer, and one is for married, joint filers.
Hi Tom,
Thanks for the tax spreadsheet. I have a question regarding taxable income. Your spreadsheet uses Total Income minus Standard Deduction to arrive at Taxable Income. Wouldn’t Total Income be based on the amount of SS that is taxable? You mentioned in your notes that SS was assumed 85% taxable, but I don’t see a reduction in Total Income to account for reduced SS income. In my case, my SS income is 65% taxable. Maybe I haven’t understood the basis for arriving at taxable income.
Thanks,
Peter