There are things many taxpayers can do to optimize their current- and next-year tax situation. Among just a few:
-Selling investments or assets this year or next year, to either "harvest losses" or use up a temporarily low tax-bracket -Making retirement contributions so as to earn the "Savers tax credit" (IRS form 8880) -Converting tax deferred ("traditional") retirement accounts to tax exempt ("Roth"-style) accounts -Earning sufficient spousal income to qualify for child care tax credits
Some of these tactics can be performed after January 1, but many need to be settled on before year's end (earning wages and converting traditional to Roth accounts, for example).
Every year around this time, I find it helpful to run "what-if" scenarios in late fall in order to help optimize such decisions. Foe me, that's generally, that's meant either getting a copy of that year's TurboTax as soon as it ships, or trying to use the past year's version, updating the figures and data for the coming year. Both of these methods have significant limitations.
The purpose of this thread is to share information on tools we like to doing these sorts of calculations. I'm thinking spreadsheets, websites, widgets, et cetera that make it easy to plug in numbers and draw conclusions.
TurboTax has a moderately helpful calculator online that seems to work reasonably well. At least it's current with 2009 tax year figures. And for up-to-date, reliable information on tax planning more generality, Kaye Thomas's fairmark.com is invaluable.
So what do you use and like, and why? Let's discuss.
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In my state I can start a "home owners savings acct" which I can add up to 3k annually (before 12/31) and it will be tax free at the state level... It's a meager something. Check your state for similar programs.
As a single, childless person, with few deductions, who is trying to get ahead -what works best for me is getting wasted and crying throughout the month of April.
Anyone think it's coincidence that taxes are paid at the near exact opposite time of year as elections?
I use a piece of software "BNA Income Tax Planner". We use it for work...may be a little costly for what you're looking for but it can do every single tax calculation you could think of.
Thanks FloorsMat, that's a very interesting piece of software, with quite a features list.
I'm wary of having to give out a mailing address and phone number to their sales team, but I'm still tempted to give it a shot if no similarly powerful options present themselves...
TaxAct publishes their preview version each year in early October. I find it extremely useful for running "what-ifs", and since payment (assuming you are using the Deluxe or State version) is only required when filing, it's possible to use the preview version for free and then not file your final tax return with TaxAct. TaxAct also tends to discount returning users if you sign up during the next year's preview window -- my offer was for $13.95 for Deluxe + State for 2009. I've found TaxAct to be an extremely good value over the years -- particularly when compared to TurboTax and TaxCut.
Estimating taxes in California is especially important this year, since income taxes increased (retroactive to January 1), yet withholdings were not made retroactive to match. California has increased withholdings for November and December to somewhat make up for the disparity, but I believe a lot more Californians than normal will end up owing this year (or owe more than normal). Fortunately the penalty thresholds were increased as well. There's a FW thread on California's increased withholding, but it's mostly useless as it completely misses the reasoning behind the withholding increase -- the thread is mostly an anti-California rant.
I like the heads up on IRA to ROTH conversion because this year our AGI is low and taxes on conversion can be spread over 3 years. I will talk to my tax guy about this.
When I look at TAXACT's website, it appears they are charging $19.95 for downloading the ultimate bundle. They say the credit card is charged when the product is released and you have to ask for a refund by writing to them if you don't want to use them.. sounds weird
pnfisher said:TaxAct publishes their preview version each year in early October. I find it extremely useful for running "what-ifs", and since payment (assuming you are using the Deluxe or State version) is only required when filing, it's possible to use the preview version for free and then not file your final tax return with TaxAct. TaxAct also tends to discount returning users if you sign up during the next year's preview window -- my offer was for $13.95 for Deluxe + State for 2009. I've found TaxAct to be an extremely good value over the years -- particularly when compared to TurboTax and TaxCut.
Estimating taxes in California is especially important this year, since income taxes increased (retroactive to January 1), yet withholdings were not made retroactive to match. California has increased withholdings for November and December to somewhat make up for the disparity, but I believe a lot more Californians than normal will end up owing this year (or owe more than normal). Fortunately the penalty thresholds were increased as well. There's a FW thread on California's increased withholding, but it's mostly useless as it completely misses the reasoning behind the withholding increase -- the thread is mostly an anti-California rant.
needdealsnow said:When I look at TAXACT's website, it appears they are charging $19.95 for downloading the ultimate bundle. They say the credit card is charged when the product is released and you have to ask for a refund by writing to them if you don't want to use them.. sounds weirdThanks for the extra data point. I only have experience with the online version of TaxAct, and I've only been charged when filing my final return. It looks like the billing process is different for the software download version.
I just use Excel to model everything. I think if you want to do serious tax planning, you need to understand the effects involved in detail, not just plug in a few numbers and look at the tax bill it spits out. Each year I add whatever new forms I actually need (that I never needed before, 6781 anyone?). I find that the time it takes me to understand a form is much longer than the time it takes to implement a model for it, so I just model it whenever I run across one that matters for me. This way you can not only play with all the inputs, but you can see all the different values on each of the lines to help understand how the different things interact. I also like being able to accurately measure my marginal tax rate (after counting state/Fed and various phasing effects) to make those sorts of decisions.
xerty said:I just use Excel to model everything. I think if you want to do serious tax planning, you need to understand the effects involved in detail, not just plug in a few numbers and look at the tax bill it spits out. Each year I add whatever new forms I actually need (that I never needed before, 6781 anyone?). I find that the time it takes me to understand a form is much longer than the time it takes to implement a model for it, so I just model it whenever I run across one that matters for me. This way you can not only play with all the inputs, but you can see all the different values on each of the lines to help understand how the different things interact. I also like being able to accurately measure my marginal tax rate (after counting state/Fed and various phasing effects) to make those sorts of decisions.
Or use a pre-created model. I use the Glenn Reeves Tax Spreadsheet at http://home.mchsi.com/~taxcalculator/index.htm, although I recently saw a tax planning spreadsheet (as opposed to one that prints out forms that you can file - I file my printouts of the Glenn Reeves tax spreadsheet every year) at http://www.taxvisor.com/taxes/index.html (I've never used it, so I can't give any comments.)
xerty, kudos to you for rolling your own excel solution. Your point about modeling being quicker than understanding is well taken--that's similar to my motivation for doing the number crunching in the first place. Alas, your facilty with excel towers above mine--I wouldn't trust my ability to construct an accurate model in a reasonable amount of time.
calwatch, the Glenn Reeves Tax Spreadsheet is updated only through 2008--does he have a regular release date for new versions? OTOH, the federal version of the taxvisor.com excel sheet has been out since early this year. I've just been playing with it. It's simple to use and to follow, but it's missing many important details (for example, on a joint return it doesn't even distinguish between a single spouse working and both spouses working, or any of the various implications of this such dependent care, savers, and the new "making work pay" credits. It has its place, but I think it's best used as a VERY quick and dirty guesstimate, or perhaps as a template for excel jockeys to start from.
pnfisher, TaxAct doesn't have a downloadable version for 2009 yet, but you're correct that the online perview version is up, running, and free. I think this is an attractive solution provided one's bandwidth is sufficient. I wish you could add more data per screen, that would speed things up. I got most of our key data entered in maybe 1/2 hour, and at the moment it's the leading contender for me.
Many thanks for the useful answers so far! Please keep them coming, and of course feel free to add your own impressions/reviews/spreadsheets.
calwatch, the Glenn Reeves Tax Spreadsheet is updated only through 2008--does he have a regular release date for new versions? OTOH, the federal version of the taxvisor.com excel sheet has been out since early this year. I've just been playing with it. It's simple to use and to follow, but it's missing many important details (for example, on a joint return it doesn't even distinguish between a single spouse working and both spouses working, or any of the various implications of this such dependent care, savers, and the new "making work pay" credits. It has its place, but I think it's best used as a VERY quick and dirty guesstimate, or perhaps as a template for excel jockeys to start from.
The Glenn Reeves spreadsheet is designed for filing so the release date is generally a few weeks after the start of the year. But it is a good start for planning purposes.
needdealsnow said:I like the heads up on IRA to ROTH conversion because this year our AGI is low and taxes on conversion can be spread over 3 years. I will talk to my tax guy about this.
Can someone please help me understand why is this a benefit to your current year taxes? I will also have a one time low AGI this year, and have been looking at converting a $50k/IRA over. I haven't made a move based on some of the questions below:
To me this may have made more sense when the market was 20% lower, but with most speculating that the markets will falter again, doesn't this mean you will be possibly paying more tax than necessary? Comparing to the possibility of making the conversion next year when the markets are lower and the AGI limit is removed.
Won't this conversion tax bump your income up more for the next 3 years and for those on medicare, potentially lower their benefts?
Wouldn't putting the 30% tax to the government into a growth fund inside the IRA net more value with compounding interest?
calwatch: thanks for the links, downloaded and bookmarked for the future.
premio158 said:needdealsnow said:I like the heads up on IRA to ROTH conversion because this year our AGI is low and taxes on conversion can be spread over 3 years. I will talk to my tax guy about this.
Can someone please help me understand why is this a benefit to your current year taxes? I will also have a one time low AGI this year, and have been looking at converting a $50k/IRA over. I haven't made a move based on some of the questions below:
To me this may have made more sense when the market was 20% lower, but with most speculating that the markets will falter again, doesn't this mean you will be possibly paying more tax than necessary? Comparing to the possibility of making the conversion next year when the markets are lower and the AGI limit is removed.
Won't this conversion tax bump your income up more for the next 3 years and for those on medicare, potentially lower their benefts?
Wouldn't putting the 30% tax to the government into a growth fund inside the IRA net more value with compounding interest?
calwatch: thanks for the links, downloaded and bookmarked for the future.
If you are so sure that stocks are dropping, why aren't you selling now? The 2010 special conversion should be done independently of what the market might do in the future, because you could be right or wrong either way. The market is more difficult to control than your income.
As for the 2010 special conversion, the amount of the conversion is added to regular taxable income in both 2011 and 2012. It isn't really split out over three years. The conversion is taxed at a normal tax rate in 2011 and 2012. So you would have to guess what your tax rate will be in 2011 and 2012 and determine if it will put it above. The big jump is from the 15% to 25% tax bracket.
I would definitely convert enough this year to exhaust the 15% tax bracket. It is up to you if you want to convert amounts in the 25% or 28% tax bracket. Likely, though, the bulk of your income will be in those two tax brackets, so ax brackets are less of an issue, and more whether you want to pay the tax. Also note that the 2010 special conversion tx treatment is optional. You could also choose to pay the taxes in 2010.
premio158 said:needdealsnow said:I like the heads up on IRA to ROTH conversion because this year our AGI is low and taxes on conversion can be spread over 3 years. I will talk to my tax guy about this.
Can someone please help me understand why is this a benefit to your current year taxes?
I have looked at the vanguard calculator and am not really impressed with the benefits myself. Some say that roth is the easiest for estate planning purposes.
These are the numbers I put:
Say your regular AGI is 200K and this year AGI is 100K. IRA conversion amount is $50K. The roth conversion AGI tops out at 100K. so this opportunity won't be available next year.you are 40 years old and filing joint
According to the vanguard calculator, your tax liability is 14000.
It is a lot of money but according to the vanguard calculator the net benefit at 60 years age (from 40 today) is $31,000
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