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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12443
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lev ..the tax professional ...how do i find m?

Customer Question

Lev ..the tax professional ...how do i find him?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from mercer University’s Stetson School of Business and Economics, as well as CFP® and CRPS designations.

I can help here

...

Expert:  Lane replied 1 year ago.

Just checked and Lev is not online right now ... how can I help

Customer: replied 1 year ago.
Happy new year.I converted $100,000 to Roth in December and I am going to convert the balance of $200,000 to Roth and convert $300,000 annuities ($100,000 is base) to gains. I think it’s better to convert $200,000 to Roth NOW (in January) now and $200,000 in annuities in Jan 2017 and I just need to verify some numbers.1. is the following close for this year’s tax return or how far off is it? ()
-one dependent and head of house hold2015:Short Term (assets held 1 year or less) -$14,411.75
Long Term (held over 1 year) -16,128.61
Total -$30,540.36Dividends Qualified (Q) $18,538.56
Nonqualified (N) 580.80
Total $19,120.95Partial Conversions To Roth IRA $101,088.56Tax Amount Owe: $17,436
Total Income $89,579
Total Deductions $9,250
Total Exemptions $8,000
Taxable Income $72,329
Regular Taxes $17,436
Alternative Minimum Tax $0
Net Investment Income Tax $0
All Tax Credits $0
Total Tax with Credits $17,436
Marginal Tax Rate 25%
Tax Pre-payments $0
Tax Amount Owe $17,436I have a $200,000 IRA remaining and $300,000 annuity ($100,000 is base).So $400,000 to cash out:4 years: -$123,000 - $133,000 per year = $21,000 / year = $84,000 tax
3 years: -$150,000 per year = $30,000 / year = $84,000 tax
2 years: -$200,000 per year = $42,000 / year = $84,000 and I would have a small balance in the 3rd yearI don’t see much benefit in spreading it out. I think I should convert $200,000 to Roth TODAY, then look at the numbers in December and maybe cash out some annuities.Tax Amount Owe: $22,510
Total Income $130,000
Total Deductions $9,250
Total Exemptions $8,000
Taxable Income $112,750
Regular Taxes $22,510
Alternative Minimum Tax $0
Net Investment Income Tax $0
All Tax Credits $0
Total Tax with Credits $22,510
Marginal Tax Rate 25%
Tax Pre-payments $0
Tax Amount Owe $22,510Tax Amount Owe: $27,605
Total Income $150,000
Total Deductions $9,250
Total Exemptions $8,000
Taxable Income $132,750
Regular Taxes $27,605
Alternative Minimum Tax $0
Net Investment Income Tax $0
All Tax Credits $0
Total Tax with Credits $27,605
Marginal Tax Rate 28%
Tax Pre-payments $0
Tax Amount Owe $27,605ax Amount Owe: $41,605
Total Income $200,000
Total Deductions $9,250
Total Exemptions $8,000
Taxable Income $182,750
Regular Taxes $41,605
Alternative Minimum Tax $0
Net Investment Income Tax $0
All Tax Credits $0
Total Tax with Credits $41,605
Marginal Tax Rate 28%
Tax Pre-payments $0
Tax Amount Owe $41,605
Customer: replied 1 year ago.
r u sure you have enough degrees?....lol.
Expert:  Lane replied 1 year ago.

Generally, I would agree, .. although some of the answer should come from how this year will compare to other years

...

Do realize that the annuity surrenders will be ordinary income not capital gain

...

Same with the roth conversions

Customer: replied 1 year ago.
i went to Northwestern and Washington University ...so just joking you
Expert:  Lane replied 1 year ago.

:0) ... yep just TOOO curious .. and love to learn ... also do some teaching at the college level ... what i TRULY enjoy doing

Customer: replied 1 year ago.
i realize this. i have not paid gains tax in 30 years
Customer: replied 1 year ago.
i live overseas and have no paid tax in 30 yeras
Expert:  Lane replied 1 year ago.

Ok... the math looks good ... Is there a particular piece that you'r wondering about

Expert:  Lane replied 1 year ago.

ahhh, why don't you Consider spreading this out over several years?

Customer: replied 1 year ago.
give me a minute and i will down load my long range plan
Expert:  Lane replied 1 year ago.

Great, context will help

Customer: replied 1 year ago.
my long range plan
Customer: replied 1 year ago.
my plan is:
-i deferred tax for 30 years. So cash out IRA and annuities now and pay little tax after age 65. if i spread it out, every year i lose $67,000 in gains exclusion. If it's cost the same to cash out in 2 vs 4 years, it better to cash out in 2. If i spread it out every year i also increase the amount of income i pay tax on. If i cash out now i think it's the best ROI
Expert:  Lane replied 1 year ago.

Holy Cow ... Lots to absorb ... Scanned rather quickly ... I agree with the concept of (gotta pay the tax at some point)

Expert:  Lane replied 1 year ago.

Gains exclusion?

Expert:  Lane replied 1 year ago.

Help me understand that one

Customer: replied 1 year ago.
Lane,
I can take $67,000 in gains every year
Expert:  Lane replied 1 year ago.

How is that?

Customer: replied 1 year ago.
I can take $67,000 in yearly gains tax free. or almost tax free.
Expert:  Lane replied 1 year ago.

Why? How? the roth and Annuities are Ordinary income not capital gains

Expert:  Lane replied 1 year ago.

and if let to the next genertion IRD (Income in Respect of a Decedent) ... Ordinary income

Customer: replied 1 year ago.
If cash out Roth and annuities in 2 years vs 4 years. That means I get 2 more years of drawing down gains
Expert:  Lane replied 1 year ago.

you file a 1040NR right?

Expert:  Lane replied 1 year ago.

Headof Household Filing Status

[Tax Rate Schedule Z, InternalRevenue Code section 1(b)]

  • 10% on taxable income from $0 to $12,950, plus

  • 15% on taxable income over $12,950 to $49,400, plus

  • 25% on taxable income over $49,400 to $127,550, plus

  • 28% on taxable income over $127,550 to $206,600, plus

  • 33% on taxable income over $206,600 to $405,100, plus

  • 35% on taxable income over $405,100 to $432,200, plus

  • 39.6% on taxable income over $432,200.

Expert:  Lane replied 1 year ago.

OR are you US citizen?

Customer: replied 1 year ago.
cashing out Roth and annuities in 2 vs 4 years cost about the same in tax. So if i cash out in 2 years, i have another 2 years to draw down $120,000 in gains at no tax.
Customer: replied 1 year ago.
usa and i have 1 dependent
Customer: replied 1 year ago.
I am USA citizen and have 1 dependent
Expert:  Lane replied 1 year ago.

So OK, ABOUT the same, some of the dollars, as you can see from looking that the brackets there WILL be taxed at higher rates by cramming it all into one year.

...

But Id need to see the math to see if paying it all up front really makes sense (given those higher brakets if all paid in one year) and the present value of NOT paying the taxes today

Expert:  Lane replied 1 year ago.

One HUGE factor (unless everything you have is in cash or fixed interest investments) ... markets this year were the first year in the last 4 where we haven't had double digit returns ... next year with all the uncertainty will VERY possibly be similar ... at least through the first three quarters ... but once the political (and possibly some of the other global) uncertainty leaves the picture 2017 could be a very good year

Customer: replied 1 year ago.
that''s my question....i don't know how much to cash out
Customer: replied 1 year ago.
every thing is in cash.... i earn 9% historically over 30 years
Expert:  Lane replied 1 year ago.

Well that gets to be art more than science (in terms of markets ... if you're all equity based my intuition says don't sell now ans lock in what by 2017 will likely have been only a loss on paper)

...

But in terms of taxes just look at those brackets again

Expert:  Lane replied 1 year ago.

Would love to see THOSE investments ... Cash and cash equivalents HERE have been, of course, at the floor

Expert:  Lane replied 1 year ago.

Headof Household Filing Status

[Tax Rate Schedule Z, InternalRevenue Code section 1(b)]

  • 10% on taxable income from $0 to $12,950, plus

  • 15% on taxable income over $12,950 to $49,400, plus

  • 25% on taxable income over $49,400 to $127,550, plus

  • 28% on taxable income over $127,550 to $206,600, plus

  • 33% on taxable income over $206,600 to $405,100, plus

  • 35% on taxable income over $405,100 to $432,200, plus

  • 39.6% on taxable income over $432,200.

Customer: replied 1 year ago.
it's all in equities sorry,,, i meant equities not cash
Customer: replied 1 year ago.
converting $300,000 to Roth and cashing out $300,000 in annuities is for tax reasons. Get out of income and get into tax free and get into gains
Expert:  Lane replied 1 year ago.

OK then selling now (forgetting taxes) is in my opinion NOT the thing to do ... again more uncertainly (which ALWAYS makes markets jittery), especially with elections coming and China trying to stabilize.

...

Looking back at election years ... we ALWAYS get a good upswing when the uncertainty is removed (doesn't matter who wins) Institutional money now knows what the policy is going to be

...

I'd submit that waiting until 2017 will far outweigh the tax effect here

Customer: replied 1 year ago.
But Id need to see the math to see if paying it all up front really makes sense (given those higher brakets if all paid in one year) and the present value of NOT paying the taxes today..... THIS IS MY QUESTION.
Expert:  Lane replied 1 year ago.

But if you forget all that and simply look at the tax brackets ....

Expert:  Lane replied 1 year ago.

Headof Household Filing Status

[Tax Rate Schedule Z, InternalRevenue Code section 1(b)]

  • 10% on taxable income from $0 to $12,950, plus

  • 15% on taxable income over $12,950 to $49,400, plus

  • 25% on taxable income over $49,400 to $127,550, plus

  • 28% on taxable income over $127,550 to $206,600, plus

  • 33% on taxable income over $206,600 to $405,100, plus

  • 35% on taxable income over $405,100 to $432,200, plus

  • 39.6% on taxable income over $432,200.

Expert:  Lane replied 1 year ago.

bear with me a minute here...

Expert:  Lane replied 1 year ago.

Lets say that you only generate 100,000 of taxable income

... as you can see from those brackets, a good deal of it is at 0, 10 and 15% (zero because or your dependency, personal and standard deduction)

Customer: replied 1 year ago.
i don't understand the comment of ""Not selling now"".. A Roth conversion is merely a roll over and it's the same with the annuities,. i keep the same investments. i just pay the tax on them
Expert:  Lane replied 1 year ago.

Ok, very good... if that's what you're doing ... remove that component ... but look at the taxes on 100,000 ... I'll do it again on 300,000

Expert:  Lane replied 1 year ago.

Estimated Tax Analysis

Gross income$100,000

Qualified plan contributions-$0

Adjusted gross income=$100,000

Standard/Itemized deductions-$9,250

Personal exemptions-$4,000

Taxable income=$86,750

Tax liability before credits$16,010

Child tax credits-$0

Estimated tax liability=$16,010

Expert:  Lane replied 1 year ago.

Estimated Tax Analysis

Gross income$300,000

Qualified plan contributions-$0

Adjusted gross income=$300,000

Standard/Itemized deductions-$9,250

Personal exemptions-$3,440

Taxable income=$287,310

Tax liability before credits$75,654

Child tax credits-$0

Estimated tax liability=$75,654

Expert:  Lane replied 1 year ago.

3 x 16,000 = 48000

...

doing it all at once the tax is 75000

Expert:  Lane replied 1 year ago.

at 400,000 it's

Estimated Tax Analysis

Gross income$400,000

Qualified plan contributions-$0

Adjusted gross income=$400,000

Standard/Itemized deductions-$9,250

Personal exemptions-$240

Taxable income=$390,510

Tax liability before credits$110,610

Child tax credits-$0

Estimated tax liability=$110,610

Customer: replied 1 year ago.
$300,000 is out of question.
$100,000 will take 5 years = $85,000 tax
$200,000 will take 2 yeras = $85,000 tax
Expert:  Lane replied 1 year ago.

Estimated Tax Analysis

Gross income$400,000

Qualified plan contributions-$0

Adjusted gross income=$400,000

Standard/Itemized deductions-$9,250

Personal exemptions-$240

Taxable income=$390,510

Tax liability before credits$110,610

Child tax credits-$0

Estimated tax liability=$110,610

...

and paying it yearly at 100,000 is 4 x 16000 = 64000

Expert:  Lane replied 1 year ago.

yes 2 years may be your sweet spot ... let me run that

Expert:  Lane replied 1 year ago.

Yep

Estimated Tax Analysis

Gross income$200,000

Qualified plan contributions-$0

Adjusted gross income=$200,000

Standard/Itemized deductions-$9,250

Personal exemptions-$4,000

Taxable income=$186,750

Tax liability before credits$42,724

Child tax credits-$0

Estimated tax liability=$42,724

Customer: replied 1 year ago.
5 yeras = $80,000 tax.
2 yeras = $84,000 tax -- but then i can take 3 years of $65,000 in gains at $0 tax. (i have $200,000 pending gains) and i have $120,000 in yearly increased gains liability from growth
Expert:  Lane replied 1 year ago.

x 2 of course, as you say ... but again, 16000 for takig itout one year at a time (16,000 x 4) = 16000

Expert:  Lane replied 1 year ago.

NO your missing that the growth for any one year (probably ought to be assumed to be negligible) is not going to bring it right back to the same amount and if you spreading it out over 5 then its (400000 / 5 ) = 80,000 withdrawals ... then

...

Estimated Tax Analysis

Gross income$80,000

Qualified plan contributions-$0

Adjusted gross income=$80,000

Standard/Itemized deductions-$9,250

Personal exemptions-$4,000

Taxable income=$66,750

Tax liability before credits$11,010

Child tax credits-$750

Estimated tax liability=$10,260

...

5 x 10,260 = 51300 in tax over 5 years

Customer: replied 1 year ago.
$500,000 Roth and annuities converted = $80,000 tax in 5 years
$500,000 Roth and annuities converted = $84,000 tax in 2 years, then in the next 3 years i can draw down $180,000 in gains at $0 tax.
So $680,000 converted to realized assets = $84,000 tax in 5 years
Expert:  Lane replied 1 year ago.

yep, what you're not accounting for however is the very different level of tax on that next dollar ... what I'm not accounting for is the growth on what's not pulled ... but a dollar moving from 15% tax to 25% costs more that getting another 9% for another year of growth

Customer: replied 1 year ago.
NO your missing that the growth for any one year (probably ought to be assumed to be negligible) is not going to bring it right back to the same amount and if you spreading it out over 5 then its (400000 / 5 ) = 80,000 withdrawals ... thenYES YOU R RIGHT..i didn't think about this. but over 5 years i would get some growth
...
Expert:  Lane replied 1 year ago.

some ... but assuming 9, the opportunity cost is the MARGINAL bracket (what that additional dollar is taxed on) and again...

...

  • 10% on taxable income from $0 to $12,950, plus

  • 15% on taxable income over $12,950 to $49,400, plus

  • 25% on taxable income over $49,400 to $127,550, plus

  • 28% on taxable income over $127,550 to $206,600, plus

  • 33% on taxable income over $206,600 to $405,100, plus

  • 35% on taxable income over $405,100 to $432,200, plus

  • 39.6% on taxable income over $432,200.

Customer: replied 1 year ago.
i agree with that....15% tax to 25%... thats why i am seeking input.
Expert:  Lane replied 1 year ago.

again at 100,000 your in the 16% effective tax bracket (some taxed at 0, some taxed at 10 some taxed at 15 and about half of it taxed at 25%)

Expert:  Lane replied 1 year ago.

if you took out 100,000 at a time that keeps you in the lowest effective tax bracket (16%) ... 16,000 or so on 100,000 of income

that's the lowest end of the spectrum

Customer: replied 1 year ago.
but again in 5 years ---
convert $500,000 Roth and annuities converted = $80,000 tax in 5 years
Vs
$500,000 Roth and annuities converted = $84,000 tax in 2 years, then in the next 3 years i can draw down $180,000 in gains at $0 tax.
So $680,000 converted to realized assets = $84,000 tax in 5 years
Expert:  Lane replied 1 year ago.

there's nothing that beats (for lowering effective taxes) that keeping yourself at a 16% bracket for the years it takes to pull out 100K at a time

Expert:  Lane replied 1 year ago.

except pulling out 80,000 at a time

Expert:  Lane replied 1 year ago.

50,000 at a time? ... tax bill is $3,855 per year

Expert:  Lane replied 1 year ago.

If this were me, THAT's what I would do ... give myself a reasonable 50000 each year (8% tax rate) then from time to tme pull more STILL keeping those tax brackets in mind

Customer: replied 1 year ago.
$600,000 grows at $50,000 /year. So i would never cash out the annuities at that rate.
Expert:  Lane replied 1 year ago.

Estimated Tax Analysis

Gross income$50,000

Qualified plan contributions-$0

Adjusted gross income=$50,000

Standard/Itemized deductions-$9,250

Personal exemptions-$4,000

Taxable income=$36,750

Tax liability before credits$4,855

Child tax credits-$1,000

Estimated tax liability=$3,855

Expert:  Lane replied 1 year ago.

I understand ... but the most powerful piece of this is the increase in marginal tax bracket Doing it ALL up fron is the least desirable from a purely financial perspective .... that's why I said ... "from time to time."

Customer: replied 1 year ago.
In 10 years i would draw down $500,000 of income and have $600,000 of annuities remaining to draw down.
Expert:  Lane replied 1 year ago.

... gives you a frame of reference

...

BY the WAY cant MISS the idea of annuitizing the annuities ... prorated return of principal and growth ...

Expert:  Lane replied 1 year ago.

The gamble is living past life expectancy

Customer: replied 1 year ago.
annuitizing the annuities ... prorated return of principal and growth .I don't understand? I have $100,000 in principle and $200,000 in growth,. so if i cash out in 1 year the effective rate is lowered to 16%
Expert:  Lane replied 1 year ago.

I understand ... just want to point out that an additional 25% on a dollar what grows at 9% is the tradeoff

...

deferring as long as possible and taking as little as possible BY FAR maxes out financially What MANY do is try as jard as possible to pass to the next generation ... It's still there, you still own it

Customer: replied 1 year ago.
The gamble is living past life expectancy.... why is relevent?
Expert:  Lane replied 1 year ago.

Hold on lets correct something first ... if you pull out 200,000 of growth that's $42,724 / 200,000 = 21.3%

Expert:  Lane replied 1 year ago.

now, on the annuitization of an annuity...

Customer: replied 1 year ago.
If i have $1.3m in realized gains by 65. vs $800,000 i draw down realized income after age 70. I have enough money to last past age 100
Customer: replied 1 year ago.
$42K/ 300k ($100k is principle) = 14% tax
Expert:  Lane replied 1 year ago.

Still, your assumption is that the objective is to get it out and pay tax WHY? ... does NOT maximize your return

Expert:  Lane replied 1 year ago.

are you looking at the models I'm running ... just moving from pulling 100,000 to 20,000 moves you from an effective rate of 16% to 21%

Customer: replied 1 year ago.
I am maximizing return. from age 60 to 90 I take home $3m at $160,000 tax (5% tax) and $100,000 of this tax is what i will pay in the next 3 years
Expert:  Lane replied 1 year ago.

nope

you're missing the effect of the marginal brackets ... AND assuming that if you don't tax it, it's not yours

Expert:  Lane replied 1 year ago.

just moving from pulling 100,000 to 20,000 moves you from an effective rate of 16% to 21%

...

pulling out 400 takes you to a 40% bracket

Customer: replied 1 year ago.
Vs $100,000 per year at $16,000 tax for 30 yeras at $480,000 tax
Expert:  Lane replied 1 year ago.

you can ALWAYS... in any one year decide to pull more out and pay more tax per dollar ... but you must keep in mind how very different those brackets are ... so you understand the opportunity cost of pulling more ... and again, if you don't decide to tax it by converting it's still your money

Expert:  Lane replied 1 year ago.

no, you're treating this as if it's earned income and if you don't tax it it's not there

Expert:  Lane replied 1 year ago.

Two things and I'll let you go ... (1) the more years you keep yourself in that 16% bracket the higher the ROI and (2) you should look at annuitizing the (or some of the) annuity money

Expert:  Lane replied 1 year ago.

Annuitized Payments – If you annuitize a nonqualified annuity, a portion of your payment will be considered a return of premium and will not be subject to ordinary income tax. The amount that is taxable will be determined at the time you elect to annuitize the policy. A calculation will be made by the insurance company to determine the “exclusion ratio,” which will determine the percentage of each payment that will be excluded from income tax.

Customer: replied 1 year ago.
Annuitized Payments – If you annuitize a nonqualified annuity, a portion of your payment will be considered a return of premium and will not be subject to ordinary income tax. The amount that is taxable will be determined at the time you elect to annuitize the policy. A calculation will be made by the insurance company to determine the “exclusion ratio,” which will determine the percentage of each payment that will be excluded from income tax.
Expert:  Lane replied 1 year ago.

A client's investment in an annuity is returned in equal tax-free amounts during the payment period. Any additional amount received is taxed at ordinary income rates.

"This means that part of each payment is considered a return of capital and is therefore nontaxable and part of each payment is considered return on capital (income) and is therefore taxable at ordinary rates.

"The formula for determining the nontaxable portion of each year's payment is, according to the Internal Revenue Code Sec. 72(b)(1):

Customer: replied 1 year ago.
ok...that's worth looking at
Customer: replied 1 year ago.
thanks
Expert:  Lane replied 1 year ago.

And remember the ROI calculation still takes all growth into consideration ... not just the part that you've pulled

...

You're very welcome ... Hope this has helped

..

Hope this has helped...Let me know if you have questions.

...

If this HAS helped,,I'd really appreciate your positive rating …(by using the stars on your screen) … … That’s the only way I'll be credited a portion of what you've paid JustAnswer.

...

Thank you,

Lane