2020 Taxes

[elindholm]

So she responded "so let me get this straight. You're blaming me for not adjusting witholdings, which in English means paying more in taxes each paycheck, to offset the big tax cuts? Does that make any sense at all, a taxcut that requires us to pay MORE in taxes to not end up owing at the end of the year?"

Well, yeah. Everything Trump says is a lie, so when he said taxes would go down, I was pretty sure they'd go up. I increased my backup witholding in order to compensate for what I figured the bottom line would end up being.

 

[Russ Smith]

Well, yeah. Everything Trump says is a lie, so when he said taxes would go down, I was pretty sure they'd go up. I increased my backup witholding in order to compensate for what I figured the bottom line would end up being.

I did too. I think her point is valid though, what sort of tax cut requires you to INCREASE the taxes you pay to not wind up owing at the end of the year.

 

[elindholm]

I did too. I think her point is valid though, what sort of tax cut requires you to INCREASE the taxes you pay to not wind up owing at the end of the year.

Right, and the answer is, a bullsh't tax cut that isn't a tax cut at all, but instead more of Trump promising stuff he has no intention of delivering.

 

[Folster]

I don't know her tax rate she didn't post that on FB. She's a dentist, her income was actually significantly lower this year because of Covid

The point is pretty hard to argue with, if a tax CUT, requires you to pay more in taxes every paycheck to not be underwitheld, it's not really a tax cut.

The numbers are pretty simple. I don't understand all the complaints. Withholdings were decreased because tax rates decreased.

If you look at the changes all joint filers paid less in taxes at every progressive rate sans a small subset of households that made between 400-416K, but the lower rates before and the larger standard deduction almost certainly made up for it.

You must be registered for see images attach

High income single filers have a small yet legitimate complaint. As income between 200-416K was taxed at 2% higher rate than it previously was. That likely only affected tax payers who were well above 200K level. But they still benefited from the much larger standard deduction and lower progressive rates.

You must be registered for see images attach

Bottom line is that I don't believe people who are complaining about paying more in total taxes with the new tax brackets and they need to show their work. If your income has stayed relatively the same and you didn't lose any significant credits, then I don't see how that is possible. The increased standard deduction was a boon to lower and working class families and the decrease in all of the progressive brackets had a compounding positive effect as well.

I do remember something regarding CA residents not being happy with the tax changes. I don't remember the particulars, but if you could enlighten me, I'd be happy to take it into consideration.

 

[Russ Smith]

The numbers are pretty simple. I don't understand all the complaints. Withholdings were decreased because tax rates decreased.

If you look at the changes all joint filers paid less in taxes at every progressive rate sans a small subset of households that made between 400-416K, but the lower rates before and the larger standard deduction almost certainly made up for it.

You must be registered for see images attach

High income single filers have a small yet legitimate complaint. As income between 200-416K was taxed at 2% higher rate than it previously was. That likely only affected tax payers who were well above 200K level. But they still benefited from the much larger standard deduction and lower progressive rates.

You must be registered for see images attach

Bottom line is that I don't believe people who are complaining about paying more in total taxes with the new tax brackets and they need to show their work. If your income has stayed relatively the same and you didn't lose any significant credits, then I don't see how that is possible. The increased standard deduction was a boon to lower and working class families and the decrease in all of the progressive brackets had a compounding positive effect as well.

I do remember something regarding CA residents not being happy with the tax changes. I don't remember the particulars, but if you could enlighten me, I'd be happy to take it into consideration.

I don't think you're following. I'm not saying I paid more in taxes, I'm sayin that the tax "CUT" resulted in me owing taxes at the end of the year, and lots of others. The only way to prevent owing taxes, was to PAY MORE in taxes in every paycheck, to make up for the "TAX CUT" that Trump said he was giving us.

I did increase but not enough.

I"m still waiting on stock stuff from Etrade so I don't know my final outcome.

 

[Folster]

I don't think you're following. I'm not saying I paid more in taxes, I'm sayin that the tax "CUT" resulted in me owing taxes at the end of the year, and lots of others. The only way to prevent owing taxes, was to PAY MORE in taxes in every paycheck, to make up for the "TAX CUT" that Trump said he was giving us.

I did increase but not enough.

I"m still waiting on stock stuff from Etrade so I don't know my final outcome.

I'm following. Withholdings were changed. We were required to make changes to our W4. I used the tools available and it worked out fine.

The tax cut is not the issue. The changes in withholdings were what messed people up. The old ones made no sense so they needed to be reformed. I remember filing when I was single with no kids, I had to file Single 2 to come out even, because Single 0 would result in massive over-withholdings.

 

[Russ Smith]

I'm following. Withholdings were changed. We were required to make changes to our W4. I used the tools available and it worked out fine.

The tax cut is not the issue. The changes in withholdings were what messed people up. The old ones made no sense so they needed to be reformed. I remember filing when I was single with no kids, I had to file Single 2 to come out even, because Single 0 would result in massive over-withholdings.

the point is witholding is another word for taxes. If you have to adjust your witholdings to hold back more, you are NOT getting a taxcut. If you don't adjust, you end up owing at the end of the year. I did adjust but not enough, I didn't sit down and do the math I just held back extra every paycheck but apparently not enough.

I know lots of people complaining right now that their paycheck is smaller because Biden increased taxes, what really happened is the Trump "cuts" expired so now the proper amount is being taken out of their pay.

I just wish this was more universally known.

 

[Folster]

the point is witholding is another word for taxes. If you have to adjust your witholdings to hold back more, you are NOT getting a taxcut. If you don't adjust, you end up owing at the end of the year. I did adjust but not enough, I didn't sit down and do the math I just held back extra every paycheck but apparently not enough.

I know lots of people complaining right now that their paycheck is smaller because Biden increased taxes, what really happened is the Trump "cuts" expired so now the proper amount is being taken out of their pay.

I just wish this was more universally known.

You're not necessarily withholding more. The withholding calculation completely changed and many did not understand.

Are you referring to the payroll tax deferral that was part of the bipartisan CARES Act or subsequent memorandum announced by Trump in 2020? I believe it was optional for employers, but I agree it was stupid and just a band aid at best. That had nothing to do with the Trump tax cuts that resulted in near universal tax cut for everyone.

 

[Devilmaycare]

the point is witholding is another word for taxes. If you have to adjust your witholdings to hold back more, you are NOT getting a taxcut. If you don't adjust, you end up owing at the end of the year. I did adjust but not enough, I didn't sit down and do the math I just held back extra every paycheck but apparently not enough.

I know lots of people complaining right now that their paycheck is smaller because Biden increased taxes, what really happened is the Trump "cuts" expired so now the proper amount is being taken out of their pay.

I just wish this was more universally known.

Did they reduce the percentage being withheld though? If they changed from withholding 15% down to 10% but your rate dropped from 15% to 14% you got a tax cut but are going to owe at the end of the year. Didn't they effectively do that when they changed the holding calculation? I thought they messed around with the amount withheld as part of one of the stimulus packages too.

For real numbers I did my 2020 taxes already. I had about a $5k income increase over 2019 (stayed in same bracket) and effective tax rate went up .6%. As far as my withholdings I did well, only owed $28 this year vs $401 for 2019.

I need to pull my 2017 and 2018 filings to see what my effective rate was those years to compare. Unfortunately I don't have them handy right now.

 

[Ouchie-Z-Clown]

The numbers are pretty simple. I don't understand all the complaints. Withholdings were decreased because tax rates decreased.

If you look at the changes all joint filers paid less in taxes at every progressive rate sans a small subset of households that made between 400-416K, but the lower rates before and the larger standard deduction almost certainly made up for it.

You must be registered for see images attach

High income single filers have a small yet legitimate complaint. As income between 200-416K was taxed at 2% higher rate than it previously was. That likely only affected tax payers who were well above 200K level. But they still benefited from the much larger standard deduction and lower progressive rates.

You must be registered for see images attach

Bottom line is that I don't believe people who are complaining about paying more in total taxes with the new tax brackets and they need to show their work. If your income has stayed relatively the same and you didn't lose any significant credits, then I don't see how that is possible. The increased standard deduction was a boon to lower and working class families and the decrease in all of the progressive brackets had a compounding positive effect as well.

I do remember something regarding CA residents not being happy with the tax changes. I don't remember the particulars, but if you could enlighten me, I'd be happy to take it into consideration.

The cap on SALT deductions killed us. My effective tax rate has gone up under the tax “cuts.” So happy to be paying for the billionaires tax cuts.

 

[Russ Smith]

Looks like with my stock sales I owe just under 3K to Feds and just over 1K state.

If I make a 4K contribution to my IRA that goes down to about 2100 Fed 500 state.

Worth it? I end up "paying out" 6600 instead of 4K, but 4K of that goes into my IRA, not to the IRS.

I've done it before I'm just never totally sure if it's worth it all but I'm leaning towards doing it this year too

 

[Russ Smith]

I also increased my witholdings again. ANother 50 per paycheck to Fed, 20 per paycheck to state. paid every 2 weeks so 70 per payperiod for the remaining ones this year so basically will be I think 23.

Am not done with taxes yet so don't know total % paid

 

[BigRedRage]

my phone has been broken for over a week and I need to get my taxes filed. Hopefully my third trip to the phone store tonight fixes it.

 

[Russ Smith]

Looks like with my stock sales I owe just under 3K to Feds and just over 1K state.

If I make a 4K contribution to my IRA that goes down to about 2100 Fed 500 state.

Worth it? I end up "paying out" 6600 instead of 4K, but 4K of that goes into my IRA, not to the IRS.

I've done it before I'm just never totally sure if it's worth it all but I'm leaning towards doing it this year too

And now Turbo Tax says my AGI is too high so I can't get a deduction by making the IRA contribution. Oh well.

Owe over 4K, still don't know the %.

 

[Folster]

And now Turbo Tax says my AGI is too high so I can't get a deduction by making the IRA contribution. Oh well.

Owe over 4K, still don't know the %.

That's because you are covered by an employer plan. The IRS is trying to prevent people from double dipping with an IRA if they are already covered by a workplace plan. This is pretty common because that phase out range is pretty low.

I tell clients in your situation that they can contribute more to their employer plan throughout the year if they need the tax deduction. If not go with a Roth assuming you aren't phased out there as well.

If you can't contribute directly to your Roth, you can look into a back door Roth contribution. There are some important considerations with the back door loophole that I can explain if you are interested/need to know.

 

[Devilmaycare]

That's because you are covered by an employer plan. The IRS is trying to prevent people from double dipping with an IRA if they are already covered by a workplace plan. This is pretty common because that phase out range is pretty low.

I tell clients in your situation that they can contribute more to their employer plan throughout the year if they need the tax deduction. If not go with a Roth assuming you aren't phased out there as well.

If you can't contribute directly to your Roth, you can look into a back door Roth contribution. There are some important considerations with the back door loophole that I can explain if you are interested/need to know.

Is this with a 401k or a different type of workplace plan? I thought you could contribute to both an IRA and your 401k. I've actually been thinking of changing my withholdings so that only the amount up to what my employer matches is put into the 401k and the extra points I have going into in now get deposited to my IRA. I'd like to have more control over the money than the handful of funds that the 401k provides.

 

[Folster]

Is this with a 401k or a different type of workplace plan? I thought you could contribute to both an IRA and your 401k. I've actually been thinking of changing my withholdings so that only the amount up to what my employer matches is put into the 401k and the extra points I have going into in now get deposited to my IRA. I'd like to have more control over the money than the handful of funds that the 401k provides.

Yes, a 401K would be an example of a workplace plan.

You can always contribute to an IRA provided you have earned income for that year. The question is whether you'll be able to deduct that contribution from your income.

This link should help.
https://www.irs.gov/retirement-plan...-you-are-covered-by-a-retirement-plan-at-work

 

[Russ Smith]

That's because you are covered by an employer plan. The IRS is trying to prevent people from double dipping with an IRA if they are already covered by a workplace plan. This is pretty common because that phase out range is pretty low.

I tell clients in your situation that they can contribute more to their employer plan throughout the year if they need the tax deduction. If not go with a Roth assuming you aren't phased out there as well.

If you can't contribute directly to your Roth, you can look into a back door Roth contribution. There are some important considerations with the back door loophole that I can explain if you are interested/need to know.

Interesting thanks. I was planning to up my 401K contribution as well I just have to see how much my paycheck changes with the extra 70 a month I'm holding back for taxes now before I decide on the 401K.

 

[jf-08]

That's because you are covered by an employer plan. The IRS is trying to prevent people from double dipping with an IRA if they are already covered by a workplace plan. This is pretty common because that phase out range is pretty low.

I tell clients in your situation that they can contribute more to their employer plan throughout the year if they need the tax deduction. If not go with a Roth assuming you aren't phased out there as well.

If you can't contribute directly to your Roth, you can look into a back door Roth contribution. There are some important considerations with the back door loophole that I can explain if you are interested/need to know.

My income is paycheck + S-Corp so as a result, my income is well above any thresholds for Roth IRAs. I already max out my 401K + the catch-up. Any scenarios to utilize the back door Roth?

 

[Devilmaycare]

Yes, a 401K would be an example of a workplace plan.

You can always contribute to an IRA provided you have earned income for that year. The question is whether you'll be able to deduct that contribution from your income.

This link should help.
https://www.irs.gov/retirement-plan...-you-are-covered-by-a-retirement-plan-at-work

Dang, thanks for the info. I never knew that the deductions are limited. When I'd searched on it in the past things said you could put money in both but never mentioned the deduction limits. It really sucks too with those income amounts. This kills what I was thinking of doing. I wish it was some combined dollar amount that's put into both or something like that since I'd prefer to have the money go into my iRA over my 401k for control.

Guess I should just look at putting money into my Roth while I can. I don't have 2020 maxed out so I can work on that for the next 2 months. I'm probably going to be over the limit though for 2021 though once I sell some the stock that's really taken off this year. I'm going to have to lock in some profits at some point.

 

[Folster]

My income is paycheck + S-Corp so as a result, my income is well above any thresholds for Roth IRAs. I already max out my 401K + the catch-up. Any scenarios to utilize the back door Roth?

As long as all of your pre-tax money is in a 401K you can do the back-door Roth. If you have funds in a traditional IRA it won't work.

So basically you set up a shell IRA in which you make a non-deductible contribution up to the max annual amount. You then can immediately convert the non-deductible contribution to a Roth. This zeros out the IRA again. You never claim the deduction so the funds you convert to the Roth have already been taxed. People above the Roth phase out range do this all the time.

The reason why it won't work if you already have an IRA with a balance is because the conversion to a Roth is not LIFO, it's based on the percentage of your IRA balance.

For example, if you have an IRA with 45K in pre tax funds and add 5K as non-deductible to make 50K total, the IRS will not let you simply covert the last 5K that was non-deductible. They'll look at the percentage of non-deductible to deductible. So in that example only 10% of your conversion will be tax free. The remaining 90% will be taxable in the conversion.

Remember the IRS considers all of your IRAs to be one so if you have one anywhere with a balance it will be considered in your conversion.

Bottom line, don't try to do a back door Roth if you already have a traditional IRA with a balance. Make sure to loop in your tax advisor or research your situation as I am not a tax advisor.

@Ouchie-Z-Clown Can you verify the above?

 

[Devilmaycare]

As long as all of your pre-tax money is in a 401K you can do the back-door Roth. If you have funds in a traditional IRA it won't work.

So basically you set up a shell IRA in which you make a non-deductible contribution up to the max annual amount. You then can immediately convert the non-deductible contribution to a Roth. This zeros out the IRA again. You never claim the deduction so the funds you convert to the Roth have already been taxed. People above the Roth phase out range do this all the time.

The reason why it won't work if you already have an IRA with a balance is because the conversion to a Roth is not LIFO, it's based on the percentage of your IRA balance.

For example, if you have an IRA with 45K in pre tax funds and add 5K as non-deductible to make 50K total, the IRS will not let you simply covert the last 5K that was non-deductible. They'll look at the percentage of non-deductible to deductible. So in that example only 10% of your conversion will be tax free. The remaining 90% will be taxable in the conversion.

Remember the IRS considers all of your IRAs to be one so if you have one anywhere with a balance it will be considered in your conversion.

Bottom line, don't try to do a back door Roth if you already have a traditional IRA with a balance. Make sure to loop in your tax advisor or research your situation as I am not a tax advisor.

Dang, I was getting excited reading this until I got to the part about the IRS considers all IRAs to be one. Back in '09 I sold part of my company at the end of the year and went over the Roth limit. I had to convert my Roth deposit for the year into a traditional due to it.

 

[Folster]

Dang, I was getting excited reading this until I got to the part about the IRS considers all IRAs to be one. Back in '09 I sold part of my company at the end of the year and went over the Roth limit. I had to convert my Roth deposit for the year into a traditional due to it.

Can you roll your IRA back into your 401K? That might open up the back-door for future years.

 

[Devilmaycare]

Can you roll your IRA back into your 401K? That might open up the back-door for future years.

Good question. I'll look into it when I get to the point that I need to do the back-door. I don't want to do it now since I don't want to dump a couple of the stocks I have in it for index funds.

 

[AZCB34]

As long as all of your pre-tax money is in a 401K you can do the back-door Roth. If you have funds in a traditional IRA it won't work.

So basically you set up a shell IRA in which you make a non-deductible contribution up to the max annual amount. You then can immediately convert the non-deductible contribution to a Roth. This zeros out the IRA again. You never claim the deduction so the funds you convert to the Roth have already been taxed. People above the Roth phase out range do this all the time.

The reason why it won't work if you already have an IRA with a balance is because the conversion to a Roth is not LIFO, it's based on the percentage of your IRA balance.

For example, if you have an IRA with 45K in pre tax funds and add 5K as non-deductible to make 50K total, the IRS will not let you simply covert the last 5K that was non-deductible. They'll look at the percentage of non-deductible to deductible. So in that example only 10% of your conversion will be tax free. The remaining 90% will be taxable in the conversion.

Remember the IRS considers all of your IRAs to be one so if you have one anywhere with a balance it will be considered in your conversion.

Bottom line, don't try to do a back door Roth if you already have a traditional IRA with a balance. Make sure to loop in your tax advisor or research your situation as I am not a tax advisor.

@Ouchie-Z-Clown Can you verify the above?

Pro rata