Roth Conversion Analysis not Honoring Maximum Tax Bracket Limit
I am seeing an issue where a 10% TCJA max tax limit results in conversions into the 12% bracket.
Please see enclosed screen shot for Tax Years 2030,2031 with and without conversions.
Please notice that no conversions are actually occurring when you're in the 12% bracket. Something else is driving you into the 12% bracket and, as a result, PRC isn't doing any conversions in those years.
Referring to the screenshots:
Top shows conversions disabled in 2030.
Right side shows 10% tax bracket with $10,256 of headroom.
Bottom shows conversions enabled in same year.
Right side shows $26,127 of conversion and 12% tax bracket.
No other changes made between the two screenshots.
@jj_ejm009_jj0 Oh, yes, I see that now on the bottom chart. Would you please email (firstname.lastname@example.org) me an export file so I can investigate that?
Testcase enclosed. It is not identical to the original screenshots but does exhibit the issue.
I believe the issue involves the calculation of the taxable portion of social security.
In year 2030 with conversion disabled:
Interest = 16,271
Qualified Dividends = 31,728
TD Withdrawal = 1,185
1/2 SS = 45,417/2
After (3,000) adjustment, this is still well in excess of the $44,000 limit for SS to be 85% taxable.
PRC is reporting taxable portion of SS as only 26,954/45,417 ~= 59%
When conversion is then enabled:
Taxable portion of SS is then correct at 38,605/45,417
As the original calculation was artificially low, the initially reported 10% tax bracket was in-correct and the resulting shift appears to push the conversion into the 12% bracket.
@jj_ejm009_jj0 You're probably right about this. To avoid circular reference errors and iterative calculations in establishing taxable income limits for the Roth conversions, PRC has to make some approximations on the taxable amount of SS and it also assumes the standard deduction. So, this can lead to exceeding the target tax bracket by a bit in certain cases.
I approach the PRC Roth Conversion results as recommendations/guidelines, not gospel. I think that's important. A lot can change between the earlier time in the year when you're setting things up in PRC, to the December timeframe when your tax situation is pretty well set for the year.
I recommend to my clients that we *plan* for what PRC is recommending, and then get together in early December, figure out what their marginal federal tax bracket might be, how much headroom is left, whether it makes sense to convert into the next bracket up, and then make a decision on how much to convert before the end of the year (really well before that as brokerages tend to get backed up!).
@hines202 I totally agree with that approach. PRC is not a money manager in any case; it's goal is to do good long-term projections. That's why the design decision not to do iterative tax calculations (and instead handle taxes on unscheduled withdrawals in the subsequent year) is acceptable.