In last blogpost, we discussed Roth Conversion could significantly affect tax on LTCGs. Now we will discuss some other stealth taxes triggered when income is increased by actions like a Roth conversion.
Stealth taxes are other indirect tax increases that occur when income is increased. If not addressed, one may see a higher tax bill than was planned. That won't go over well at tax time next year.
Some of these stealth-type tax increases result from the increase in adjusted gross income (AGI) from a Roth IRA conversion. AGI is a key amount on the tax return and an increase can cause the loss of valuable tax deductions, credits and other benefits.
Stealth taxes are other indirect tax increases that occur when income is increased. If not addressed, one may see a higher tax bill than was planned. That won't go over well at tax time next year.
Some of these stealth-type tax increases result from the increase in adjusted gross income (AGI) from a Roth IRA conversion. AGI is a key amount on the tax return and an increase can cause the loss of valuable tax deductions, credits and other benefits.
Some of these well-known items include:
- medical deductions;
- additional taxes on Social Security benefits and Medicare surcharges;
- education-related tax benefits (and financial aid eligibility);
- child tax credits; deductible real estate losses;
- Roth and IRA contribution limitations;
- as well as the new 20% deduction for qualified business income, aka “the 199A” deduction available to certain self-employed business owners
These very favorable LTCG rates generally apply to capital assets held for more than one year. The rates have been made more attractive by the tax law change. For example, the rate is 0% for capital gains of up to $78,750 in 2019 for a married couple filing jointly. But a Roth conversion can reduce or even eliminate the benefits of the lower capital gains rates. This is something that is not widely noticed until it is seen on the completed tax return, which, of course, is too late. Capital gains should be added to the list of stealth taxes to be considered when projecting the true overall tax cost of a Roth conversion.
In next blogpost, we will show some examples how if Roth IRA conversion not carefully planned could drive up taxes.
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