What are the important federal income tax cliffs to watch out for?

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Topic Author
water2357
Posts: 654
Joined: Sat Sep 12, 2020 9:24 am

What are the important federal income tax cliffs to watch out for?

Post by water2357 »

Assuming single federal income tax status, can anyone provide some insight into what are the most important federal income tax cliffs to watch out for? I.e. at what AGIs (assuming MAGI and AGI are the same) does one become subject to either a higher tax rate or an additional tax, beyond the normal changes in tax brackets?

This applies to planning for how to deal with potential one time increases in income in a year or series of years (this is in addition to RMDs), where it may be possible to shift some income into another year, once you have retired (65+) and begun receiving Social Security (with 85% taxed). Also, this one time increased income is not capital gains.

I know the various IRMAA brackets will effectively increase a marginal "tax" rate through increased Medicare premiums.

Also, I think that AGI over $200,000 triggers NIIT and I don't believe that $200,000 is indexed for inflation ever, is that correct?

And AMT can be an issue, however does anyone know what single AGI amount actually triggers this now? I believe it was increased a couple years ago.

What else am I missing? This would be for single AGIs up to about $400,000.

If the amount that triggers the increased tax is based on income after deductions instead of AGI, please indicate that also.

Thanks!
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: What are the important federal income tax cliffs to watch out for?

Post by sycamore »

water2357 wrote: Sat May 08, 2021 3:15 am Assuming single federal income tax status, can anyone provide some insight into what are the most important federal income tax cliffs to watch out for? I.e. at what AGIs (assuming MAGI and AGI are the same) does one become subject to either a higher tax rate or an additional tax, beyond the normal changes in tax brackets?

This applies to planning for how to deal with potential one time increases in income in a year or series of years (this is in addition to RMDs), where it may be possible to shift some income into another year, once you have retired (65+) and begun receiving Social Security (with 85% taxed). Also, this one time increased income is not capital gains.

I know the various IRMAA brackets will effectively increase a marginal "tax" rate through increased Medicare premiums.

Also, I think that AGI over $200,000 triggers NIIT and I don't believe that $200,000 is indexed for inflation ever, is that correct?

And AMT can be an issue, however does anyone know what single AGI amount actually triggers this now? I believe it was increased a couple years ago.

What else am I missing? This would be for single AGIs up to about $400,000.

If the amount that triggers the increased tax is based on income after deductions instead of AGI, please indicate that also.

Thanks!
Regarding "assuming MAGI and AGI are the same", I'm sure that's true for a number of situations but I would always check to be sure.

It's not a table of cliff limits, but the wiki article on MAGI has links to articles on the MAGI for various important tax-related thresholds.

I don't believe AGI/MAGI is what triggers AMT per se. It revolves around an exemption amount instead. In the past I found the fairmark.com articles on AMT to be helpful.
Last edited by sycamore on Sun May 09, 2021 8:06 am, edited 1 time in total.
Swivelguy
Posts: 509
Joined: Sun Jan 18, 2009 10:37 pm

Re: What are the important federal income tax cliffs to watch out for?

Post by Swivelguy »

Here are a few:

* Deductibility of traditional IRA contributions phase out
* Roth IRA contribution eligibility phase out
* 401k contribution limit might become affected by the highly-compensated employee test, depending on your employer
* Above a certain income, the minimum withholding to avoid an underwithholding penalty changes from 100% of your prior year's tax to 110%
* Most if not all education-related deductions and credits phase out at certain income levels
Topic Author
water2357
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Joined: Sat Sep 12, 2020 9:24 am

Re: What are the important federal income tax cliffs to watch out for?

Post by water2357 »

Thanks for the links, particularly on MAGI and AMT, very helpful, and the other possible phase outs.

I've had to deal with the AMT but that was before the last major federal income tax set of changes. It looks like I'm going to have to take a look at the new law and possibly consider it, if the single exemption is in the $70,000 range. Although normal single tax rates are generally high enough and deductions minimal enough that the AMT is lower. I'm hoping the the increase in exemption vs what it was before the new law will help, but $70,000 may still be a problem.

Looks like there is no easy answer on AMT, hoping that AMT doesn't hit until AGI/MAGI is at least over $200,000, which is the trigger for NIIT.

It's difficult to minimize future one time tax increases due to a one time increase in income and shift the income, but I'm trying to become aware of what may trigger all these additional taxes and particularly something like the NIIT $200,000 limit that isn't indexed and is a clear line for additional tax.

If anyone has additional links or additional AGI/MAGI tax triggers, please add your comments.

Thanks.
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FiveK
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Re: What are the important federal income tax cliffs to watch out for?

Post by FiveK »

It's not a list per se, but the personal finance toolbox marginal tax rate chart will show the vast majority of marginal rate changes, including effects of all the acronyms already mentioned, based on one's specific filing situation.

For a list, The important "trigger" income levels 2021 - Early Retirement & Financial Independence Community is the best one I know.
Topic Author
water2357
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Joined: Sat Sep 12, 2020 9:24 am

Re: What are the important federal income tax cliffs to watch out for?

Post by water2357 »

Thanks! Very helpful, particularly the list of triggers in dollar amount order.
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