2022 Edit — Find my updated calculators here:
*** If you care to learn deeply about the tax code, I have begun writing a book which contains everything I know on the topic. The book discusses wealth accumulation strategies, of which tax minimization is a key component. The (imperfect and incomplete) draft can be downloaded here.***
A friend of mine told me that TaxCaster was now updated to 2017 values, so I suppose it is time to update my spreadsheet as well. You can download the updated 2017 version here.
If you want to experiment with the 2018 version (the one that captures all the new tax law stuff), you can download that version here.
Features built into the spreadsheet:
- Married Filing Jointly or Single Filers (No head of household yet)
- Standard vs Itemized deduction (mortgage interest, charitable contributions, etc)
- Student loan interest deduction
Known limitations of the spreadsheet (all of which I’ll update in the future):
- Doesn’t include saver’s credit
- Doesn’t handle phasing in/out of TIRA contributions
If you cared to hack the EITC, here’s how you should target your taxable income:
Here is the validation of my spreadsheet against Taxcaster for a bunch of scenarios. For simplicity, I assume all kids are under 16.
|Taxable Wages = $25,000|
|Taxable Wages = $75,000|
|Taxable Wages = $125,000|
|Taxable Wages = $175,000|
|Taxable Wages = $225,000|
* subtracts Taxcaster’s estimated tax payments to arrive at federal tax liability with $0 withholdings.
This site is for entertainment purposes only, as disclosed here: https://frugalprofessor.com/disclaimers/
24 thoughts on “Updated Tax Calculator (2017 Edition)”
It’s nearly impossible to do with any precision, but the calculator should reflect the so-called ObamaCare cliff at 400% of poverty line.
For people who pay their own ObamaCare premiums, especially older people, the consequences of the ObamaCare cliff are enormous. In my own case, the marginal tax rate at 400% of poverty line is about 800,000%.
Even weirder is the way the IRS treats ObamaCare premiums paid by self-employed taxpayers. You can’t determine the adjustment to AGI (the 161(I) deduction) until you know the amount of the ObamaCare credit (the Section 36B credit). However, the ObamaCare credit is based upon AGI, which cannot be determined until you know what the eligible ObamaCare credit is.
This could be solved precisely using a iterative method. However, IRS Revenue Procedure 2014-41 only allows for two iterations, and if that doesn’t obtain convergence then you get a smaller amount for the credit (and higher taxes) than you would obtain with iterative convergence. As a result, it is possible to have a negative marginal rates of over 20,000%.
I discovered this little ObamaCare land mine when I did a proforma on my 2016 return with TurboTax. I have done this routinely to determine my true marginal income tax rate on various types of income. Lo and behold, when I added $100 of self-employment income, my tax liability decreased by $260! It turns out that was the “sweet spot” where the method converged in two iterations and got the largest possible credit. One dollar less income, and the credit was lower.
But the worst case under ObamaCare is for people who make less than 100% of poverty line in states that did not expand Medicaid eligibility. Many of these poor folks don’t qualify for Medicaid and they don’t qualify for ObamaCare subsidies. In that case, the marginal dollar that crosses the threshold of 100% of poverty line has a marginal benefit (i.e., a negative marginal income tax rate) of hundreds of thousands of percent. Make 101% of poverty line and you get virtually free insurance; make 99% of poverty line and get nothing.
I haven’t looked too much into the Obamacare stuff, but I agree it’s a mess. I’d encourage you to read this post: http://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/. I’ll eventually come around to modelling this in my tax spreadsheet.
Thanks so much for building this. Really simple and really extremely useful.
Happy to help.
Love the site, New to all this and trying to figure it out, Basically I have 5 kids and my wife is in school to be a nurse right now. Im making 28 an hour at my new job I started in December last year I was right below the max for the EITC I made around 52k so we got a nice refund around 7k. This year I got a slight raise taking me 20 around 56k a year which I believe is around 3k over the limit.
Im looking for a sweet spot where im just under the max you can make and still get the EITC I understand I could get even more back if I stashed more money aside but taking care of the family gets difficult if I save to much so simple question If I put 3-4k a year in the hospital I work for 401k then that lowers my taxable income allowing me to still qualify for the EITC correct?
Welcome to the site. I’m glad you found it. Everything you need to find out about the EITC is here: https://frugalprofessor.com/etic-guest-post-on-gocurrycracker/
If you want the simple version, skip to the “Cliff Notes Version of EITC Hacking” section. With 5 kids, the optimal taxable income you want in a given year is $36,300. You can reduce your gross income by 401k contributions to get you to that point. For every dollar in income above that point, it will cost you $0.31 in extra taxes (or more precisely, $0.31 less in free money from gov’t). I understand it takes money to live, but if you can get your taxable income down to $36,300, your refund will be $8,619. If it requires your more to live, no big deal.
One thing’s for sure, though. Claim “exempt” on your W4 so that you aren’t unnecessarily withholding taxes through the year. It is clear that you will owe none.
Download and use this tool for a more detailed understanding of your situation: https://frugalprofessor.com/updated-tax-calculator/.
To be clear, you lose ETIC a few pennies at a time. There isn’t a threat of 100% loss of losing the EITC. It’s just a matter of optimizing your 401k contributions to maximize your potential benefit, provided you can afford to do so from a cash flow standpoint.
Appreciate it sounds good, The optimal sounds great but I would be ok with what be getting the last few years. We been getting our state back as well so its been around 8k total so I think its a no brainer for me to atleast keep myself under the max for ETIC. I don’t claim exempt however with all the dependents listed I pay nothing in federal would it still benefit to make it exempt?
If you already have $0 withheld on your paychecks, then claiming “exempt” won’t help you any more.
As far as what I would do if I were you, I would probably be as frugal as possible to try to max out the EITC. If it takes you more than $36,300 to live, then oh well. If, come November or December you realize that you can afford a massive 401k contribution to hack the EITC, go for it at that point. You can contribute 100% of your pacheck in those months, so long as you don’t exceed $18k total. Then, come Jan 2018, file your taxes early and get your $8.6k check from the gov’t in February.
Love the site and your Excel Tools are great. Keep it up!
Does this spreadsheet account for partial deductions of traditional IRA’s? We are MFJ with a gross income of ~$150k, maxing out two 401k’s ($36k) and an HSA ($6.75k). So, with all deductions, our MAGI will be around $107k which is in the middle of the partial deductions range for traditional IRA’s ($98k to $118k for MFJ). This is a new calculation for me and I’m just trying to figure out the best way to optimize Traditional vs. Roth contributions. Are there any further deductions I’m missing besides the 401k’s and HSA that could get us below $98k MAGI?
Ken, thanks for the feedback.
I’m not an expert on TIRA deductibility phase outs, but this looks helpful:
If I were in this region, I’d probably think REALLY hard about going full Roth.
Let’s say your effective marginal tax rate is 30% today and that you can contribute $11k to a TIRA, but only half of this is deductible. Here’s the tradeoff:
Assume 5% return in 30 years. 30% MTR now and 15% MTR later.
(11k*(1-0.3))*(1.05)^30 = 33.3k
FV Trad (assumes 5.5k of 11k is deductible):
((11k-5.5k*(0.3))*(1.05)^30)*(1-0.15) = 34.3k.
Depending on the parameters you put in, this could go either way. But the Fidelity calculator should get you started in the right direction. The above analysis is what you’d need to calculate yourself. If it appears to be a wash, like above, you may as well go Roth to give yourself added flexibility (no RMDs to worry about down road, ability to access principal any time, hedge against tax increases, etc).
It took me awhile to get back to this, but thanks for the thoughtful comment and links. I see what you’re saying, but wouldn’t a better comparison be a full Roth vs. contributing the deductible portion to a Trad and the remainder to a Roth? I ran the numbers for my expected case: 25% tax bracket now and 15% later, half is deductible.
FV = (11000-(11000*0.25))*((1+0.05)^30) = $35,656
Splitting them up to contribute $5,500 to Roth and $5,500 to deductible Trad IRA:
FV Roth = (5500-(5500*0.25))*((1+0.05)^30) = $17,828
FV Trad = (5500*((1+0.05)^30))-(5500*((1+0.05)^30))*0.15 = $20,205
Total FV = $38,033
I’ve learned that one complication is that each IRA is treated separately when MFJ. I’d originally planned to have his be all Trad and hers be all Roth. Instead, we’d each need to split between Roth and Trad. This will require some recharacterizing, once we have our MAGI at the end of the year. Kind of a pain, but probably worth it for ~$2,400.
IRA deduction worksheet: https://apps.irs.gov/app/vita/content/globalmedia/ira_deduction_worksheet_1040i.pdf
Ken, thanks for following up. Your math and logic appear sound to me. Great job using math to logically think through the tax code.
Thanks for the tool! I used it to make sure the AMT did not affect me if I prepaid my 2018 property taxes. I saw your comment on the ChooseFI site.
Happy to help. Before making drastic moves, please consult Turbotax’s TaxCaster + TaxAct’s estimator. If you want to be super duper sure, you can log into TurboTax and FreeTaxUSA already for next year’s return (payment is not made until eFiling, so you are free to dink around with scenario analysis there). I did all of the above steps after first consulting with my spreadsheet. Fortunately, they all jive. Unfortunately, I’m in AMT territory so prepayment of property taxes will not benefit me at all.
I like your 2018 spreadsheet; it makes understanding topics like AMT so much clearer when I can see how the calculations work.
I think your 2018 spreadsheet is not using the correct LTCG breakpoints. From the sources you site, the breakpoints no longer align with the ordinary tax brackets. E.g., the MFJ 15% breakpoint is apparently 77200 instead of the regular tax bracket 77,400 and the 20% is 479,000 instead of 480,500.
They seem to match more closely the existing 2017 LTCG brackets.
All four of the sources below agree on these breakpoints for 2018.
page 9 at “Maximum rates on capital gains and qualified dividends”
Thanks Spencer! I updated the model per your links. I didn’t catch that with my initial readings of the news.
The new file is downloadable at the bottom of this page: https://frugalprofessor.com/model-of-new-tax-plan-house-senate-compromise/
Thanks for the super useful excel you have created.
Just one question,
I see you have the parameter “ETIC dies w/ investment income” as $3400 but the IRS website (https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts) it mentions the Investment income must be $3,450 or less for the year.
I would love to see the Retirement Savings Contributions Credit modeled in your spreadsheet.
Eduardo, glad you find the model helpful. Thanks for pointing out the new EITC parameter. I’ll update the model right now. As far as Retirement Savings Contributions, it’s on my list of things to do and I appreciate the suggestion to add it.
Thank you for the great resource! After years of using tax prep software, I am using your spreadsheet to help me understand how taxes really work, including AMT.
I’m starting by trying to match my 2017 tax return to the spreadsheet. I have a couple questions for you which may be silly newbie questions, in which case please excuse me.
Q1. When calculating “wages” to use as table lookup, should I be including ordinary dividends (1040 line 9a)? Or is this already included in some other input?
Q2. It seems to me that the AMT AGI columns should be reduced by the amount of any traditional IRA contributions, since those are still allowed to be deducted under AMT. What do you think?
Q3. It looks like the column under AMT called “Adjustment required” is used to adjust AMT on LTCG, since it still gets lower tax rates, even under AMT. However, it seems to be assuming all LTCG are taxed at 15%, while some can be taxed at 0% or 20%. For example see Form 6251 lines 47 and 58. Or am I misunderstanding?
Sorry about the delayed response. It’s been a while since I worked on the tool, but here’s what I remember: “wages” should exclude dividends since you’ll include the dividends separately in cell B20.
AMT is a beast. To be honest, I forget how AMT interacted with TIRA contributions and whether I coded that correctly in the 2017 file. The good news is that, going forward, AMT is effectively obsolete meaning that the calculation of your 2018 taxes should be a breeze relative to 2017. Turbotax’s taxcaster already has a 2018 tax estimator tool (accessible in the final stage of the 2017 tool output). My 2018 file should match this output to within a dollar or two. If not, tell me your parameters and I’ll investigate.
Hi again FrugalProfessor,
I ended up just using the IRS forms to estimate various scenarios. Having studied your spreadsheet first gave me a big picture understanding, which helped the forms look like more than just endless lines of numbers, so thanks again for that!
Your spreadsheet, my forms, and Taxcaster match for 2018 regular income tax on the scenarios I was testing. (Yay!)
Unfortunately (though actually fortunately, depending on perspective), I do need to worry about AMT even in 2018 due to ISOs exercise. I tried to use your spreadsheet to help with this by comparing:
* “Federal taxes owed” in regular “Taxable wages” row vs
* “AMT tax” (aka Tentative Minimum Tax) in row where I include additional ISO “wages” in the “Taxable wages”
Using the IRS forms, I got different results than your spreadsheets’ “AMT tax” columns . I think only because of the reasons previously mentioned:
* Your spreadsheets’ AMT calculations do not seem to take TIRA into account (looking at their formulas, they start from column B income, which does not incorporate TIRA)
* Your spreadsheets’ AMT calculations do not seem to use the correct LTCG brackets, which are the same as LTCG brackets on regular income. (Again I can see this in the cell formulas.)
As far as I can tell, I cannot use Taxcaster to run my AMT scenarios, since it only shows the AMT amount if it is greater than the regular tax amount, and there is no way to enter AMT-only income. (So if I increase my regular income in the tool to account for the AMT-only items, then my regular tax also increases and obscures the AMT amount.) Although I only found the public Taxcaster app and website and couldn’t find it while logged in to TurboTax, so maybe there is a more sophisticated version somewhere.
However, I was able to match my manual calculations on the 2017 AMT form 6251 to TurboTax’s automatic filling of that form. That gives me some confidence in my 2018 manual calculations, which are very similar in structure. I can give you some specific numbers via a less public channel if you’d like. (Feel free to use my email on this comment if you can see it.) Might not be worth supporting AMT in your spreadsheet anymore, it was just one way you have the potential to be more useful than Taxcaster for us weirdos still looking at AMT. 🙂
Sorry that my sheet couldn’t handle your AMT scenarios, but I’m happy it at least pointed you in the right direction in thinking about AMT. Going forward, I’ll probably pull AMT entirely from the sheet given that 99% of the population won’t hit it going forward. The reason I so painstakingly modeled it is because it was causing me to hit an effective federal marginal rate of 37.5% in years past. Absent the formal modelling, it’s easy to miss the economic implications of AMT (or any other aspect of the tax code for that matter).
It sounds like you have a good understanding of the implications of the ISO going forward. The only other think I’ll add is that the Bogleheads website is your friend. They are brilliant, high income, and understand the tax code quite well. The forum website is ugly (the wiki is less ugly), but the search bar will give you tons of functionality. For example, the following phrase looks to provide some interesting forum discussions: https://www.google.com/search?sitesearch=bogleheads.org&q=iso+amt+bargain+element
Best of luck. Thanks for the comments.
Thanks for posting the draft of your book! I’m learning a lot by reading it.
There may be a typo in the section “Dividend Taxes”. The text says the dividend yield is 2% US and 3% international, but then for $100K invested in each the dividends are said to be $200 or $300. I think they should have been $2,000 and $3,000.
Thanks for the kind comment. Glad that you’re enjoying the “book”. I appreciate you catching the typo. I’ll fix it in the next revision.