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My wife and I adopted a special needs child this year. According to
what I've read in the IRS literature, that entitles us to claim the
entire adoption credit ($11,650) even though we had no out of pocket
expenses. However, the adoption credit is phased out for AGIs between
$174,730 and $214,730. Our AGI will put us right in the middle of
that range and our taxable income will put us in the 25% bracket.
If I've done the math correctly, it seems like our marginal rate is
67.53%. The adoption credit is phased out at a rate of 11650/40000 =
29.13%. We're in the 25% tax bracket. Tack on an extra 7.65% for
FICA (possibly only 1.45%). And toss in 5.75% for Virginia income
tax. Add it all up and you get 67.53%.
The next question: If this is correct, is there anything we should
do? We're on track to max out 401k contributions for the year. I've
also maxed out my child care FSA. At this point, it seems like the
next logical move is to try and defer some compensation until next
year. However, I doubt either of our employers have such a plan.
Thanks in advance,
Bill
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Bill Woessner wrote:
> My wife and I adopted a special needs child this year. According to
> what I've read in the IRS literature, that entitles us to claim the
> entire adoption credit ($11,650) even though we had no out of pocket
> expenses. However, the adoption credit is phased out for AGIs between
> $174,730 and $214,730. Our AGI will put us right in the middle of
> that range and our taxable income will put us in the 25% bracket.
>
> If I've done the math correctly, it seems like our marginal rate is
> 67.53%. The adoption credit is phased out at a rate of 11650/40000 =
> 29.13%. We're in the 25% tax bracket. Tack on an extra 7.65% for
> FICA (possibly only 1.45%). And toss in 5.75% for Virginia income
> tax. Add it all up and you get 67.53%.
I feel your pain. I relate the story of how my 80+ yr old woman hits a
46% bracket by taking an IRA distribution of just $33K.
Does your company also have a FSA (flex spending account) to cover
medical? There's $5K that you are allowed to turn on due to change in
family situation, the adoption counting as such.
How about paying property tax ahead of schedule? My tax guy at town hall
said he'd be happy to take my money as far ahead as I wanted to pay.
Maybe yours will take your 2009 tax, and it will be pennies (well 33 of
'em) on the dollar to you.
Make your January mortgage payment in mid-Dec to be sure it's credited
in 2008.
If you are a donator to any charity or house of worship, make those
donation in 2008 and include extra to cover 2009.
Ask both your employers if they can help. I had a similar issue years
ago, and called the payroll dept. They agreed to shut me down for a
month, December, and then cut me the check in January with a 'sorry for
the glitch' letter, but it stayed off the prior year W2.
Adjust your state W4 withholdings to have a bit too much withheld. Too
much can be an issue, but a certain amount will help you, and no problem.
I hope that helps. I tip my hat to you and the misses. I've always felt
there was a special place in hell for people who wallpaper over brick,
and a special place in heaven for those who adopt special needs children.
Joe
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On Jul 25, 11:18 am, Bill Woessner <w...@g...com> wrote:
> If I've done the math correctly, it seems like our marginal rate is
> 67.53%. The adoption credit is phased out at a rate of 11650/40000 =
> 29.13%. We're in the 25% tax bracket. Tack on an extra 7.65% for
> FICA (possibly only 1.45%). And toss in 5.75% for Virginia income
> tax. Add it all up and you get 67.53%.
And don't forget to add, as a percentage, all the other
deductibles that you cannot claim because of AGI caps.
Add them all together, and you probably have a 100+%
marginal rate, by your way of thinking.
In short, no, your math is not correct. You cannot take
the unqualified adoption credit and add it as perentage
to your (real) marginal tax rate and get any kind of
meaningful number.
(If you want a meaningful number, consider this approach.
First, figure your total tax as a percentage of taxable
income. Then figure your total tax less the credit you
wish you qualified for, again as a percentage of taxable
income. The difference is the "cost" of the unqualified
credit as a percentage of taxable income.)
That is not really your point. But I think you are making
yourself feel more miserable than necessary by the
"innumerate" way you are trying to spin the numbers.
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joetaxpayer wrote:
> Bill Woessner wrote:
>
>> My wife and I adopted a special needs child this year. According to
>> what I've read in the IRS literature, that entitles us to claim the
>> entire adoption credit ($11,650) even though we had no out of pocket
>> expenses. However, the adoption credit is phased out for AGIs between
>> $174,730 and $214,730.
The adoption credit basically means the government will subsidize the
cost of the adoption dollar-for-dollar off your taxes, up to a certain
amount, unless you are a high-income taxpayer. And, as you mention, for
a special needs child, you can get the subsidy even if you didn't spend
anything at all out of pocket.
By definition, a "special needs" adoption is one where "assistance is
provided to the adoptive parents" (Form 8839 instructions). The fact
that you had no expenses means you already got a pretty good break, no?
> Add it all up and you get 67.53%.
This part of the discussion really should go in the misc.taxes.moderated
group, but your terminology is misleading. Your tax rate is based on,
and applied to, your taxable income. Credits, if any, come *after* the
tax rate is applied. (Really, why don't you post over there, I'd be
curious to see what others say).
Yes, you are losing the benefit of a credit due to high-income
limitations, just like you probably lost most or all the stimulus rebate
payment -- but I don't think it's accurate to say your (marginal) tax
rate somehow went *up* just because you completed an adoption, or didn't
get a stimulus rebate.
> Does your company also have a FSA (flex spending account) to cover
> medical? There's $5K that you are allowed to turn on due to change in
> family situation, the adoption counting as such.
He said they had no expenses, and I don't think FSA's (section 125
cafeteria plan) cover adoption costs. Only payments from qualified
employer adoption assistance programs can be excluded from income.
> How about paying property tax ahead of schedule? My tax guy at town hall
> said he'd be happy to take my money as far ahead as I wanted to pay.
> Maybe yours will take your 2009 tax, and it will be pennies (well 33 of
> 'em) on the dollar to you.
Without looking it up, I believe you can only deduct property tax that
you were legally liable for, so it won't do any good to pay more than
what you've been assessed by the end of the year (which of course could
include tax for part of the following year, just not multiple years).
What's worse, while all your suggestions about increasing itemized
deductions may help the current year's tax bill, they don't do a thing
to reduce the modified AGI (adjusted gross income), so they don't change
the phase-out calculation for the adoption credit at all. (Another
reason why "marginal tax rate" terminology does not apply, since
itemized deductions *do* factor in to your taxable income).
> Ask both your employers if they can help. I had a similar issue years
> ago, and called the payroll dept. They agreed to shut me down for a
> month, December, and then cut me the check in January with a 'sorry for
> the glitch' letter, but it stayed off the prior year W2.
That could be problematic, non-qualified deferred compensation might
still be taxable when earned, not when paid. You might be asking your
employer to put itself at risk.
> Adjust your state W4 withholdings to have a bit too much withheld. Too
> much can be an issue, but a certain amount will help you, and no problem.
See above about AGI vs. itemized deductions. (Joe, I know you know this,
I assume you were just in a hurry to post, especially since with the
moderators on vacation, only the "regulars" can post anything anyway, so
we're just talking amongst ourselves).
> I hope that helps. I tip my hat to you and the misses. I've always felt
> there was a special place in hell for people who wallpaper over brick,
> and a special place in heaven for those who adopt special needs children.
I agree, at least about the heaven part! ;-) The adoption credit is
pretty rare AFAIK, but can be very valuable (just not for higher-income
taxpayers). It is one of the rare personal credits that actually has
carry-over provisions if you can't use it all in the first year. Also,
don't forget to check your state rules, they may have a benefit that is
determined differently from federal rules.
-Mark Bole
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joeu2004 wrote:
> In short, no, your math is not correct. You cannot take
> the unqualified adoption credit and add it as perentage
> to your (real) marginal tax rate and get any kind of
> meaningful number.
>
> (If you want a meaningful number, consider this approach.
> First, figure your total tax as a percentage of taxable
> income. Then figure your total tax less the credit you
> wish you qualified for, again as a percentage of taxable
> income. The difference is the "cost" of the unqualified
> credit as a percentage of taxable income.)
>
> That is not really your point. But I think you are making
> yourself feel more miserable than necessary by the
> "innumerate" way you are trying to spin the numbers.
joeu - I didn't run the numbers, but Bill's post and his math stood to
reason, passing the 'napkin' test.
I'll trust he knows the credit phaseout. If that last $40K of income
costs him the whole credit, there's the equivalent of a 29% increase to
his marginal rate. If his tax rises $26,800 with his last $40K worth of
income, then indeed, that's his marginal rate. In my social security
post, I refer to these rates as "phantom" because the official rates are
lower than that of course.
One can debate that 'marginal' references the tax on the last $100 you
make. I'd not get caught up in those semantics. Sorry, total tax as % of
total income is not the topic here. It may be of anecdotal interest, but
it's not relevant at all to Bill's plight.
Joe
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Mark Bole wrote:
> See above about AGI vs. itemized deductions. (Joe, I know you know this,
> I assume you were just in a hurry to post, especially since with the
> moderators on vacation, only the "regulars" can post anything anyway, so
> we're just talking amongst ourselves).
Thanks, Mark. Right you are. I was distracted, and blew it on that reply.
Joe
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On Jul 25, 6:09 pm, joeu2004 <j...@h...com> wrote:
> In short, no, your math is not correct. You cannot take
> the unqualified adoption credit and add it as perentage
> to your (real) marginal tax rate and get any kind of
> meaningful number.
I don't see why not. If I make one more dollar, my tax bill will go
up by 67.53%. Conversely, if I make one less dollar, my tax bill will
go down by 67.53%. Is that not the very definition of marginal tax
rate?
> That is not really your point. But I think you are making
> yourself feel more miserable than necessary by the
> "innumerate" way you are trying to spin the numbers.
Ouch. That's an ironic twist of fate: the mathematician being called
innumerate.
On the contrary, I don't feel miserable at all. Our total tax rate
this year is astonishingly low. So I'm not complaining about our
taxes. However, our ultra-high marginal rate is a somewhat unique
situation. I tend to think of it as an opportunity to employ some
serious financial planning. Hence the reason I turned to
misc.invest.FINANCIAL-PLAN.
--Bill
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Bill Woessner wrote:
[...]
> On the contrary, I don't feel miserable at all. Our total tax rate
> this year is astonishingly low. So I'm not complaining about our
> taxes. However, our ultra-high marginal rate is a somewhat unique
> situation. I tend to think of it as an opportunity to employ some
> serious financial planning. Hence the reason I turned to
> misc.invest.FINANCIAL-PLAN.
You asked whether your notion of marginal tax rate was correct, and got
at least two nays.
Are you really asking, "how can I reduce the impact of income phase-out
on the amount of my adoption credit"?
Answer: reduce your AGI, this is basically the front page of your Form
1040. Examples: Pay some alimony. Incur moving expenses for a new job.
Start a business and lose money. Sell some securities at a loss. Cash
in some bank CD's and pay an early withdrawal penalty.
-Mark Bole
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On Jul 27, 12:18 pm, Bill Woessner <w...@g...com> wrote:
> On Jul 25, 6:09 pm, joeu2004 <j...@h...com> wrote:
> > In short, no, your math is not correct. You cannot take
> > the unqualified adoption credit and add it as perentage
> > to your (real) marginal tax rate and get any kind of
> > meaningful number.
>
> I don't see why not. If I make one more dollar, my tax
> bill will go up by 67.53%.
A deductible expense or credit can reduce your tax
and your effective marginal tax rate, but being
unable to claim that cannot increase your tax rate.
If you are in the 25% tax bracket without the tax
credit and your taxable income increases by $100,
you will pay $25 more in taxes [1]. Obviously that
number is not changed by the fact that you cannot
take the adoption credit. (x - 0 = x.)
To make the point clearer, let's crunch the numbers
that you offer.
If you are in the 25% tax bracket, your total 2008
tax before credits will be between $8963 and
$25,550 [2]. You do not provide sufficient
information for us to know where you fall in that
tax bracket [3]. Suppose you fall midway -- $17,256.
If you could claim the full $11,650 tax credit in
2008, your total tax liablity would be $5606. That
would put you into the 15% bracket.
So you could say that the tax credit reduces your
marginal tax rate by "10%" (really, 10 percentage
points). In a twisted way, you might say that it
increases your marginal tax by 10%; but that is 10%
up from 15%, not 25%. Either way, your marginal
tax without the tax credit remains at 25%.
I think it is clear that you're saying that your
tax bracket is 25% __before__ credits. After all,
you computed 67.53% by adding 29.13%, the mistaken
increase in the marginal rate, to 25% (plus 7.65%
FICA and 5.75% state tax).
But arguably, suppose you mean that the tax credit
would put you into the 25% tax bracket. At most,
that means that your tax before the credit would
be $37,200 ($25,550 plus $11,650). But that means
that your marginal tax rate is only 28% without the
tax credit [4].
In that case, you might say that failing to be able
to take the tax credit increases your marginal tax
rate by 3% (up from 25%, not 28%). But your marginal
tax rate without credits is still 28%.
"Joetaxpayer" argues that this a question of
semantics, namely your meaning of the term "marginal
tax rate". But your mistaken example above clearly
indicates that you are referring to the term as it
is used by financial professionals, namely: the
percentage of the next $1 in taxable income that
comprises the additional tax.
I have shown that is not what the 29.13% represents.
You cannot add apples to oranges unless you want to
make "fruit salad" :-).
In conclusion, adding your figures for FICA and
Virginia tax rates puts your total marginal tax
rate without the credit at either 38.4% or 41.4%,
depending on interpretation [5].
QED.
-----
Endnotes:
[1] The additional tax of $25 per $100 of additional
taxable income assumes that additional taxable
income does not put you into the 28% tax bracket.
[2] I am assuming that you file MFJ. Generally, that
is a requirement in order to claim the adoption
credit, athough there are some exceptions.
[3] You say that your AGI is "in the middle" of the
range between $174,730 and $214,730; that would
be $194,730. If your tax bracket before credits
is 25%, your 2008 taxable income is between
$65,100 and $131,449. The difference is your
deductions and exemptions: between $63,281 and
$129,630.
[4] The 28% tax bracket covers taxable incomes
between $131,450 and $200,300. The computed
tax is between $25,550 and $44,828.
[5] That assumes a maximum FICA rate of 7.65%. That
is the correct marginal FICA rate if only one of
you works and your 2008 wage income is under
$102,000, or if both of you work and both wage
incomes are under that amount. Your marginal
FICA rate is only 1.45% if only one of you works
and your wage income is over $102,000. Otherwise,
your marginal FICA rate is a weighted average of
1.45% and 7.65%.
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Errata....
Previously I wrote:
> In conclusion, adding your figures for FICA and
> Virginia tax rates puts your total marginal tax
> rate without the credit at either 38.4% or 41.4%,
> depending on interpretation [5].
> [....]
> [5] That assumes a maximum FICA rate of 7.65%.
And of course, FICA applies only to additional
taxable income due to income subject to FICA
(e.g. wage income). It does not apply to other
sources of additional taxable income.
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