by Kristin P. Sinclair – A Accu Tax – May 10, 2022
Recently Carol has had to make several expensive trips to the car repair shop, and she has decided now is the time to trade up. Carol will be researching 2022 models and plans to purchase a new vehicle with a nice warranty. Carol is looking for one of the newer style trucks with an extended cab, and a smaller truck bed just the right size for the things that she looks forward to doing like hauling yard work supplies. Since Carol is an avid bike rider, she will also have the appropriate hitch added to her truck, with a new bike rack that she can put on and take off as needed. She feels this truck will provide her reliable transportation and has a warranty that will provide her peace of mind.
Carol has not had a car payment for five years. She has been saving for her down payment, and would like to pay off her new truck in three years or less. Carol is aware that the current higher standard deduction with no exemption taken tax law will expire in 2025 based upon current guidance. And Carol wants to have her expenses more predictable before the 2025 tax year. Carol does not have a home mortgage payment and has two credit cards that she pays off every month. She feels confident that she will qualify for a low interest rate truck loan. Obviously, Carol has been considering many factors in this truck purchase decision. Carol is also aware that having a truck payment history added to her credit score will help keep her credit rating high.
Carol enjoys her part time job; enjoys the people she works with and the folks she meets at work. She also likes the extra spending money. She doesn’t want the new truck payment to crimp her lifestyle. Carol has 15% federal and 7% state taxes withheld from her monthly pension. Plus 10% federal taxes withheld from her Social Security income, and 5% of her part-time job income withheld for state taxes.
Carol plans to discuss with her tax preparer Kristin her plans for 2021 tax year preparation, and the tax impact of withdrawing extra funds from her Traditional IRA to help with her truck down payment.
Carols’ home state does not tax her on her Social Security income, even when the federal government taxes her based upon her provisional income. Carol’s home state provides an additional tax break since she is over 65 years of age. She also qualifies for an additional tax break on her long-term capital gains from her investment capital gain income.
Carol has some friends advising her to pay her new truck outright and skip the loan payment. Before making a final decision to take an additional $15,000 out of her Traditional IRA Carol waits to discuss this with Kristin her tax preparer.
Carol tells Kristin that with an additional $15,000 Carol can keep her payment low and pay off the truck loan in less than three years. Kristin determines that an additional $15,000 IRA withdrawal all in one year, most likely would increase Carol’s taxable income if all other income remained similar to the prior year. So much so that significantly more of Carol’s income would now be in a higher tax bracket. Kristin also determines that there would be more taxes on Carol’s capital gains, and more of her Social Security income would have to be federally taxable. Plus that additional Traditional IRA distribution would also increase Carol’s state taxable income by enough to move her into a higher state income tax bracket.
Kristin advises Carol to take $5,000 from her Traditional IRA this year to add to her down payment. Then in early January 2022 Carol should take an additional $5,000 from her Traditional IRA and make a principal only payment on her truck loan. Finally, in January 2023 to take an additional $5,000 from her Traditional IRA and make another principal only payment. This should only move a little more of Carol’s Social Security into the taxable column. Carol will pay a little more in taxes on her upcoming tax return, but still will have already withheld enough to cover the obligation. However, she should still receive tax refunds as she has in the past just not as much as the prior annual return. Plus, she will be able to pay off her new truck in less than three years that she has decided is important to her!
Smart tax and financial planning for retirement income living !
Kristin P Sinclair A Accu Tax (803)329-0615 May 10, 2022
Written in Rock Hill SC
