To simplify, I always added up all income less standard deduction to come up with my taxable income. I then calculated my Roth conversion amount by looking how much room i had to the top of my tax bracket. ( I didn’t want the Roth putting me in a higher tax bracket.)
Anyway, someone mentioned to me i should not include Capital gains and ordinary dividends since those are taxed on “separate schedules” with different tax rates. If i did it that way, I would be able to make larger Roth conversions each year. Anybody know the correct way to do this?
I don’t have the answer, but another good place for this type of question is the Tax Strategies board. One of my favorite places to learn. (It has been quiet since the boards moved so I promote it whenever it seems appropriate.)
I always included the cap gains and qualified dividends even though they are taxed at a lower rate. They will affect your rate bracket.
It was more important to me to make sure I did not “violate” the bracket boundary.
But, normally my cap gains/dividends in out taxable account were low so the difference wasn’t significant.
On a side note: Maybe it added a little more time to our conversion process but I did complete our conversion with 13 annual conversions, the last being Jan 2022.
Ordinary income (including Roth conversions and short term capital gains) is on the bottom of the income stack and use the ordinary income tax brackets, which are the brackets you are probably familiar with. Then capital gains and qualified dividends are stacked on top of the ordinary income and use the capital gains tax brackets Capital Gains Tax Rates For 2022 And 2023 – Forbes Advisor
I will caution that with investment income (i.e. gains, dividend and interest), you need to be aware of the 3.8% NIIT surcharge that starts at $125k for MFS, $200k for Single/HOH, and $250k for MFJ, so that may be more of a limiting factor than the brackets.