Calculating roth conversion space with feie and state taxes?

[Ineedcoffee123]

We will be claiming the standard deduction this year married filing joint for $24, 400 and have deductions for 401k pretax contributions for $38,000 so we have space of $62,400 roughly tax free. I estimate our taxable income between earned and unearned income this year being roughly $32,000. Does this mean we can do a roth conversion up to $30,400 and stay in the 12% marginal tax bracket? Since I was abroad working my income will be excluded under the bona fide resident test so this calculation is based on my husband's income.

1. Am I understanding the tax free space correctly?
2. Does my income excluded under FEIE get factored back in for federal and state taxes then excluded? I want to avoid losing any credits we were eligible for that I was not aware of. Last year, we lost the child tax credit because I didn't realize our income should have been split between pretax and roth 401k contributions to get more taxable income.
3. Is the tax we would pay on the conversion be based on the converted amount only i.e. $3648? I will be paying this from our savings.
4. How can I calculate how this roth conversion  amount will affect our NY state taxes? I am worried what impact this roth conversion with the FEIE will affect our state taxes since we still claim part year residence in NY due to my husband's job.

Thanks for your help!

[gocurrycracker]

great choice of user name! I need coffee too 

This is a bit complicated, and we would need to know more about your income specific overseas contract, and more to figure everything out.


A1: this isn't quite right

I'm not able to make the numbers add up from what you've shared here. If you are excluding your income, it would only make sense to contribute to a traditional/deductible 401k if your income is over the FEIE amount + 401k contribution max (105,900 + 19,000 for 2019.)

Then, in addition you have your husband's US based earned income (if I'm understanding correctly), your US based income (if you traveled back to NY for business meetings, your income during that time is not excludable), your income over the FEIE max, and investment income.

If that is the case, you have no tax free space, and any Roth conversion would be taxed at 22%+. See A2 below


A2: yes, foreign earned income is factored in
With the FEIE, you need to calculate your US taxes as if you were in the US the entire time. No exclusions. And then the tax that would have applied to the foreign earned income is subtracted from the total.

See our 2017 tax return for an example of how that works: https://www.gocurrycracker.com/go-curry-cracker-2017-taxes-feie/


A3: You would pay tax on the Roth conversion, plus if you had qualified dividends / capital gains that were previously taxed at 0%, some of those could be pushed into the 15% marginal rate.

In some cases, this could mean a tax of 22% on the Roth conversion + 15% tax on those qualified dividends for an effective tax rate of 37%

See this post for examples: https://www.gocurrycracker.com/feie-and-capital-gain-harvesting/


A4) Any Roth conversion would be taxable by NY State as long as you are considered a resident.

They may even tax the excluded foreign income if your foreign assignment is temporary and they believe you intend to return to NY, which sounds like the case. See this as a possible starting point for further research:
https://ttlc.intuit.com/community/tax-credits-deductions/discussion/full-year-resident-of-ny-state-living-in-foreign-country/00/543553




Overall, I would run the numbers to see if you would pay less tax as Married filing Separately, and see if you can argue that you have no intention of returning to NY. This is probably a good conversation to have with a NY/Expat tax specialist

The folks at Taxes for Expats may be able to help (they have quite a few articles on this topic)
https://www.gocurrycracker.com/tax-services/

[Ineedcoffee123]

With a newborn, coffee is always welcome!

I went back and calculated the total earned and unearned income for our US based earnings as roughly $32,000. There is no other income from US sources and the FEIE would be roughly $75,000.  This totals roughly $107,000. This puts us into the 22% tax bracket federally so about $23,162 in Federal, FICA, and State taxes. The total tax on $75,000 is roughly $14,334. Subtracting the difference between these two numbers is $8,828. At this point, what do I do next?

I just started a taxable brokerage account so no capital gains there and we would be considered NY state residents due to my husband's job. MFS doesn't help as we'd lose some of the credits and deductions (I've checked).

So with the numbers above, does it make sense to do a roth conversion? What tax bracket is the dividing line in which to do a roth conversion? I don't know in retirement if we will move to a state with only federal taxes or be going abroad again with my husband completely retired and thus no earned income from his end-all very up in the air but I figure with the lowest tax rates right now and the ballooning deficit, the roth conversions would make sense now even if we do pay a little more tax upfront. Right now, we will be in the lowest tax bracket the next couple years due to me being stationed abroad.

I can't seem to find any definite answers online so any help you can provide would help-and with a newborn and no sleep, I may need to read slowly

[gocurrycracker]

Right now, we will be in the lowest tax bracket the next couple years due to me being stationed abroad.

You aren't in the lowest tax bracket. You are in the same tax bracket as if you made $75k in the US.

A Roth conversion would be taxed at 22% plus State taxes.

the roth conversions would make sense now even if we do pay a little more tax upfront.

A Roth conversion only makes sense if you pay a lower tax rate than you would otherwise in the future. 22% + NY State tax is a high rate to pay on a conversion.

The total tax on $75,000 is roughly $14,334.

The Federal tax on $75k FEIE is about $8,600. The FEIE fills the bottom tax brackets and doesn't impact FICA/SS or NY State (see link shared earlier.)
10% * 19750 = 1975
12% * 55250 = 6630