Solar roof vs TSLA stock

I now remember another of those traps. And running informed guestimates (*) of income through TurboTax 2024 (TT'24) (still loaded on my laptop), confirmed that he would have been got caught in it, and also pushing him into the same trap that snagged us that year.

Here is a summary, tuned to approximate the known portions of the situation, with common assumptions. Numerous unknowns and differences from the most common assumptions can add additional complications and change the tax.

The income tax status of Social Security benefits (SSA) depends on the amount of other income also being reported. For households with little or no other income, SSA is tax-free, or at the very highest possible benefits level, still remains below the standard deduction. When outside income is included, then some fraction of SSA (a mix of 0%, 50%, and 85%) also becomes taxable as regular income. I confirmed in TT'24 that if there had no other income, the disclosed SSA benefit would have been entirely non-taxable, so no federal income tax. SSA is exempt from Alabama state tax.

A couple pensions were mentioned, which are fully taxable. Combined, these approximately matched the standard deductions (including added senior deduction.) If these non-government pensions were the only income, all of it would be taxable, but would fall almost entirely into the standard deduction (0% bracket), or maybe go over just enough to create a $5 federal tax bill. Any state tax on these pensions depends on details I don't recall being mentioned.

But combining SSA and pensions causes a portion of SSA to become taxable. TT'24 showed me about 13% of his SSA benefit became taxable, landing in the 10% bracket, for a total federal tax equal to about 1.3% of the SSA benefit.

Long term capital gains are generally taxed at a mixture of 0% and 15% for ordinary mortals. (The 20% and +3.8% brackets start far far north of this example.) If this were one's only income, most of the $65k would fall in the 0% bracket, about a third would fall into the 15% bracket.

But adding this $65k capital gain to other income, changes plenty. Suddenly, 85% of SSA becomes taxable as regular income, far exceeding the standard deduction in itself, so a big portion gets taxed. This also pushes the entirety of the pensions out of the 0% ordinary income brackets and up into the real brackets. And also boosts virtually all the capital gain out of the 0% capital gains bracket and into its 15% bracket.

Net result: adding this capital gain income adds not just 15% tax on most of itself, but also pushes the all the private pensions income up into the 10 and 12% brackets, and also creates an effectively 8.5% tax (= 10% of 85%) on the SSA benefits. If there had any other ordinary taxable income, such as bank interest or a small wage side job that technically would be taxed at 10% or 12%, these effects would combine to make these next incremental dollars appear to be taxed at approximately 27 - 28% . . .

. . . then add in Alabama's 5% state tax.

All these combine to make a nominal 15% federal capital gains tax, plus 5% state tax, appear to be in the 30%-ish range, when it lands in certain ranges. Linear superposition (quantum physicians and many engineers know what this means) doesn't apply here. (Total federal cap gain tax in this example is 16.1%, but that is an average. Different portions of it caused different effective marginal rates.)

At its top level, TurboTax acts mostly as a "black box", not showing how all these internal details interact. One needs to know where to dig down to find the fine details. It is much easier to learn and understand these details elsewhere, from various financial industry or tax planning discussions or even directly from IRS publications.

. . . then use TurboTax or similar to verify the bottom line. Tracking this throughout the tax year, not waiting until after December 31 when it becomes too late to adjust anything, is an essential part of my retirement tax planning.



(*) Over the years, various income elements have been described or disclosed in various threads. I used only the pieces I noticed, other unmentioned or missed elements would further complicate the picture.

 

Any financial analysts in the audience would be quite underwhelmed. Other reasons, such as social consciousness or the benefit of future generations, are needed to justify a large portion of that particular investment.

I added solar PV and heat pumps and other energy improvements to put my money where my mouth is on anthropomorphic climate change. From a strictly personal financial standpoint, ignoring ACC and my descendants, it would have done significantly better just left in broad stock market indexes.

TSLA is a not a dividend stock, so that last line is completely irrelevant. It is a growth stock that has managed to fly very high, and putting my money there would done much better still. But I already have "enough" for my actual needs, so have been aiming some of it to places where it will do more good than simply adding to personal wealth.