# Reference — US Personal Tax Optimization

# Contents

• Traditional vs Roth decision table
• Worked example: traditional vs Roth at two rates
• Worked example: Roth conversion in a gap year
• Worked example: bunching deductions
• Worked example: tax-loss harvesting
• Common credits worth checking (2026)
• Estimated-tax safe harbor
• Contribution mechanics and deadlines
• Gotchas

# Traditional vs Roth decision table

# Worked example: traditional vs Roth at two rates

$10,000 of salary directed to a 401(k), invested 25 years at 7%/yr (≈5.43× growth).

Case A — 32% now, 22% in retirement:

• Traditional: $10,000 grows to $54,300; taxed 22% at withdrawal → $42,354 net
• Roth: $6,800 after tax grows to $36,924 tax-free → $36,924 net
• Traditional wins by ~$5,400 per $10k contributed.

Case B — 12% now, 22% in retirement:

• Traditional: $54,300 × 0.78 → $42,354 net
• Roth: $8,800 after tax grows to $47,784 tax-free → $47,784 net
• Roth wins by ~$5,400. The comparison is symmetric: only the rate differential matters (plus RMD/flexibility considerations).

# Worked example: Roth conversion in a gap year

Single filer takes an unpaid sabbatical in 2026; only income is $15,000 of freelance work.

1. Standard deduction $16,100 wipes out ordinary income — taxable income ≈ $0.
2. Convert traditional IRA dollars to Roth up to the top of the 12% bracket. Roughly: $16,100 (deduction) + 12%-bracket ceiling − $15,000 existing income of conversion headroom taxed at only 10–12%.
3. Those dollars would have been taxed at 24%+ in a working year — each $10,000 converted saves ≈ $1,200+ in lifetime tax.
4. Caveats: conversion income can affect ACA premium subsidies (a cliff-like phase-out — model it first), and conversions cannot be undone (recharacterization of conversions was eliminated).

# Worked example: bunching deductions

Married couple, tax year 2026, standard deduction $32,200. Annual itemizables: $10,000 state/local tax (capped), $8,000 mortgage interest, $12,000 charity = $30,000 — below the standard deduction every year, so charity yields zero tax benefit.

Bunched: give $24,000 to a donor-advised fund in year 1, $0 in year 2.

• Year 1 itemized: $10,000 + $8,000 + $24,000 = $42,000 → $9,800 above standard
• Year 2: standard $32,200
• Two-year deductions: $74,200 vs $64,400 unbunched → $9,800 more deducted; at 24% ≈ $2,352 saved for the same giving.

# Worked example: tax-loss harvesting

Holding shows a $15,000 loss in November.

1. Sell; buy a similar-but-not-substantially-identical fund the same day (S&P 500 → total market) to stay invested.
2. Offset $15,000 of realized gains; if gains < losses, deduct up to $3,000 against ordinary income and carry the rest forward indefinitely.
3. At 24% + state, the $3,000 ordinary offset alone ≈ $720+ this year.
4. Check every account (both spouses, IRAs, DRIPs) for purchases of the sold security within ±30 days — any match wash-sales that portion of the loss.

# Common credits worth checking (2026)

Credits reduce tax dollar-for-dollar; check these before optimizing deductions. Verify amounts and phase-outs on irs.gov — they move yearly.

# Estimated-tax safe harbor

Freelancers and investors avoid underpayment penalties by paying, through withholding + quarterly estimates, the smaller of:

• 90% of the current year's tax, or
• 100% of last year's tax (110% if prior-year AGI > $150,000).

Quarterly due dates: Apr 15, Jun 15, Sep 15, Jan 15. A December W-2 withholding bump counts as paid evenly through the year — the cleanest late-year fix for an estimate shortfall.

# Contribution mechanics and deadlines

Traditional-IRA deductibility phases out when covered by a workplace plan — verify the current phase-out bands on irs.gov before recommending.

# Gotchas

• Wash sale across accounts: an IRA repurchase of the harvested security permanently destroys the loss (no basis adjustment). Automatic dividend reinvestment is the classic accidental trigger.
• "Substantially identical": same-index ETFs from different providers are risky; different-index funds (S&P 500 → total market) are the accepted swap.
• Roth income limits: direct Roth IRA contributions phase out at high AGI; an ineligible contribution accrues a 6% excise per year until fixed.
• Backdoor Roth pro-rata trap: existing pre-tax IRA balances make the conversion mostly taxable — the pro-rata rule looks at all IRAs on Dec 31.
• Bracket myths: crossing a bracket only taxes the marginal dollars — never advise refusing income to "stay in a lower bracket"; but do watch cliff-based credits (ACA subsidies pre-2026 rules, saver's credit tiers) where $1 can cost hundreds.
• HSA state nonconformity: CA and NJ tax HSA earnings — the triple advantage is federal.
• Short-term vs long-term lot selection: specify lots (SpecID) when selling; default FIFO can realize short-term gains unnecessarily.