Why Line 10 Is My Very Favorite Line on the Tax Return with David McKnight

Line 10 on your tax return can be a great joy for you in retirement. Before the tax cuts of 2018, you may have known it as Line 43, and it simply means your taxable income.

Taxable income is important to someone trying to achieve the Power of Zero paradigm because in a rising tax rate environment there is an ideal amount of money in both your taxable and tax-deferred buckets. Anything above those amounts should be repositioned to tax free. That's approximately six months of living expenses in the taxable bucket, and in the tax-deferred bucket. The ideal balance is low enough that your required minimum distributions are less than or equal to your standard deduction in retirement.

When you're shifting money from tax deferred to tax free, you create a taxable event, and to understand how much your going to pay in taxes, you need to know your taxable income. This is where Line 10 on your tax return comes in.

Your Line 10 number will inform how much you can shift in a given year before bumping up into the next tax bracket and how much heartburn you will be exposed to.

How do you get to your taxable income? Start with your gross income and then subtract your "above the line" deductions like contributions to your traditional tax deferred plans. Once you're at your adjusted gross income, to get to your taxable income you have to decide which one is greater: your standard deduction or your itemized deductions.

You need to understand the implications of any shifting you do from tax deferred to tax free and you can't do that without figuring out what your taxable income is. The marginal tax bracket is also the tax rate at which you save taxes when you do something that generates tax savings like taking out a mortgage.

Most people we meet are in the 22% tax bracket so they aren't too upset about doing enough shifting to get to the top of that tax bracket, but they should also take advantage of the 24% tax bracket as well.

The 24% tax bracket is only 2% higher than the 22% tax bracket, but it allows you to shift another $150,000 each year before hitting the top of that bracket. If you have a $1 million in your IRA right now, you're going to need to shift $125,000 each year over the course of the next seven years to get to the right amounts in your tax deferred and tax free buckets.

Ultimately you have to ask yourself are tax rates going to be higher in the future than they are today. If you believe they will go down, then hold off on the Roth conversion. If you believe they are going to be dramatically higher, then line 10 on your tax return will be a good barometer for what the implications of shifting will be.

Check out your line 10, figure out what marginal tax bracket that puts you in, and then ask yourself how much room you have to shift before you get to the next level.

Remember your pension and social security taxation will fill up your first two tax brackets, and any money that comes out of your IRA's or 401(k)'s and will be taxed at the future equivalent of the 22% tax bracket.