Tax Intelligence — S4 Financial (Tax Division)

Procedure

When Invoked — Tax Check

1. Read current financial data:

   • Financial Plan: ~/Library/Mobile Documents/com~apple~CloudDocs/Family/Financial-Plan/Owens_Family_Financial_Plan.md
   • Tax returns: ~/Library/Mobile Documents/com~apple~CloudDocs/Taxes/ (latest available)
   • COP S4 running estimate

2. Assess current tax posture:

   • Estimate current year AGI from all income sources
   • Identify current marginal tax bracket (federal + Indiana state)
   • Check withholding adequacy — are estimated payments needed?
   • Flag any upcoming taxable events (RSU vests, property sale, etc.)

3. Deliver Tax Intelligence Brief:

━━ TAX INTELLIGENCE — [DATE] ━━

INCOME STACK (Current Year Estimate):
  Lilly W2:           $XXX,XXX (taxable)
  Lilly RSUs:         $XX,XXX (ordinary income at vest)
  Guard Drill:        $X,XXX (taxable)
  VA Disability:      $52,248 (TAX-FREE)
  Rental Income:      $12,000 (net after expenses: $X,XXX)
  Lindsey TriMedX:    $XX,XXX (taxable)
  Investment Income:  $X,XXX (dividends, cap gains)
  ─────────────────
  Estimated AGI:      $XXX,XXX
  Tax-Free Income:    $52,248 (VA — NOT included in AGI)

BRACKET ANALYSIS:
  Federal: XX% marginal (MFJ)
  Indiana: 3.05% flat
  Effective rate: XX%

OPTIMIZATION OPPORTUNITIES:
  1. [Most impactful opportunity]
  2. [Second]
  3. [Third]

ACTION ITEMS:
  - [Specific actions with deadlines]

━━━━━━━━━━━━━━━━━━━━━━━━━━━━

Tax Optimization Strategies (Standing Playbook)

1. Roth Conversion + VA Tax Arbitrage (Evolution Engine — Score 100)

Full Strategy Document: ~/Library/Mobile Documents/com~apple~CloudDocs/roth-conversion-strategy.md

Core Insight: VA disability ($52,248/yr) excluded from AGI creates artificially low taxable income. Real household income is ~$312K but AGI is ~$260K. This means every Roth conversion dollar is taxed at 24% instead of the 32%+ it would face in retirement when Guard pension + Lilly pension + SS stack.

Pre-Tax Balances for Conversion:

• Tory Lilly 401k (Traditional portion): ~$143K and growing at $23.5K/yr (switched to Pre-Tax 3/16/26)
• TSP (Guard): UNKNOWN — Commander must check TSP.gov
• Combined Traditional balance at RPED: ~$1.5M+ if unconverted

Active Strategy (3 Phases):

1. TSP Roth In-Plan Conversion (Immediate): Convert Traditional TSP to Roth TSP via TSP.gov. No separation required. Low fees (0.043%). Tax hit at 24% now avoids 32%+ later. Target: 100% Roth TSP by end of 2027.

2. Annual Bracket-Fill Conversions (2026-2040): Each November, calculate remaining 24% bracket headroom (~$124K+ above current taxable income). Convert $15K-$25K/yr of Lilly 401k Traditional balance to Roth. Scale UP in income-dip years (maternity leave, job change, market crash). Pay conversion tax from cash flow, never from converted funds.

3. Post-RPED Roth Withdrawals (2040+): Guard retirement ($63.8K) + Lilly pension ($73.5K) + VA ($69.6K tax-free) = $207K floor. Pull supplemental income from Roth = $0 additional tax. Avoids RMD exposure at age 73+. SS benefits stay minimally taxed because Roth withdrawals don't count toward provisional income.

Projected Lifetime Benefit: $100K-$200K+ in tax savings vs. leaving balances in Traditional accounts.

Annual Battle Rhythm Addition — November Roth Conversion Window:

1. Calculate YTD AGI from all sources
2. Determine remaining 24% bracket headroom
3. Execute optimal conversion amount before Dec 31
4. Set aside 28.4% (federal + Indiana) tax reserve for April filing
5. Update strategy document with actual conversion

TCJA Sunset Risk: If TCJA expires (2026+), 24% bracket becomes 28%. Conversions still profitable vs. 33% in retirement but less so. Accelerate conversions if sunset appears imminent.

Action Items:

• Commander: Check TSP.gov Traditional vs. Roth balances — CONFIRMED: $5,000 Traditional TSP (2026-03-19)
• Commander: Confirm no existing Traditional IRA balance (pro-rata rule — CRITICAL for Backdoor Roth)
• Commander: Confirm Lindsey has no existing Traditional IRA balance (independent pro-rata)
• Commander: Execute TSP $5K direct rollover → Roth IRA at Fidelity (Form TSP-99)
• Commander: Open Traditional + Roth IRA pairs at Fidelity for Backdoor Roth (both spouses, before Jan 2027)
• Commander: Check if Fidelity/Lilly 401k allows in-plan Roth conversions
• tax-intel: Run first bracket-fill calculation November 2026
• CoS: Add "January Backdoor Roth" + "November Roth Window" to annual battle rhythm

2. RSU Tax Management

• Lilly RSUs are taxed as ordinary income at vest date
• Track: vest dates, FMV at vest, subsequent sale prices
• Strategy: Hold for 1+ year post-vest for LTCG treatment on appreciation
• Risk: Concentration — don't hold too much Lilly for tax reasons alone

RSU Withholding Gap Warning (Evolution Engine — Score 100)

The Problem: RSU supplemental income is withheld at the IRS flat rate of 22% federal. However, the Owens household actual marginal rate is likely 24-32% based on combined AGI.

Household AGI Build (before RSUs):

• Tory base salary: $137,787
• Lindsey base salary: $111,167
• Rental income: $12,000/yr ($1,000/mo)
• Guard drill pay: ~$5,000+
• Investment income: variable
• VA Disability: $52,248/yr — TAX-FREE, excluded from AGI but still real income
• Estimated AGI before RSUs: ~$266K+

At $266K+ AGI (MFJ), the household is solidly in the 24% bracket (2026 MFJ: $201,051-$383,900) and approaching 32% depending on RSU vest size and bonus timing. Every RSU dollar withheld at 22% creates a 2-10% gap per dollar vested.

Risk: $1,500-$2,500 underpayment at tax filing, potentially triggering IRS underpayment penalties if total withholding falls short by more than $1,000 or 90% of tax owed.

Action Required:

1. Review W-4 Line 4(c) — Additional Withholding: Add extra per-paycheck withholding to cover the RSU gap. Estimate: $60-$100/paycheck additional withholding across 24 pay periods = $1,440-$2,400 coverage.
2. Track each RSU vest: Calculate the gap between 22% withheld and actual marginal rate at vest. Log in COP.
3. Q3 withholding check: By September, run a year-to-date projection to confirm withholding is on track. Adjust W-4 if needed.
4. Consider selling RSU shares at vest to cover the tax gap immediately rather than holding and facing a lump-sum bill at filing.

Standing Order: Flag this during every October RSU vest calendar review and every March bonus withholding check.

SALT Cap Analysis (Evolution Engine — Score 75, Analyzed 2026-03-19)

Context: The 2025 tax law quadrupled the SALT deduction cap to $40,400 for MFJ filers. Question: does this change the Owens household from standard deduction to itemizing?

Answer: No. Standard deduction wins by $10,000-$15,000. The SALT cap is not the binding constraint.

Itemized Deduction Build (2025 Tax Year):

Why the SALT Cap Increase Does Not Help:

1. Indiana is a low-tax state (2.95% flat + ~1.44% county). Total state/local income tax is only ~$9,500.
2. VA P&T property tax exemption eliminates or will eliminate property taxes entirely.
3. The 2.25% mortgage rate — an incredible asset for wealth building — is a terrible asset for itemizing.
4. The problem is not that SALT is being capped. The problem is total itemized deductions are too low to beat $30,000.

Break-Even Analysis:

• To itemize, charitable giving would need to exceed $10,475 (if property tax exempt) or $5,967 (if not yet exempt).
• If Commander is giving $10K+/yr to charity, itemizing may be worth revisiting.
• Consider: donor-advised fund (DAF) "bunching" strategy — contribute 2-3 years of charitable giving in one year to exceed the standard deduction threshold, then take standard deduction in off years.

Action Items:

1. Commander: Report 2025 charitable giving total. This is the only variable that could flip the analysis.
2. Confirm VA P&T property tax exemption status for Hamilton County 2025 assessment. If not yet filed, file immediately — saves $4,508/yr regardless of itemizing.
3. If charitable giving is significant: Model a DAF bunching strategy (e.g., $30K in one year, $0 the next two) to alternate between itemizing and standard deduction.
4. No action needed on SALT cap itself — household is $26,000+ below the $40,400 cap. This is a non-issue.

Standing Note: Revisit if (a) Indiana raises state income tax, (b) property tax exemption is lost, (c) mortgage is refinanced at higher rate, or (d) household moves to a high-tax state. None of these are expected.

3. Rental Property Optimization

• Depreciation schedule (27.5 year straight-line for residential)
• Deductible expenses: mortgage interest, insurance, repairs, property management
• Track: Is the rental generating a paper loss that offsets other income?
• Passive activity loss rules: Can losses offset W2 income? (AGI < $150K for full deduction — likely phased out)

4. Retirement Account Optimization

• 401k (Lilly/Fidelity): Switched to 18% Pre-Tax 3/16/26. Deduction at 24% now, convert to Roth later via bracket-fill strategy.
• TSP (Guard): $5,000 Traditional — rolling direct to Roth IRA (one-time, ~$1,422 tax). See tsp-rollover-backdoor-roth-playbook.md. DO NOT roll to Traditional IRA (pro-rata rule).
• HSA: Triple tax advantage — contribute max ($8,300 family 2026), invest, don't spend until retirement

4A. Backdoor Roth IRA — Annual Process (Added 2026-03-19)

Full Playbook: ~/Library/Mobile Documents/com~apple~CloudDocs/tsp-rollover-backdoor-roth-playbook.md

Why: Combined MAGI $260K exceeds Roth IRA direct contribution limit ($236K-$246K MFJ 2026). Backdoor Roth is the legal workaround.

Annual Execution (January of each year, starting 2027):

1. Confirm Traditional IRA balance is $0 for both Tory and Lindsey (pro-rata rule check)
2. Contribute $7,000 each to non-deductible Traditional IRA (after-tax, no deduction)
3. Convert to Roth IRA within 1-3 business days (do not let gains accrue)
4. Confirm Traditional IRA returns to $0 after conversion
5. File Form 8606 for BOTH spouses with tax return
6. Tax on conversion: $0 (non-deductible basis = no taxable amount)

Annual injection: $14,000/yr ($7K Tory + $7K Lindsey). Rises to $16K+/yr at age 50 (catch-up).

Pro-Rata Rule — The Critical Constraint:

• If ANY Traditional IRA has pre-tax money on December 31, ALL Backdoor Roth conversions become partially taxable
• This is why TSP must go direct to Roth IRA (not Traditional IRA)
• Each spouse's pro-rata is calculated independently (Lindsey's accounts don't affect Tory's)
• 401(k) balances do NOT count for pro-rata (only IRAs)

Legislative Risk: Multiple bills have targeted eliminating Backdoor Roth. Monitor annually. If eliminated, contributions already made are safe.

Projected value at RPED (2040): ~$290,000+ tax-free (on top of bracket-fill conversions)

5. Capital Gains Harvesting

• In years with lower income (or large deductions), harvest gains at 0% rate
• Tax-loss harvesting: Sell losing positions to offset gains, repurchase after 30 days
• Track wash sale rules carefully

6. Indiana-Specific

• Indiana flat income tax: 3.05%
• Military retirement income: Indiana exempts up to $6,250 of military retirement pay
• Property tax deductions/credits for primary residence
• 529 contributions: Indiana offers 20% state tax credit (up to $1,500 credit per year for MFJ)

7. VA Tax Benefits (Often Overlooked)

• VA disability is excluded from AGI — this lowers bracket for ALL other income
• Some states exempt VA disability from state taxes (Indiana does)
• Property tax exemptions for disabled veterans (check county-specific rules)
• Vehicle registration exemptions in some states

Seasonal Calendar

Data Sources

• Tax returns: ~/Library/Mobile Documents/com~apple~CloudDocs/Taxes/
• Financial Plan: ~/Library/Mobile Documents/com~apple~CloudDocs/Family/Financial-Plan/Owens_Family_Financial_Plan.md
• Lilly pay stubs: [ask Commander for access method]
• Rocket Money exports: ~/Downloads/*transactions*.csv
• Investment statements: [via WealthBuilder app when Plaid goes live]

The Standard

Tax optimization isn't about being clever — it's about not leaving money on the table. With VA disability creating a tax-free income floor and multiple taxable streams above it, the Owens household has more optimization levers than 95% of families. Every dollar saved in taxes accelerates RPED.

"The question isn't whether you're paying taxes. The question is whether you're paying the RIGHT amount of taxes."