Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

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motorcyclesarecool
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by motorcyclesarecool » Fri Feb 02, 2018 5:22 am

FiveK wrote:
Fri Feb 02, 2018 1:03 am
phage wrote:
Tue Jan 30, 2018 2:26 pm
It is even better if you use retirement savers contribution credit and some Roth IRAs.
+1

Depending on exactly how the refundable and non-refundable portions of the CTC are administered (see (Refundable) Child Tax Credit in 2018 - Bogleheads.org), using the OP's numbers one might get
$90,000. Salary
$24,000. Standard deduction
$18,500. Traditional §401(k) contribution
$11,000. Traditional IRA contributions (self & spousal)
$ 6,900. HSA contributions via cafeteria plan
——————————————
$29,600 taxable income

$3,171 Federal Tax
-$400 Saver's credit
-$2,771 non-refundable Child Tax Credit
———————————————-
$0. Federal Income Tax due -$29 refundable Child Tax Credit = $29 refund

Again, assuming that $1400/child is the maximum CTC if any part of that is to be refunded, much of the 401k/tIRA contributions in the OP would be saving 0% marginal and should be done using Roth instead of traditional.

E.g., if one assumes the 401k, HSA, and $5500 of the tIRA contributions are fixed, and looks at the other possible $5500 tIRA, one may calculate the marginal saving rate as Image
That IRA would be much better as a Roth than as a traditional.
I don’t understand from reading Form 8880, Credit for Qualified Retirement Savings Contributions how the Savers Credit meshes with the new Child Tax Credit. Doesn’t appear that one can claim the credit if they have sufficient credits to cover his/her tax bill. Wouldn’t increasing Roth contributions risk losing the Savers Credit if AGI blipped above $62k?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

Seal the Deal
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Seal the Deal » Fri Feb 02, 2018 7:25 am

[/quote]I don’t understand from reading Form 8880, Credit for Qualified Retirement Savings Contributions how the Savers Credit meshes with the new Child Tax Credit. Doesn’t appear that one can claim the credit if they have sufficient credits to cover his/her tax bill. Wouldn’t increasing Roth contributions risk losing the Savers Credit if AGI blipped above $62k?
[/quote]

Yes - that is my understanding. You need to weigh whether a $400 Saver's Credit by using Traditional is worth losing years of tax free growth in Roth.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Fri Feb 02, 2018 12:21 pm

motorcyclesarecool wrote:
Fri Feb 02, 2018 5:22 am
FiveK wrote:
Fri Feb 02, 2018 1:03 am
phage wrote:
Tue Jan 30, 2018 2:26 pm
It is even better if you use retirement savers contribution credit and some Roth IRAs.
+1

Depending on exactly how the refundable and non-refundable portions of the CTC are administered (see (Refundable) Child Tax Credit in 2018 - Bogleheads.org), using the OP's numbers one might get
$90,000. Salary
$24,000. Standard deduction
$18,500. Traditional §401(k) contribution
$11,000. Traditional IRA contributions (self & spousal)
$ 6,900. HSA contributions via cafeteria plan
——————————————
$29,600 taxable income

$3,171 Federal Tax
-$400 Saver's credit
-$2,771 non-refundable Child Tax Credit
———————————————-
$0. Federal Income Tax due -$29 refundable Child Tax Credit = $29 refund

Again, assuming that $1400/child is the maximum CTC if any part of that is to be refunded, much of the 401k/tIRA contributions in the OP would be saving 0% marginal and should be done using Roth instead of traditional.

E.g., if one assumes the 401k, HSA, and $5500 of the tIRA contributions are fixed, and looks at the other possible $5500 tIRA, one may calculate the marginal saving rate as <snip>
That IRA would be much better as a Roth than as a traditional.
I don’t understand from reading Form 8880, Credit for Qualified Retirement Savings Contributions how the Savers Credit meshes with the new Child Tax Credit. Doesn’t appear that one can claim the credit if they have sufficient credits to cover his/her tax bill. Wouldn’t increasing Roth contributions risk losing the Savers Credit if AGI blipped above $62k?
Depends on exactly how the 2018 1040 is implemented, but for now the saver's credit is taken on line 51 and the non-refundable part of the CTC on line 52. Thus, in OP's case, the full saver's credit is taken first, and only then is the non-refundable CTC taken on whatever tax remains due.

With $90K gross, $6900 to an HSA, $18.5K to 401k, and $5500 to one tIRA brings the AGI down to $59,100. That is under the 2018 saver's credit tier of $63K. If one assumes the non-earning spouse contributes to the first tIRA, the second tIRA has no effect on the saver's credit.

Under the assumption that the total CTC cannot exceed $1400/child for any part of the CTC to be refundable (and this assumption may or may not be correct), the second IRA has no effect on tax due for the first ~$5260 of traditional contributions. That's because the net tax due is already $0, and further AGI reductions merely use less of the non-refundable CTC. This happens until the taxable income drops to ~$29,840, giving $3200 gross tax due. At that point, subtracting the $400 saver's credit and the full $2800 CTC keeps the net tax due at $0. Further tIRA contributions mean that less than $2800 of non-deductible CTC is needed, leaving the remainder available for a tax refund.

Traveler
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Traveler » Fri Feb 02, 2018 9:20 pm

Thank us single people for subsidizing you....

motorcyclesarecool
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by motorcyclesarecool » Sat Feb 03, 2018 10:06 am

Traveler wrote:
Fri Feb 02, 2018 9:20 pm
Thank us single people for subsidizing you....
You’ll thank me later when my kids are paying for both our Social Security.
:sharebeer
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

Matt Y.
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Matt Y. » Sat Feb 03, 2018 10:23 am

Since the CTC will be refundable at $1,400/ child, if as in the OP situation with 2 children >17 years old, if one had additional deductions available such as 457 (b), would it then not be better to take all deductions to receive the refundable credit rather than go with roth? This would also reduce any state income tax liability - assuming they do not live in a state w/o income tax. This also assumes the couple has other assets to cover their living expenses, which for some is indeed the case.

$90,000. Salary
$24,000. Standard deduction
$18,500. Traditional §401(k) contribution
$18,500. 457(b) contribution
$11,000. Traditional IRA contributions (self & spousal)
$ 6,900. HSA contributions via cafeteria plan
——————————————
$11,100 taxable income in 10% bracket = $1,110

$1,110 Federal Tax
-$400 Saver's credit
-$2,800 refundable Child Tax Credit (2 children at $1400 each)
———————————————-
$2,090. refund Child Tax Credit

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Sat Feb 03, 2018 11:30 am

Matt Y. wrote:
Sat Feb 03, 2018 10:23 am
Since the CTC will be refundable at $1,400/ child, if as in the OP situation with 2 children >17 years old, if one had additional deductions available such as 457 (b), would it then not be better to take all deductions to receive the refundable credit rather than go with roth?
It's an interesting question. The final state would be even better than you show:

$11,100 taxable income in 10% bracket = $1,110

$1,110 Federal Tax
-$2000 Saver's credit (only 1110 usable)
----------
$0 before refundable credits
-$1,158 Earned Income Tax Credit
-$2,800 refundable Child Tax Credit (2 children at $1400 each)
———————————————-
$3,958 refund check from the IRS

Without either of the tIRAs or a 457b, the tax due is $491.

The marginal tax saving rate for $18,500 + $5,500 + $5,500 = $29,500 traditional contributions is then (3958 + 491)/29500 = 15.1%. That may or may not make traditional more attractive than Roth.

There are many step changes in the dollar-by-dollar marginal rate across that $29,500. If interested, one could probably jury-rig the graph in the personal finance toolbox spreadsheet to show all of them, depending on the order one chooses for funding the three separate buckets.

Matt Y.
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Matt Y. » Sat Feb 03, 2018 5:04 pm

OK, so I ran several scenarios through CashFlow.xls under the OP situation, but added an additional $18,000 457(b) deferral and 5.75 state tax to replicate my own situation, which resulted in an effective $3,208 check from the IRS (after subtracting 5.75 in state tax). I then ran three additional scenarios where I progressively reduced the amount of pre-tax deferral while simultaneously increasing the corresponding Roth deferrals at the same dollar amounts. These are the resulting trade-off questions/ conclusions I came up with:

1) By shifting $12,000 in deferrals from TIRA to Roth IRAs: Is it worth increasing tax liability/ reducing check payment from IRS by $2,014 (16.8%) today so I could position an additional $12,000 into Roth IRAs going forward?

2) By shifting $18,500 in deferrals from pre-tax 457 (b) to Roth 457 (b): Is it worth increasing tax liability/ reducing check payment from IRS by $3,821 (20.7%) today to position an additional $18,500 into Roth 457 (b) going forward?

3) By shifting $30,500 deferrals from both TIRAs to Roth IRAs & 457 (b) to Roth: Is it worth increasing effective tax liability/ credit payment from IRS by $5,284 (17.3%) today to position an additional $30,500 into Roth IRA & 457 (b) going forward?

Is the obvious answer: If you think your tax rate will be higher than 16.8%, 20.7% or 17.3% in the future, than pay the tax now.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Sat Feb 03, 2018 5:18 pm

Matt Y. wrote:
Sat Feb 03, 2018 5:04 pm
Is the obvious answer: If you think your tax rate will be higher than 16.8%, 20.7% or 17.3% in the future, than pay the tax now.
Yes. You might check your own assumptions for how you will reach such tax rates, but if you believe that is the case then the indicated action is to use Roth now.

Matt Y.
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Matt Y. » Sat Feb 03, 2018 6:13 pm

Thanks for that confirmation in thinking FiveK.

I understand some plan and do retire 7-years or so prior to taking full SS, where income and tax liability during this period would be low enough - even w/o children/ dependents - that much can be converted to roth in these non-working years prior to taking SS.

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camillus
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by camillus » Sun Feb 04, 2018 10:35 pm

This is similar to my family's situation. I ran our 2017 numbers through the 2018 tax code and I believe we have $56 of federal income tax liability for 2018 with present deferrals. I am happy deferring income in a 403(b) in the 12% bracket and want to make sure I don't "overshoot" zero FIT liability, or past that, the limit of refundable credits I could receive - given the credits are still "earned" at the marginal tax rate.

I have a question regarding how the credits interact with each other, should I want to increase 403(b) contributions resulting in the following.

Say I have:

$5500 of federal income tax
-$850 dependent care credit
-$1200 of lifetime learning credit
-$4000 of (2) child tax credits

$550 refund

That makes for a $550 refund, correct? 403(b) contributions will continue to "save/earn" a 12% rebate from federal plus state and local income tax.
Last edited by camillus on Mon Feb 05, 2018 12:25 am, edited 1 time in total.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Sun Feb 04, 2018 11:28 pm

camillus wrote:
Sun Feb 04, 2018 10:35 pm
This is similar to my family's situation. I ran our 2017 numbers through the 2018 tax code and I believe we have $56 of federal income tax liability for 2018 with present deferrals. I am happy deferring income in a 403(b) in the 12% bracket and want to make sure I don't "overshoot" zero FIT liability, or past that, the limit of refundable credits I could receive - given the credits are still "earned" at the marginal tax rate.

I have a question regarding how the credits interact with each other, should I want to increase 403(b) contributions.

Say I have:

$5500 of federal income tax
-$850 dependent care credit
-$1200 of lifetime learning credit
-$4000 of (2) child tax credits

$550 refund

That makes for a $550 refund, correct? 403(b) contributions will continue to "save/earn" a 12% rebate from federal plus state and local income tax.
Maybe, maybe not. See (Refundable) Child Tax Credit in 2018 - Bogleheads.org for some discussion about how the new CTC may or may not work.

That aside, the non-refundable credits are applied in the order they appear on 2017 Form 1040 - f1040.pdf. E.g., see the Credit Limit Worksheets in 2017 Instructions for Form 8863 - i8863.pdf and 2017 Form 8880 - f8880.pdf.

One set of numbers that fits most of the example is
- MFJ with both adults earning $36,504, and no deductions on those amounts.
- $4,250 in child care
- $6,000 in qualified educational expenses.

If any CTC result that includes a refundable amount has to use $1400/child as the overall maximum, a non-refundable CTC of $3,450 drives the tax due to $0, but provides no refund. In this situation, the first $5,420 of 403b contributions saves 0% because it merely reduces the non-refundable CTC to $2800. At $10K of 403b contributions, the first tier of the saver'c credit kicks in. The overall effect of $18.5K of 403b contributions is
Image

See the personal finance toolbox spreadsheet if you would like to enter specific numbers.

Again, if the implementation of the new CTC differs from what is assumed above, the above conclusions may also change.
Last edited by FiveK on Sun Jul 22, 2018 12:04 pm, edited 1 time in total.

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camillus
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by camillus » Mon Feb 05, 2018 11:54 am

FiveK wrote:
Sun Feb 04, 2018 11:28 pm
Maybe, maybe not.
Oh, my head hurts. My assumption is that the credits are worked out in favor of the taxpayer, as I laid out in my example with each child tax credit always being a total of $2000, with only $1400 being refundable - no cliffs or dead space.

How would I know? What publication from the IRS will spell this out explicitly? Perhaps I won't defer any more income until I can be sure.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Mon Feb 05, 2018 12:06 pm

camillus wrote:
Mon Feb 05, 2018 11:54 am
FiveK wrote:
Sun Feb 04, 2018 11:28 pm
Maybe, maybe not.
Oh, my head hurts. My assumption is that the credits are worked out in favor of the taxpayer, as I laid out in my example with each child tax credit always being a total of $2000, with only $1400 being refundable - no cliffs or dead space.

How would I know? What publication from the IRS will spell this out explicitly? Perhaps I won't defer any more income until I can be sure.
2018 versions of Schedule 8812 or Publication 972 (2017), Child Tax Credit | Internal Revenue Service for sure.

A worked example by a federal tax lawyer (or the IRS itself), with plain language "translations" of the US Code referenced in (Refundable) Child Tax Credit in 2018 - Bogleheads.org, might be reliable.

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teen persuasion
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by teen persuasion » Tue Feb 06, 2018 10:26 am

Matt Y. wrote:
Sat Feb 03, 2018 5:04 pm
OK, so I ran several scenarios through CashFlow.xls under the OP situation, but added an additional $18,000 457(b) deferral and 5.75 state tax to replicate my own situation, which resulted in an effective $3,208 check from the IRS (after subtracting 5.75 in state tax). I then ran three additional scenarios where I progressively reduced the amount of pre-tax deferral while simultaneously increasing the corresponding Roth deferrals at the same dollar amounts. These are the resulting trade-off questions/ conclusions I came up with:

1) By shifting $12,000 in deferrals from TIRA to Roth IRAs: Is it worth increasing tax liability/ reducing check payment from IRS by $2,014 (16.8%) today so I could position an additional $12,000 into Roth IRAs going forward?

2) By shifting $18,500 in deferrals from pre-tax 457 (b) to Roth 457 (b): Is it worth increasing tax liability/ reducing check payment from IRS by $3,821 (20.7%) today to position an additional $18,500 into Roth 457 (b) going forward?

3) By shifting $30,500 deferrals from both TIRAs to Roth IRAs & 457 (b) to Roth: Is it worth increasing effective tax liability/ credit payment from IRS by $5,284 (17.3%) today to position an additional $30,500 into Roth IRA & 457 (b) going forward?

Is the obvious answer: If you think your tax rate will be higher than 16.8%, 20.7% or 17.3% in the future, than pay the tax now.
One thing to remember about EITC is that only traditional retirement contributions made thru payroll (and HSA thru payroll) will increase your credit; Roth contributions will not lower income and AGI (EITC tests both), while traditional IRA contributions only lower AGI, not line 7 wage income.

So if you are trying to maximize EITC, prioritize traditional contributions in employer plans over IRAs.

In the scenario set out, EITC of $1158 hits at wage and AGI = $46,100 (after subtracting $37000 401k and 457b plus $6900 HSA). If Roth IRAs are funded $11k, then the retirement savers credit is in the 10% range for $400 credit. Tax is $2277. I'm not clear how the new CTC will be implemented, but I lean towards use of the nonrefundable portion against tax owed (only), so there is $600 * 2 = $1200 use-it-or-lose-it in addition to the $400 nonrefundable RSC. So $2277 - $1200 - $400 = $677 tax owed, or subtracted from refundable credits for EITC ($1158) and CTC ($1400 * 2): $1158 + $2800 -$677 = $3281 refund.

If trying to get as much as possible in refundable credits, you could increase the RSC by contributing to tIRAs partially, to get into the 20% bracket. You'd need to get AGI <=$41000, so contribute $5100 to traditional IRA, and $5900 to Roth IRAs. Then the tax owed drops to $1700 and RSC increases to $800, + $1200 nonrefundable CTC. Some nonrefundable credits are unusable. Refundable credits are $1158 + $2800 = $3958.

LiterallyIronic
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by LiterallyIronic » Tue Feb 06, 2018 10:47 am

This is what gets me.

Here we have OP making 50% more than me going to pay $0 in federal income tax while I'm paying $142.51 per paycheck ($3,420.24/year)?

$63,500 Salary
$24,000 Standard deduction
$3,600 Traditional 401k contribution
$11,000 Roth IRA contribution (self and wife)
$0 Traditional IRA
$0 HSA
-----
$35,900 taxable income

$19,050 in 10% bracket = $1,905
$16,850 in 12% bracket = $2,022

$3,927 in Federal Tax

After that, what's the child tax credit? We had our first child in 2017. And what's the retirement credit? We're saving for retirement.

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spangineer
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by spangineer » Tue Feb 06, 2018 11:03 am

LiterallyIronic wrote:
Tue Feb 06, 2018 10:47 am
This is what gets me.

Here we have OP making 50% more than me going to pay $0 in federal income tax while I'm paying $142.51 per paycheck ($3,420.24/year)?

$63,500 Salary
$24,000 Standard deduction
$3,600 Traditional 401k contribution
$11,000 Roth IRA contribution (self and wife)
$0 Traditional IRA
$0 HSA
-----
$35,900 taxable income

$19,050 in 10% bracket = $1,905
$16,850 in 12% bracket = $2,022

$3,927 in Federal Tax

After that, what's the child tax credit? We had our first child in 2017. And what's the retirement credit? We're saving for retirement.
You're putting a lot less in pre-tax vehicles, and you don't have two kids. But yes your tax burden will be much lower if you include the child tax credit of $2k and the savers tax credit.

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camillus
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by camillus » Tue Feb 06, 2018 12:36 pm

LiterallyIronic wrote:
Tue Feb 06, 2018 10:47 am
This is what gets me.
You have opted-in to paying federal income tax by choosing Roth over deferred accounts (401k, HSA, and traditional IRA).

The OP is simply making different choices, which are also available to you, by choosing to pay federal income tax later (or not at all).

This doesn't address if/whether you have children, which seems to be a substantial benefit, especially in lower tax brackets. A single child tax credit shields $16,666 of taxable income in the 12% bracket

boglewill34
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by boglewill34 » Tue Feb 06, 2018 3:32 pm

LiterallyIronic wrote:
Tue Feb 06, 2018 10:47 am
This is what gets me.

Here we have OP making 50% more than me going to pay $0 in federal income tax while I'm paying $142.51 per paycheck ($3,420.24/year)?

$63,500 Salary
$24,000 Standard deduction
$3,600 Traditional 401k contribution
$11,000 Roth IRA contribution (self and wife)
$0 Traditional IRA
$0 HSA
-----
$35,900 taxable income

$19,050 in 10% bracket = $1,905
$16,850 in 12% bracket = $2,022

$3,927 in Federal Tax

After that, what's the child tax credit? We had our first child in 2017. And what's the retirement credit? We're saving for retirement.
Child tax credit is $2000 per child *credit* in 2018, and the Saver's Tax Credit should be 50% of your total contributions to any IRA for the year, at your income level.

So, $3927 less $2000 is $1927, then (11,000+3600)*0.50=$7300 more credit, which would be well into the zero tax range.

Info for Saver's Tax Credit taken from here: https://www.fool.com/retirement/2017/10 ... e-for.aspx

People with more knowledge than me, correct if I'm wrong. If I were in that spot, and after confirming, I'd increase my W4 (or whatever replaces it) allowances to reduce withholding, and maybe save more.

Which leads to my own question, for somewhat different reasons I have no current or near future tax liability, both state and fed. Given that I am well within safe harbor for withholding, how many allowances are "too many," ie how many will cause consternation by the IRS or state tax people? I had previously read above 9 may cause them to want to look at your W4, but since read that may be not true.

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teen persuasion
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by teen persuasion » Tue Feb 06, 2018 4:07 pm

boglewill34 wrote:
Tue Feb 06, 2018 3:32 pm
LiterallyIronic wrote:
Tue Feb 06, 2018 10:47 am
This is what gets me.

Here we have OP making 50% more than me going to pay $0 in federal income tax while I'm paying $142.51 per paycheck ($3,420.24/year)?

$63,500 Salary
$24,000 Standard deduction
$3,600 Traditional 401k contribution
$11,000 Roth IRA contribution (self and wife)
$0 Traditional IRA
$0 HSA
-----
$35,900 taxable income

$19,050 in 10% bracket = $1,905
$16,850 in 12% bracket = $2,022

$3,927 in Federal Tax

After that, what's the child tax credit? We had our first child in 2017. And what's the retirement credit? We're saving for retirement.
Child tax credit is $2000 per child *credit* in 2018, and the Saver's Tax Credit should be 50% of your total contributions to any IRA for the year, at your income level.

So, $3927 less $2000 is $1927, then (11,000+3600)*0.50=$7300 more credit, which would be well into the zero tax range.

Info for Saver's Tax Credit taken from here: https://www.fool.com/retirement/2017/10 ... e-for.aspx

People with more knowledge than me, correct if I'm wrong. If I were in that spot, and after confirming, I'd increase my W4 (or whatever replaces it) allowances to reduce withholding, and maybe save more.

Which leads to my own question, for somewhat different reasons I have no current or near future tax liability, both state and fed. Given that I am well within safe harbor for withholding, how many allowances are "too many," ie how many will cause consternation by the IRS or state tax people? I had previously read above 9 may cause them to want to look at your W4, but since read that may be not true.
Not quite how the Saver's credit works. He's at the 10% level - it's based on AGI, not taxable (so before the standard deduction, not after). Then it's on a max of $2k in retirement contributions per spouse, not all retirement contributions. So 10% of $4k or $400 Saver's credit.



As for how many allowances are "too many", DH and I have claimed 14 without any issues. Our state balks at 15+, it's right on the form that if 15 or more is claimed, the form must be submitted to the state for examination.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Tue Feb 06, 2018 4:19 pm

boglewill34 wrote:
Tue Feb 06, 2018 3:32 pm
LiterallyIronic wrote:
Tue Feb 06, 2018 10:47 am
$63,500 Salary
$24,000 Standard deduction
$3,600 Traditional 401k contribution
$11,000 Roth IRA contribution (self and wife)
$0 Traditional IRA
$0 HSA
Child tax credit is $2000 per child *credit* in 2018, and the Saver's Tax Credit should be 50% of your total contributions to any IRA for the year, at your income level.

So, $3927 less $2000 is $1927, then (11,000+3600)*0.50=$7300 more credit, which would be well into the zero tax range.

Info for Saver's Tax Credit taken from here: https://www.fool.com/retirement/2017/10 ... e-for.aspx
There are some caveats. Teen persuasion already covered the saver's credit. The Motley Fool article is from October, prior to the new tax law. See (Refundable) Child Tax Credit in 2018 - Bogleheads.org for some discussion about how that new law might or might not be implemented. In this case there is no ambiguity: a $2000 non-refundable CTC. Adding a $400 saver's credit and the tax due will be $3927 - $400 - $2000 = $1527.
Which leads to my own question, for somewhat different reasons I have no current or near future tax liability, both state and fed. Given that I am well within safe harbor for withholding, how many allowances are "too many," ie how many will cause consternation by the IRS or state tax people? I had previously read above 9 may cause them to want to look at your W4, but since read that may be not true.
If for 2017 you have a right to a refund of all federal income tax withheld because you had no tax liability,
and for 2018 expect a refund of all federal income tax withheld because you expect to have no tax liability, you can write "Exempt" in box 7 of 2017 Form W-4 - fw4.pdf (or whatever the analogous 2018 version provides).

At one time an employer had to notify the IRS if someone claimed >9 allowances, but your reading is correct that that no longer applies.

State laws may vary.
Last edited by FiveK on Tue Feb 06, 2018 4:33 pm, edited 1 time in total.

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ray.james
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by ray.james » Tue Feb 06, 2018 4:23 pm

Ron Ronnerson wrote:
Thu Feb 01, 2018 12:31 am

It's totally possible. A friend of mine who is married and has three children is in a position to pay no federal income tax with an income above $200k. His California state tax would be much higher at around $1500. Deductions and the child tax credit make this possible.
Wow, that is crazy tax optimization. May i know what vehicles they use? I can think of 3 * 18.5K(2 * 401k + 457); 5K DFSA; 7K HSA; 11K IRA; 24K standard deduction; 6K CTC; 200-1K dependent care credit if childcare is used -- what else is missing. Still comes to 6K fed tax. Any insights?

I can see mortgage deduction and property taxes to make 30K itemized but with income tax so low; the possibility seems low.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

Ron Ronnerson
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by Ron Ronnerson » Sun Feb 25, 2018 5:14 pm

ray.james wrote:
Tue Feb 06, 2018 4:23 pm
Ron Ronnerson wrote:
Thu Feb 01, 2018 12:31 am

It's totally possible. A friend of mine who is married and has three children is in a position to pay no federal income tax with an income above $200k. His California state tax would be much higher at around $1500. Deductions and the child tax credit make this possible.
Wow, that is crazy tax optimization. May i know what vehicles they use? I can think of 3 * 18.5K(2 * 401k + 457); 5K DFSA; 7K HSA; 11K IRA; 24K standard deduction; 6K CTC; 200-1K dependent care credit if childcare is used -- what else is missing. Still comes to 6K fed tax. Any insights?

I can see mortgage deduction and property taxes to make 30K itemized but with income tax so low; the possibility seems low.

Sorry for the late response. I haven't been on here for a bit and just saw your message.

Here's their situation: My friend is a California public school teacher married to another California public school teacher. They have 3 kids. They purchased their home about 20 years ago and it is paid off now. This is in the Bay Area so their largest spending category is gone. Due to proposition 13, property taxes are based on a purchase price from the late 90s.

Combined Gross Income: $210,000 (each earns about $105k).
Above Line Deductions that are possible total $131k
$21.5k for pension contributions for two people (10.25% of each of their salaries)
$24.5k for medical insurance premiums taken from one person’s paychecks (health benefits not provided by employer)
$3k for dental insurance premiums taken from their paychecks (this is mandatory)
$37k for 457b for two people
$37k for 403b for two people
$2.5k for health FSA
$5k for dependent care FSA
$500 for educator expenses

AGI: $79k
Standard Deduction: $24k
Taxable Income: $55k
Taxes on income of $55k: $6216
Child Tax Credit: $6000
Taxes Owed: $216
This could be reduced to zero by putting a little something into a traditional IRA.

If they take advantage of all the deductions/credits available to them, they would have $6600 per month to live on with no mortgage payment, low property taxes locked in, and health/dental insurance covered. There would be no federal tax to pay now. Once their pensions and withdrawals in retirement begin and kids have grown, it may be a different story.

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ray.james
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by ray.james » Sun Feb 25, 2018 9:10 pm

Ron Ronnerson wrote:
Sun Feb 25, 2018 5:14 pm
ray.james wrote:
Tue Feb 06, 2018 4:23 pm
Ron Ronnerson wrote:
Thu Feb 01, 2018 12:31 am

It's totally possible. A friend of mine who is married and has three children is in a position to pay no federal income tax with an income above $200k. His California state tax would be much higher at around $1500. Deductions and the child tax credit make this possible.
Wow, that is crazy tax optimization. May i know what vehicles they use? I can think of 3 * 18.5K(2 * 401k + 457); 5K DFSA; 7K HSA; 11K IRA; 24K standard deduction; 6K CTC; 200-1K dependent care credit if childcare is used -- what else is missing. Still comes to 6K fed tax. Any insights?

I can see mortgage deduction and property taxes to make 30K itemized but with income tax so low; the possibility seems low.

Sorry for the late response. I haven't been on here for a bit and just saw your message.

Here's their situation: My friend is a California public school teacher married to another California public school teacher. They have 3 kids. They purchased their home about 20 years ago and it is paid off now. This is in the Bay Area so their largest spending category is gone. Due to proposition 13, property taxes are based on a purchase price from the late 90s.

Combined Gross Income: $210,000 (each earns about $105k).
Above Line Deductions that are possible total $131k
$21.5k for pension contributions for two people (10.25% of each of their salaries)
$24.5k for medical insurance premiums taken from one person’s paychecks (health benefits not provided by employer)
$3k for dental insurance premiums taken from their paychecks (this is mandatory)
$37k for 457b for two people
$37k for 403b for two people
$2.5k for health FSA
$5k for dependent care FSA
$500 for educator expenses

AGI: $79k
Standard Deduction: $24k
Taxable Income: $55k
Taxes on income of $55k: $6216
Child Tax Credit: $6000
Taxes Owed: $216
This could be reduced to zero by putting a little something into a traditional IRA.

If they take advantage of all the deductions/credits available to them, they would have $6600 per month to live on with no mortgage payment, low property taxes locked in, and health/dental insurance covered. There would be no federal tax to pay now. Once their pensions and withdrawals in retirement begin and kids have grown, it may be a different story.
Thank you, Ron for sharing. Wow, I hope they do not hit quite a big RMD's. That is a lot of tax deferred savings.
As per new tax law they can expand up to 100k safe but still be in 12% tax bracket.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

mnnice
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by mnnice » Sun Feb 25, 2018 10:24 pm

I would be curious what the state tax liabilities would be in various states?

For 2017 as part of a MFJ couple with two dependents we had no federal liability. We had $5500 of state liability. :( .

masteraleph
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Joined: Wed Nov 04, 2009 9:45 am

Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by masteraleph » Sun Feb 25, 2018 10:31 pm

Ron Ronnerson wrote:
Sun Feb 25, 2018 5:14 pm

Sorry for the late response. I haven't been on here for a bit and just saw your message.

Here's their situation: My friend is a California public school teacher married to another California public school teacher. They have 3 kids. They purchased their home about 20 years ago and it is paid off now. This is in the Bay Area so their largest spending category is gone. Due to proposition 13, property taxes are based on a purchase price from the late 90s.

Combined Gross Income: $210,000 (each earns about $105k).
Above Line Deductions that are possible total $131k
$21.5k for pension contributions for two people (10.25% of each of their salaries)
$24.5k for medical insurance premiums taken from one person’s paychecks (health benefits not provided by employer)
$3k for dental insurance premiums taken from their paychecks (this is mandatory)
$37k for 457b for two people
$37k for 403b for two people
$2.5k for health FSA
$5k for dependent care FSA
$500 for educator expenses

AGI: $79k
Standard Deduction: $24k
Taxable Income: $55k
Taxes on income of $55k: $6216
Child Tax Credit: $6000
Taxes Owed: $216
This could be reduced to zero by putting a little something into a traditional IRA.

If they take advantage of all the deductions/credits available to them, they would have $6600 per month to live on with no mortgage payment, low property taxes locked in, and health/dental insurance covered. There would be no federal tax to pay now. Once their pensions and withdrawals in retirement begin and kids have grown, it may be a different story.
That's likely to be a massive RMD. They're avoiding taxes now, but may well get slammed with them later. If I were them, I'd definitely shift some of that savings towards Roth IRAs to at least start dealing with some of those issues.

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FiveK
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Re: Make $90k, pay no Federal Income Tax in 2018? Check / critique this scenario.

Post by FiveK » Sun Feb 25, 2018 10:46 pm

mnnice wrote:
Sun Feb 25, 2018 10:24 pm
I would be curious what the state tax liabilities would be in various states?

For 2017 as part of a MFJ couple with two dependents we had no federal liability. We had $5500 of state liability. :( .
You could try the state calculations in the personal finance toolbox spreadsheet. Federal calcs are good (e.g., matches the $6216 - $6000 = $216 for the California public school teachers) but, depending on state tax complexity, may be good or only ballpark numbers for State Income Tax calculations.

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