$158k Income and 0 federal income tax

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Topic Author
jdilla1107
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$158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 9:44 am

I am a high net worth individual who sold a business and decided to slow down and do part time consulting. I am playing with tax software and am amazed at how much you can make and pay no federal income tax with an effective a 0% marginal tax rate. (because of credits.) Here is a rough example I just worked through:

Income:
$120k in 1099 self employed income
$38k in qualified dividends
$3k in interest

Deductions:
Std Deduction - 24k
Solo 401k employer contribution - 20k
Self Employed Health Insurance - 16k
QBI deduction - 11k
Self employment FICA deduction - 8k
HSA - 7k

Taxable Income: 81k
Federal Tax: $5,537
Child Tax Credit - 4k
Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)

I guess the catch is that I would pay 16k in FICA, but still this is still surprising to me.

This also stresses the importance of running tax simulations to decide between roth and traditional contributions.

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Fri Jan 25, 2019 9:46 am

OP,

Come on. Besides not paying taxes, you should take advantage of refundable tax credits too. Zero federal income tax is not a big deal.

KlangFool
Last edited by KlangFool on Fri Jan 25, 2019 9:50 am, edited 1 time in total.

The Wizard
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Re: $158k Income and 0 federal income tax

Post by The Wizard » Fri Jan 25, 2019 9:49 am

Well that's for MFJ.
As a single person with that ballpark level of income, I think I'll be paying a bit of Federal tax this year, as always...
Attempted new signature...

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Fri Jan 25, 2019 9:54 am

jdilla1107 wrote:
Fri Jan 25, 2019 9:44 am
I am a high net worth individual who sold a business and decided to slow down and do part time consulting. I am playing with tax software and am amazed at how much you can make and pay no federal income tax with an effective a 0% marginal tax rate. (because of credits.) Here is a rough example I just worked through:

Income:
$120k in 1099 self employed income
$38k in qualified dividends
$3k in interest

Deductions:
Std Deduction - 24k
Solo 401k employer contribution - 20k
Self Employed Health Insurance - 16k
QBI deduction - 11k
Self employment FICA deduction - 8k
HSA - 7k

Taxable Income: 81k
Federal Tax: $5,537
Child Tax Credit - 4k
Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)

I guess the catch is that I would pay 16k in FICA, but still this is still surprising to me.

This also stresses the importance of running tax simulations to decide between roth and traditional contributions.
jdilla1107,

<<Deductions:
Std Deduction - 24k
Solo 401k employer contribution - 20k>>

You are missing Solo 401K employee contribution of 18K.

You should check out saver's credit too.

https://www.bogleheads.org/wiki/Saver%27s_credit
KlangFool
Last edited by KlangFool on Fri Jan 25, 2019 10:02 am, edited 1 time in total.

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TheTimeLord
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Re: $158k Income and 0 federal income tax

Post by TheTimeLord » Fri Jan 25, 2019 10:01 am

Okay, I need some help here. I see $8,907 plus 22% of the amount over $77,400 as your tax basis on $81,000. What am I missing that makes it $5,537?
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KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Fri Jan 25, 2019 10:05 am

OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool

livesoft
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Re: $158k Income and 0 federal income tax

Post by livesoft » Fri Jan 25, 2019 10:07 am

Welcome to the club.

While income tax is low, the OP still paid $16,000+ in FICA/medicare tax.

Previous discussions on pay low/no taxes:

Taxes on a family with $200,000 gross income

How to pay ZERO taxes in retirement with 6-figure expenses
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Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 10:28 am

TheTimeLord wrote:
Fri Jan 25, 2019 10:01 am
Okay, I need some help here. I see $8,907 plus 22% of the amount over $77,400 as your tax basis on $81,000. What am I missing that makes it $5,537?
I think it's that the amount over 77k is qualified dividends.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 10:32 am

KlangFool wrote:
Fri Jan 25, 2019 9:54 am
jdilla1107,

<<Deductions:
Std Deduction - 24k
Solo 401k employer contribution - 20k>>

You are missing Solo 401K employee contribution of 18K.

You should check out saver's credit too.

https://www.bogleheads.org/wiki/Saver%27s_credit
KlangFool
When I added this in, my taxes went down by only $500 on $18k. My point was that roth seems better for that 18k.
Last edited by jdilla1107 on Fri Jan 25, 2019 10:39 am, edited 1 time in total.

sergio
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Re: $158k Income and 0 federal income tax

Post by sergio » Fri Jan 25, 2019 10:32 am

livesoft wrote:
Fri Jan 25, 2019 10:07 am
Welcome to the club.

While income tax is low, the OP still paid $16,000+ in FICA/medicare tax.

Previous discussions on pay low/no taxes:

Taxes on a family with $200,000 gross income

How to pay ZERO taxes in retirement with 6-figure expenses
And over $1300/month for health insurance....

Topic Author
jdilla1107
Posts: 751
Joined: Sun Jun 24, 2012 8:31 pm

Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 10:34 am

KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
HR Block tax software didn't make it seem refundable. The credit kept decreasing as I lowered the income. I will double check.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 10:37 am

sergio wrote:
Fri Jan 25, 2019 10:32 am
livesoft wrote:
Fri Jan 25, 2019 10:07 am
Welcome to the club.

While income tax is low, the OP still paid $16,000+ in FICA/medicare tax.

Previous discussions on pay low/no taxes:

Taxes on a family with $200,000 gross income

How to pay ZERO taxes in retirement with 6-figure expenses
And over $1300/month for health insurance....
I'm focusing on things I can control wihtin my circumstances.

For Fica avoidance, perhaps I could ask clients to pay me in capital gains?
For health insurance savings, I could move to Canada?

Glockenspiel
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Re: $158k Income and 0 federal income tax

Post by Glockenspiel » Fri Jan 25, 2019 10:40 am

sergio wrote:
Fri Jan 25, 2019 10:32 am
livesoft wrote:
Fri Jan 25, 2019 10:07 am
Welcome to the club.

While income tax is low, the OP still paid $16,000+ in FICA/medicare tax.

Previous discussions on pay low/no taxes:

Taxes on a family with $200,000 gross income

How to pay ZERO taxes in retirement with 6-figure expenses
And over $1300/month for health insurance....
Money spent on health insurance is not a TAX.

corysold
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Re: $158k Income and 0 federal income tax

Post by corysold » Fri Jan 25, 2019 11:26 am

It's get even better with more kids.

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Re: $158k Income and 0 federal income tax

Post by LadyGeek » Fri Jan 25, 2019 2:05 pm

To keep this actionable, please stay focused on helping the OP with tax obligations.
jdilla1107 wrote:
Fri Jan 25, 2019 10:37 am
I'm focusing on things I can control wihtin my circumstances.

For Fica avoidance, perhaps I could ask clients to pay me in capital gains?
For health insurance savings, I could move to Canada?
From the IRS: What is Taxable and Nontaxable Income | Internal Revenue Service
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
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KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Fri Jan 25, 2019 2:10 pm

jdilla1107 wrote:
Fri Jan 25, 2019 10:37 am

For Fica avoidance, perhaps I could ask clients to pay me in capital gains?
jdilla1107,

Financially, it does not make sense unless and until you cross the second bend points.

https://www.ssa.gov/oact/cola/bendpoints.html

KlangFool

caffeperfavore
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Re: $158k Income and 0 federal income tax

Post by caffeperfavore » Fri Jan 25, 2019 2:11 pm

You can also set up an S Corp to trim down your FICA and income on earnings. Doing 50/50% in payroll and deduction is, as I understand, pretty standard. There's also business expenses you can deduct.

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Watty
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Re: $158k Income and 0 federal income tax

Post by Watty » Fri Jan 25, 2019 2:24 pm

It is too late now but next you might want to do Roth conversions to the top of the 12% federal tax bracket.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Fri Jan 25, 2019 4:26 pm

caffeperfavore wrote:
Fri Jan 25, 2019 2:11 pm
You can also set up an S Corp to trim down your FICA and income on earnings. Doing 50/50% in payroll and deduction is, as I understand, pretty standard. There's also business expenses you can deduct.
I did not realize this. Thanks for the tip.

niceguy7376
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Re: $158k Income and 0 federal income tax

Post by niceguy7376 » Fri Jan 25, 2019 7:12 pm

caffeperfavore wrote:
Fri Jan 25, 2019 2:11 pm
You can also set up an S Corp to trim down your FICA and income on earnings. Doing 50/50% in payroll and deduction is, as I understand, pretty standard. There's also business expenses you can deduct.
That might not be the best method if you factor in registration, additional tax filings for s corp and hence cpa fees and some states have flat minimum fee for corporations (like CA).

S Corp Vs Sole Prop is a very personal situation.

And the mention of 50% salary and 50% withdrawls might not pass the smell test if IRS Audits in some low salary scenarios.

JoeJohnson
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Re: $158k Income and 0 federal income tax

Post by JoeJohnson » Fri Jan 25, 2019 8:26 pm

caffeperfavore wrote:
Fri Jan 25, 2019 2:11 pm
You can also set up an S Corp to trim down your FICA and income on earnings. Doing 50/50% in payroll and deduction is, as I understand, pretty standard. There's also business expenses you can deduct.
A good way to get the IRS sniffing around is by setting up an S Corp for a profitable consulting venture and only running 50% of the money through payroll/FICA taxes. Bad idea.

Also, an S Corp is not necessary to deduct business expenses. Schedule C is perfectly sufficient for a sole proprietor.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Sat Jan 26, 2019 11:16 am

KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Sat Jan 26, 2019 11:23 am

jdilla1107 wrote:
Sat Jan 26, 2019 11:16 am
KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.
jdilla1107,

The point here is if you reduce the tax owed to $0, you collect the whole $4,000 refund. So, it may be worthwhile for you to do that.

KlangFool

corysold
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Re: $158k Income and 0 federal income tax

Post by corysold » Sat Jan 26, 2019 11:24 am

jdilla1107 wrote:
Sat Jan 26, 2019 11:16 am
KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.
The child tax credit can reduce your tax owed to $0, but not below.

However, if you are eligible for the "Additional Child Tax Credit", which in your scenario you should be, that is when you can get the refundable portion to go below $0 and actually have a negative tax rate and be refunded the amount over what would bring you to $0.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Sat Jan 26, 2019 11:30 am

KlangFool wrote:
Sat Jan 26, 2019 11:23 am
jdilla1107,

The point here is if you reduce the tax owed to $0, you collect the whole $4,000 refund. So, it may be worthwhile for you to do that.

KlangFool
That is odd. It appears there is a strong incentive to not owe anywhere between 0-$4000 in federal tax before the credit is applied.

For example, if I owed $2000, I may as well plan to owe $4000. This is likely where i was seeing the 0% marginal tax rate in my experiments.

corysold
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Re: $158k Income and 0 federal income tax

Post by corysold » Sat Jan 26, 2019 11:34 am

The Smart Assets article in the link talks about the phasing out of the Additional Child Tax Credit except for previous years, but when I did my taxes for this year, it shows up on Form 8812 and is taken into account and labeled "Additional Child Tax Credit". So either my tax software is wrong, or the article is wrong. I'm hoping it's the article.

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Sat Jan 26, 2019 11:37 am

jdilla1107 wrote:
Sat Jan 26, 2019 11:30 am
KlangFool wrote:
Sat Jan 26, 2019 11:23 am
jdilla1107,

The point here is if you reduce the tax owed to $0, you collect the whole $4,000 refund. So, it may be worthwhile for you to do that.

KlangFool
That is odd. It appears there is a strong incentive to not owe anywhere between 0-$4000 in federal tax before the credit is applied.

For example, if I owed $2000, I may as well plan to owe $4000. This is likely where i was seeing the 0% marginal tax rate in my experiments.
jdilla1107,

Technically, your marginal tax rate is not 0%.

If you owed $2,000, you got paid $2,000 refund. If you owed $2,001, you got paid $1,999. So, your marginal tax rate is negative. It is not 0%.

KlangFool

JoeJohnson
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Re: $158k Income and 0 federal income tax

Post by JoeJohnson » Sat Jan 26, 2019 12:12 pm

KlangFool wrote:
Sat Jan 26, 2019 11:23 am
jdilla1107 wrote:
Sat Jan 26, 2019 11:16 am
KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.
jdilla1107,

The point here is if you reduce the tax owed to $0, you collect the whole $4,000 refund. So, it may be worthwhile for you to do that.

KlangFool

$4k is not refundable. It's capped at $1.4k per child.

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Sat Jan 26, 2019 12:22 pm

JoeJohnson wrote:
Sat Jan 26, 2019 12:12 pm
KlangFool wrote:
Sat Jan 26, 2019 11:23 am
jdilla1107 wrote:
Sat Jan 26, 2019 11:16 am
KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.
jdilla1107,

The point here is if you reduce the tax owed to $0, you collect the whole $4,000 refund. So, it may be worthwhile for you to do that.

KlangFool

$4k is not refundable. It's capped at $1.4k per child.
You are right.

KlangFool

michaeljc70
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Re: $158k Income and 0 federal income tax

Post by michaeljc70 » Sat Jan 26, 2019 12:33 pm

Most people cannot control how much in qualified dividends they get. Most people are not self employed. Most people self employed won't be maximizing all the tax breaks (HSA, 401k, etc.) and most self employed people will not qualify for the QBI. So, it isn't really surprising to me that you can create scenarios (or actually fall into one) that will result in low or no federal income tax.

Topic Author
jdilla1107
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Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Sat Jan 26, 2019 3:20 pm

KlangFool wrote:
Sat Jan 26, 2019 12:22 pm
JoeJohnson wrote:
Sat Jan 26, 2019 12:12 pm
$4k is not refundable. It's capped at $1.4k per child.
You are right.

KlangFool
This credit seems complicated based on this and seeing it get reduced based on the amount that I owe.

I think I'm back to not being interested into how any of this works and just running what-if scenarios. :-)

KlangFool
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Re: $158k Income and 0 federal income tax

Post by KlangFool » Sat Jan 26, 2019 3:27 pm

jdilla1107 wrote:
Sat Jan 26, 2019 3:20 pm
KlangFool wrote:
Sat Jan 26, 2019 12:22 pm
JoeJohnson wrote:
Sat Jan 26, 2019 12:12 pm
$4k is not refundable. It's capped at $1.4k per child.
You are right.

KlangFool
This credit seems complicated based on this and seeing it get reduced based on the amount that I owe.

I think I'm back to not being interested into how any of this works and just running what-if scenarios. :-)
jdilla1107,

Just use your tax software to calculate the number as to what if you contribute $1,000 more to the Trad. 401K and so on.

KlangFool

Traveler
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Re: $158k Income and 0 federal income tax

Post by Traveler » Sat Jan 26, 2019 9:47 pm

You should be thanking the rest of us who don't have your situation for subsidizing you by paying more than our fair share of taxes

Slick8503
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Re: $158k Income and 0 federal income tax

Post by Slick8503 » Sat Jan 26, 2019 10:17 pm

~115k income from w2 job
DW ~ 40k income from w2 job
Total 155k
Both max 401ks, max hsa, 5k dependent care account
24k std ded
3 child tax credits

Only ~5k owed in fed taxes.

Amazing to me.

This could be a spinoff of the “Do you feel overpaid?” thread.

“Do you feel under taxed?” :D

HEDGEFUNDIE
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Re: $158k Income and 0 federal income tax

Post by HEDGEFUNDIE » Sat Jan 26, 2019 10:31 pm

Slick8503 wrote:
Sat Jan 26, 2019 10:17 pm
~115k income from w2 job
DW ~ 40k income from w2 job
Total 155k
Both max 401ks, max hsa, 5k dependent care account
24k std ded
3 child tax credits

Only ~5k owed in fed taxes.

Amazing to me.

This could be a spinoff of the “Do you feel overpaid?” thread.

“Do you feel under taxed?” :D
And that could 5k could easily be zero with some itemized deductions (S&L taxes, mortgage interest, charity, etc.)

In my case I definitely feel undertaxed. We earned $357k in 2018 and only owe $46k federal taxes, for a 12.9% effective rate.

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JonnyDVM
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Location: Atlanta, GA

Re: $158k Income and 0 federal income tax

Post by JonnyDVM » Sun Jan 27, 2019 7:28 am

Traveler wrote:
Sat Jan 26, 2019 9:47 pm
You should be thanking the rest of us who don't have your situation for subsidizing you by paying more than our fair share of taxes
Hear, hear!
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

JerLon
Posts: 166
Joined: Fri Aug 21, 2009 2:03 pm
Location: Western NY

Re: $158k Income and 0 federal income tax

Post by JerLon » Sun Jan 27, 2019 7:57 am

jdilla1107 wrote:
Sat Jan 26, 2019 3:20 pm
KlangFool wrote:
Sat Jan 26, 2019 12:22 pm
JoeJohnson wrote:
Sat Jan 26, 2019 12:12 pm
$4k is not refundable. It's capped at $1.4k per child.
You are right.

KlangFool
This credit seems complicated based on this and seeing it get reduced based on the amount that I owe.

I think I'm back to not being interested into how any of this works and just running what-if scenarios. :-)
Also complicated based on the fact that it shows up on two different lines on the 1040 tied to two different forms/worksheets.

Line 12a - Comes from the Child Tax Credit Worksheet.

Line 17 - Comes from form 8812 and is the refundable portion.

I can't imagine trying to do my taxes this year by hand and without software.

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teen persuasion
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Re: $158k Income and 0 federal income tax

Post by teen persuasion » Sun Jan 27, 2019 12:39 pm

jdilla1107 wrote:
Sat Jan 26, 2019 11:16 am
KlangFool wrote:
Fri Jan 25, 2019 10:05 am
OP,

Please explain why this is a problem? It is a refundable tax credit. So, the government pays you even if your tax bill is zero.

<<Total Tax Owed - $1,537 ( I could optimize this to 0 with some employee 401k deductions, but if i do too much, I will hit the 0% marginal tax rate from child tax credit.)>>

https://smartasset.com/taxes/all-about- ... ax-credits
<<How Much of the Child Tax Credit Is Refundable?
For 2018, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your income tax bill when you file in 2019 is zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.>>

KlangFool
You are correct that it is a refundable credit, but that doesn't mean what I thought it meant. The credit appears to be reduced by the tax you actually owe.

One scenario looks like this:
Child tax credit: $4,000
Tax owed: $1,858
Refundable Credit: 4,000 - 1858 = $2,142

I don't understand the logic behind reducing the credit, but I guess it does appear that I could pay negative taxes by moving some things around.
A tax credit directly offsets (pays) tax you owe. A refundable tax credit can offset any tax owed, and the remainder can be refunded to you. A nonrefundable tax credit can only offset taxes owed; if there is any remainder, it is lost.

What did you think a refundable credit meant?


We are eligible for several nonrefundable credits, and they typically mostly go to waste because of the interactions between different credit cliffs and phaseouts. We should have $500 other child tax credit (over age 16), $600 nonrefundable portion of CTC (under age 16), $2k retirement Saver's credit, $1500 nonrefundable portion of AOTC. There's the refundable $1400 CTC, refundable $1k AOTC, and the refundable EITC which depends on line 7 wages and AGI. Attempting to maximize EITC by reducing the 21% phaseout on line 7/AGI by increased HSA and 401k contributions results in little tax owed. Increasing AGI by Roth conversions (in an attempt to use nonrefundable credits rather than waste them) reduces the retirement Saver's credit, and phases out any EITC.

Playing around real quickly, if I converted $15k to Roth, that would completely consume the nonrefundable credits (retirement Saver's credit reduced to $400). We would lose $3050 in EITC, and the state 30% match of $915, and jump 3 brackets in state taxes. In all, roughly $5k cost to convert $15k to Roth. Instead, we contribute as much as possible to HSA and 401k to maximize refundable credits, which I then use to contribute to Roth IRAs. We only have a few more years with kid related refundable credits, so I'm focusing on utilizing those now, and shifting to Roth conversions later when there are no refundable credits driving up our marginal rate.

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jdilla1107
Posts: 751
Joined: Sun Jun 24, 2012 8:31 pm

Re: $158k Income and 0 federal income tax

Post by jdilla1107 » Sun Jan 27, 2019 6:05 pm

teen persuasion wrote:
Sun Jan 27, 2019 12:39 pm

What did you think a refundable credit meant?
My assumption was that it would always be $2k per child.

1) It's only partially refundable. (Max $1,400 per child)
2) You need to owe at least the value of the credit to get the full credit amount.

For two children, it's optimal for me to owe $4k, before the credit.

So, it's only a partially refundable credit.

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teen persuasion
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Re: $158k Income and 0 federal income tax

Post by teen persuasion » Sun Jan 27, 2019 7:05 pm

The partially refundable part is new this year - previously the credit was max $1k up to $1k refundable (if your income was in the right range, neither too low nor too high).

Part of the enlarged credit, and the credit for other dependents, offsets the lack of personal exemptions. Presumably this "part" is the nonrefundable part, though they are different ($600 vs $500).

I'd think the optimal scenario would be to owe exactly the nonrefundable portion, and receive the refundable portion as a tax refund. I certainly enjoyed getting refunds large enough to fully fund 2 Roth IRAs tax free, more than reaching 0 tax refund.

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ginmqi
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Re: $158k Income and 0 federal income tax

Post by ginmqi » Mon Jan 28, 2019 2:58 am

The Wizard wrote:
Fri Jan 25, 2019 9:49 am
Well that's for MFJ.
As a single person with that ballpark level of income, I think I'll be paying a bit of Federal tax this year, as always...
Indeed.

We grossed about 310k last year (vast majority is my 1099 income), got married, no kids. Thank god for the higher standard deduction and the 20% business income pass through which we did qualify for.

Haven't filed yet but coming up with the following ballpark figures in my tax software:
$311k gross income
$273k AGI (-HSA, -1/2 SE Tax deduction, -solo 401k, -SE health insurance)
$199k taxable income (-24k std deduction, -50k 20% QBI pass through deduction)

Tax liabilities
$60k federal (36k) + SE tax (24k)
$20k Hawaii state tax (yuck, moving to a lower tax state later this year)

We don't have kids or own home or bought any electric cars so not any credits.

but yeah looking at just two numbers: 311k and 36k federal tax...seems low but you pay for it in many other ways too

Could be worse

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