Unicorns pay no federal tax!

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vanbogle59
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Unicorns pay no federal tax!

Post by vanbogle59 »

I've stumbled across a few of these friendly beasts on another thread. Started this to broaden the conversation.

Sure. If I had 20M in a Roth IRA, I know I could have a huge "income" and pay 0 Federal tax.
I could probably even qualify for tax credits (designed for low-income filers).
But, alas, that does not appear to be in the cards.

What other examples/strategies do people have of paying 0 (or very low) Federal tax while enjoying higher-than-expected spending levels?
It goes without saying, all suggestions should be ethical, practical and above reproach. :D
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mmmodem
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Re: Unicorns pay no federal tax!

Post by mmmodem »

Here's mine. Method is to have a lot of kids.
viewtopic.php?t=300604

Here's Ron Ronnerson's. Method is maximize tax advantaged accounts.
viewtopic.php?t=290459

Here's livesoft's. I don't fully understand his method.
viewtopic.php?t=87471
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vanbogle59
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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

mmmodem wrote: Wed Apr 21, 2021 10:37 am Here's mine. Method is to have a lot of kids.
viewtopic.php?t=300604

Here's Ron Ronnerson's. Method is maximize tax advantaged accounts.
viewtopic.php?t=290459

Here's livesoft's. I don't fully understand his method.
viewtopic.php?t=87471
Wow. TY. I should have known this was already out there.
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Re: Unicorns pay no federal tax!

Post by willthrill81 »

There are many existing threads about how to pay zero or very little in taxes in retirement. This is one of them.

Here's a very simple example for those MFJ: You 'fill' the standard deduction via withdrawals from tax-deferred accounts ($25,100), pay zero tax on $80k of long-term capital gains (in addition to the cost basis of your taxable investments; so if 50% of a taxable investment you sold was gains, the other 50% is your own capital, which isn't taxed), and can withdraw as much from Roth as you want.

But in the above scenario, the contributions to the taxable and Roth accounts were subject to taxation, and there was some tax drag in the taxable account along way.

In general, it's better to have a goal of maximizing one's after-tax wealth than minimizing taxes in retirement. The two are not equivalent.
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Re: Unicorns pay no federal tax!

Post by Steve747 »

.....
Last edited by Steve747 on Fri Apr 23, 2021 5:50 pm, edited 1 time in total.
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Re: Unicorns pay no federal tax!

Post by CoastLawyer2030 »

vanbogle59 wrote: Wed Apr 21, 2021 10:24 am I've stumbled across a few of these friendly beasts on another thread. Started this to broaden the conversation.

Sure. If I had 20M in a Roth IRA, I know I could have a huge "income" and pay 0 Federal tax.
I could probably even qualify for tax credits (designed for low-income filers).
But, alas, that does not appear to be in the cards.

What other examples/strategies do people have of paying 0 (or very low) Federal tax while enjoying higher-than-expected spending levels?
It goes without saying, all suggestions should be ethical, practical and above reproach. :D
Since I was one of the posters in the other thread, I think there are a confluence of factors to get you to "zero federal income tax" land, where us unicorns and fairies live.

To preface, however, it is important to reflect that avoiding tax should not be the sole focus of the financial analysis. It's just a piece of the puzzle. Joshua Sheets on Radical Personal Finance just did a podcast episode emphasizing this point -- surrounding all of your decisions around taxes just does not make sense.

But there are a confluence of things you can do to incredibly minimize your tax burden:

(1) Contribute to tax-deferred accounts;

(2) Have kids (the tax credits are exceptionally high);

(3) Maintain low expenses (which might include paying off a mortgage); and

(4) Draw from capital gains, which are taxed far better than ordinary income.

By my math, a family of four could earn $120,000 income and pay no income tax:

$120,000 Income
- $19,500 to Husband 401k
- $19,500 to Wife 401k
- $24,000 Standard Deduction

This equals an $57,000 AGI. The income tax on that is roughly $6,250, but with two kids, you are entitled to a $7,200 credit, meaning you would actually get a refund on your income taxes. Note that these credits may go back down to $2,000 per child, but I do not want to speculate on future legislation.

Best part of this example is that, with an AGI of $57,000, you could still pull $22,999 in gains (meaning a pretty large distribution if your basis is high enough) and pay zero income tax on that as well. Capital gains are taxed at zero percent if your AGI is below $80,000.

This is generally my plan in 4-5 years.
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Re: Unicorns pay no federal tax!

Post by TheHiker »

For MFJ capital gains are not taxed up to 80K. Then the next 24K are the standard deduction.
So if you live off your investments, you can have 104K non-taxable income.

And, of course, if you are sitting in a pile of cash, you can spend it all without paying income tax.
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Re: Unicorns pay no federal tax!

Post by willthrill81 »

TheHiker wrote: Wed Apr 21, 2021 12:18 pm For MFJ capital gains are not taxed up to 80K. Then the next 24K are the standard deduction.
So if you live off your investments, you can have 104K non-taxable income.
And that's in addition to the cost-basis of your proceeds, which are not subject to taxation.
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Re: Unicorns pay no federal tax!

Post by LadyGeek »

As a reminder, please stay focused on your own situation.
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Re: Unicorns pay no federal tax!

Post by KlangFool »

OP,

I may be early retired if I cannot find the next job.

A) I have 3 years of expense in CASH -> zero taxable income.

B) I have 6 years of expense in 100% stock at my taxable account -> I can harvest at 0% long-term capital gain

C) I have 5 years of expense in my Roth IRAs -> ZERO taxable income with Roth IRA contribution now. Zero taxable income on everything after 59 1/2 years old.

D) I have 14 years of expense in my tax-deferred account -> I can Roth convert at 0% with my standard deduction.

I could generate whatever amount of taxable income that I want. I could do 0% if I choose.

KlangFool
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Re: Unicorns pay no federal tax!

Post by KlangFool »

https://www.fueleconomy.gov/feg/taxevb.shtml

OP,

Or, buy an electric car and get the $7,500 federal tax credit for electric car.

KlangFool
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Re: Unicorns pay no federal tax!

Post by VtsaxParade »

Others have already provided great advice.

HSA is very helpful.

Being able to contribute to both a 403b and 457b is very helpful as well - especially if you create a good spreadsheet to precalculate your taxes. You can fine tune the roth/traditional mix to put your AGI right where you want it.

457b in particular can be traditional and accessed upon early retirement as an income bridge before accessing traditional IRAs or pensions.

Anything that provides tax free income or lowers expenses is helpful. Solar is an example, credit card and other rewards if you're into that kind of thing.

The Saver's Tax Credit helps.
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Re: Unicorns pay no federal tax!

Post by ralph124cf »

KlangFool wrote: Wed Apr 21, 2021 1:25 pm OP,

I may be early retired if I cannot find the next job.

A) I have 3 years of expense in CASH -> zero taxable income.

B) I have 6 years of expense in 100% stock at my taxable account -> I can harvest at 0% long-term capital gain

C) I have 5 years of expense in my Roth IRAs -> ZERO taxable income with Roth IRA contribution now. Zero taxable income on everything after 59 1/2 years old.

D) I have 14 years of expense in my tax-deferred account -> I can Roth convert at 0% with my standard deduction.

I could generate whatever amount of taxable income that I want. I could do 0% if I choose.

KlangFool
Hi Klang.

A comment on your C) above. No Roth contributions with no earned income. Roth conversions are fine.

Ralph
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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

KlangFool wrote: Wed Apr 21, 2021 1:25 pm A) I have 3 years of expense in CASH
B) I have 6 years of expense in 100% stock at my taxable account
C) I have 5 years of expense in my Roth IRAs
That's 14 years of "already taxed" income.
If I did my math right, starting from 0 and assuming 8% average return, to reach that target takes 30 years of saving 10%.
And that doesn't include D.

Even for a unicorn, that's got to be unusual.
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Re: Unicorns pay no federal tax!

Post by KlangFool »

ralph124cf wrote: Wed Apr 21, 2021 1:51 pm
KlangFool wrote: Wed Apr 21, 2021 1:25 pm OP,

I may be early retired if I cannot find the next job.

A) I have 3 years of expense in CASH -> zero taxable income.

B) I have 6 years of expense in 100% stock at my taxable account -> I can harvest at 0% long-term capital gain

C) I have 5 years of expense in my Roth IRAs -> ZERO taxable income with Roth IRA contribution now. Zero taxable income on everything after 59 1/2 years old.

D) I have 14 years of expense in my tax-deferred account -> I can Roth convert at 0% with my standard deduction.

I could generate whatever amount of taxable income that I want. I could do 0% if I choose.

KlangFool
Hi Klang.

A comment on your C) above. No Roth contributions with no earned income. Roth conversions are fine.

Ralph
ralph124cf,

I was referring to withdrawing my past Roth IRA contribution in my Roth IRA accounts.

KlangFool
Last edited by KlangFool on Wed Apr 21, 2021 2:12 pm, edited 1 time in total.
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Re: Unicorns pay no federal tax!

Post by KlangFool »

vanbogle59 wrote: Wed Apr 21, 2021 2:05 pm
KlangFool wrote: Wed Apr 21, 2021 1:25 pm A) I have 3 years of expense in CASH
B) I have 6 years of expense in 100% stock at my taxable account
C) I have 5 years of expense in my Roth IRAs
That's 14 years of "already taxed" income.
If I did my math right, starting from 0 and assuming 8% average return, to reach that target takes 30 years of saving 10%.
And that doesn't include D.

Even for a unicorn, that's got to be unusual.
vanbogle59,

1) I save 1 year of expense every year.

2) I lost 50% of my portfolio during Telecom Bust by gambling on the Telecom stocks.

3) I was unemployed for more than 1 year every year.

4) It is not unusual in my family/culture. The average gross saving rate is 30+%. My older brother and older sister early retired at 49 years old. I would had early retired at that age if I did not make the mistake at Telecom Bust.

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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

KlangFool wrote: Wed Apr 21, 2021 2:12 pm 1) I save 1 year of expense every year.
...
4) It is not unusual in my family/culture.
Um, not to be impolite, but....
I don't think family/culture are the words you are looking for.
A group of unicorns is properly referred to as a "blessing".
:D
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Re: Unicorns pay no federal tax!

Post by KlangFool »

vanbogle59 wrote: Wed Apr 21, 2021 2:18 pm
KlangFool wrote: Wed Apr 21, 2021 2:12 pm 1) I save 1 year of expense every year.
...
4) It is not unusual in my family/culture.
Um, not to be impolite, but....
I don't think family/culture are the words you are looking for.
A group of unicorns is properly referred to as a "blessing".
:D
vanbogle59,

I disagreed.

I came from a country where my family/culture was an oppressed minority,. The majority use the law and the government to take away our jobs, businesses, and education opportunities. Nothing was given and everything was taken away. We have to pay taxes to support the majority and fund our own private schools with private donation in order to get educated. We have to get out of the country in order to attend college. There are limited room for the minority in the public universities.

There is no such thing as "blessing". Everything that we earned is from helping each others within the family/community with a lot of hard work and sacrifices.

KlangFool
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Re: Unicorns pay no federal tax!

Post by chipaway »

It's confusing. Several mentions of capital gains being taxed lower than distributions from tax deferred accounts. Yet the Boglehead way is to use index funds. If one uses index funds that pretty much rules out the capital gains method doesn't it? Maybe I'm missing something here.

I retired last year. My 401k and Roth IRA are invested in index funds. In addition I saved 3-4 years of expenses in a regular savings account. I put as much as I was able into the Roth IRA while still working and plan some Roth conversions starting this year for the next few years while I'm living off of savings. I should be in the 10% bracket until the savings runs out.

The tax rates are set to go back up in 2025 so I plan to convert as much as I can to Roth before then. Still deciding whether to go to the top of the 12% bracket or the 22% bracket. At age 72 required minimum distributions (RMD's) start and I'll then be getting social security too. That will put me in a higher tax bracket.

I don't see any way for me to pay zero tax.

Edit to add: I'm covered by a high deductible insurance plan so will also convert the max from my 401k to my health savings account (HSA).
Last edited by chipaway on Wed Apr 21, 2021 2:36 pm, edited 1 time in total.
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Re: Unicorns pay no federal tax!

Post by HootingSloth »

chipaway wrote: Wed Apr 21, 2021 2:33 pm It's confusing. Several mentions of capital gains being taxed lower than distributions from tax deferred accounts. Yet the Boglehead way is to use index funds. If one uses index funds that pretty much rules out the capital gains method doesn't it? Maybe I'm missing something here.

I retired last year. My 401k and Roth IRA are invested in index funds. In addition I saved 3-4 years of expenses in a regular savings account. I put as much as I was able into the Roth IRA while still working and plan some Roth conversions starting this year for the next few years while I'm living off of savings. I should be in the 10% bracket until the savings runs out.

The tax rates are set to go back up in 2025 so I plan to convert as much as I can to Roth before then. Still deciding whether to go to the top of the 12% bracket or the 22% bracket. At age 72 required minimum distributions (RMD's) start and I'll then be getting social security too. That will put me in a higher tax bracket.

I don't see any way for me to pay zero tax.
chipaway,

Many Bogleheads save more than they are able to put in a tax advantaged account, so that they have large taxable brokerage accounts. That is generally where the funds are coming from that result in tax-free return of basis plus capital gains taxed at 0%. This has nothing to do with whether the money is invested in index funds or any other capital asset.
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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

KlangFool wrote: Wed Apr 21, 2021 2:27 pm
vanbogle59 wrote: Wed Apr 21, 2021 2:18 pm
KlangFool wrote: Wed Apr 21, 2021 2:12 pm 1) I save 1 year of expense every year.
...
4) It is not unusual in my family/culture.
Um, not to be impolite, but....
I don't think family/culture are the words you are looking for.
A group of unicorns is properly referred to as a "blessing".
:D
vanbogle59,

I disagreed.

I came from a country where my family/culture was an oppressed minority,. The majority use the law and the government to take away our jobs, businesses, and education opportunities. Nothing was given and everything was taken away. We have to pay taxes to support the majority and fund our own private schools with private donation in order to get educated. We have to get out of the country in order to attend college. There are limited room for the minority in the public universities.

There is no such thing as "blessing". Everything that we earned is from helping each others within the family/community with a lot of hard work and sacrifices.

KlangFool
Yikes! Sorry. I was trying to be funny and give you a backhanded compliment. Something along these lines:
According to CollectiveNounsList, the collective noun – name for collection or a number of people or things– for Unicorn is not only a Blessing, but it can be Glory or Marvel as well. Which means that a Group of Unicorns can easily be called “Glory of Unicorns” or “Marvel of Unicorns”.

So, Congrats. Glad you ended up in a better place.
chipaway
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Re: Unicorns pay no federal tax!

Post by chipaway »

HootingSloth wrote: Wed Apr 21, 2021 2:36 pm
chipaway wrote: Wed Apr 21, 2021 2:33 pm It's confusing. Several mentions of capital gains being taxed lower than distributions from tax deferred accounts. Yet the Boglehead way is to use index funds. If one uses index funds that pretty much rules out the capital gains method doesn't it? Maybe I'm missing something here.

I retired last year. My 401k and Roth IRA are invested in index funds. In addition I saved 3-4 years of expenses in a regular savings account. I put as much as I was able into the Roth IRA while still working and plan some Roth conversions starting this year for the next few years while I'm living off of savings. I should be in the 10% bracket until the savings runs out.

The tax rates are set to go back up in 2025 so I plan to convert as much as I can to Roth before then. Still deciding whether to go to the top of the 12% bracket or the 22% bracket. At age 72 required minimum distributions (RMD's) start and I'll then be getting social security too. That will put me in a higher tax bracket.

I don't see any way for me to pay zero tax.
chipaway,

Many Bogleheads save more than they are able to put in a tax advantaged account, so that they have large taxable brokerage accounts. That is generally where the funds are coming from that result in tax-free return of basis plus capital gains taxed at 0%. This has nothing to do with whether the money is invested in index funds or any other capital asset.
Thanks HootingSloth. I have some taxable money invested in the Vanguard Wellesley fund. I thought that the Wellesley earnings were taxed the same as interest is taxed in a savings account. I have my taxes prepared so I apologize for my ignorance in this area. Are you saying that the earnings in this fund are taxed at capital gains rates?
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Re: Unicorns pay no federal tax!

Post by delamer »

What do you mean by “higher-than-expected spending levels?”

Expected relative to what?
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Re: Unicorns pay no federal tax!

Post by HootingSloth »

chipaway wrote: Wed Apr 21, 2021 2:53 pm Thanks HootingSloth. I have some taxable money invested in the Vanguard Wellesley fund. I thought that the Wellesley earnings were taxed the same as interest is taxed in a savings account. I have my taxes prepared so I apologize for my ignorance in this area. Are you saying that the earnings in this fund are taxed at capital gains rates?
That's not quite what folks are talking about. They are talking about selling shares in order to fund expenses when in retirement. When you sell a share of an index fund (or any other capital asset) from a taxable account, you realize a capital gain equal to the amount received from the sale minus your basis in the shares (typically equal to the cost you paid).

So, for example, if you purchased 3000 shares of Wellesley for $17 per share in 2009 and sold them today for $28 per share, then you would get $84,000 in cash to spend on expenses. $51,000 of this cash would represent tax-free return of basis. The other $33,000 of cash would represent a capital gain, subject to long term capital gains tax rates. If the rest of your taxable income is low enough, then this capital gain would be taxed at 0%.

You are right that Wellesley will also throw off some distributions during the year, but these amounts will not be all that large relative to your overall holdings (I think the distribution yield for Wellesley is around 2.5%). I believe for Wellesley (which holds both bonds and stocks), you will have a mixture of interest income (taxed at ordinary rates) and qualified dividends (taxed at long term capital gains rates). As long as your ordinary income is staying below the amount of the standard deduction, and the combination of your ordinary income and long term capital gains is below the higher threshold for 0% capital gains rates, then you still would not be paying federal income tax as a result of holding Wellesley in a taxable brokerage.

A lot of Bogleheads would not hold Wellesley in a taxable account, and they are more likely to hold something like VTSAX, VTIAX, or VTWAX (total stock funds). The distribution yield on VTSAX is even lower than Wellesley, and distributions are usually 100% qualified dividends, so would only give rise to income taxed at long term capital gains rates.
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Re: Unicorns pay no federal tax!

Post by gtg970g »

With 3 kids and daycare expenses we expect to have a negative tax liability this year due to tax code changes. We gross about 150k but max our 401ks & HSAs. Also max Roth IRAs but that doesn't help with reducing tax liability.
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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

delamer wrote: Wed Apr 21, 2021 3:05 pm What do you mean by “higher-than-expected spending levels?”

Expected relative to what?
Higher than expected for paying no federal tax. IOW, you don't expect someone making 15K per yr to be paying federal tax. But it's a surprise (at least to me) to find someone making 150K and still not paying any.
Normchad
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Re: Unicorns pay no federal tax!

Post by Normchad »

willthrill81 wrote: Wed Apr 21, 2021 12:29 pm
TheHiker wrote: Wed Apr 21, 2021 12:18 pm For MFJ capital gains are not taxed up to 80K. Then the next 24K are the standard deduction.
So if you live off your investments, you can have 104K non-taxable income.
And that's in addition to the cost-basis of your proceeds, which are not subject to taxation.
This is it right here. And it’s my plan.

Learn and understand the tax code. Not all money is income. And not all income is taxed.

In your original post, you mentioned spending down a big ROTH IRA. Well, that’s not income. That’s just spending money you’ve accumulated. Other than the tax free growth, it’s no different than putting all your money in your mattress and spending it when you’re old.

My plan is to retire at 53, and pay zero federal and state income tax until I’m 65. And that makes sense, because I won’t have any actual W2 wage income. I will have to sell of some investments as I go to make ends meet. And so there will be long term capital gains on those, but it should fall under the threshold for taxation. It looks like if I was retire today, I could sell 150K worth of my VTSAX, and only have a capital gain on it of 35K. So that’s how I’m going to do it.....

It will be a big change from last year, when I paid a combined $165K in state and federal income tax.
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Re: Unicorns pay no federal tax!

Post by LilyFleur »

Don't have a pension.
If you have one, just tell them you don't want it and refuse to cash the checks.
That'll fix a tax problem.
Oh, and while you're at it, don't collect social security either.
:mrgreen:
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Re: Unicorns pay no federal tax!

Post by HootingSloth »

Normchad wrote: Wed Apr 21, 2021 3:31 pm My plan is to retire at 53, and pay zero federal and state income tax until I’m 65. [snip]

It will be a big change from last year, when I paid a combined $165K in state and federal income tax.
Normchad, if your goal is to minimize your aggregate taxes paid over the course of your lifetime, you may want to consider alternatives to this plan. Generally speaking, you achieve this by paying, as close as possible given other constraints, equal marginal tax rates in each year. For your situation, it seems likely that you would benefit from doing Roth conversions during ages 54 to 65 (taxed at lower rates) to reduce RMDs in later years (which would otherwise be taxed at higher rates). Given the taxes you are paying today, it seems likely that you are making (or should be making) large traditional 401(k) contributions.

In other words, we should reemphasize a point already made in this thread: trying to pay zero taxes in a given year can be counterproductive to minimizing your lifetime aggregate tax liability.
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Re: Unicorns pay no federal tax!

Post by an_asker »

mmmodem wrote: Wed Apr 21, 2021 10:37 am [...]
Here's livesoft's. I don't fully understand his method.
viewtopic.php?t=87471
I don't either lol.
Steve747
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Re: Unicorns pay no federal tax!

Post by Steve747 »

vanbogle59 wrote: Wed Apr 21, 2021 10:24 am I've stumbled across a few of these friendly beasts on another thread. Started this to broaden the conversation.

Sure. If I had 20M in a Roth IRA, I know I could have a huge "income" and pay 0 Federal tax.
I could probably even qualify for tax credits (designed for low-income filers).
But, alas, that does not appear to be in the cards.

What other examples/strategies do people have of paying 0 (or very low) Federal tax while enjoying higher-than-expected spending levels?
It goes without saying, all suggestions should be ethical, practical and above reproach. :D
I believe the text in Red is an issue, especially when asking for "ethical, practical and above reproach" suggestions.

To require "ethical, practical and above reproach" suggestions when you leave the meat of the question open to different opinion on "higher-than-expected spending" is just looking for varying answers.
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TheTimeLord
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Re: Unicorns pay no federal tax!

Post by TheTimeLord »

vanbogle59 wrote: Wed Apr 21, 2021 10:24 am I've stumbled across a few of these friendly beasts on another thread. Started this to broaden the conversation.

Sure. If I had 20M in a Roth IRA, I know I could have a huge "income" and pay 0 Federal tax.
I could probably even qualify for tax credits (designed for low-income filers).
But, alas, that does not appear to be in the cards.

What other examples/strategies do people have of paying 0 (or very low) Federal tax while enjoying higher-than-expected spending levels?
It goes without saying, all suggestions should be ethical, practical and above reproach. :D
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"Unicorn" is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed-stage venture capital fund based in Palo Alto, California.
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corp_sharecropper
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Re: Unicorns pay no federal tax!

Post by corp_sharecropper »

"Buy, Borrow, Die" would be my preferred method. Alas, I may only have the assets to move to step 2 around the time I retire anyway so it's not in the cards.
Ron Ronnerson
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Re: Unicorns pay no federal tax!

Post by Ron Ronnerson »

mmmodem wrote: Wed Apr 21, 2021 10:37 am
Here's Ron Ronnerson's. Method is maximize tax advantaged accounts.
viewtopic.php?t=290459
To be clear, I'm deferring taxes so will eventually have to pay. We currently pay about $500/year for federal income tax and don’t have any California income tax liability (we itemize on state taxes and deduct mortgage interest and property taxes on our Bay Area home). My gross income is $115k and we max out a 457b, 403b, two IRAs, and I contribute 10.25% of my salary toward a teacher’s pension. My wife is a stay-at-home parent and we have a six-year-old.

While it sort of feels nice to have low tax liability at the moment, I have to emphasize that we will likely be faced with having to pay much more in taxes at some point down the road. My hope is that we can just pay those taxes when the time comes and not have to worry much about it. Some people think we are saving too much, particularly in light of the fact that I am expecting a pension that should pretty much cover our retirement expenses. However, due to the issue of health insurance, we are very strongly incentivized to defer taxes (the link above contains an explanation about this).

On a side note (but a related one), tax credits have been helpful to us over the years. We either get or have gotten tax credits for buying a house (first-time home buyer’s tax credit during The Great Recession), becoming parents (adoption tax credit), saving in retirement accounts (saver’s credit), having someone take care of our kid (child care tax credit), being parents (child tax credit), and buying health insurance (we are currently getting a gold plan on the health insurance exchange for just about no cost to us).
chipaway
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Re: Unicorns pay no federal tax!

Post by chipaway »

HootingSloth wrote: Wed Apr 21, 2021 3:06 pm
chipaway wrote: Wed Apr 21, 2021 2:53 pm Thanks HootingSloth. I have some taxable money invested in the Vanguard Wellesley fund. I thought that the Wellesley earnings were taxed the same as interest is taxed in a savings account. I have my taxes prepared so I apologize for my ignorance in this area. Are you saying that the earnings in this fund are taxed at capital gains rates?
That's not quite what folks are talking about. They are talking about selling shares in order to fund expenses when in retirement. When you sell a share of an index fund (or any other capital asset) from a taxable account, you realize a capital gain equal to the amount received from the sale minus your basis in the shares (typically equal to the cost you paid)....
HoootingSloth, Thanks again for the excellent explanation!
radiowave
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Re: Unicorns pay no federal tax!

Post by radiowave »

So if a couple is transitioning to retirement at full retirement age and have about 4-5 years deferred SS and RMD at 72, and MFJ, which of the following should be priority to optimize time before bump into higher tax bracket from above:

1. withdraw from taxable account (e.g. VTSAX total stock) up to top of 0% LTCG
2. withdraw from rollover IRAs up to top of 12% federal tax rate save as cash in high yield savings
3. Rollover IRA to Roth IRA conversion at 12% fed rate
4. use accumulated savings/CDs at 0% tax

Tnx
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mffl
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Re: Unicorns pay no federal tax!

Post by mffl »

My effective federal tax rate was -2.84% (yes, negative) in 2010 with a (barely) 6 figure income. No state income tax either.

Kids, traditional IRA, own a house and mortgage, charitable contributions, business mileage deduction, homebuyer tax credit.

In other words, a bunch of deductions half of which don't work that way anymore. So, that's not much help, is it?
mnnice
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Re: Unicorns pay no federal tax!

Post by mnnice »

We have found it easy to have no federal liability since capital gains have figured prominently in our income stream. Our state taxes LTCG as income so this unicorn keeps having state taxes.
PowderDay9
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Re: Unicorns pay no federal tax!

Post by PowderDay9 »

I can't tell if this thread is serious based on the title. It's a pretty easy Google search to see that roughly half of federal tax returns don't owe any federal income taxes. Millions of people pay negative federal income taxes due to various refundable tax credits. With the expansion of the child tax credit in 2021, there will be even more filers with negative income taxes, including plenty with 6 figure incomes.

Here's one article with many ways to get to a zero or negative tax rate with a 6 figure income.

https://www.physicianonfire.com/the-tax ... etirement/
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Harry Livermore
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Re: Unicorns pay no federal tax!

Post by Harry Livermore »

Normchad wrote: Wed Apr 21, 2021 3:31 pm
It will be a big change from last year, when I paid a combined $165K in state and federal income tax.
This brings up an observation of mine from this tax season.
Due to the COVID restrictions, I made very little money in 2020, spent down some of my cash EF, and sold some VTSAX in taxable to replenish the EF. My wife made her usual teacher salary minus the 403(b).
I had already run the numbers prior to handing off to the CPA, but was shocked at how little federal tax we paid. We got a refund for the first time in 27 years. I do NOT mean this in a political way, but the US tax code is extremely progressive.
Normchad, we have not had a tax bill quite that high, but there was one year where we topped $100K in federal and state taxes.
My plan is to retire somewhere in the next 5-10 years (still planning) and live off our cash savings and taxable accounts, doing the max tax-free Roth conversions we can. I think there probably is a sweet spot where we do not deplete taxable, beef up the Roths, and we will still have substantial IRAs with requisite RMDs looming. 10 years from now, we will start both our pensions, so there will be income, but we can still do Roth conversions. I'll be 72 in 2038 so a long way off for RMDs.
Of course, if things pick up for me, I'd rather work hard over the next 10 years and make a pile. I enjoy what I do.
I think it's a noble goal to minimize taxes, but it's not the main driver.
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AnEngineer
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Re: Unicorns pay no federal tax!

Post by AnEngineer »

CoastLawyer2030 wrote: Wed Apr 21, 2021 11:16 am
vanbogle59 wrote: Wed Apr 21, 2021 10:24 am I've stumbled across a few of these friendly beasts on another thread. Started this to broaden the conversation.

Sure. If I had 20M in a Roth IRA, I know I could have a huge "income" and pay 0 Federal tax.
I could probably even qualify for tax credits (designed for low-income filers).
But, alas, that does not appear to be in the cards.

What other examples/strategies do people have of paying 0 (or very low) Federal tax while enjoying higher-than-expected spending levels?
It goes without saying, all suggestions should be ethical, practical and above reproach. :D
Since I was one of the posters in the other thread, I think there are a confluence of factors to get you to "zero federal income tax" land, where us unicorns and fairies live.

To preface, however, it is important to reflect that avoiding tax should not be the sole focus of the financial analysis. It's just a piece of the puzzle. Joshua Sheets on Radical Personal Finance just did a podcast episode emphasizing this point -- surrounding all of your decisions around taxes just does not make sense.

But there are a confluence of things you can do to incredibly minimize your tax burden:

(1) Contribute to tax-deferred accounts;

(2) Have kids (the tax credits are exceptionally high);

(3) Maintain low expenses (which might include paying off a mortgage); and

(4) Draw from capital gains, which are taxed far better than ordinary income.

By my math, a family of four could earn $120,000 income and pay no income tax:

$120,000 Income
- $19,500 to Husband 401k
- $19,500 to Wife 401k
- $24,000 Standard Deduction

This equals an $57,000 AGI. The income tax on that is roughly $6,250, but with two kids, you are entitled to a $7,200 credit, meaning you would actually get a refund on your income taxes. Note that these credits may go back down to $2,000 per child, but I do not want to speculate on future legislation.

Best part of this example is that, with an AGI of $57,000, you could still pull $22,999 in gains (meaning a pretty large distribution if your basis is high enough) and pay zero income tax on that as well. Capital gains are taxed at zero percent if your AGI is below $80,000.

This is generally my plan in 4-5 years.
AGI is before deductions, you mean taxable income.
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dziuniek
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Re: Unicorns pay no federal tax!

Post by dziuniek »

Gets harder once you pass around 200k.

Wish I had more pre-tax space to fill.
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donaldfair71
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Re: Unicorns pay no federal tax!

Post by donaldfair71 »

One thing to keep in mind is that, if we learned anything from the most recent stimulus legislation, a lot of tax credits will be tied to keeping household income below a certain threshold (for me, the 125k HH income to get the 50% credit on daycare is applicable and worthwhile).

So working to keep total tax liability low, but working in conjunction with keeping income below thresholds for credits, is very, very important. The two usually, not always, but usually work hand in hand.

For a person looking at his/her taxes and seeing an AGI of 700k, it's not worthwhile. For someone seeing 200k or less, and the ability to allocate to things like 401K or HSA that can lower AGI, your return can become more than just the alpha in tax rate arbitrage; your return can begin to include substantial tax credits.
delamer
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Re: Unicorns pay no federal tax!

Post by delamer »

vanbogle59 wrote: Wed Apr 21, 2021 3:25 pm
delamer wrote: Wed Apr 21, 2021 3:05 pm What do you mean by “higher-than-expected spending levels?”

Expected relative to what?
Higher than expected for paying no federal tax. IOW, you don't expect someone making 15K per yr to be paying federal tax. But it's a surprise (at least to me) to find someone making 150K and still not paying any.
Spending levels are a different thing than income levels, though.

And a lot depends on your stage in life. Earned income from a W-2 job can be reduced — for tax purposes— by contributing to traditional 401(k)/IRA or child care flexible spending account. But there are limits.

Retirees can draw down taxable accounts and stay in the zero bracket, even with Social Security.

But I am a lot more interested in maximizing my after-tax income than in minimizing my taxes.
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JoMoney
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Re: Unicorns pay no federal tax!

Post by JoMoney »

You don't owe taxes on borrowed money. I've heard of people managing to use real estate equity loans to live off of, while being able to otherwise deduct any rental income received with depreciation, interest, and other expenses, and effectively use real estate to owe no taxes while having quite a bit of cash flow and available equity to borrow against as long as the underlying housing market is rising. Problems hit if/when real estate prices collapse, there is no equity in the house. In some situations I've heard of people being able to walk away with just their credit dinged, in others I've heard of people having huge tax burdens with taxes owed on forgiven debt. It might be possible to somehow use margin or no-recourse stock loans to do something similar.

I've also heard of people being able to manage tax-free "income" through reverse mortgages, and (while I'm a bit uncertain of the mechanics) certain life insurance products that allowed the owner to "borrow" against while the assets inside the policy are investments growing in value and potentially float the debt indefinitely until the owners death where the policy is paid/distributed without taxes on it.
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vanbogle59
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Re: Unicorns pay no federal tax!

Post by vanbogle59 »

JoMoney wrote: Thu Apr 22, 2021 8:41 am certain life insurance products that allowed the owner to "borrow" against while the assets inside the policy are investments growing in value and potentially float the debt indefinitely until the owners death where the policy is paid/distributed without taxes on it.
I once read an article about a football coach (at a certain school that fixated on the moon's effect on large bodies of water).
His compensation included recurring loans against life insurance paid for by the school.
That made a HUGE chunk of his salary tax free.

I will leave it to others to decide if such arrangements are "ethical, practical and above reproach".
That might come down to what college you went to. :shock:
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dodecahedron
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Re: Unicorns pay no federal tax!

Post by dodecahedron »

Ron Ronnerson wrote: Wed Apr 21, 2021 6:02 pm On a side note (but a related one), tax credits have been helpful to us over the years. We either get or have gotten tax credits for buying a house (first-time home buyer’s tax credit during The Great Recession), becoming parents (adoption tax credit), saving in retirement accounts (saver’s credit), having someone take care of our kid (child care tax credit), being parents (child tax credit), and buying health insurance (we are currently getting a gold plan on the health insurance exchange for just about no cost to us).
Indeed, your family is something of a "poster child/textbook example" of tax credits in action. More major tax credits to consider and/or look forward to down the road: credit for solar/wind/renewable, credit for buying an electric car, education credits (American Op Credit when your child is older and/or Lifetime Learning Credit whenever either you or spouse want to invest in continuing professional education.)

Solar credits combined with large itemized deductions (charitable donations, primarily made with in-kind donations of appreciated securities, are my largest budget item and I also hit the $10K deductible SALT limit with my real estate taxes alone, which are my second largest budget item) and a taxable account with significant qualified dividend income have been the primary factors in keeping my federal taxes at zero for past few years, even though I have been filing single with no dependents.

Both solar credits and large charitable donations conveniently have carryforwards so the excess is not lost. The use of a Donor Advised Fund is also convenient for tax-efficient timing. In a little over three years, I will also have access to Qualified Charitable Donations. At that point, I will probably stop itemizing and claim the standard deduction.

Another contributing factor is that my SS (I took widow's benefits when those maxed out at my FRA) is not fully taxable. Another factor keeping my taxes low: I have a large taxable account (50% of my assets) and a significant allocation to fixed income and interest rates have been so low that interest income has been minimal. If and when inflation/nominal interest rates revert to past levels, I would expect my taxes to become significant. However, a mitigating factor is that I have 30% of assets in Roth and only 20% in tax-deferred. Roth has been growing faster than tax-deferred due to conversions, contributions, and somewhat more aggressive assets located there.
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David Jay
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Re: Unicorns pay no federal tax!

Post by David Jay »

For moderate-income couples in a LCOL area, one can not only pay no federal income taxes but also make annual Roth conversions to control RMD amounts, thread here: viewtopic.php?f=10&t=237277
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Re: Unicorns pay no federal tax!

Post by pshonore »

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mmmodem
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Re: Unicorns pay no federal tax!

Post by mmmodem »

Ron Ronnerson wrote: Wed Apr 21, 2021 6:02 pm
mmmodem wrote: Wed Apr 21, 2021 10:37 am
Here's Ron Ronnerson's. Method is maximize tax advantaged accounts.
viewtopic.php?t=290459
To be clear, I'm deferring taxes so will eventually have to pay.

...

While it sort of feels nice to have low tax liability at the moment, I have to emphasize that we will likely be faced with having to pay much more in taxes at some point down the road. My hope is that we can just pay those taxes when the time comes and not have to worry much about it.
Yeah, pretty difficult to summarize your post with a single sentence. Did my best. :wink:

Even though the bulk of our savings is tax deferred, my hope is that we will pay very little to no taxes in retirement. I'll need to study up on livesoft's linked post above to achieve it. Should we fail, that's actually a good thing. Because that means we have more money than planned. I'll gladly "pay those taxes when the time comes."
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