Well, first the EITC (earned income tax credit) is a refundable credit. Not sure about the saver's credit. So you saying that you couldn't get the EITC doesn't make any sense to me.Where do you learn this, and which are what?
There are 2 types of credits in US taxes - refundable and non-refundable. Refundable you get the money regardless of your tax liability. Non-refundable are limited to your tax liability.
The amount of withholding has no bearing on the amount of credits you can get. Credits subtract from the amount you owe regardless of what you've already paid. Basically owing $100 and getting a $100 credit means you now owe $0. Owing $100, which you have already paid through withholding and getting a $100 credit means you get a $100 refund. Under both circumstances you end up with $0 paid in taxes at the end of it all.I'm ignoring withholding entirely for now and assuming that it was all just calculated and settled at the end of the year (for my theoretical purposes, I am actually paying taxes of course). What I'm trying to do is make my tax bill match the non-refundable credits as closely as possible so that I can move as much money from pre-tax to post-tax as possible without actually paying tax. The traditional strategies I've seen in madfientist and the like don't match my current situation at all, they start with the assumption that your taxes will be a positive number and focus on trying to make it as low as possible, in my case they're a negative number which gets rounded up to zero so I need to try and pay more tax.
Can you deposit in a 401k at any time the way you can with an IRA?No, a 401k is a plan offered by your employer and is taken out every paycheck.
Okay, next question. What is the EITC phase out formula. I've found a number of calculator tools, I know the lower and upper limits but I cannot find the actual formula they use to calculate it? I need it for my spreadsheet.terran already mentioned one of these web pages that will help evaluate some "what if?" options:
Well, first the EITC (earned income tax credit) is a refundable credit. Not sure about the saver's credit. So you saying that you couldn't get the EITC doesn't make any sense to me.Where do you learn this, and which are what?
There are 2 types of credits in US taxes - refundable and non-refundable. Refundable you get the money regardless of your tax liability. Non-refundable are limited to your tax liability.
Assuming EITC is refundable and Saver's is non refundable the optimal low income solution would be an AGI of around $19,400 which would amount to $2,006 owed, qualify you for the 50% match on the Saver's Credit on up to $2,000 for both husband and wife giving you a non refundable credit of $2,000 and a tax bill of $6. You then claim the full $503 refundable credit.
If we assume a $12,600 deductible then that means we can earn $32,000 before we play around with the retirement savings at all. Under that $32,000 number any money put into a t IRA rather than a ROTH IRA would be money wasted because your tax rate would be 0 and by deferring the tax on the money so you don't pay it all you do it reduce the amount of non-refundable tax you can claim back.
Well, first the EITC (earned income tax credit) is a refundable credit. Not sure about the saver's credit. So you saying that you couldn't get the EITC doesn't make any sense to me.Where do you learn this, and which are what?
There are 2 types of credits in US taxes - refundable and non-refundable. Refundable you get the money regardless of your tax liability. Non-refundable are limited to your tax liability.
Assuming EITC is refundable and Saver's is non refundable the optimal low income solution would be an AGI of around $19,400 which would amount to $2,006 owed, qualify you for the 50% match on the Saver's Credit on up to $2,000 for both husband and wife giving you a non refundable credit of $2,000 and a tax bill of $6. You then claim the full $503 refundable credit.
If we assume a $12,600 deductible then that means we can earn $32,000 before we play around with the retirement savings at all. Under that $32,000 number any money put into a t IRA rather than a ROTH IRA would be money wasted because your tax rate would be 0 and by deferring the tax on the money so you don't pay it all you do it reduce the amount of non-refundable tax you can claim back.
Okay, next question. What is the EITC phase out formula. I've found a number of calculator tools, I know the lower and upper limits but I cannot find the actual formula they use to calculate it? I need it for my spreadsheet.
The thing about the Saver's Credit is that you can "tune" it to match your tax liability exactly. In other words, make just enough traditional IRA contributions to get your tax to $0, then make Roth contributions to max it out.
Okay, next question. What is the EITC phase out formula. I've found a number of calculator tools, I know the lower and upper limits but I cannot find the actual formula they use to calculate it? I need it for my spreadsheet.
It's not a formula. You fill out a worksheet, and then plug the value you calculate you look up the credit from a table.
Here is form 1040 for 2014: http://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Page 58 is the form you need to fill out, and page 61 is the table you pull the EIC value from.
Here is the draft 1040 for 2015: http://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf
But the worksheet must be from a formula, surely? Like there is a worksheet which lists every potential income and how much you owe on it in taxes but it's still derived from a formula, 10% on the first X, 15% on the next Y and so forth. The worksheet is just because the IRS doesn't trust people to work it out for themselves (quite rightly).
But the worksheet must be from a formula, surely? Like there is a worksheet which lists every potential income and how much you owe on it in taxes but it's still derived from a formula, 10% on the first X, 15% on the next Y and so forth. The worksheet is just because the IRS doesn't trust people to work it out for themselves (quite rightly).
For when my wife and I have two children I found a sweet spot with an AGI of around $19,750. This would give us $2040 in taxes owed and $2000 in non-refundable credits through the Saver's Credit getting our tax liability to $40. I was able to find the full EITC tables (but still no formula for how it is calculated) and the maximum benefit for two children filing jointly stays the same from $13,650 AGI to $23,300 at $5,460 refundable credit. That ought to get us to $5,420 positive for a total tax rate of -8% (as in the government gives you 8 cents for every dollar you earn).
The input numbers were a pre-tax income of $67,000 for a family filing jointly, the output was post-tax spending money of $37,770 for the year, $6,650 in the HSA, $17,000 in the 401k and $11,000 in the tIRA.
But the worksheet must be from a formula, surely? Like there is a worksheet which lists every potential income and how much you owe on it in taxes but it's still derived from a formula, 10% on the first X, 15% on the next Y and so forth. The worksheet is just because the IRS doesn't trust people to work it out for themselves (quite rightly).
The thing about the Saver's Credit is that you can "tune" it to match your tax liability exactly. In other words, make just enough traditional IRA contributions to get your tax to $0, then make Roth contributions to max it out.
This is what we did. You can't really "tune" it to exactly $0 though. I contributed to a tIRA just enough to qualify for the maximum credit, which ended up leaving several hundred dollars of credit on the table because we didn't owe enough in taxes, yet if my AGI was one dollar higher the credit would have been slashed by 60%. So it's either leave several hundred dollars of non-refundable credits on the table, or earn a single dollar more and lose so much of the credit that you actually owe several hundred in taxes. I did not analyze all possible situations, but that was the case for me (MFJ no kids).
The thing about the Saver's Credit is that you can "tune" it to match your tax liability exactly. In other words, make just enough traditional IRA contributions to get your tax to $0, then make Roth contributions to max it out.
This is what we did. You can't really "tune" it to exactly $0 though. I contributed to a tIRA just enough to qualify for the maximum credit, which ended up leaving several hundred dollars of credit on the table because we didn't owe enough in taxes, yet if my AGI was one dollar higher the credit would have been slashed by 60%. So it's either leave several hundred dollars of non-refundable credits on the table, or earn a single dollar more and lose so much of the credit that you actually owe several hundred in taxes. I did not analyze all possible situations, but that was the case for me (MFJ no kids).
You didn't really "leave money on the table" since the credit isn't refundable. The best you can do is get your tax down to zero. Once you have made enough traditional contributions to lower your income enough to have zero tax after the credit, pat yourself on the back. At that point if you still haven't maxed out all of your retirement accounts you might as well make Roth contributions since you aren't going to lower your taxes any more by making traditional contributions. I think that's what Jack was trying to say, but feel free to correct me if I'm wrong.
To clarify, gross minus things like retirement deductions is AGI, AGI minus your standard deduction is taxable income? So if we take the very basic example of a $20,000 gross income, a $5000 tIRA contribution and a $6300 standard deduction then AGI would be $15000 and taxable income would be $8700?For when my wife and I have two children I found a sweet spot with an AGI of around $19,750. This would give us $2040 in taxes owed and $2000 in non-refundable credits through the Saver's Credit getting our tax liability to $40. I was able to find the full EITC tables (but still no formula for how it is calculated) and the maximum benefit for two children filing jointly stays the same from $13,650 AGI to $23,300 at $5,460 refundable credit. That ought to get us to $5,420 positive for a total tax rate of -8% (as in the government gives you 8 cents for every dollar you earn).
The input numbers were a pre-tax income of $67,000 for a family filing jointly, the output was post-tax spending money of $37,770 for the year, $6,650 in the HSA, $17,000 in the 401k and $11,000 in the tIRA.
You are confusing AGI with taxable income (after standard deductions and personal exemptions are subtracted). An AGI under $20k MFJ would be taxable income of $0.
Also, the EITC calculations are tricky: your credit is tested on BOTH line 7 wages and AGI, and you get the smaller credit result. So 401k and HSA thru payroll contributions are good (lower line 7 and AGI), but tIRA contributions only reduce AGI.
One more gotcha to watch for with the EITC: investment income can make you completely ineligible. I believe the limit is $3350 of investment income in a year.
To clarify, gross minus things like retirement deductions is AGI, AGI minus your standard deduction is taxable income? So if we take the very basic example of a $20,000 gross income, a $5000 tIRA contribution and a $6300 standard deduction then AGI would be $15000 and taxable income would be $8700?For when my wife and I have two children I found a sweet spot with an AGI of around $19,750. This would give us $2040 in taxes owed and $2000 in non-refundable credits through the Saver's Credit getting our tax liability to $40. I was able to find the full EITC tables (but still no formula for how it is calculated) and the maximum benefit for two children filing jointly stays the same from $13,650 AGI to $23,300 at $5,460 refundable credit. That ought to get us to $5,420 positive for a total tax rate of -8% (as in the government gives you 8 cents for every dollar you earn).
The input numbers were a pre-tax income of $67,000 for a family filing jointly, the output was post-tax spending money of $37,770 for the year, $6,650 in the HSA, $17,000 in the 401k and $11,000 in the tIRA.
You are confusing AGI with taxable income (after standard deductions and personal exemptions are subtracted). An AGI under $20k MFJ would be taxable income of $0.
Also, the EITC calculations are tricky: your credit is tested on BOTH line 7 wages and AGI, and you get the smaller credit result. So 401k and HSA thru payroll contributions are good (lower line 7 and AGI), but tIRA contributions only reduce AGI.
One more gotcha to watch for with the EITC: investment income can make you completely ineligible. I believe the limit is $3350 of investment income in a year.
Less than zero is bad because then you'd be deferring tax which you wouldn't owe at all if you put it in the present day. How to plan out your income by putting money in the right places to get your non-refundable to be as close to 0 as possible is the point of this topic.So you can either chose a standard deduction or itemize, depending on which gives you the highest amount but everyone gets $4000 at 0% for every member of your family. The standard deduction depends on your filling status, personal exemptions depend on how many people are within that family.
What exactly is the difference between the standard deduction and the exemption? Because in the UK the way we do it is we have a 0% tax bracket from 0-10,000GBP (roughly) and my thinking was that the US had more or less the same through the standard deduction (the first $6,300 you earn isn't taxed). A standard deduction of $6,300 is effectively a 0% tax bracket that pushes the brackets above is all up by $6,300. So we each have a $4,000 exemption (lower your taxable salary by $4,000 as that $4,000 is effectively taxed at 0%, move the $4,000 from pre-tax to post-tax), a $6,300 standard deductible (do the exact same thing as the exemption)?
What exactly is the difference between the standard deduction and the exemption? Because in the UK the way we do it is we have a 0% tax bracket from 0-10,000GBP (roughly) and my thinking was that the US had more or less the same through the standard deduction (the first $6,300 you earn isn't taxed). A standard deduction of $6,300 is effectively a 0% tax bracket that pushes the brackets above is all up by $6,300. So we each have a $4,000 exemption (lower your taxable salary by $4,000 as that $4,000 is effectively taxed at 0%, move the $4,000 from pre-tax to post-tax), a $6,300 standard deductible (do the exact same thing as the exemption)?
Less than zero is bad because then you'd be deferring tax which you wouldn't owe at all if you put it in the present day. How to plan out your income by putting money in the right places to get your non-refundable to be as close to 0 as possible is the point of this topic.
What exactly is the difference between the standard deduction and the exemption? Because in the UK the way we do it is we have a 0% tax bracket from 0-10,000GBP (roughly) and my thinking was that the US had more or less the same through the standard deduction (the first $6,300 you earn isn't taxed). A standard deduction of $6,300 is effectively a 0% tax bracket that pushes the brackets above is all up by $6,300. So we each have a $4,000 exemption (lower your taxable salary by $4,000 as that $4,000 is effectively taxed at 0%, move the $4,000 from pre-tax to post-tax), a $6,300 standard deductible (do the exact same thing as the exemption)?
So before we even count EITC we're looking at a tax free income of $20,300 per person in a childless household as long as they contributed at least $2,000 to a retirement plan ($6,300 at 0%, $4,000 at 0%, $10,000 at 10%, 50% match non refundable tax credit on up to $2,000), right?
So if you earn $22,300 then you can tIRA $2,000, live on $20,300 and not pay a cent in tax, before we even count EITC paying you back some.
If you can live on $18,300 then you can earn $20,300, ROTH $2000 and still not pay a cent in tax.
Why the hell do low to middle income families complain about tax and vote for lower taxes for other people? The median household in my state earned just $44,000, they're not even taxed, and we're assuming no children.
Questions such as "which order are the credits applied in?" seem to plague the system. And you're right about dropping out of the 50% match bracket but I'm pretty sure that we can manage on $36,500 if we have to. Well done on the 0 tax, I'm scheming to do the same.Actually they don't because it is quite simple to determine. Check out a 1040 form and you will have the answer easily enough. And for the record, non-refundable credits get applied first.
I am not sure which order the credits are applied, so hopefully someone else can help. If they apply your EIC first and reduce you to $0 liability (or even pay you) then you won't be able to use the savers credit at all.
I meant that in the sense that I have been entirely unable to find a list of "The Rules". I've extrapolated many of them from the forms because I can work out what they're trying to do but the way in which it's written, step by painstaking step, makes it difficult to see the forest for the trees. It's as if I read "bend forwards, open hand, reach down, grasp, straighten up, outstretch arm, release grip" and only when taken all together with context do I suddenly go "ooooh, you want me to pick up that pen off the floor and put it on the desk, makes sense". I get that it has to be that way because they want it to be a path that you can follow without knowing where it leads or why they're following it but it does cause problems like "what exactly is the EITC formula?" when the forms just give you a list of every possible income and combination of filing status and child number.
I am not sure which order the credits are applied, so hopefully someone else can help. If they apply your EIC first and reduce you to $0 liability (or even pay you) then you won't be able to use the savers credit at all.I meant that in the sense that I have been entirely unable to find a list of "The Rules". I've extrapolated many of them from the forms because I can work out what they're trying to do but the way in which it's written, step by painstaking step, makes it difficult to see the forest for the trees. It's as if I read "bend forwards, open hand, reach down, grasp, straighten up, outstretch arm, release grip" and only when taken all together with context do I suddenly go "ooooh, you want me to pick up that pen off the floor and put it on the desk, makes sense". I get that it has to be that way because they want it to be a path that you can follow without knowing where it leads or why they're following it but it does cause problems like "what exactly is the EITC formula?" when the forms just give you a list of every possible income and combination of filing status and child number.
Have you looked at the case study spreadsheet mentioned a few times above and found it incorrect? Granted, it doesn't draw a roadmap, but it seems to answer all the questions being posed here. If, however, it is incorrect please advise and it can be corrected.
I meant that in the sense that I have been entirely unable to find a list of "The Rules". I've extrapolated many of them from the forms because I can work out what they're trying to do but the way in which it's written, step by painstaking step, makes it difficult to see the forest for the trees. It's as if I read "bend forwards, open hand, reach down, grasp, straighten up, outstretch arm, release grip" and only when taken all together with context do I suddenly go "ooooh, you want me to pick up that pen off the floor and put it on the desk, makes sense". I get that it has to be that way because they want it to be a path that you can follow without knowing where it leads or why they're following it but it does cause problems like "what exactly is the EITC formula?" when the forms just give you a list of every possible income and combination of filing status and child number.
Is there a way to add unreported income? Like say you had a side hustle selling tomatoes from your garden that brought in $1,000/mo and you never intend to let the IRS know. Or should you just use that money to displace some spending, and leave an equivalent amount out of your spending categories?It's Excel, so whatever you can do in Excel.... :)
Is there a way to add unreported income? Like say you had a side hustle selling tomatoes from your garden that brought in $1,000/mo and you never intend to let the IRS know. Or should you just use that money to displace some spending, and leave an equivalent amount out of your spending categories?It's Excel, so whatever you can do in Excel.... :)
Picking an expense category that doesn't apply to you and entering a negative number would be one way.
The "you" was generic, not aimed at any one individual.
So before we even count EITC we're looking at a tax free income of $20,300 per person in a childless household as long as they contributed at least $2,000 to a retirement plan ($6,300 at 0%, $4,000 at 0%, $10,000 at 10%, 50% match non refundable tax credit on up to $2,000), right?
So if you earn $22,300 then you can tIRA $2,000, live on $20,300 and not pay a cent in tax, before we even count EITC paying you back some.
If you can live on $18,300 then you can earn $20,300, ROTH $2000 and still not pay a cent in tax.
Why the hell do low to middle income families complain about tax and vote for lower taxes for other people? The median household in my state earned just $44,000, they're not even taxed, and we're assuming no children.
I'm sure i'm not the only one here that has earned money under the table, and will probably earn more money under the table on my path to FIRE.
I don't think you read what I did. $4000 exemption, $6300 deduction, $10000 taxed at 10% to result in $1000 tax which is offset by the Saver's credit. It's per person.So before we even count EITC we're looking at a tax free income of $20,300 per person in a childless household as long as they contributed at least $2,000 to a retirement plan ($6,300 at 0%, $4,000 at 0%, $10,000 at 10%, 50% match non refundable tax credit on up to $2,000), right?
So if you earn $22,300 then you can tIRA $2,000, live on $20,300 and not pay a cent in tax, before we even count EITC paying you back some.
If you can live on $18,300 then you can earn $20,300, ROTH $2000 and still not pay a cent in tax.
Why the hell do low to middle income families complain about tax and vote for lower taxes for other people? The median household in my state earned just $44,000, they're not even taxed, and we're assuming no children.
It is not $20,300 per person, that is for the couple MFJ. But you have the general idea. The EITC for zero kids is relatively low, and phases out early, compared to with kids.
There is largely a trade-off between the EITC and retirement savers credit. If you have 0 kids, and relatively low income (possibly thru retirement contributions), the retirement credit may eliminate your taxes if your AGI is in a sweet spot, but any EITC is negligible. If you have kids on a similar income, you probably owe 0 in taxes (due to the children's added exemptions), so the retirement savers credit is pointless, but you can get a larger refund from the EITC.
Category | Monthly | Comments | Annual |
Salary/Wages | $14,083 | $169,000 | |
Traditional IRA | $1,083 | At maximum | $13,000 |
401(k) / 403(b) / TSP / etc. | $4,000 | At maximum | $48,000 |
457 plans | $4,000 | At maximum | $48,000 |
Federal Adj. Gross Inc. | $5,000 | $60,000 | |
Federal tax | -$18 | 2015 rates, MFJ, stand. ded., 5 exempt. | -$212 |
Filing Status | 2 | 1=S, 2=MFJ | |
# of earners | 2 | ||
AGI | $60,000 | ||
Std. Deduct. | $12,600 | ||
Act. Deduct. | $12,600 | ||
# Exempt. | 5 | ||
Exemption | $20,000 | ||
Taxable | $27,400 | ||
Tax | $3,188 | ||
Savers' credit | $400 | ||
Tax after n-r credit | $2,788 | ||
# Children <17 | 3 | ||
Child Tax Cred. | $3,000 | ||
EIC | $0 | ||
Net Tax | -$212 |
I've thought about this a bit more, but that would give erroneous calculations regarding FIRE dates and draw downs. My expenses would be artificially low. I need to keep my expenses real, as well as my income real, even if a portion is not reported. I'm sure i'm not the only one here that has earned money under the table, and will probably earn more money under the table on my path to FIRE.That looks correct. If there are enough (some number >0, depending on the phase of the moon, etc.) people who have good examples it wouldn't be hard to add a row, e.g. between the current row 42 & 43, for non-taxable income in the template. Of course one can make such a change in one's own copy....
I've thought about this a bit more, but that would give erroneous calculations regarding FIRE dates and draw downs. My expenses would be artificially low. I need to keep my expenses real, as well as my income real, even if a portion is not reported. I'm sure i'm not the only one here that has earned money under the table, and will probably earn more money under the table on my path to FIRE.That looks correct. If there are enough (some number >0, depending on the phase of the moon, etc.) people who have good examples it wouldn't be hard to add a row, e.g. between the current row 42 & 43, for non-taxable income in the template. Of course one can make such a change in one's own copy....
I've thought about this a bit more, but that would give erroneous calculations regarding FIRE dates and draw downs. My expenses would be artificially low. I need to keep my expenses real, as well as my income real, even if a portion is not reported. I'm sure i'm not the only one here that has earned money under the table, and will probably earn more money under the table on my path to FIRE.That looks correct. If there are enough (some number >0, depending on the phase of the moon, etc.) people who have good examples it wouldn't be hard to add a row, e.g. between the current row 42 & 43, for non-taxable income in the template. Of course one can make such a change in one's own copy....
I'm sure i'm not the only one here that has earned money under the table, and will probably earn more money under the table on my path to FIRE.
Heh. I'm way too much of a sucker (http://forum.mrmoneymustache.com/welcome-to-the-forum/the-sucker-who-complies-with-tax-laws/) to commit tax fraud. I faithfully report all my income and pay my tax owing in full, even when the government or governments would be hard-pressed to find all my income if I weren't so honest.
People who commit tax fraud effectively raise the rates for the rest of us, and ironically, these are often the same people who vote to raise rates on people other than themselves (all while claiming the current rates are low and yet declining to pay them), basically adding insult to injury.
I don't think you read what I did. $4000 exemption, $6300 deduction, $10000 taxed at 10% to result in $1000 tax which is offset by the Saver's credit. It's per person.So before we even count EITC we're looking at a tax free income of $20,300 per person in a childless household as long as they contributed at least $2,000 to a retirement plan ($6,300 at 0%, $4,000 at 0%, $10,000 at 10%, 50% match non refundable tax credit on up to $2,000), right?
So if you earn $22,300 then you can tIRA $2,000, live on $20,300 and not pay a cent in tax, before we even count EITC paying you back some.
If you can live on $18,300 then you can earn $20,300, ROTH $2000 and still not pay a cent in tax.
Why the hell do low to middle income families complain about tax and vote for lower taxes for other people? The median household in my state earned just $44,000, they're not even taxed, and we're assuming no children.
It is not $20,300 per person, that is for the couple MFJ. But you have the general idea. The EITC for zero kids is relatively low, and phases out early, compared to with kids.
There is largely a trade-off between the EITC and retirement savers credit. If you have 0 kids, and relatively low income (possibly thru retirement contributions), the retirement credit may eliminate your taxes if your AGI is in a sweet spot, but any EITC is negligible. If you have kids on a similar income, you probably owe 0 in taxes (due to the children's added exemptions), so the retirement savers credit is pointless, but you can get a larger refund from the EITC.