Author Topic: I had an effective 1% income tax rate this year.  (Read 3730 times)

Jack

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I had an effective 1% income tax rate this year.
« on: April 15, 2014, 03:24:03 PM »
Through careful allocation between our IRAs and Roth IRAs, my wife and I adjusted our AGI to just below $35.5K, which is the phase-out point for the Saver's Credit, and were able to use said credit to drop our (W-2) tax liability to zero. (My wife had a small amount of 1099 income for which the $350 in self-employment tax was not deductible, hence the $350 / ~$35K = 1% effective rate.)

The best part is that it made our Roth contributions this year completely tax-free, including principal!

My challenge for the next year will be to do the same thing, but with a significantly higher gross income and significantly higher retirement account contribution to match.

B L I S S

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Re: I had an effective 1% income tax rate this year.
« Reply #1 on: April 15, 2014, 07:27:50 PM »
I had absolutely no clue about the Saver's Credit. Good stuff.

Exflyboy

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Re: I had an effective 1% income tax rate this year.
« Reply #2 on: April 16, 2014, 03:33:22 PM »
OK.. help me out here.. What IS the savers credit?.. is this to do with Traditional IRA deductions?

Frank

szmaine

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Re: I had an effective 1% income tax rate this year.
« Reply #3 on: April 16, 2014, 05:00:34 PM »
Coincidentally, I just read this epic thread on bogleheads today...
It'll tell you everything you want to know about the savers credit and plus, the thread is just An EPIC feel good!!

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=110739&

szmaine

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Re: I had an effective 1% income tax rate this year.
« Reply #4 on: April 16, 2014, 05:13:22 PM »
Jack, how did you do it?? Our income is about 45k single income..I'd be interested in details, if you don't mind.

Jack

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Re: I had an effective 1% income tax rate this year.
« Reply #5 on: April 16, 2014, 07:50:56 PM »
Jack, how did you do it?? Our income is about 45k single income..I'd be interested in details, if you don't mind.

Assume you were married filing jointly and your household Adjusted Gross Income not counting traditional IRA deductions were exactly $45,000.
  • First, you would contribute $9501 to your traditional IRA, which would reduce your AGI to $35,499.
  • That IRA contribution is more than $4000, so it also has the effect of maxing out your saver's credit (since the credit is [retirement plan contributions or $4000, whichever is smaller] * 50%).
  • Next assume you take the standard deduction ($12,200) and you have 2 exemptions ($7800), so your Taxable Income becomes $15499.
  • Your total tax is then $1548, so once you subtract your $2000 Saver's Credit from that your final tax liability is $0 (since unfortunately the Saver's Credit is not refundable.)
  • Feel free to fill the rest of your $11000 IRA space with Roth contributions (up to $1499 in this example), which will be tax free forever (unless the IRS changes the rules).

Also note that if you weren't able to contribute quite enough to your traditional IRA (i.e., if your AGI ended up being >=$35500) then you would only be able to deduct 20% of your contribution, and the maximum credit you could claim would be 20% * $4000  = $800. For want of a single dollar of IRA contribution, your final tax liability would skyrocket from $0 to $748!

For more information, see http://www.irs.gov/pub/irs-pdf/f8880.pdf

Heart of Tin

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Re: I had an effective 1% income tax rate this year.
« Reply #6 on: April 17, 2014, 11:46:58 AM »
God bless who ever came up with the Savers Tax Credit! I didn't realize that it existed until I filed my taxes for 2013. I was unexpectedly refunded all federal taxes this year, so my federal tax rate was 0% in 2013. Now I just need to repeat that in 2014.

dan@themadrealworld

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Re: I had an effective 1% income tax rate this year.
« Reply #7 on: April 17, 2014, 01:22:26 PM »
That is great!  I am working on getting there myself.  The last few years have been going down: 4.62%, 3.19%, and 2.05%.  It is actually lower than that because I have income that is not taxed with my job.