The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Done by Forty on February 07, 2018, 11:46:23 AM
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Hi there, Mustachians. I have a tax situation that I imagine is similar to that of many on the path to FI:
-The new tax law is reducing our taxable income quite a bit, thanks to the larger standard deduction and, starting this year for us, a nice big child tax credit.
-However, we do see quite a bit of dividend income from our index funds in our taxable account.
-Our taxable income from wages alone, after deductions from 401k, HSA, a traditional IRA, and that $24k standard deduction, is amazingly down to $68k or so for 2018. This has me drooling over the possibility that we'll pay $0 tax on (some of) our qualified dividends.
-However, I'm estimating that we'll see something like $15k+ in dividend income, with perhaps 75% of that amount being qualified dividends.
-This would put us over the $77,200 threshold for paying a 0% tax rate on qualified dividends.
Does someone have a good handle on how this dividend income would be handled? I suspect it's something like the dividends that are NOT qualified would first count as regular taxable income (so, taxed at 12% for a married couple filing jointly), then the qualified dividends up to $77,200 would be taxed at 0%, but anything above that would be taxed at 15%?
I'm no tax wizard so would love help from those who have this nailed down!
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Have you tried the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/)?
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This is a post I did last year... but the logic still holds even if the tax rate brackets are different:
https://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/
To summarize, the most highly taxed income gets "poured first" and into the lowest income tax brackets. I.e., the last dollars of income taxed will be things like LTCG and qualified dividends which are taxed at low rates.
Note that this approach saves you money. You wouldn't want to "use" something like your standard deduction by pouring qualified dividends into that 'bucket'...
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I like the bucket analogy. Using that idea, we'd 'pour' as much of the dividend income as we could into the 12% bucket...up until it was full...but then any remaining dividend income would go into the 22% bucket (and be taxed at...15%)?
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I like the bucket analogy. Using that idea, we'd 'pour' as much of the dividend income as we could into the 12% bucket...up until it was full...but then any remaining dividend income would go into the 22% bucket (and be taxed at...15%)?
Yup.
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This is very good news: thank you.
So it seems like we'll get a good portion of our dividend income taxed at 0%. Woot!