The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Mysticcal on September 10, 2014, 11:52:07 AM
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Hi Everyone,
I was looking at more ways of evading taxes today and I noticed that the savers tax exists and I could probably hit it with some finagling.
I currently contribute 26250 to 401k/TradIRA/HSA which gives me a current MAGI of 38750. My intention was to throw another $1000 in an FSA and 7750 into Tax-exempt municipal bonds. to get me to just below the 30000 limit for the 10% contribution for the savers credit.
My questions are:
Do Tax exempt muni bonds reduce taxes similar to a traditional IRA?
Would I receive the full $2000 credit limit (10% of 23000 (IRA/401k)) ?
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Do Tax exempt muni bonds reduce taxes similar to a traditional IRA?
No. The interest from the bonds doesn't count as income, but purchasing the bonds has no immediate effect on your taxable income.
Would I receive the full $2000 credit limit (10% of 23000 (IRA/401k)) ?
See this IRS web page (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29). Supposing you somehow got your AGI down to the $19,501 - $30,000 range, you would be eligible for a 10% credit on your first $2,000 of retirement savings, for a maximum credit of $200.
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Do Tax exempt muni bonds reduce taxes similar to a traditional IRA?
No. The interest from the bonds doesn't count as income, but purchasing the bonds has no immediate effect on your taxable income.
Would I receive the full $2000 credit limit (10% of 23000 (IRA/401k)) ?
See this IRS web page (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29). Supposing you somehow got your AGI down to the $19,501 - $30,000 range, you would be eligible for a 10% credit on your first $2,000 of retirement savings, for a maximum credit of $200.
Thank you, guess I was way off in hoping this was too good to be true.
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This is a great credit for individuals who qualify and the last poster is correct about muni bonds not counting against your AGI but there example is incorrect. Imagine your gross income was 47,500 -17500(401 k) = 30000 agi. Plus the person put 5500 in Roth, this person would get the 2000 credit to offset federal taxes up to zero. I just wanted to clearify
I checked and the wording is actually really bad. it is a 10/20/50% credit on the first 2k/4k(married) not as big as expected.
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This is a great credit for individuals who qualify and the last poster is correct about muni bonds not counting against your AGI but there example is incorrect. Imagine your gross income was 47,500 -17500(401 k) = 30000 agi. Plus the person put 5500 in Roth, this person would get the 2000 credit to offset federal taxes up to zero. I just wanted to clearify
No, this is false. Check the link I posted before. Retirement savings over $2,000 ($4,000 if married filing jointly) don't count for the credit. If your income lets you claim a 10% credit, that's a maximum credit of 10% of $2,000, or $200. The only way to get a $2,000 credit is if you're married filing jointly, have an AGI below $36k (so you get a 50% credit), have at least $4,000 of retirement savings contributions, and you otherwise have $2,000 worth of federal income taxes to offset. This is a very rare situation indeed.
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Just chiming in to fix something:
Hi Everyone,
I was looking at more ways of evading avoiding taxes today and I noticed that the savers tax exists and I could probably hit it with some finagling.
Evading = Jail and/or fines
Avoiding = Appropriately strategizing to take advantage of the current tax laws.
There's a big difference. Be careful. Nothing you've discussed is evasion, just be aware there is a HUGE difference.
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Sorry, seattle cyclone is correct. Removed my post so no one else gets confused
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This is a great credit for individuals who qualify and the last poster is correct about muni bonds not counting against your AGI but there example is incorrect. Imagine your gross income was 47,500 -17500(401 k) = 30000 agi. Plus the person put 5500 in Roth, this person would get the 2000 credit to offset federal taxes up to zero. I just wanted to clearify
No, this is false. Check the link I posted before. Retirement savings over $2,000 ($4,000 if married filing jointly) don't count for the credit. If your income lets you claim a 10% credit, that's a maximum credit of 10% of $2,000, or $200. The only way to get a $2,000 credit is if you're married filing jointly, have an AGI below $36k (so you get a 50% credit), have at least $4,000 of retirement savings contributions, and you otherwise have $2,000 worth of federal income taxes to offset. This is a very rare situation indeed.
Very good explanation, I just have a few tweaks. In a MFJ situation, it is not only have at least $4000 of retirement contributions, it must be at least $2000 from each spouse. You also cannot be a student or you are ineligible. Finally, the last part about the tax to offset is the most important. We are in the income range to be eligible for the full $2000 credit, but owe $0 tax. I have played with scenarios and cannot find one that uses the full $2000. To owe $2000, we'd need higher AGI, but then our credit rate would drop to 10%. It looks impossible to me.
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This is a great credit for individuals who qualify and the last poster is correct about muni bonds not counting against your AGI but there example is incorrect. Imagine your gross income was 47,500 -17500(401 k) = 30000 agi. Plus the person put 5500 in Roth, this person would get the 2000 credit to offset federal taxes up to zero. I just wanted to clearify
No, this is false. Check the link I posted before. Retirement savings over $2,000 ($4,000 if married filing jointly) don't count for the credit. If your income lets you claim a 10% credit, that's a maximum credit of 10% of $2,000, or $200. The only way to get a $2,000 credit is if you're married filing jointly, have an AGI below $36k (so you get a 50% credit), have at least $4,000 of retirement savings contributions, and you otherwise have $2,000 worth of federal income taxes to offset. This is a very rare situation indeed.
Very good explanation, I just have a few tweaks. In a MFJ situation, it is not only have at least $4000 of retirement contributions, it must be at least $2000 from each spouse. You also cannot be a student or you are ineligible. Finally, the last part about the tax to offset is the most important. We are in the income range to be eligible for the full $2000 credit, but owe $0 tax. I have played with scenarios and cannot find one that uses the full $2000. To owe $2000, we'd need higher AGI, but then our credit rate would drop to 10%. It looks impossible to me.
I know this is an old thread, but I would add one thing about the student. If you are enrolled as an student for less than five months, you are not considered a full time student for purposes of the Saver's Credit (See insturctions for Form 8880). I found this out when I was trying to help my brother qualify when he was enrolled for only 4 months. I do agree that it seems almost impossible to qualify for the full credit unless you have just the right amount of income.
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This is a great credit for individuals who qualify and the last poster is correct about muni bonds not counting against your AGI but there example is incorrect. Imagine your gross income was 47,500 -17500(401 k) = 30000 agi. Plus the person put 5500 in Roth, this person would get the 2000 credit to offset federal taxes up to zero. I just wanted to clearify
No, this is false. Check the link I posted before. Retirement savings over $2,000 ($4,000 if married filing jointly) don't count for the credit. If your income lets you claim a 10% credit, that's a maximum credit of 10% of $2,000, or $200. The only way to get a $2,000 credit is if you're married filing jointly, have an AGI below $36k (so you get a 50% credit), have at least $4,000 of retirement savings contributions, and you otherwise have $2,000 worth of federal income taxes to offset. This is a very rare situation indeed.
Very good explanation, I just have a few tweaks. In a MFJ situation, it is not only have at least $4000 of retirement contributions, it must be at least $2000 from each spouse. You also cannot be a student or you are ineligible. Finally, the last part about the tax to offset is the most important. We are in the income range to be eligible for the full $2000 credit, but owe $0 tax. I have played with scenarios and cannot find one that uses the full $2000. To owe $2000, we'd need higher AGI, but then our credit rate would drop to 10%. It looks impossible to me.
I know this is an old thread, but I would add one thing about the student. If you are enrolled as an student for less than five months, you are not considered a full time student for purposes of the Saver's Credit (See insturctions for Form 8880). I found this out when I was trying to help my brother qualify when he was enrolled for only 4 months. I do agree that it seems almost impossible to qualify for the full credit unless you have just the right amount of income.
Good point about <5 months = not a student. However, that has to be extremely rare, unless you drop out. All the colleges seem to begin classes in the last week of August, and end in May. The wording on form 8880 was "any part of 5 months" in a year, so most regular college students are hit at either end. I was originally looking into it on behalf of my college age kids, but realized the implications for DH and me when I was considering going back for a masters. I'm considering how the retirement savers credit will fit into our taxes in a few years as our family size shrinks, and we shift to partial RE (DH retires, I continue PT). Small earned income, fund Roths for both of us at least enough to qualify of max savers credit, Roth pipeline...
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- I'm not sure if it's possible to get the full $2000 credit, but I managed $1,533 two years ago.
- You're not eligible for the saver's credit if you're a full-time student. Being a part-time student is just fine, though.