Author Topic: Earned Income Tax Credit  (Read 2337 times)

Cowspot28

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Earned Income Tax Credit
« on: May 10, 2017, 08:19:22 PM »
Go Curry Cracker had a recent article about hacking the earned income tax credit. The major hold up for not qualifying for it in early retirement would be the investment income of no more than $3400/year. Is there a way to structure your investments to limit the income without sacrificing returns? Would it make sense to do this? I know you want to be careful about the tax tail wagging the dog. Thanks!


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maizeman

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Re: Earned Income Tax Credit
« Reply #1 on: May 10, 2017, 09:07:14 PM »
My first instinct is no, there's no way to do this in FIRE without, as you say, having the tax tail wagging the dog.

In the accumulation phase you could conceivably put all your money in non-dividend paying stocks like Berkshire Hathaway, but this would reduce your diversification and skew your investments towards certain sectors of the economy.

I'd welcome someone else piping up to prove me wrong though.
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teen persuasion

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Re: Earned Income Tax Credit
« Reply #2 on: May 11, 2017, 06:36:43 AM »
First, it's the EARNED income credit, so you'd need some earnings, can't just quit working completely.

In our case, with a relatively low income, we have essentially 0 taxable savings.  Everything beyond EF/checking is in retirement accounts and our HSA.  So to date, we haven't hit the investment income cliff and get substantial EITC, but we are still accumulating. 

Ideally, we'd like to do a Roth conversion ladder, but FAFSA considerations will interfere.  I've been mentally trying out different scenarios:  both of us quit working, DH quits and I continue part-time to allow more Roth IRA contributions for both of us, before DS5 files FAFSA, start a Roth conversion ladder when we FIRE vs after FAFSA filing is done, do 401k withdrawals from DH's employer plan if he quits after 55 instead, etc.  Trying to maximize EITC vs maximize Roth conversion and the tax costs.  Any way to balance the parts against each other?

I'll have to find that GCC post for his thoughts.

teen persuasion

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Re: Earned Income Tax Credit
« Reply #3 on: May 11, 2017, 08:27:56 PM »
Ok, read the guest post on GCC.  That guy is still accumulating like me, has 5 kids like me.  Makes more than me, but can shelter more, too.

The trick with EITC is that they test income at two points: line 7 wages, and AGI.  Your credit is whichever result is lower.  So to max EITC, you'd need line 7 wages of at least $13,900, and AGI under $23,750 for MFJ 3+ kids on 2016 tax return.  Lower wages drops the credit, as does larger AGI.  This would limit any Roth conversion space, below standard deduction plus 5 exemptions.

Your state can sweeten the deal here.  My state matches EITC at 30%, and CTC at 33%.  When my kids were younger, I've had $11k in refunds, between state and fed, EITC + CTC.  I turned around and put that in Roth IRAs for us.  Now I've only got one <17 for CTC, and 2 dependents for EITC, plus AOTC.  Won't be long before it's just one for EITC and no AOTC.

CanuckExpat

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Re: Earned Income Tax Credit
« Reply #4 on: May 11, 2017, 10:22:07 PM »
I don't know if there is a good way, if you have anything more than a few hundred thousand in a taxable account. I haven't researched that hard. Perhaps if you have real estate investments, as suggested here:

I'd say forget about the EITC. It requires investment income to be below $3,450, which even at a 2% dividend yield means you need to have less than $172,500 invested. It will take you some years to draw down your taxable account that much. Or you could convert it all to cash, but that hardly seems like a good tradeoff. I guess if you really want the credit you could look into buying a rental house or two, and hoping the depreciation gives you a loss on paper.

Cowspot28

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Re: Earned Income Tax Credit
« Reply #5 on: May 12, 2017, 08:14:50 PM »
Thank you all for your input. I was hoping we may be able to use it as a way to transition to part time work before full FIRE status. I think our taxable investment accounts will generate too much income before that happens though. I guess that's a good problem to have overall.


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seattlecyclone

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Re: Earned Income Tax Credit
« Reply #6 on: May 24, 2017, 10:44:51 AM »
I don't have this but it may be a good fund for this strategy:

VSGAX

Vanguard Small Cap Growth Index Fund

Looks like that one paid out just over 1% in dividends last year, so it's better for this strategy than the 2% that VTSAX pays out, but you'll still need to have less than about $300k in taxable to make it work. And no selling appreciated shares allowed!
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CanuckExpat

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Re: Earned Income Tax Credit
« Reply #7 on: May 24, 2017, 11:47:57 AM »
Can capital losses offset dividend income for the sake of investment gains as calculated for EITC?

You could perhaps agressively tax loss harvest when the opportunity comes up? Carry forward and use as needed to offset capital gains and dividends?

teen persuasion

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Re: Earned Income Tax Credit
« Reply #8 on: May 24, 2017, 07:09:42 PM »
Can capital losses offset dividend income for the sake of investment gains as calculated for EITC?

You could perhaps agressively tax loss harvest when the opportunity comes up? Carry forward and use as needed to offset capital gains and dividends?
It looks like losses can't offset dividend income.  The instructions for calculating investment income say if line 13 (cap gain or loss) is a loss, enter zero.

Proud Foot

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Re: Earned Income Tax Credit
« Reply #9 on: May 25, 2017, 12:59:20 PM »
I don't have this but it may be a good fund for this strategy:

VSGAX

Vanguard Small Cap Growth Index Fund

Another option would be to load up on Berkshire Hathaway (BRK.B) in your taxable account.  Good growth with a 10% CAGR since this class was made and no dividends to worry about.

eta: I view BRK as similar to a mutual fund as they are invested in a wide range of both public and private companies.  Some 100% owned and others with only small interests.
« Last Edit: May 25, 2017, 01:05:18 PM by Proud Foot »

Proud Foot

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Re: Earned Income Tax Credit
« Reply #10 on: May 30, 2017, 10:43:51 AM »
I don't have this but it may be a good fund for this strategy:

VSGAX

Vanguard Small Cap Growth Index Fund

Another option would be to load up on Berkshire Hathaway (BRK.B) in your taxable account.  Good growth with a 10% CAGR since this class was made and no dividends to worry about.

eta: I view BRK as similar to a mutual fund as they are invested in a wide range of both public and private companies.  Some 100% owned and others with only small interests.

I don't like stocks of individual companies.  What happens when Warren Buffett retires/dies?

I believe there is a very thorough and well though out plan for that point in time and don't see anything happening to the company. I don't really see him retiring unless he becomes physically unable to.  And I don't know how much he is really involved in the investment decisions anymore, other than the big decisions.

As far as stocks of individual companies, because of the holdings of BRK are so diversified it is, in my opinion, a lot less risky than other individual stocks and probably less risky than a lot of mutual funds.

Proud Foot

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Re: Earned Income Tax Credit
« Reply #11 on: May 31, 2017, 08:39:57 AM »
I think it would depend on which mutual fund.  Definitely more risky than any of the index and passive funds. 

startbyservingothers

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Re: Earned Income Tax Credit
« Reply #12 on: June 05, 2017, 01:27:15 PM »
It is easier while accumulating and deferring most of your money. 

Depending on the tax burden of increasing capital gains you could play a shell game.  ***  Increase capital gains in certain years by selling appreciated stock.  Other years you manage to keep gains/dividends below the $3200 thresh-hold.   If it's impossible to do this with your taxable accounts, I think you just have to live with it.

While the posts above used rental properties as a suggestion to lower income, that's not going to happen in many instances. However count this or another business investment towards income and at least it's not counted toward the $3200 limit.
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CanuckExpat

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Re: Earned Income Tax Credit
« Reply #13 on: June 06, 2017, 06:50:19 AM »
You could move to Canada in retirement ;)
I think the rough Canadian equivalent is the Child Tax Benefit, which like the EITC is income but not asset tested. Canadian version does not have the limitation on investment income. Looking at about $6,000 / kid under six I believe.

CanuckExpat

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Re: Earned Income Tax Credit
« Reply #14 on: August 25, 2017, 08:30:55 AM »
Is qualifying for EITC a corner case where you might have extra incentive to consider paying off a mortgage early

For example take the case where you retire with two children, let's say a $200,000 mortgage, and $300,000 in taxable brokerage account (can ignore what you have in tax advantaged accounts).  Assume the dividend yield on your taxable account is 2%. The investment income cut-off is $3,400, so you wouldn't qualify for EITC, since your taxable account throws off $6000 in dividends.

Instead, if you have zero mortgage and $100,000 in taxable brokerage account, now your investment income is down to $2000 and you do qualify for EITC. With two kids that might be worth ~$5000 annually.

So you have the possibility of lost investment gains on the $200,000 that you used to pay off your mortgage, but you are getting an effective "tax yield" of 2.5% by now qualifying for the EITC. If your mortgage was 4%, that means you bump your "guaranteed" rate of return up to 6.5% (as long as your children stay dependents and tax code doesn't change). Not mind blowing, but 6.5% guaranteed isn't anything to sneeze at for a conservative investor either.

This is assuming you qualify for roughly the full amount of EITC every year, which isn't a given. I'm also ignoring the effects of any capital gains if any in the year you have to liquidate your taxable account to pay off the mortgage. Anything else I'm missing?