Author Topic: Negative effective tax rate?  (Read 2159 times)

ShuShu1971

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Negative effective tax rate?
« on: September 24, 2017, 02:28:30 PM »
I am trying to learn more about how taxes work and tax optimization strategies. Slowly but surely, I am figuring out how the various numbers impact each other and my bottom line. I am expecting a windfall in 2017 from the sale of some land, and in preparation for that, my husband and I are maxing as many tax-deferred accounts as possible. I was playing around with some projected numbers in Turbo Tax (2016) today, and wound up with a negative effective tax rate even though it looks like we will pay $930 in Federal Taxes. Can someone explain how this is possible/what it means? Also, is there a resource you can recommend to learn more about how taxes work so that I can learn to make them work in our favor?

dandarc

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Re: Negative effective tax rate?
« Reply #1 on: September 24, 2017, 02:55:19 PM »
Specifics that you put in that got you this result?

Usually a negative effective tax rate would mean you got some kind of refundable credit that was more than your taxes owed before the credit, however you're saying the end result is "we pay $930 in federal tax . . .", so seems like it should be positive.

ShuShu1971

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Re: Negative effective tax rate?
« Reply #2 on: September 24, 2017, 03:35:37 PM »
I'm not sure exactly how specific you need me to be, but I'm showing

Income and adjustments: 36,982
Deductions: 12,600 (old version of Turbo Tax)
Taxable Income: 12,232
Total tax: 930
Effective tax rate: -3.75%

The big numbers are about 62,000 from my husband's job and about the same amount in capital gains.

dandarc

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Re: Negative effective tax rate?
« Reply #3 on: September 24, 2017, 03:47:45 PM »
You have a child or other dependent.  The child tax credit and additional child tax credit puts you into negative income tax territory.  If the 62K capital gain is all long-term, there is no tax on that at this taxable income shown.

I'm guessing the 36982 is 62,000 less $18K for a 401K or similar, less another $7K or so in health insurance / HSA / other deductions?  Or maybe a traditional IRA?

ShuShu1971

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Re: Negative effective tax rate?
« Reply #4 on: September 24, 2017, 03:52:15 PM »
Yes, we have one child under 17. We will be pretty close to maxing 401k, definitely maxing HSA, doing some tIRAs (up to the point where it isn't making an impact on our taxes), then switching to Roth. Is it weird to have a negative effective tax rate? Does it mean we are not fully optimizing our taxes in some way? I've tried different things and can't get the 930 in taxes to go any lower.

Michael in ABQ

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Re: Negative effective tax rate?
« Reply #5 on: September 24, 2017, 03:54:23 PM »
We have five kids so over the years our taxes have always been minimal due to the additional exemptions and tax credits provided by children. When I was early in my career and only making about $35k  we qualified for the earned income tax credit for a few years and between that and child tax credits we ended up getting back all of the taxes that were withheld throughout the year, plus a few thousand more. I think one year we had a negative 12% tax rate. These days our effective tax rate is still close to 0% even though my income has doubled.

Bottom line is that you want to get your taxable income as low as possible. That's the number that you're paying 10%, 15%, 25% and so on. Your gross income can be lowered through deductions and exemptions. Your taxes can be reduced through credits, some of which are refundable. So if you owe $900 in taxes and have a $1,000 refundable tax credit you'll get $100 back, if it's non-refundable you'll just owe $0.
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dandarc

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Re: Negative effective tax rate?
« Reply #6 on: September 24, 2017, 03:57:04 PM »
Actually, this doesn't add up with the LTCG included.  When I look at it ignoring the LTCG, I get around -$980 tax owed - that is a refund of $980 due to the child and earned income tax credits.

However, including the LTCG pushes you well outside the EITC range, so then it looks more like you'd owe $220 - you still qualify for the child tax credit.

ShuShu1971

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Re: Negative effective tax rate?
« Reply #7 on: September 24, 2017, 04:01:44 PM »
Maybe I am including the long term capital gains incorrectly? I believe it will come on a 1099-S. I put in 62,000 and it didn't seem to impact anything at all.

dandarc

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Re: Negative effective tax rate?
« Reply #8 on: September 24, 2017, 04:05:26 PM »
Ah - so this was a real-estate transaction?

Can you give details as to the nature of the transaction?  Did you sell your house and make a gain?  Was it an investment property?

ShuShu1971

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Re: Negative effective tax rate?
« Reply #9 on: September 24, 2017, 04:07:42 PM »
Yes, it is from the sale of some land that I inherited 25 years ago. I don't know the exact basis yet, only the gross amount I expect (62,000). I suspect it has appreciated a lot in 25 years.

dandarc

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Re: Negative effective tax rate?
« Reply #10 on: September 24, 2017, 04:25:14 PM »
Hmm - well I'm stumped - if you entered the basis as 0, that should result in a small amount tax owed.  Possible you've stumbled on to a bug in how turbo tax calculates that number.  Or maybe one of the tax-accountant types will chime in with some ideas.

ShuShu1971

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Re: Negative effective tax rate?
« Reply #11 on: September 24, 2017, 04:34:26 PM »
Well it does show me owing 930 ... We have paid in more than that already, so there will be a refund. Maybe that is similar to what you're getting? I have a few other things here and there that I didn't share, so I know your totals won't be 100% accurate. Thank you for all your help anyway. I was just confused to see 930 in tax, but a negative effective rate overall. I think I can live with that, though! Lol!

MDM

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Re: Negative effective tax rate?
« Reply #12 on: September 24, 2017, 08:05:24 PM »
This question was double posted.  Copying answer here from the other thread.

I am trying to learn more about how taxes work and tax optimization strategies. Slowly but surely, I am figuring out how the various numbers impact each other and my bottom line. I am expecting a windfall in 2017 from the sale of some land, and in preparation for that, my husband and I are maxing as many tax-deferred accounts as possible. I was playing around with some projected numbers in Turbo Tax (2016) today, and wound up with a negative effective tax rate even though it looks like we will pay $930 in Federal Taxes.  Can someone explain how this is possible/what it means?
By definition, this is not possible.  Now, if your federal tax calculated before refundable credits are applied is $930, and you have refundable credits more than $930, then your effective rate will be negative.

Quote
Also, is there a resource you can recommend to learn more about how taxes work so that I can learn to make them work in our favor?
About Form 1040 U.S. Individual Income Tax Return | Internal Revenue Service.  Seriously.  Fill in what you expect for your 2017 return, using the 2016 form, line by line, by hand.  At least once.  Some lines will be zero.  Then, after you have done it by hand, use your TurboTax program to check your work.

Next April (or whenever you file), you can see how close your estimate was to reality.

See also 2016 Publication 17 - p17.pdf.

There is also The Mustache Tax Guide (U.S. Version) for what may be lighter reading.

MDM

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Re: Negative effective tax rate?
« Reply #13 on: September 24, 2017, 08:11:04 PM »
I'm not sure exactly how specific you need me to be, but I'm showing

Income and adjustments: 36,982
Deductions: 12,600 (old version of Turbo Tax)
Taxable Income: 12,232
Total tax: 930
Effective tax rate: -3.75%

The big numbers are about 62,000 from my husband's job and about the same amount in capital gains.
You could try putting your numbers into the case study spreadsheet and posting the results (or just use them yourselves for whatever insight they provide).

ShuShu1971

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Re: Negative effective tax rate?
« Reply #14 on: September 24, 2017, 08:42:38 PM »
Thanks for all your help. I have read the Mad Fientist post about using the tIRA and converting to Roth in early retirement. If we don't get to retire as early as we might like, does the conversion process still work the same way?

MDM

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Re: Negative effective tax rate?
« Reply #15 on: September 24, 2017, 08:52:38 PM »
Thanks for all your help. I have read the Mad Fientist post about using the tIRA and converting to Roth in early retirement. If we don't get to retire as early as we might like, does the conversion process still work the same way?
Depends on what you mean by "the same way."

The process itself doesn't change.

What may change is amount you can convert at a low tax rate.