tax savers credit cliff

[frugalnacho]

Last year I managed to get my federal tax liability down to $0 through a combination of 401k and IRA deductions and the tax savers credit.  This year I put $18k in my 401k, and $5.5 in each of mine and my wife's tIRA which brings our taxable incomeAGI to about $36k, but we also sold some shares in our taxable account locking in about $1k in long term capital gains, bumping us just over the $36.5k limit for receiving the full 50% of the tax savers credit (instead we will only qualify for a credit of 20% instead of 50%, so $800 instead of $2000). 

I don't have any questions, I'm just really bummed out that we earned about $500 too much to qualify for the full credit, and we would have been better off financially to have not earned it.  I know, #mustachianproblems, but didn't tally it all up until just now and i'm a bit upset about it.

[frugalnacho]

No one is going to come in and comfort me?  Not even a "tough break kid"? I don't think there is anything I can do about it now, nor anything I could do about it in retrospect other than asking my employer to pay me less money (which seems like a really odd request). 

[dandarc]

Doe you mean 36.5K AGI?  Because taxable income for MFJ should be at least 20K less than AGI.

Next time, hold off on selling shares, and put your tax return together before end of year, and only then decide on the sale of taxable shares.

There really should be a phase-out range for the Saver's credit - creates perverse incentives when you have cliffs like this.  At worst, earning another dollar should not cost more than a dollar in taxes.

Have you considered recharacterizing to Roth to get AGI near the top of the 20% saver's credit range?  You're surely in the 10% bracket, unless there are other credits or deductions that would be a problem.  Or are you aiming for 0% withdrawals, thus making even 10% tax worth saving today?

[frugalnacho]

Doe you mean 36.5K AGI?  Because taxable income for MFJ should be at least 20K less than AGI.

Next time, hold off on selling shares, and put your tax return together before end of year, and only then decide on the sale of taxable shares.

There really should be a phase-out range for the Saver's credit - creates perverse incentives when you have cliffs like this.  At worst, earning another dollar should not cost more than a dollar in taxes.

Have you considered recharacterizing to Roth to get AGI near the top of the 20% saver's credit range?  You're surely in the 10% bracket, unless there are other credits or deductions that would be a problem.  Or are you aiming for 0% withdrawals, thus making even 10% tax worth saving today?

Yes I meant AGI when I said taxable income.  I know the difference, I just misspoke.  Err, or mistyped. 

We had a bunch of money invested in a taxable account, and no money in a savings account because that is how we roll.  However we have been trying to conceive unsuccessfully for about 2 years, and are planning on potentially spending $30-40k on IVF treatments in 2016.  I felt uncomfortable leaving all that money invested in the market with only a year until we needed it, so we made the decision to pull out of the market and park it in a savings account to insulate us from the risk of a declining market.  I knew I was realizing about $1k in capital gains, but still anticipated our AGI coming in under the threshold.    Had I known how close we were actually going to be I would have assumed the risk and kept it invested until 2016.  However I think that would have only shifted my problem one year later. 

I agree that there should be a phase-out range rather than a fairly drastic cliff.  I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I am aiming for 0% withdrawls, or close to 0% after FIRE.  Even still I will need access to at least 5 years worth of expenses before my roth pipeline kicks in, so I may recharacterize some of it and just pay the 10% so I will have access to that money.  I have been going so heavily on tIRA the past couple years because the perverse incentives you mentioned are too enticing for me not to take advantage of in the years I can qualify - even though I fear it will leave me will less than 5 years worth of "non retirement" funds to access before my roth pipeline kicks in.   I still have like 10 years to figure that out though, so i'll worry about it later.

[BlueLesPaul]

...I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I noticed this too this year and I thought I was making a math error and that there had to be a way to get the full credit.  I guess I put too much faith in Congress and/or the IRS to make the credit work like that.

It is too bad that you can't recognize capital losses from the end of the tax year until the tax filing deadline, similar to what you can do for IRAs and HSAs contributions.  Still, at least you got some of the credit and it isn't a 100%--->0% cliff.

[Jack]

but we also sold some shares in our taxable account locking in about $1k in long term capital gains, bumping us just over the $36.5k limit for receiving the full 50% of the tax savers credit (instead we will only qualify for a credit of 20% instead of 50%, so $800 instead of $2000). 

Too bad you couldn't have done a couple hundred bucks worth of tax loss harvesting.

...I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I noticed this too this year and I thought I was making a math error and that there had to be a way to get the full credit.  I guess I put too much faith in Congress and/or the IRS to make the credit work like that.

I'd like to think there's some kind of weird corner-case that makes it possible to realize the whole credit, but I haven't figured out what it is.

[johnny847]

...I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I noticed this too this year and I thought I was making a math error and that there had to be a way to get the full credit.  I guess I put too much faith in Congress and/or the IRS to make the credit work like that.

I'd like to think there's some kind of weird corner-case that makes it possible to realize the whole credit, but I haven't figured out what it is.

There is. Seattlecyclone mentioned it in some other thread. It involves being hit with AMT because of stock options or something like that.

[seattlecyclone]

Indeed. The saver's credit is applied after AMT is added to your tax. It's ordinarily hard to be hit with AMT if your AGI is anywhere near low enough for the saver's credit, but exercise of incentive stock options is one way for that to happen.

[dandarc]

I think filing head of household with one dependent might do it as well.

[frugalnacho]

...I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I noticed this too this year and I thought I was making a math error and that there had to be a way to get the full credit.  I guess I put too much faith in Congress and/or the IRS to make the credit work like that.

It is too bad that you can't recognize capital losses from the end of the tax year until the tax filing deadline, similar to what you can do for IRAs and HSAs contributions.  Still, at least you got some of the credit and it isn't a 100%--->0% cliff.

The cliff of 50%->20% is bad though because it causes a $1200 difference in credit for $1 in earnings.

Say for example I earned $40,500 and I put $2k in my IRA and $2k in my wife's IRA.  My AGI is now $36,500.  Minus $20,600 for the standard deduction and 2 personal exemptions brings my taxable income to $15,900, and I owe 10% or $1,590 in federal taxes.  I qualify for the full 50% ($2k) non refundable credit, so it brings my liability down to $0

Now assume the same scenario, but I earn 1 extra dollar instead, so my AGI is now $36,501 and my taxable income is $15,901 and I only qualify for 20% of the credit.  Now I owe $1,590.1 in taxes, and I get an $800 credit meaning I owe $790.1 in federal taxes!  That last dollar I earned cost me almost $800!  It takes $878 of additional income before I finally break even with the above scenario, and that's only considering federal taxes and not state taxes.  In reality I will also be charge a small fraction of each dollar by my state making the true break even point even higher.

Of course in that scenario you could just put the $1 into your tIRA to reduce your AGI to qualify for the full credit, but in my situation i've already maxed out all possible retirement accounts so I essentially am getting punished severely for earning that last $500.  It's mind boggling they would include something this asinine and backwards into the tax code.

[hoping2retire35]

Doe you mean 36.5K AGI?  Because taxable income for MFJ should be at least 20K less than AGI.

Next time, hold off on selling shares, and put your tax return together before end of year, and only then decide on the sale of taxable shares.

There really should be a phase-out range for the Saver's credit - creates perverse incentives when you have cliffs like this.  At worst, earning another dollar should not cost more than a dollar in taxes.

Have you considered recharacterizing to Roth to get AGI near the top of the 20% saver's credit range?  You're surely in the 10% bracket, unless there are other credits or deductions that would be a problem.  Or are you aiming for 0% withdrawals, thus making even 10% tax worth saving today?

Yes I meant AGI when I said taxable income.  I know the difference, I just misspoke.  Err, or mistyped. 

We had a bunch of money invested in a taxable account, and no money in a savings account because that is how we roll.  However we have been trying to conceive unsuccessfully for about 2 years, and are planning on potentially spending $30-40k on IVF treatments in 2016.  I felt uncomfortable leaving all that money invested in the market with only a year until we needed it, so we made the decision to pull out of the market and park it in a savings account to insulate us from the risk of a declining market.  I knew I was realizing about $1k in capital gains, but still anticipated our AGI coming in under the threshold.    Had I known how close we were actually going to be I would have assumed the risk and kept it invested until 2016.  However I think that would have only shifted my problem one year later. 

I agree that there should be a phase-out range rather than a fairly drastic cliff.  I don't think the credit was very well thought out though, as you can't utilize the full credit anyway.  In order to qualify for the max credit of $2000 you have to owe several hundred dollars less than $2000 in taxes anyway.  If you owe $2000 in federal taxes, then your AGI is too high to qualify for the full credit anyway, so it doesn't make much sense to me why they chose the values they did.

I am aiming for 0% withdrawls, or close to 0% after FIRE.  Even still I will need access to at least 5 years worth of expenses before my roth pipeline kicks in, so I may recharacterize some of it and just pay the 10% so I will have access to that money.  I have been going so heavily on tIRA the past couple years because the perverse incentives you mentioned are too enticing for me not to take advantage of in the years I can qualify - even though I fear it will leave me will less than 5 years worth of "non retirement" funds to access before my roth pipeline kicks in.   I still have like 10 years to figure that out though, so i'll worry about it later.

a little off topic but you brought it up.
IVF is a little extreme. I assume you have tried other avenues and this is not just what the doctor first recommended?

Best of Luck

[frugalnacho]

We tried naturally for a year, then saw the fertility specialists.  We did 4 rounds of iui along with fertility drugs.  Now we are trying naturally again.  Planning to pull the trigger around June or July with the ivf. Not 100% sure about it, but we are still planning for it.

[GoldenStache]

Just donate something to charity and write it off.

[frugalnacho]

Just donate something to charity and write it off.

Isn't that a below-the-line deduction? As in it will lower my taxable income, but not lower my AGI (which is the cutoff I need to hit)?

Also doesn't that have to be done in the year you want to claim it?  If I donate now won't it count as a donation for the 2016 tax season?

[seattlecyclone]

Just donate something to charity and write it off.

Isn't that a below-the-line deduction? As in it will lower my taxable income, but not lower my AGI (which is the cutoff I need to hit)?

Also doesn't that have to be done in the year you want to claim it?  If I donate now won't it count as a donation for the 2016 tax season?

Correct on both counts. Aside from IRA contributions that you've already maxed out, I think the only way to lower your AGI after the end of the calendar year is to make HSA contributions. You would need to have had a qualifying HDHP as of December though.

[frugalnacho]

That's what I thought.  I suppose the only good news is that because I own 2 houses, the property taxes are enough to bump my itemized deductions to right around standard deduction for MFJ.  Last year I was able to deduct $12,903 instead of the standard deduction of $12,400.  This year I should have between $5-6k in medical expenses because of the aforementioned fertility treatments we went through, though I expect that will only end up letting me deduct a couple extra thousand off my taxable income.  That should still save me a couple hundred in taxes though.

[seattlecyclone]

Do you use both houses yourself, or is one a rental? If you have a rental you shouldn't be deducting its property taxes on Schedule A. That should be on Schedule E, which would be a deduction straight against the rent you receive. This would reduce your AGI directly.

[frugalnacho]

Do you use both houses yourself, or is one a rental? If you have a rental you shouldn't be deducting its property taxes on Schedule A. That should be on Schedule E, which would be a deduction straight against the rent you receive. This would reduce your AGI directly.

It's not exactly a rental, i'm counting it as my non-primary residence.  I owned a house, and my wife also owned a house before we got married.  After we married I moved in with her, and my family moved into my house (they got foreclosed on).  They pay me "rent", but it's just enough to cover the mortgage payment (with taxes and insurance included in the mortgage payment) with no profit, and they fell behind almost immediately and have still not fully caught up with payments.  It's a shitty situation because i'm not making any profit (i've actually lost money because they haven't paid for about 1.5 months so far), it's a huge liability in my name, and it's tying about $70k of my net worth in equity that could be put to better use.

I talked with some professionals, and everyone gave me different advice on how to handle the situation.  Some said it has to be counted as a rental.  Others said i'm being reimbursed by family members and it's not a rental, it's just my second house (shared living expenses they called it).  Others said I can't count it as a rental because i'm "renting" it for less than fair market value...but I must count the "rent" they pay me as income but get absolutely no deductions because it's a personal residence and not a rental (this option made the least sense to me - but multiple told me this was the correct option - why should I count that rent as income but not get any deductions? what's the logic behind that?).  The home is no longer homesteaded so the taxes increased slightly, and the insurance has been changed to "rental".  The insurance agents I spoke with said it has to be classified as a rental because it's not my primary residence, but it's not actually a rental, it just needs to be classified as that in their insurance system because that's the only option for a 2nd house you don't live in full time (but also has other people living in it).

So I  have just been counting it as my 2nd residence, and not reporting the rent they pay me.  I would like to run it as a rental, because I think that would benefit me the most financially, but it seems like it doesn't qualify as a full blown rental.

Any advice on how I should handle the situation?

[hoping2retire35]

Do you use both houses yourself, or is one a rental? If you have a rental you shouldn't be deducting its property taxes on Schedule A. That should be on Schedule E, which would be a deduction straight against the rent you receive. This would reduce your AGI directly.

It's not exactly a rental, i'm counting it as my non-primary residence.  I owned a house, and my wife also owned a house before we got married.  After we married I moved in with her, and my family moved into my house (they got foreclosed on).  They pay me "rent", but it's just enough to cover the mortgage payment (with taxes and insurance included in the mortgage payment) with no profit, and they fell behind almost immediately and have still not fully caught up with payments.  It's a shitty situation because i'm not making any profit (i've actually lost money because they haven't paid for about 1.5 months so far), it's a huge liability in my name, and it's tying about $70k of my net worth in equity that could be put to better use.

I talked with some professionals, and everyone gave me different advice on how to handle the situation.  Some said it has to be counted as a rental.  Others said i'm being reimbursed by family members and it's not a rental, it's just my second house (shared living expenses they called it).  Others said I can't count it as a rental because i'm "renting" it for less than fair market value...but I must count the "rent" they pay me as income but get absolutely no deductions because it's a personal residence and not a rental (this option made the least sense to me - but multiple told me this was the correct option - why should I count that rent as income but not get any deductions? what's the logic behind that?).  The home is no longer homesteaded so the taxes increased slightly, and the insurance has been changed to "rental".  The insurance agents I spoke with said it has to be classified as a rental because it's not my primary residence, but it's not actually a rental, it just needs to be classified as that in their insurance system because that's the only option for a 2nd house you don't live in full time (but also has other people living in it).

So I  have just been counting it as my 2nd residence, and not reporting the rent they pay me.  I would like to run it as a rental, because I think that would benefit me the most financially, but it seems like it doesn't qualify as a full blown rental.

Any advice on how I should handle the situation?

Ah! I have the solution to your problem, at least going forward in the long term.

Get them to sign a lease for a market value and get everything on the up and up. make sure they write a check for the full amount and give a recipt each month etc, etc. THEN give them back some money to help them out using the gift tax exemption. I think the total (couple to couple) is like $56,000! since each person can give another person $14,000(it is based on a individual not a HH). You claim the place as a rental with deductions and extended family gets to live in place they can afford. This is also better in case you ever fall out with them and need a means to evict :(. I know you don't want to think about that, but if you have a falling out...

FWIW, I have several family members with money problems and something like this is what I plan to do in the near future, post/past pre/postFIRE.

[frugalnacho]

Do you use both houses yourself, or is one a rental? If you have a rental you shouldn't be deducting its property taxes on Schedule A. That should be on Schedule E, which would be a deduction straight against the rent you receive. This would reduce your AGI directly.

It's not exactly a rental, i'm counting it as my non-primary residence.  I owned a house, and my wife also owned a house before we got married.  After we married I moved in with her, and my family moved into my house (they got foreclosed on).  They pay me "rent", but it's just enough to cover the mortgage payment (with taxes and insurance included in the mortgage payment) with no profit, and they fell behind almost immediately and have still not fully caught up with payments.  It's a shitty situation because i'm not making any profit (i've actually lost money because they haven't paid for about 1.5 months so far), it's a huge liability in my name, and it's tying about $70k of my net worth in equity that could be put to better use.

I talked with some professionals, and everyone gave me different advice on how to handle the situation.  Some said it has to be counted as a rental.  Others said i'm being reimbursed by family members and it's not a rental, it's just my second house (shared living expenses they called it).  Others said I can't count it as a rental because i'm "renting" it for less than fair market value...but I must count the "rent" they pay me as income but get absolutely no deductions because it's a personal residence and not a rental (this option made the least sense to me - but multiple told me this was the correct option - why should I count that rent as income but not get any deductions? what's the logic behind that?).  The home is no longer homesteaded so the taxes increased slightly, and the insurance has been changed to "rental".  The insurance agents I spoke with said it has to be classified as a rental because it's not my primary residence, but it's not actually a rental, it just needs to be classified as that in their insurance system because that's the only option for a 2nd house you don't live in full time (but also has other people living in it).

So I  have just been counting it as my 2nd residence, and not reporting the rent they pay me.  I would like to run it as a rental, because I think that would benefit me the most financially, but it seems like it doesn't qualify as a full blown rental.

Any advice on how I should handle the situation?

Ah! I have the solution to your problem, at least going forward in the long term.

Get them to sign a lease for a market value and get everything on the up and up. make sure they write a check for the full amount and give a recipt each month etc, etc. THEN give them back some money to help them out using the gift tax exemption. I think the total (couple to couple) is like $56,000! since each person can give another person $14,000(it is based on a individual not a HH). You claim the place as a rental with deductions and extended family gets to live in place they can afford. This is also better in case you ever fall out with them and need a means to evict :(. I know you don't want to think about that, but if you have a falling out...

FWIW, I have several family members with money problems and something like this is what I plan to do in the near future, post/past pre/postFIRE.

Oh i've already thought about it. I was hesitant to enter the arraignment in the first place.  I could kick them out, fix up the place and sell it, and pocket at least $70k.  As irresponsible and unmustachian as they are though, I would have a hard time kicking my parents out on the street knowing they can't afford to get a mortgage, couldn't afford to rent a house, and couldn't qualify to rent most apartments.  My dad worked his ass off his whole life (and still is) trying to provide for his family and set us up, and he let me live at home all the way through college.  Plus my 2 sisters and my niece live their too.  One sister just recently got out of jail and is trying really hard to get her shit together, so I have some pity for her and am not ready to put her on the chopping block.  The other sister is a total fuck up leach and I would love to kick her out, but she has a 9 year old daughter and I know the kid would go with her and I don't want to do that to my niece.

It's a low cost of living area, so the entire year of payments (including non-homesteaded property taxes and rental insurance) totals less than $9k/yr.  There is nothing wrong with owning a second home and deducting the property taxes for that, and also nothing wrong with my parents gifting me $9k/yr.

Is what hoping2retire posted a legit way of doing things (from a financial/tax perspective I mean)?  How much could I benefit from doing this? 

I paid $0 federal tax last year, and obviously expected to pay $0 this year as well, so I didn't see much benefit from changing from what I was doing now.  Hopefully I have another mustachian problem next year and I earn too much money again and get too big of a bonus to pay no taxes. 

[seattlecyclone]

I think Chapter 5 of IRS Publication 527 would be useful here. It lays out what is considered "personal use" of a property.

If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Only your rental expenses may be deducted on Schedule E (Form 1040). Some of your personal expenses may be deductible on Schedule A (Form 1040), if you itemize your deductions.

You must also determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year.

What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.

• You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting , later.
• A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
• Anyone under an arrangement that lets you use some other dwelling unit.
• Anyone at less than a fair rental price.

Based on this, it seems like your current arrangement of offering below-market rent to your family members means that the house is actually considered a second "home." You do seem to be treating it that way on your taxes as well.

hoping2retire35's suggestion is interesting. It looks like if you did charge your family a fair market rent, and you did not live in the home yourself, you could consider treating this house as a rental property on your tax return instead of a second home. Separately, you can give family members (or anyone else) gifts of up to $14k/year without filing gift tax forms at all. I offer no opinion on whether the IRS or the tax code would agree that these two things can be combined in this manner.

Supposing this is legit, what would the potential benefit of this arrangement be? If you "actively participated" in the rental activity and your MAGI is below $100,000, you may deduct the first $25,000 of rental losses from your AGI. Would you have a rental loss? Possibly. You would have to report the full fair-market rent, but you would get to deduct all expenses from this, including property tax, insurance, maintenance, mortgage interest, and even depreciation on the building. If this all comes out to a loss, you could then deduct this amount from your AGI, otherwise it would count as income. If you wouldn't have a loss in a typical year, then you're probably better off with the current situation where you treat it as a second home, report no income from the below-market rent your family pays, and deduct certain expenses on Schedule A.

Of course this would all be for future years. You didn't actually charge fair-market rent last year, so this wouldn't help you get the 2015 saver's credit.

[MVal]

Just donate something to charity and write it off.

You can't do that unless you itemize, though, right?

[dandarc]

Just donate something to charity and write it off.

You can't do that unless you itemize, though, right?

Yes.  Donating helps your tax bill if you're already over the standard deduction with itemized deductions, or if it would push you over the standard deduction.  And it doesn't help with the saver's credit regardless.

[MVal]

Last year I managed to get my federal tax liability down to $0 through a combination of 401k and IRA deductions and the tax savers credit.  This year I put $18k in my 401k, and $5.5 in each of mine and my wife's tIRA which brings our taxable incomeAGI to about $36k, but we also sold some shares in our taxable account locking in about $1k in long term capital gains, bumping us just over the $36.5k limit for receiving the full 50% of the tax savers credit (instead we will only qualify for a credit of 20% instead of 50%, so $800 instead of $2000). 

I don't have any questions, I'm just really bummed out that we earned about $500 too much to qualify for the full credit, and we would have been better off financially to have not earned it.  I know, #mustachianproblems, but didn't tally it all up until just now and i'm a bit upset about it.

I know how you feel. I was so excited for the last several weeks that it looks like I'll be able to get the full Saver's credit for 2016, but then I remembered this is also the year we will probably get commissions for good scores on our bi-annual tenant satisfaction surveys. That's going to put me probably about $500-1000 over the $18,500 AGI limit, crushing my credit. I've never been so bummed about getting a bonus. :(

[robartsd]

Is what hoping2retire posted a legit way of doing things (from a financial/tax perspective I mean)?  How much could I benefit from doing this? 

I would ask "How could I benefit from doing this?" Unless your rental income is completely offset by rental expenses (or you'd have more non-refundable credits than tax libability before this income) you'd end up paying tax on this income then giving the income back to your parents. The gift to your parents would not be an expense (tax wise). While the depreciation "expense" could make this work out for the time being, it would decrease your cost basis when you eventually sell this house so you'd really just be posponing paying the tax on this "income" that you are giving back to your parents.

[DavidAnnArbor]

I'm starting to feel that I need to start investing the dividends that are generated from my taxable investment account, and start putting them into my Solo 401(k) in order to get my AGI down enough so that I can take advantage of these credits as well as better premium subsidies on the health care exchange. It's these dividends that are stopping me from getting my AGI below the 34K level, and I'm a single filer.

[dandarc]

That's a great plan David.  And so long as you still have room on your employer side, you can still put some in to the SoloK for 2015.

[frugalnacho]

I'm starting to feel that I need to start investing the dividends that are generated from my taxable investment account, and start putting them into my Solo 401(k) in order to get my AGI down enough so that I can take advantage of these credits as well as better premium subsidies on the health care exchange. It's these dividends that are stopping me from getting my AGI below the 34K level, and I'm a single filer.

Single filers have a different cut off than MFJ.

Not sure how this table will copy over to the forum, but you can check it out here if the numbers below aren't legible: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

2015 Saver's Credit
Credit Rate    Married Filing Jointly    Head of Household    All Other Filers*
50% of your contribution    AGI not more than $36,500    AGI not more than $27,375    AGI not more than $18,250
20% of your contribution    $36,501 - $39,500    $27,376 - $29,625    $18,251 - $19,750
10% of your contribution    $39,501 - $61,000    $29,626 - $45,750    $19,751 - $30,500
0% of your contribution    more than $61,000    more than $45,750    more than $30,500

[Jack]

I'm starting to feel that I need to start investing the dividends that are generated from my taxable investment account, and start putting them into my Solo 401(k) in order to get my AGI down enough so that I can take advantage of these credits as well as better premium subsidies on the health care exchange. It's these dividends that are stopping me from getting my AGI below the 34K level, and I'm a single filer.

Unless you're already maxing your entire $53,000 solo 401(k) space out each year, I suggest doing that before investing in taxable at all. (If you think you need the money before age 59 1/2, you could do a solo Roth 401(k) -- still better than taxable. Or do a Roth pipeline or SEPP or whatever later.)

[dandarc]

I'm starting to feel that I need to start investing the dividends that are generated from my taxable investment account, and start putting them into my Solo 401(k) in order to get my AGI down enough so that I can take advantage of these credits as well as better premium subsidies on the health care exchange. It's these dividends that are stopping me from getting my AGI below the 34K level, and I'm a single filer.

Unless you're already maxing your entire $53,000 solo 401(k) space out each year, I suggest doing that before investing in taxable at all. (If you think you need the money before age 59 1/2, you could do a solo Roth 401(k) -- still better than taxable. Or do a Roth pipeline or SEPP or whatever later.)

You can max a SoloK without being at $53K.  My 'max' for 2015 is $43,493.  Formula is:

Corporate:
$18,000 + 25% of W-2 wages

Proprieter:
$18,000 + 20% of (Net Income less 1/2 self employment tax)

Up to $53K total.  There are also other limits that can come into play on the lower-income end.

And a solo Roth 401K doesn't really help with the before 59.5 thing as much until you rollover to a Roth IRA.  Non-qualified withdrawals from Roth 401K are always pro-rated between contributions and earnings, whereas in a Roth IRA, you withdraw contributions first.  So if you're going Roth in this situation, I'd go Roth IRA before Roth 401K.

[zephyr911]

What generally helps me feel better about missing stuff like this is taknig a step back and remember that it was free money to begin with. Plus, the RSCC and similar perks are really just training wheels for someone who invests as much as you and I do. Win some lose some, right?

If you really wanna go the badass route, go figure out how to cut costs in the amount you lost here. ;)

[frugalnacho]

What generally helps me feel better about missing stuff like this is taknig a step back and remember that it was free money to begin with. Plus, the RSCC and similar perks are really just training wheels for someone who invests as much as you and I do. Win some lose some, right?

If you really wanna go the badass route, go figure out how to cut costs in the amount you lost here. ;)

Yea i'm trying to take the stoic approach, and also be appreciative of what I do have.  I earned $65k and i'm going to get upset about having to pay like $1k in taxes?  I dumped $29k into tax deferred investments, several more thousand into savings, was able to spend over $5k for medical expenses (mostly fertility related), and still lived a very happy life all year!  I had a roof over my head every night, a roof over my families heads also, I didn't go hungry except by choice - I have access to a full fridge and pantry not to mention multiple stores within walking distance that stock every food imaginable, I have natural gas piped into my house for dirt cheap, and electricity, and potable water! I have enough clean water that I not only drink however much I want, but I take long extended hot showers every single day.  In fact I have so much clean water that I shit it in on a daily basis and don't think twice about it! 

I have my health, a wonderful wife, family members and friends in addition to everything named above.  I am incredibly lucky and have a great life.  If missing the tax saver's credit by earning too much money is my only major problem I shouldn't complain too much.  Like I said, #mustachianproblems

[DavidAnnArbor]

Thanks Jack, Dandarc and Frugalnacho.  Yes I already have a lot of money in taxable from investing over the years, I'm not adding to that. I'm not yet at the 53K limit. Right now I've contributed my 24K max. as the employee. I'll probably contribute a bit more as an employer. At age 50 you get a 6K catch up for the employee contribution.

[zephyr911]

Like I said, #mustachianproblems

Seriously, just pull a few Benjamins out of your huge investment account and wipe away the tears with them... >.<

[RootofGood]

Been there, done that and had to develop (and solve) a quadratic equation to maximize my income up to the edge of the cliff but just $1 short of falling off (business expenses that could be immediately expensed or depreciated over time = flexibility to craft AGI to whatever you want at tax time).  I noted the same thing - A few hundred extra income could cost me more than that in lost credits. 

[frugalnacho]

Well I finished up with my taxes.  We were about $1,000 over the line as expected, but are squarely in the bracket to receive the 20% (so $800) tax credit.  A lot of my large medical bills I was hoping to deduct were actually paid off at the end of december 2014 (and my medical expenses in 2014 weren't high enough to deduct, so those payments never got deducted) so I missed out on about $2k worth of medical expenses because of that - Doh!  I still had enough in 2015 to total about $4k, so I was able to use a couple hundred in medical deductions. 

All in all we owe about $750 in federal taxes, and we had about $500 withheld from our paychecks this year.  So we owe about $250.  Not sure how we are going to pay it since neither of us own checkbooks.  I guess i'll  have to go into the bank and purchase a single check for 25 cents.

We will be getting about $1,500 back from the state of michigan though.  I should have adjusted my michigan withholding I guess.

[dandarc]

Do you have to pay by check?  Couldn't you make a payment via EFTPS or Direct Pay?  Requires a checking account, but not a physical check.

[frugalnacho]

Do you have to pay by check?  Couldn't you make a payment via EFTPS or Direct Pay?  Requires a checking account, but not a physical check.

Nice! I was not aware of that.  This is the first time i've ever owed money.  I suppose I just assumed I needed to mail a check in.  I've been flying without a check book for years now because I never need them (I even made a thread about it in August 2014 - http://forum.mrmoneymustache.com/ask-a-mustachian/wife-insists-on-getting-checks/ - And no, we have not written a check since then).

I like to get my taxes done early, but I wait a bit to send them in.  One year my mortgage company gave me an incorrect mortgage interest statement and I filed almost immediately.  Then they sent me a corrected statement and I had to amend my taxes, and it was a pain in the ass.  I'd much rather just wait a month or so before I mail them in.

EDIT: fixed link

[robartsd]

The IRS is just as happy to take money directly out of your bank account as they are to put the refund directly into it. You need exactly the same information for your account that you would need for direct deposit. You may even be able to file now and request that the withdraw be made on April 15th (you certainly could delay filing until April to delay the withdrawl).

[Paul der Krake]

My heart skipped a beat and I was already doing cartwheels when reading:

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).

Unfortunately a closer reading and filling in form 8880 means that for $45k+ worth of contributions and an AGI of $55k, I only get back 10% of $4,000, instead of 10% of $45k+ capped at $4,000.

Ambiguous grammar. Grrr.

[seattlecyclone]

Hooray for ambiguous sentences. As you discovered, they mean 10% of (your retirement contributions up to $4,000), not (10% of your retirement contributions) up to $4,000.

[dandarc]

Hooray for ambiguous sentences. As you discovered, they mean 10% of (your retirement contributions up to $4,000), not (10% of your retirement contributions) up to $4,000.

We should all push for this parenthetical notation to be added to the language!  Doubleplusgood for clarity.

[teen persuasion]

My heart skipped a beat and I was already doing cartwheels when reading:

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).

Unfortunately a closer reading and filling in form 8880 means that for $45k+ worth of contributions and an AGI of $55k, I only get back 10% of $4,000, instead of 10% of $45k+ capped at $4,000.

Ambiguous grammar. Grrr.

Yes!  Can we PLEASE have a formula based option for those that are fluent in math?  It would be so much clearer (and quicker) than verbose English word problems.  I prefer the IRS forms to the Q&A format of software tax programs, but some of the IRS forms go to ridiculous lengths to compare the smaller of two differences, for example.


And thanks to seattlecyclone, for helping me to finally figure out why I feel the need to use parentheses so often in writing.  It's my computer/math brain trying to force proper meaning onto ambiguous English.  Paradigm shift!

[johnny847]

My heart skipped a beat and I was already doing cartwheels when reading:

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).

Unfortunately a closer reading and filling in form 8880 means that for $45k+ worth of contributions and an AGI of $55k, I only get back 10% of $4,000, instead of 10% of $45k+ capped at $4,000.

Ambiguous grammar. Grrr.

Yes!  Can we PLEASE have a formula based option for those that are fluent in math?  It would be so much clearer (and quicker) than verbose English word problems.  I prefer the IRS forms to the Q&A format of software tax programs, but some of the IRS forms go to ridiculous lengths to compare the smaller of two differences, for example.


And thanks to seattlecyclone, for helping me to finally figure out why I feel the need to use parentheses so often in writing.  It's my computer/math brain trying to force proper meaning onto ambiguous English.  Paradigm shift!

Haha I wish. But I doubt this will ever happen. Look at how the IRS always has worksheets of write X on line 1, Y on line 2, multiply 1 and 2, etc.

God I hate that shit. I have to sit down and figure out a formula, even though they clearly have a formula in mind and then purposely obfuscate it by creating a worksheet for it.

They're probably worried about how  tons of Americans are bad at math and the inclusion of formulas would confuse them,even if they were included in an appendix or something

[teen persuasion]

My heart skipped a beat and I was already doing cartwheels when reading:

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).

Unfortunately a closer reading and filling in form 8880 means that for $45k+ worth of contributions and an AGI of $55k, I only get back 10% of $4,000, instead of 10% of $45k+ capped at $4,000.

Ambiguous grammar. Grrr.

Yes!  Can we PLEASE have a formula based option for those that are fluent in math?  It would be so much clearer (and quicker) than verbose English word problems.  I prefer the IRS forms to the Q&A format of software tax programs, but some of the IRS forms go to ridiculous lengths to compare the smaller of two differences, for example.


And thanks to seattlecyclone, for helping me to finally figure out why I feel the need to use parentheses so often in writing.  It's my computer/math brain trying to force proper meaning onto ambiguous English.  Paradigm shift!

Haha I wish. But I doubt this will ever happen. Look at how the IRS always has worksheets of write X on line 1, Y on line 2, multiply 1 and 2, etc.

God I hate that shit. I have to sit down and figure out a formula, even though they clearly have a formula in mind and then purposely obfuscate it by creating a worksheet for it.

They're probably worried about how  tons of Americans are bad at math and the inclusion of formulas would confuse them,even if they were included in an appendix or something

Those worksheets are exactly what I find so frustrating.  I am more likely to make a mistake on those types of things, simply because there are more points for error.

Yes, some people need the hand-holding on the math (my DH, whom I affectionately refer to as math illiterate).  But many of those people go to lengths to avoid exposure to their weakness - use software, use tax services, or like DH - trust a spouse to do it properly.  There are options already: services, software, different forms like 1040 vs 1040EZ.  Why not a 1040 formula version?

[Paul der Krake]

They're probably worried about how  tons of Americans are bad at math and the inclusion of formulas would confuse them,even if they were included in an appendix or something

You know what, since we're talking about form 8880 specifically, I was pleasantly surprised that they didn't have a few extra steps for line 10 where they have you multiply by a number between 0.1 and 0.5. That's like, not even a real number! Classic gubmint bureaucrats making shit up with our tax dollars.

[brooklynguy]

In the world of U.S. federal income taxes, mathematical formulae are reductions of concepts expressed in English in the primary authority, not the other way around (as some of you are suggesting).  The quoted language from the IRS website is, as noted, an ambiguous sentence, but ambiguity is not a problem inherent in the expression of concepts using the written word -- for example, the actual statutory text governing the tax credit in question (§ 25B of the Tax Code, which the quoted language from the IRS website was attempting to describe) contains no such ambiguity (which, incidentally, means that this is another example illustrating the general need to exercise caution in relying on IRS publications to accurately describe the law, as Cathy frequently points out).  So, if anything, it sounds like you mathophiles are actually the ones looking for a crutch  :-P

[Cathy]

It sounds like some of the commentators here might be fans of the Canadian federal Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"), which does use mathematical notation throughout the actual statute in order to describe calculations. For example, ITA § 6(2) says that the "reasonable standby charge for an automobile" is given by A/B × [2% × (C × D) + 2/3 × (E - F)], and the statute then proceeds to define what each of those letter variables mean.

Having studied both the US and Canadian federal tax codes, I actually think the US one is for the most part a relatively simpler read (this does not mean that either is simple, though). The liberal use of mathematical notation by Canadian legislators allows them to introduce some very complicated complications that can be quite difficult to understand and implement even where the underlying concept should be simple (especially since the definitions of the variables often contain sub-calculations).

Although the US primary authorities don't use formulas as frequently as the Canadian authorities do, the US Secretary of the Treasury has promulgated a few regulations that rely on mathematical notation to define a value. For example, if a taxpayer needs to figure the value of "a remainder interest following one life", 26 CFR 1.170A-12(b)(2) instructs the taxpayer to first calculate the "special factor" given by the following expression:

[Paul der Krake]

Hey, we have at least one lawmaker who knows LaTeX!

More seriously, the Canadian approach is an interesting one. Does this mean that there is less a of burden on the administrative agency to come up with a translation from the law into actionable tax forms?

[teen persuasion]

In the world of U.S. federal income taxes, mathematical formulae are reductions of concepts expressed in English in the primary authority, not the other way around (as some of you are suggesting).  The quoted language from the IRS website is, as noted, an ambiguous sentence, but ambiguity is not a problem inherent in the expression of concepts using the written word -- for example, the actual statutory text governing the tax credit in question (§ 25B of the Tax Code, which the quoted language from the IRS website was attempting to describe) contains no such ambiguity (which, incidentally, means that this is another example illustrating the general need to exercise caution in relying on IRS publications to accurately describe the law, as Cathy frequently points out).  So, if anything, it sounds like you mathophiles are actually the ones looking for a crutch  :-P

Lol, not exactly looking for a crutch, but rather more clarity and precision of expression.  Also, less need to reverse engineer the intent and method from the materials commonly provided to us, the end users: IRS forms and publications.

So if I'm understanding correctly, the publications are a cliff notes version of the authoritative tax code, and pertinent details may be lost in simplification.  The IRS forms are the reporting mechanism, but require more details to be correctly utilized.  Software is an attempt to automate the form generation thru a different data gathering procedure, and removes rule interpretation (from the user's POV) to a large degree. 

The point I am less clear on is where the IRS forms data ultimately ends up; I am guessing it is input data to some software at the IRS that analyzes for correctness.  If so, the ultimate end process is computer based, not English language based.  From what I remember from Compiler Construction, no one has yet written a compiler capable of handling English.  Parsing would be a nightmare.