Author Topic: The Mustache Tax Guide (U.S. Version)  (Read 29445 times)

Cheddar Stacker

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The Mustache Tax Guide (U.S. Version)
« on: July 01, 2015, 08:41:14 AM »
Introduction

Early Retirees, and aspiring ones, are …… different. We don’t quite fit the mold. This is true in many areas, and it’s particularly true in tax planning. Our tax code is overly complex; ridiculous really. If you play the game right, you can avoid many taxes when you are working (See Root of Good and Mad Fientist) and when you aren’t working (See Go Curry Cracker!).

This guide should help those looking for an edge, or those simply looking for an explanation. It will also be heavily focused toward the early retiree given that we are on an early retirement forum. Therefore, it will likely contradict many of the common recommendations you’ll find elsewhere like “Young people should put all their money in Roth accounts since they will have higher taxes later in life”. Strategies recommended here might not apply to your friend/dad/sister/boss if they don’t lean toward a FIRE lifestyle.

All of these items should be considered on a Macro level if you want the maximum benefit in your tax planning strategy. In other words, a larger contribution to your 401K/IRA may increase your student loan interest deduction, therefore it may lower your AGI in two ways, therefore it increases your chances to qualify for the child tax credit and the saver’s credit, etc. It’s a very iterative process, but the more of these deductions/credits you aim for, the more it all snowballs. In addition, this is not something you should be thinking about at/after year end, this is something to keep in mind throughout the year.


Form 1040 Savings Measures (The Working Years):

This list sequential, meaning it roughly follows the lines on a 1040.

Pre-Tax Deductions: As you’ll see in the links provided above and below, there are many deductions you can take before income is ever taxed. These deductions can include 401(k)/403(b)/457(b), Health/Dental Insurance, Cafeteria Plan, and Health Savings Account, among others. Some of these items reduce the FICA wage base as well, and they are the only available deductions against Social Security and Medicare Tax. All of these deductions reduce the income you are required to input on your tax return. Therefore, they all reduce your AGI, MAGI, taxable income, and tax, and they should be maximized whenever possible in most cases.

Tax Loss Harvesting is a way to sell securities in a regular (taxable) brokerage account in order to reduce taxable income. Any losses will first offset any other Capital Gains in the current year, including capital gain distributions on your Schedule D. The result from Schedule D carries to your 1040 and you can use a $3,000 loss to offset other income reducing your AGI and taxable income accordingly.

Traditional and Roth IRAs are another great tool to consider utilizing, and they are both good. A Traditional IRA contribution reduces your AGI and taxable income, a Roth contribution does not. A lot is said about both of these accounts all over this forum and the interwebs including a great analysis from The Mad Fientist. What you need to know for tax planning purposes is this: If you believe you will pay a higher tax rate in the future, go with Roth, and if you believe you will pay a lower tax rate in the future, go with Traditional. When you clear out all the other noise, this is really the only thing that matters. Most early retirees will benefit more from Traditional if they qualify (see the links to the IRS or key facts and figures for qualification), but this must be a case by case analysis.

Student Loan Interest is a Pre-AGI tax deduction unlike mortgage interest, but it has some limitations. The first is you can only deduct up to $2,500 of interest payments; hopefully most of us won’t exceed that anyway. The second is many high income earners have a chance of losing all/part of this deduction. It is gradually phased out as your AGI grows from $130K-$160K (MFJ for 2014). This means if you pay $3,000 in SL interest and your AGI is $145K, your deduction will first be limited to $2,500, then cut in half to $1,250 because you have reached 50% of the phase-out.

Deductions/Exemptions:
The Standard Deduction is available to everyone, and can be particularly beneficial to a frugal early retiree. It doesn’t matter how much you spend, what city/state you live in, or what you ate for breakfast, you get $12,600 (MFJ for 2015). Some forum members barely exceed that amount in expenses each year.

The Itemized Deduction is available for the spendypants members. If your deductible expenses from this form exceed the standard amount, use the itemized amount; you can’t use both. For many people this is very easy to reach. If you live in a state with an income tax, real estate tax, and personal property tax (see Cheddar Stacker – my deductible taxes in 2014 were $9,080) you will likely itemize. If you are close to the top of the standard deduction, consider intentionally lumping expenses into one year. In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

Personal Exemptions are available for each person claimed on your tax return. Multiply the number claimed in box 6d times the personal exemption rate for any given year ($4,000 for 2015) and reduce your taxable income accordingly.

If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this.

Credits:
The Credit for Child and Dependent Care is a nice benefit for working parents with kids in daycare. If you have a cafeteria plan you should use that instead of this (don’t double dip), but this is a nice option for those who don’t have one. In summary, the IRS will pay for 20-35% of the cost of someone watching your kids, up to $3,000 in expenses for one kid, or $6,000 in expenses for two or more kids. This can result in a credit of up to $2,100 if all the cards fall into place for you. The qualifying expenses are limited to the lesser of the two parents’ taxable income, so pre-tax deductions can actually work against you here. Plan accordingly. One side note on this credit – the instructions are very clear that if you have two kids, but only one of them is in daycare, you can claim both of the kids on this form opening up the full 6,000 in expenses and potentially doubling the credit.

The Saver’s Credit is something to shoot for if you earn a low income, or you are able to reduce your AGI to an extremely low level via Pre-Tax Deductions. The maximum credit is $1,000/person, so $2,000 for married couples. However, it can be very difficult to reach the maximum level of this credit as described here by teen persuasion. It’s a paradox. This is also one of the few legitimate "tax cliffs" out there where it's not a phase-out. You don't want to go $1 over the limits or you will not like the result.

The Child Tax Credit is awesome. Step 1, have a kid or 7. Step 2, pay less tax. Unfortunately it’s not quite that simple. The credit is up to $1,000 per child under age 17 at the end of the tax year, and it’s refundable through the additional child tax credit. Much like the student loan interest deduction, it has a phase out range. This credit is gradually phased out as your AGI grows from $110K-$150K (MFJ for 2014). So if you have 2 qualifying kids and a potential child tax credit of $2,000, but your AGI is $130K, you will receive a child tax credit of $1,000.

The Earned Income Credit or EIC is also something to shoot for if you earn a low income, or you are able to reduce your AGI to an extremely low level via Pre-Tax Deductions. This credit becomes much easier to qualify for when you have a few children. Investment income must be no more than $3,350 for the year.


Resources:
Key Facts and Figures is one of the best resources I’ve found online that summarizes a lot of data into just 2 pages. I keep a printed copy in my top desk drawer and refer to it often. You can get an updated version of this each year with this search: 2016 key facts and figures.

Annual Limits is another fine resource listing much of the same information, but different enough that both should be reviewed.

MDM’s Case Study Spreadsheet began as something to help organize case study posts.  That ability remains, and it has evolved to deal with common Mustachian tax issues, calculating most of the credits and deductions mentioned above.  It also includes a simple "time to FI" section.  One might consider it a gateway drug to more advanced tax and FI calculation tools.

The 1040 Instructions are great if you want to dig into an specific line item on the tax return.

IRS.GOV is great when all else fails, or if you just prefer going straight to one of the best online detailed sources of tax code, forms, instructions, bulletins, and revenue rulings.

FAQ:
How can I estimate the impact of particular tax planning events in my life?
The Taxcaster

Can I (should I) prepare my own taxes?
You certainly can. Whether you should or not will vary a lot based on your specific tax situation, and your technical ability for DIY. There are many people around here who do their own complex returns as well as any CPA could. There are also many extremely brilliant people around here with complex tax situations who hire the experts. There's no shame in paying someone else to do it for you, but always remember you are your best advocate. Your tax preparer can't advise you properly without your help, so you need to know the basics as well.

What should I use to prepare my tax return?
Pencil and Paper is a strategy recommended by some around here. I’ve never done that myself, but I can understand how it can be of great benefit to do this. You must learn the nuances of each line on the 1040 in order to do it properly, so it will certainly give you an edge.

Creating a spreadsheet to reproduce your own tax return is also a good way to learn how the tax code works.  It can also predict tax consequences for the coming year (e.g., add a column for the new year and start by copying the previous year).

Tax software: Turbotax, TaxAct, Taxslayer

Free tax filing methods:
https://www.freefilefillableforms.com/#/fd
http://www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free
http://www.mymoneyblog.com/free-online-tax-e-filing-options-for-all-50-states.html

Acknowledgements:
I obviously leaned heavily on many FI bloggers for links. Why re-create the wheel? But honestly I couldn’t really expand much on what they’ve already said. This is just a nice way to bring all these ideas into one place.

Special thanks to MDM for assisting with the creation and editing of this post.

Special thanks to everyone else on the forum who discusses these tax strategies regularly – you know who you are. I’ve learned a lot from all of you, and I hope you can say the same about me.
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Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #1 on: July 01, 2015, 08:41:29 AM »
Form 1040 Savings Measures (The Retirement Years):

Congrats, you’re done trading your time for more money! Hopefully you have plenty of time left, and hopefully this guide will help you preserve your portfolio to fund your remaining time.

This list sequential, meaning it roughly follows the lines on a 1040.

Wages should be $0, so let’s skip that line. No more of that FICA guy. However, there are some serious benefits to earning a little bit of income, including the earned income credit. It's worth considering the idea of earning a little bit of income if there's something you really want to do.

Taxable interest will come from checking/savings accounts, CD’s, corporate bonds, and some other sources. It’s important to keep some of your wealth in stable places, but there are also solid reasons to avoid this type of income. Aside from the fact it’s harder for your portfolio to keep pace with inflation, interest is taxed at ordinary rates.

Tax-exempt interest will come from municipal/government bonds. As of the writing of this guide it would be hard to receive a great return on these, but when interest rates return to normal levels this can be a solid place to park your stable funds to avoid taxes. Purchasing bonds issued within your own state can also help you avoid paying state income taxes, as these are not necessarily exempt from state taxes.

Ordinary Dividends will come from dividend paying stocks/mutual funds held in a taxable brokerage account. These are also taxed at ordinary tax rates, so you should attempt to keep them to a minimum. You can do this by either purchasing securities that pay less (or no) dividends, or by purchasing stocks/mutual funds that pay Qualified dividends.

Note: REITs pay heavy dividends, are generally a good investment, and can be a great way to diversify your portfolio. However, their dividends are Ordinary (never qualified) so keep that in mind during tax planning.

Qualified Dividends are ordinary dividends that are paid by a U.S. corporation, or a corporation traded on an established U.S. stock market, and meet the holding requirements (basically 60 days). These are taxed at Qualified tax rates which is a very, very good thing. With proper planning you can pay $0 tax on these, and they should be considered a good option for any early retiree.

When you purchase individual stocks and hold them long-term, you will receive Qualified dividends. When you purchase mutual funds, a high turnover of stocks held by the fund will produce Ordinary dividends, so you have less control over the Ordinary vs. Qualified. Pay attention to the type of dividends typically paid by a mutual fund when selecting them for purchase, because they can vary widely. Consider whether the fund itself has a buy and hold strategy, because high turnover creates higher taxes for you. *

Capital Gains (Losses) are reported when you sell securities. If you hold them for less than 365 days you will pay ordinary tax rates, and if you hold them for more than 365 days you will pay Qualified tax rates. So…..hold them for at least 1 year whenever possible. This is the area of your return where the Tax Loss Harvesting and Tax Gain Harvesting will be reported. Depending on your circumstances, you can create a lot of tax free income in this area while staying within the 15% tax bracket.

IRA Distributions are currently reported on line 15a. If they are distributions from a Roth IRA they will NOT be reported on line 15b. This means they will not become income so they don’t increase your AGI. If they are distributions from a Traditional IRA they will carry over to line 15b and become income which increases AGI. Anything reported on this line will be subject to Ordinary tax rates. This is where the Roth IRA Pipeline conversions will appear each year when you move them out of Traditional into Roth, and when you then withdraw them from the Roth later on.

401k Distributions, Pensions and annuities are currently reported on line 16a. If they are distributions from a Roth 401k (or tax free transfers out of a 401k into another tax deferred account) they will NOT be reported on line 16b. This means they will not become income so they don’t increase your AGI. If they are distributions from a Traditional 401k, a Pension, or an annuity they will carry over to line 16b and become income which increases AGI. Anything reported on this line will be subject to Ordinary tax rates.

Social Security Benefits are currently reported on line 20a but they are not necessarily taxable so not all of them carry over to line 20b. Up to 85% of your SS benefits may be taxable. In order to find out exactly what to put on line 20b you need to complete This Worksheet but if you are MFJ you have to reach about $44K of income (including 50% of SS benefits) before anything related to SS benefits will become taxable. If you have time, it’s in your best interest to convert all possible Traditional funds into Roth funds before you begin drawing SS benefits, and before RMD’s begin.

Deductions/Exemptions: See the original post. Almost everything up there still applies, and there isn’t a lot to add. Unfortunately most of the credits mentioned up there are no longer applicable since you need earned income to qualify, with the child tax credit being the only exception.


Other notes/strategies/highlights:

-Utilize tax exempt or qualified rates whenever possible.

-Deductions/Exemptions will reduce Ordinary income first. If you have $40K Ordinary income, $60K Qualified income, and $35K deductions exemptions, you only have $5K in Ordinary taxable income and will only pay $500 in tax (10% bracket). You should create enough income to offset your Deductions/Exemptions. If you have any credits (Child tax credit, tuition credits, etc.) you should create enough income to offset those as well. I plan to create at least $40K income each year post FIRE while I still have 2 kids at home.

-Deplete Traditional accounts as fast as possible with the lowest possible effective tax rate. You might be able to pay 0% tax on your Traditional accounts, but if not project out the next 20 years and determine a reasonable amount to convert. Maybe a 5% effective rate averaged over 20 years is your best bet.

-Consider eligibility for ACA subsidies, and FAFSA in any strategy you utilize. There are entire threads devoted to this topic on the forum like this one and not enough room here to discuss them.

-While Qualified tax rates are wonderful, not all states follow suit. Check local listings, and if you don’t like the rules in your state plan accordingly or move to a more favorable locale.

-Once you have a plan in place and understand the basics, you only need 7 minutes per year to maximize your tax free space. Your hourly pay rate will be substantial, so take the time to learn this stuff.

-Consider a HELOC as a tax free source of cash during the first 5 years of the Roth Pipeline if there is ever a shortfall. It's a temporary fix, but could be better than another alternative.

What to avoid (from a tax-optimization standpoint):

-Annuities. Some people love these. Some very well respected, long-time early retirees even suggest these as a way to reduce the risk of portfolio failure. While they are one method for accomplishing reduced risk (although in my opinion a sub-optimal one), they are horrible in terms of tax strategy. You are essentially trading your potential Qualified taxable income for Ordinary taxable income.

Good luck, and let me know if I missed anything.

* Taxes should not be the only consideration when investing, but they shouldn't be ignored either. If a fund with a high turnover consistently beats the fund with a low turnover by 3%, but produces additional taxes, the net return of each option should be considered. Weigh the opportunity cost, and don't ignore the potential for a 12% return because you might have to pay a little more tax.
« Last Edit: August 04, 2015, 12:14:28 PM by Cheddar Stacker »
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tweezers

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #2 on: July 01, 2015, 08:51:30 AM »
This is EXACTLY what I was hoping to see in a sticky when this new sub-forum was started.  THANK YOU!!!

Kris

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #3 on: July 01, 2015, 08:56:20 AM »
Following the hell out of this.  Hope it gets stickied.
"Well I'm sure I'd feel much worse if I weren't under such heavy sedation."   - David St. Hubins, This is Spinal Tap

Axecleaver

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #4 on: July 01, 2015, 09:57:08 AM »
Great post, Cheddar.

For future posts, I'd love to see targeted tax advice for people in high-income accumulation years, and/or small business owners (S corp/C corp/LLC decision tree, for example).

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #5 on: July 01, 2015, 10:26:32 AM »
Thanks Axe, Tweezers, and Kris for the comments.

Great post, Cheddar.

For future posts, I'd love to see targeted tax advice for people in high-income accumulation years, and/or small business owners (S corp/C corp/LLC decision tree, for example).

My intent with this post was:
-Consolidate many ideas from around the web and forum geared toward early retirees.
-Make it as easy to understand as possible, particularly for any new members or tax novices.
-Aim to give ideas to both low earners and high earners, but not necessarily specific to ultra-high earners.
-Stick to personal taxes only.

I appreciate the feedback for future posts. I'll entertain any suggestions and time/knowledge permitting may devote future posts in this thread.

Also, there are many other CPA's on the forum, and many non-CPA's with immense tax knowledge. I hope this can be a place for anyone to share ideas and create more guides to follow. Hopefully this is just the start.
« Last Edit: July 01, 2015, 10:28:40 AM by Cheddar Stacker »
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johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #6 on: July 02, 2015, 06:17:37 AM »
The tax loss harvesting link doesn't discuss an important aspect about the wash sale rule:
With respect to TLH you get the worst of both worlds in retirement accounts. You cannot TLH in a retirement account but you can cause wash sales in a taxable account.
So for example say I want to TLH VTSAX in my taxable account. I sell some shares at a loss. If I buy some shares of VTSAX in my IRA within 30 days then I incur a wash sale, reducing the losses that I claim.
Furthermore, that loss is now forever disallowed. What a wash sale really does is it changes the cost basis of the shares I just bought. But the cost basis is irrelevant in an IRA!

This is why I don't have auto reinvestment for any of my dividends - it can cause a wash sale. Just make sure if you do this in Vanguard you are aware of this quirk
« Last Edit: July 02, 2015, 07:10:44 AM by johnny847 »

Penny Lane

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #7 on: July 03, 2015, 08:52:52 AM »
Such an excellent tool you have created, CS!  Since retiring, we no longer pay the Alt min; seems like a dream.  Although accountant points out that's because we are making LESS $! 

Maybe somewhere you can expound on being self-employed.  I do some consulting now for  fun and $, on my own time, when I want to, so I still consider myself retired.  I've always done that so i knew about FICA on dollar ONE, but our poor daughter, who earns very little and all self-employed, learned about that the hard way. 

TomTX

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #8 on: July 03, 2015, 07:39:53 PM »
Excellent post. Thanks.

On the Saver's Credit: Your AGI doesn't have to be that low to get some benefit - for MFJ, the AGI is $60,000. A couple can get a $400 credit at this AGI. If your income is near one of the "cliffs" - you can leave some headroom in your IRA contributions until you do a first run-through on your taxes. If you need to get your AGI down a bit, put that much more in a Traditional IRA for the (prior) tax year up until tax day.

electriceagle

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #9 on: July 07, 2015, 06:31:17 AM »
The tax loss harvesting link doesn't discuss an important aspect about the wash sale rule:
With respect to TLH you get the worst of both worlds in retirement accounts. You cannot TLH in a retirement account but you can cause wash sales in a taxable account.
So for example say I want to TLH VTSAX in my taxable account. I sell some shares at a loss. If I buy some shares of VTSAX in my IRA within 30 days then I incur a wash sale, reducing the losses that I claim.
Furthermore, that loss is now forever disallowed. What a wash sale really does is it changes the cost basis of the shares I just bought. But the cost basis is irrelevant in an IRA!

This is why I don't have auto reinvestment for any of my dividends - it can cause a wash sale. Just make sure if you do this in Vanguard you are aware of this quirk

Many people put foreign mutual funds/ETFs in taxable because the taxes that they pay to foreign governments produce a credit. Bond funds can go into retirement accounts because the returns that they pay would otherwise be taxed as ordinary income.

If you plan your AA across accounts, you won't run into TLH problems nearly as much.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #10 on: July 07, 2015, 08:11:13 AM »
The tax loss harvesting link doesn't discuss an important aspect about the wash sale rule:
With respect to TLH you get the worst of both worlds in retirement accounts. You cannot TLH in a retirement account but you can cause wash sales in a taxable account.
So for example say I want to TLH VTSAX in my taxable account. I sell some shares at a loss. If I buy some shares of VTSAX in my IRA within 30 days then I incur a wash sale, reducing the losses that I claim.
Furthermore, that loss is now forever disallowed. What a wash sale really does is it changes the cost basis of the shares I just bought. But the cost basis is irrelevant in an IRA!

This is why I don't have auto reinvestment for any of my dividends - it can cause a wash sale. Just make sure if you do this in Vanguard you are aware of this quirk

Many people put foreign mutual funds/ETFs in taxable because the taxes that they pay to foreign governments produce a credit. Bond funds can go into retirement accounts because the returns that they pay would otherwise be taxed as ordinary income.

If you plan your AA across accounts, you won't run into TLH problems nearly as much.

Okay, but not everyone can do that. I'm 100/0  stocks and bonds and 50/50 (really, I'm pegged to market weight) US/Intl. My taxable account is ~$57k and my IRAs are ~$17k. I do not have a workplace retirement account. It's not possible for me to avoid TLH issues.

Furthermore, while what you said about the foreign tax credit is true, you neglect the fact that for most foreign funds, the dividend yield is higher than a typical US stock fund, and the rate of qualified dividends is not 100% (whereas a tax efficient US stocks index fund such as VTSAX is). On the Bogleheads wiki page for VTIAX - Vanguard Total International Stock Index you can find the rate of qualified dividends in past years. It's usually around 70%. They also tell you the foreign tax credit amount.
Why is this important? I'll illustrate with examples - in some cases you should hold international funds in a retirement account, not a taxable account. In each case we assume that if you want to hold VTIAX in one account, you are displacing an equal amount of VTSAX which must be held in the other account.

But first let me explain how the FTC (foreign tax credit) and foreign tax withholding actually works:
Suppose you earn $1000 in dividends from VTIAX. Foreign countries will withhold some of that in taxes. Suppose it's $70.
Vanguard only pays you $930, not $1000. BUT, the US taxes you on $1000 in dividends, NOT $930. Then, if you held VTIAX in a taxable account, you qualify for the FTC (which if you d not have any other foreign income, is exactly equal to foreign tax withheld - otherwise this may not be true). This means you get the $70 back on your tax returns.

Somebody with a 0% tax rate:
The decision is clear: No matter which fund is held in the taxable account, no taxes are paid on dividends. But holding VTIAX in the taxable allows you to claim the FTC (foreign tax credit). So hold VTIAX in the taxable.

Somebody in the 39.6% marginal tax rate (and hence 23.8% LTCG/QDI tax rate - extra 3.8% for ACA tax):
Without loss of generality, look at a $10k holding
Let's take 2014 data (there isn't too much variation year to year).

VTIAX VTSAX
Dividend yield3.24%1.89%
Dividends$324$189
Foreign tax withholding$38$0
Qualified dividends$226.80$189
Unqualified dividends$97.20$0

Relevant equation:
FTC yield on VTIAX in 2014 was 0.38%. $10000*0.0038 = $38.

VTIAX in taxableVTIAX in retirement
VTSAX dividend$189$189
VTIAX dividend$324$324
FTC received$38$0
Foreign tax withheld$38$38
Taxes on dividends$92.47$44.98
Net Dividends$420.53$430.02
Relevant equations:
0.396*97.2 + .238*226.80 = $92.47.
0.238*189 = $44.98

So holding VTIAX in the retirement account is the winner.


Okay okay, that was just for illustrative purposes. Almost nobody on this forum is in the 39.6% bracket. What about the 25% bracket?

VTIAX in taxableVTIAX in retirement
VTSAX dividend$189$189
VTIAX dividend$324$324
FTC received$38$0
Foreign tax withheld$38$38
Taxes on dividends$58.32$28.35
Net Dividends$454.68$446.65
Relevant equations:
0.25*97.2+.15*226.80 = $58.32
0.15*189 = $28.35

So here, the taxable account is the winner.

But wait, there's more! I didn't add in the effect of state taxes. Of the states that have an income tax, most if not all of them start with your federal AGI and do not tax investment income at a favorable rate. Here, VTIAX's higher dividend yield hurts you if held in a taxable.

So what if you have a 6% marginal state tax rate?

VTIAX in taxableVTIAX in retirement
VTSAX dividend$189$189
VTIAX dividend$324$324
FTC received$38$0
Foreign tax withheld$38$38
Federal Taxes on dividends$58.32$28.35
State taxes on dividends19.4411.34
Net Dividends$435.24$435.31
Relevant equations:
.06*324 = $19.44
.06*189 = 11.34

Here there is no clear winner - fluctuations in the dividend yield for VTIAX and VTSAX in any given year is going to rule this one.

So as you can see, it's not as simple as saying international funds give you a FTC if held in a taxable so it should always be held in a taxable. You have to consider dividend yield and qualified dividend rate of your international fund and the displaced fund, and state and federal tax rates (both marginal and LTCG/QDI).

Now one could argue that $1 in a taxable account is not worth the same as $1 in a retirement account. But that is all solved with tax adjusted asset allocation.

BUT keep in mind that all of this analysis assumes you make enough to save in both a taxable account and a retirement account. If you only have enough to save in a retirement account, don't avoid VTIAX just because of the tax issue - don't let the tax tail wag the dog.
« Last Edit: July 07, 2015, 09:57:24 AM by johnny847 »

hobbes1

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #11 on: July 07, 2015, 09:01:16 AM »
looking forward to perusing this thread! Thanks!

Cathy

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #12 on: July 07, 2015, 04:40:14 PM »
...But first let me explain how the FTC (foreign tax credit) and foreign tax withholding actually works:
Suppose you earn $1000 in dividends from VTIAX. Foreign countries will withhold some of that in taxes. Suppose it's $70.
Vanguard only pays you $930, not $1000. BUT, the US taxes you on $1000 in dividends, NOT $930. Then, if you held VTIAX in a taxable account, you qualify for the FTC (which if you d not have any other foreign income, is exactly equal to foreign tax withheld - otherwise this may not be true). This means you get the $70 back on your tax returns. ...

This is generally true, but it does raise the question of "why?", which I will answer.

In the US, mutual funds are often "regulated investment companies" within the meaning of 26 USC § 851. A regulated investment company is not a disregarded entity under the Internal Revenue Code. It is in fact its own legal personality, subject to income tax generally as a corporation, or, if certain requirements are met, under the alternative taxation regime of 26 USC § 852. Furthermore, as we learned in my previous post (from a Canadian perspective), when a regulated investment company purchases and holds foreign securities, it may have to pay foreign taxes. These taxes are paid by the regulated investment company (i.e. the mutual fund) and not by the person who owns shares in the fund.

Given that it is the fund (and not its shareholders) that pays the foreign taxes, the default rule is that the shareholder will not need to include the foreign tax amount in her income, and also will not be able to claim a foreign tax credit, because she did not pay any foreign tax. In other words, the default rule is that the shareholder will only report on her US tax return the amount of dividend actually received (i.e. not including the foreign tax, which was paid by the fund and never received by the shareholder).

The default rule described above is subject to an exception found in 26 USC § 853. This latter statute provides that if a regulated investment company satisfies certain technical conditions and has more than 50% of its assets in stock and securities of foreign corporations (as of the close of the taxable year), then it may make an election to change the foreign tax credit rule. If the regulated investment company makes this election, then for the purpose of the tax laws, the foreign tax paid by the fund is deemed to have been received by the shareholders and then paid by them as foreign taxes. The foreign tax credit statute, 26 USC § 901(k)(2), confirms that these amounts are eligible for the foreign tax credit if the usual technical requirements are met, including the minimum holding period.
« Last Edit: July 07, 2015, 04:42:42 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

Uncle Scrooge

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #13 on: July 15, 2015, 07:33:28 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?

dandarc

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #14 on: July 15, 2015, 07:42:07 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #15 on: July 15, 2015, 07:47:42 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.

Yes, and it really belongs in the second post of this thread. I'm still working on that post but I'll be sure to expand on this point when I get to it.
Indecision may or may not be my problem.

Reynold

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #16 on: July 16, 2015, 08:03:05 AM »

What should I use to prepare my tax return?
Pencil and Paper is a strategy recommended by some around here. I’ve never done that myself, but I can understand how it can be of great benefit to do this. You must learn the nuances of each line on the 1040 in order to do it properly, so it will certainly give you an edge.


I'd like to chime in to recommend this, if you haven't done your taxes before and want to start.  When I started doing my own taxes, I didn't have a computer at home (which gives you an idea how long ago that was), so pencil and paper was the only option.  When I got a computer and tax software for it, having worked through the forms on my own and read the instructions to do so I was able to do a much better job of using the software.  The big companies do their best to explain things in the software as you go along, but there are a lot of items which would be completely baffling if you don't know what they mean.  If you do know what they mean, you know which 90% you can skip right over and which 10% are actually relevant and you need to dig into. 

Also, if like a lot of people here, you have a business + wage income, depending on the business structure taxes can get a lot more complex, and the business software does a lot less hand holding than the personal.  I found it best to use an accountant for a year or two, then I could use what they did as a guideline for doing my own with the software.  Ditto the year I lived in 2 states and had income from 3, I didn't want to put the time into figuring out three sets of state tax returns on a one-time basis. 

doubled85

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #17 on: July 24, 2015, 02:12:18 PM »
So much fantastic information in here. A few points in no particular order:

  • Doing your own taxes is a great way to learn about taxes; weird, right? If you're just starting off and you're currently using a tax preparer (CPA, enrolled agent, whatever) trying giving them a shot yourself first. Plenty of personal tax software packages allow this such as TurboTax and Tax Slayer, what have you. You can see how close you get to your preparer's version. As CPA that used to work with exclusively high net worth clients, I had a few clients that would prepare their own and then compare their results with what we prepared for them. This wasn't the norm but a few engineers stood out.
  • If and when you get more comfortable preparing your own returns and you get stuck, I highly recommend just reading the form and then reading the instructions. You'd be amazed at how much easier it is sometimes to just read the damned form rather than go through the tax software's questions and prompts.
  • If you have a small business, you're starting to get into a territory where you can be a bit more creative with tax management. However, there's no official definition of "small business" except within the context you're using. Meaning, a small business could be a rental property, a small retail business,  or a $5 million manufacturing company. Or bigger. Each has it's own idiosyncrasies. Anybody outside of the tax world know much about ACRS, MACRS, bonus depreciation, Section 179 limits, and when it might be beneficial to elect out of them? What about DPAD? "I heard I can deduct my car." Sure, but have you heard of PUCC? (Personal Use of Company Car, for those wondering.) Point is, there's a lot of weeds to wade through and a good CPA can help with that. I also loved to hear "my friend owns 'such and such business' and his accountant told him that he could deduct 'some silly thing'. Possibly but I don't know your friends business or really care what you read on the interwebs and can't even really prove if it's true and I have a license to keep and a professional liability insurer to keep happy. Meaning, 
  • Keep in mind that CPAs and tax preparers aren't magic workers and most aren't going to break the law for you or risk losing their license. I loved to hear "my friend owns 'such and such business' and his accountant told him that he could deduct 'some silly thing'. Or, I heard on the interwebs... Possibly but I don't know your friend's business or really care what you read on the interwebs and can't even really prove if it's true and I have a license to keep and a professional liability insurer to keep happy.
  • As has been pointed out, you're responsible for your own tax situation. If you work with a good tax professional and are proactive throughout the year, it makes a much better relationship. Calling on 12/30, or worse on 1/1 of the following year, how to save on taxes is going to be an exercise in frustration. If you have a good professional and something comes up during the year that you think might have a tax consequence, give him/her a call and chat about it. At least until you get more comfortable and can do your own research.

/rant
Advice worth the price paid.

themagicman

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #18 on: July 24, 2015, 02:45:42 PM »
Following! Thank you for putting this together!

ender

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #19 on: July 24, 2015, 07:15:37 PM »
I hope someday to take complete advantage of the credit section by working part-time and basically maxing out all available tax credits.

This is a great resource!

MrsEnder

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #20 on: July 26, 2015, 01:21:17 PM »
Alright, so I'm frugal and somewhat interested in finances, but I'm a newbie when it comes to the language and really understanding the details. Interested in learning more, but always feel a bit overwhelmed. And I’ve never done my own taxes - my dad took care of it (I’m in grad school, too, so haven’t yet had a “real job” with much income for it to matter. I got married this year and my husband and I will be filing jointly next year. He loves this stuff and I want to understand it better. I will be discussing this with him as well, but thought I’d post, too, for additional perspective as well as some 'this is what a total newbie has questions on' perspective for you.

I apologize if the questions are too basic or not formatted well (some stuff like the AGI I realized I had more questions as I went). I just went through what you said piece by piece and I tried to look up what seemed most basic so it wasn't all like 'google could have answered that for you...'

Tax Loss Harvesting is a way to sell securities in a regular (taxable) brokerage account in order to reduce taxable income. Any losses will first offset any other Capital Gains in the current year, including capital gain distributions on your Schedule D. The result from Schedule D carries to your 1040 and you can use a $3,000 loss to offset other income reducing your AGI and taxable income accordingly.

Is this legal? “Tax Loss Harvesting” sounds sketchy and the fact that it links to something that says “Tax Avoidance” seems concerning. I mean, I’m assuming you’re not suggesting anything illegal, but when does utilizing what’s there to your benefit become “tax evasion”? I’m ok with “playing their game” but I don’t want to do anything too sketchy.

What does “securities” mean exactly? What is a Schedule D? I don’t really follow what this is saying.

A Traditional IRA contribution reduces your AGI and taxable income, a Roth contribution does not.

My husband and I have talked a lot about this and he’s explained it to me many times and I get it….except that I have to think through it every time. Traditional is taxed now, and Roth later….so why does traditional reduce your taxable income and Roth not? If Roth doesn’t then aren’t you getting taxed twice on it?

Student Loan Interest is a Pre-AGI tax deduction unlike mortgage interest

This part isn’t applicable to me but for the sake of learning: Pre-AGI tax deduction? What does that mean? I mean, I figured out the acronym, but what is the significance?

Deductions/Exemptions:
The Standard Deduction is available to everyone, and can be particularly beneficial to a frugal early retiree. It doesn’t matter how much you spend, what city/state you live in, or what you ate for breakfast, you get $12,600 (MFJ for 2015). Some forum members barely exceed that amount in expenses each year.

So…dumb question, but a deduction means you don’t pay taxes on that amount, right? Why do these exist anyway? (Not complaining, knowing why helps with remembering.)

The Itemized Deduction is available for the spendypants members. If your deductible expenses from this form exceed the standard amount, use the itemized amount; you can’t use both. For many people this is very easy to reach. If you live in a state with an income tax, real estate tax, and personal property tax (see Cheddar Stacker – my deductible taxes in 2014 were $9,080) you will likely itemize. If you are close to the top of the standard deduction, consider intentionally lumping expenses into one year. In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

What qualifies something as a deductible expense?

Personal Exemptions are available for each person claimed on your tax return. Multiply the number claimed in box 6d times the personal exemption rate for any given year ($4,000 for 2015) and reduce your taxable income accordingly.

Is this extra on top of the standard or itemized? Is it the same no matter how you file? Why might you file MFJ vs head of household?
And back everything up - I need some more explanation on pre/post-AGI. Are these deductions affecting your AGI? Is taxable income the same as AGI? What would it even mean for something to be a post-tax deduction?

If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this.

create enough income? Is this because as a retired person you may actually not have that much income? But if you somehow don’t and are living fine without it, why do you want to “create” that income?
Roth Pipeline must be converting roth to traditional?

The Child Tax Credit is awesome. Step 1, have a kid or 7. Step 2, pay less tax. Unfortunately it’s not quite that simple. The credit is up to $1,000 per child under age 17 at the end of the tax year, and it’s refundable through the additional child tax credit. Much like the student loan interest deduction, it has a phase out range. This credit is gradually phased out as your AGI grows from $110K-$150K (MFJ for 2014). So if you have 2 qualifying kids and a potential child tax credit of $2,000, but your AGI is $130K, you will receive a child tax credit of $1,000.

What is the difference between a deduction and a credit? What does it mean that the credit is refundable?

The Earned Income Credit or EIC is also something to shoot for if you earn a low income, or you are able to reduce your AGI to an extremely low level via Pre-Tax Deductions. This credit becomes much easier to qualify for when you have a few children. Investment income must be no more than $3,350 for the year.

Is investment income part of your AGI?

And a final global question - what happens if you mess up your taxes and file something wrong on accident?

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #21 on: July 26, 2015, 01:51:52 PM »
Is this legal? “Tax Loss Harvesting” sounds sketchy and the fact that it links to something that says “Tax Avoidance” seems concerning. I mean, I’m assuming you’re not suggesting anything illegal, but when does utilizing what’s there to your benefit become “tax evasion”? I’m ok with “playing their game” but I don’t want to do anything too sketchy.
Yes, perfectly legal.  As long as you "utilize what's there" (aka follow the tax laws) then avoidance never becomes evasion.

Quote
What does “securities” mean exactly? What is a Schedule D? I don’t really follow what this is saying.
Think "stocks, mutual funds, etc." for securities.  Schedule D is used for capital gains (e.g., when you sell some securities that you previously bought).

Quote
My husband and I have talked a lot about this and he’s explained it to me many times and I get it….except that I have to think through it every time. Traditional is taxed now, and Roth later….so why does traditional reduce your taxable income and Roth not? If Roth doesn’t then aren’t you getting taxed twice on it?
Traditional is not taxed now, it is taxed later.  Roth is taxed now, not later.

Quote
This part isn’t applicable to me but for the sake of learning: Pre-AGI tax deduction? What does that mean? I mean, I figured out the acronym, but what is the significance?
It means that you can take this deduction in addition to the "standard deduction", vs. instead of the standard deduction if you itemized deductions.  For that matter, pre-AGI deductions can be taken in addition to your itemized deductions if you choose to itemize.

Quote
So…dumb question, but a deduction means you don’t pay taxes on that amount, right? Why do these exist anyway? (Not complaining, knowing why helps with remembering.)
The simple answer: because that is how the law is written.  To know for sure on "why" one would need to poll the law writers.  A reasonable guess here would be "to avoid taxing those with the lowest incomes."

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What qualifies something as a deductible expense?
The tax law.  No two ways about it.  E.g., see http://www.irs.gov/taxtopics/tc500.html.

Quote
Is this extra on top of the standard or itemized?
Yes, either/both.
Quote
Is it the same no matter how you file?
No, it depends on how many people are covered by the return.

Quote
And back everything up - I need some more explanation on pre/post-AGI. Are these deductions affecting your AGI? Is taxable income the same as AGI? What would it even mean for something to be a post-tax deduction?
Without delving into details, you can think of pre-AGI deductions as those appearing on the front page of form 1040, while post-AGI deductions and exemptions appear on the back.  No, taxable income is not the same as AGI - see form 1040.

Quote
create enough income? Is this because as a retired person you may actually not have that much income? But if you somehow don’t and are living fine without it, why do you want to “create” that income?
"...not have that much taxable income."  You may not need it now, but you might need it later.

Quote
What is the difference between a deduction and a credit?
You subtract a deduction from your income on the way to calculating your taxable income.  The tax you pay is some fraction of your taxable income.  The deduction is "worth" (i.e., reduces your taxes by) your marginal rate times the deduction (e.g., 25% times the deduction).  A credit is subtracted directly from the tax you owe, thus is "worth" 100% of the credit amount.

Quote
What does it mean that the credit is refundable?
If your tax due is $100 and you have a $150 credit, with a "refundable " credit you get a $50 refund from the IRS.  With a "non-refundable" credit you simply pay $0 tax and "lose" the extra $50.

Quote
Is investment income part of your AGI?
Yes.

Quote
And a final global question - what happens if you mess up your taxes and file something wrong on accident?
You pay (or get a refund of) the difference between what you did pay and what you should have paid.  If you owe more, you also pay interest and possibly some flat fees in addition.  If you get a refund, the IRS pays you no interest.


Going line by line through Form 1040 would be a lot more efficient than random googling.
« Last Edit: July 26, 2015, 01:53:42 PM by MDM »

Lski'stash

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #22 on: July 26, 2015, 01:57:04 PM »
Replying because I want to make sure I have this! Thanks!

MrsEnder

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #23 on: July 26, 2015, 02:48:10 PM »
Thanks.

Going line by line through Form 1040 would be a lot more efficient than random googling.

Yeah, I think when my husband and I file taxes together for this year it will help a lot.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #24 on: July 26, 2015, 03:05:04 PM »
Going line by line through Form 1040 would be a lot more efficient than random googling.
Yeah, I think when my husband and I file taxes together for this year it will help a lot.
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April.  My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing."  Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.

MrsEnder

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #25 on: July 26, 2015, 04:05:22 PM »
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April.  My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing."  Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.

My husband did his taxes himself the past couple years (with Turbotax a few years and has done his own spreadsheets for them, too.) And we're doing a pretty exhaustive budget. So I don't think we'll have any surprises. Might be worth the dry-run though just for helping me learn sooner.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #26 on: July 26, 2015, 08:47:15 PM »
You should do a dry run now - ok, in the next month or so - to ensure you aren't unpleasantly surprised next April.  My personal favorite would be for the two of you to put your Form 1040 (and any supporting forms/schedules needed) into your own spreadsheet form so you "learn by doing."  Doing it all by hand, or getting an old copy of 2014 TaxAct, TurboTax, etc., or any of the suggestions in the OP here are also reasonable approaches.

My husband did his taxes himself the past couple years (with Turbotax a few years and has done his own spreadsheets for them, too.) And we're doing a pretty exhaustive budget. So I don't think we'll have any surprises. Might be worth the dry-run though just for helping me learn sooner.

I'd do it by hand. There is no better way for you to learn about the portions of the tax code that affect you than filling out tax forms by hand.

DrJohn

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #27 on: July 27, 2015, 08:38:25 AM »
OK- this is great- but how does it play out for expatriates living in non-tax countries?  Maybe think of it as the next step of information provision?

Thanks.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #28 on: July 27, 2015, 10:54:38 AM »
MDM, thanks for answering all those questions.

One additional note on the Pre-AGI deductions (The bottom of 1040 page 1):

They lower your AGI. This is a big deal in many ways. AGI is the focal point of many tax laws. 10% AGI floor for medical expenses, 2% AGI floor for miscellaneous expenses, threshold for determining traditional IRA deductibility (Modified AGI at least), etc.

Take advantage of any Pre-AGI deduction you can get, they're great.
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Dan_Breakfree

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #29 on: July 29, 2015, 08:40:39 PM »
Wow, really great information, thanks for compiling in one spot. We are fortunate to be in a very high income year and will eclipse the 33% bracket if we're not careful. I was already maxing out my 401k, but my wife wasn't on hers... we had been using her income to pile up cash savings, but this was before I knew about the Roth IRA conversion ladder.

To summarize, we just cranked her 401k contributions up to 50% and which will allow it to max out by the end of the year, effectively saving $4,950 in federal income tax!!! If we ever meet up, I owe many people on this forum a beer.
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Workinghard

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #30 on: July 30, 2015, 06:39:15 AM »
Thanks for compiling info and starting this thread!

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #31 on: July 30, 2015, 03:38:04 PM »
Finally posted the Retirement Years strategy in reply #1. Sorry for the delay, I tend to procrastinate quite a bit.
Indecision may or may not be my problem.

brooklynguy

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #32 on: July 31, 2015, 08:21:24 AM »
Finally posted the Retirement Years strategy in reply #1. Sorry for the delay, I tend to procrastinate quite a bit.

Excellent write-up, Chedds.  At the risk of looking a gift horse in the mouth, I have a couple of minor suggestions:

- the Ordinary Dividends and Qualified Dividends sections, when read in conjunction, make it sound like dividends received from a mutual fund (as opposed to directly held stock) can't be qualified -- perhaps tweak either or both of these sections to clarify that they can be?

- consider including a section on rental income, given that it is another common form of retirement income with its own 1040 line item

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #33 on: July 31, 2015, 08:36:23 AM »
Finally posted the Retirement Years strategy in reply #1. Sorry for the delay, I tend to procrastinate quite a bit.

Excellent write-up, Chedds.  At the risk of looking a gift horse in the mouth, I have a couple of minor suggestions:

- the Ordinary Dividends and Qualified Dividends sections, when read in conjunction, make it sound like dividends received from a mutual fund (as opposed to directly held stock) can't be qualified -- perhaps tweak either or both of these sections to clarify that they can be?

- consider including a section on rental income, given that it is another common form of retirement income with its own 1040 line item

Thanks for the notes. I'll definitely tweak the dividends section, I don't want that to be misleading.

Rentals - I think that might deserve it's own reply sometime soon, and I'll link it up to reply #1 so it's easy to get to. As I mentioned before I tried to keep this personal vs. business, but it's a viable personal cash flow strategy for retirement so I understand the reason behind the suggestion.
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Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #34 on: July 31, 2015, 08:56:35 AM »
- the Ordinary Dividends and Qualified Dividends sections, when read in conjunction, make it sound like dividends received from a mutual fund (as opposed to directly held stock) can't be qualified -- perhaps tweak either or both of these sections to clarify that they can be?

Added the following 2 paragraphs, and tweaked a little bit more of the wording that was already there:

When you purchase individual stocks and hold them long-term, you will receive Qualified dividends. When you purchase mutual funds, a high turnover of stocks held by the fund will produce Ordinary dividends, so you have less control over the Ordinary vs. Qualified. Pay attention to the type of dividends typically paid by a mutual fund when selecting them for purchase, because they can vary widely. Consider whether the fund itself has a buy and hold strategy, because high turnover creates higher taxes for you. *

* Taxes should not be the only consideration when investing, but they shouldn't be ignored either. If a fund with a high turnover consistently beats the fund with a low turnover by 3%, but produces additional taxes, the net return of each option should be considered. Weigh the opportunity cost, and don't ignore the potential for a 12% return because you might have to pay a little more tax.
Indecision may or may not be my problem.

ender

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #35 on: July 31, 2015, 03:57:41 PM »
Quote
Wages should be $0, so let’s skip that line. No more of that FICA guy.


Not sure if this is the best place, but for many, a small amount of earned income in retirement can really pay off tax wise with refundable tax credits.

Quote
but if you are MFJ you have to reach about $44K of income (including 50% of SS benefits) before anything related to SS benefits will become taxable.

This isn't super clear to me, "including 50% of SS benefits" - do you mean if I have $50k SS income and $19k other income that means I have $19k+$25k = $44k? Or something else?

Honestly I'm not even sure reading the IRS page though what the implications are, so I can't really suggest alternate wordings - http://www.ssa.gov/planners/taxes.html - it looks like you only include 50% of your SS as "income" for tax purposes, until you hit $44k total taxable income?

Tremeroy

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #36 on: July 31, 2015, 04:14:04 PM »
Speaking specifically to learning the tax rules:
  • Remember, the tax regulations are just regulations. There is no unifying principle. Stick to the wording of the forms / instructions whenever possible. There are some rare cases where one has to consult the IRS regulations, but if you're in that boat, a lawyer / accountant is probably the right call.
  • The best introductory resource that I've found is Publication 17.
  • The best advanced resource that I've found is the Instructions to Form 1040

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #37 on: July 31, 2015, 09:41:11 PM »
Quote
Wages should be $0, so let’s skip that line. No more of that FICA guy.


Not sure if this is the best place, but for many, a small amount of earned income in retirement can really pay off tax wise with refundable tax credits.

Very good point ender. A small amount of earned income can help in many ways. Not only does it supplement your SWR,  but all of the sudden the earned income credit is simple to reach (if you don't have a lot of investment income). I may circle back and add a note. Thanks.

Quote
but if you are MFJ you have to reach about $44K of income (including 50% of SS benefits) before anything related to SS benefits will become taxable.

This isn't super clear to me, "including 50% of SS benefits" - do you mean if I have $50k SS income and $19k other income that means I have $19k+$25k = $44k? Or something else?

Honestly I'm not even sure reading the IRS page though what the implications are, so I can't really suggest alternate wordings - http://www.ssa.gov/planners/taxes.html - it looks like you only include 50% of your SS as "income" for tax purposes, until you hit $44k total taxable income?

Yep, you got the idea. I've found in practice that around $20k income from non SS sources is safe. Beyond that the SS income starts to phase into the taxable range.
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N

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #38 on: August 01, 2015, 12:18:08 AM »
thanks for assembling this!

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #39 on: August 03, 2015, 08:34:53 AM »
thanks for assembling this!

You're welcome.

@Ender, I added a note in the wages section based on your suggestion, thanks again.

I also added a note on REITs in the dividend section which I meant to include but forgot about until just now.
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anoneemus

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #40 on: August 07, 2015, 10:11:28 AM »
Wow, very cool stuff! I am working my way through the initial post.

Having just checked out the Key Facts and Figures link, I want to flag an error on that sheet:

In the 2015 MFJ table, the calculation for taxes in the $151,200-$230,450 taxable income range is incorrect. It shows the calculation as: 26,387.50 + 28% 151,200 but the correct calculation is 29,387.50 + 28% 151,200. IOW it's $3000 off.

I built a spreadsheet to calculate our taxes given various assumptions about income and deductions, so some months ago I looked up the 2015 tax tables - that's why I honed in on that part of the worksheet and noticed the error.

Resources:
Key Facts and Figures is one of the best resources I’ve found online that summarizes a lot of data into just 2 pages. I keep a printed copy in my top desk drawer and refer to it often. You can get an updated version of this each year with this search: 2016 key facts and figures.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #41 on: August 07, 2015, 10:30:29 AM »
Wow, very cool stuff! I am working my way through the initial post.

Having just checked out the Key Facts and Figures link, I want to flag an error on that sheet:

In the 2015 MFJ table, the calculation for taxes in the $151,200-$230,450 taxable income range is incorrect. It shows the calculation as: 26,387.50 + 28% 151,200 but the correct calculation is 29,387.50 + 28% 151,200. IOW it's $3000 off.

I built a spreadsheet to calculate our taxes given various assumptions about income and deductions, so some months ago I looked up the 2015 tax tables - that's why I honed in on that part of the worksheet and noticed the error.

Good catch! And congrats on reaching that level of income. I've never made it to the 28% tax bracket, but there are a few variables this year that could put us at the bottom of that bracket. Bittersweet.
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MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #42 on: August 07, 2015, 10:56:23 AM »
In the 2015 MFJ table, the calculation for taxes in the $151,200-$230,450 taxable income range is incorrect.

I built a spreadsheet to calculate our taxes given various assumptions about income and deductions

As CS said, good catch!  Given that, I suspect your own spreadsheet is pretty good.  If you see substantive ways to improve the MMM case study spreadsheet, let us know.

Paul der Krake

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #43 on: August 11, 2015, 08:42:02 PM »
Does anyone have a good resource or general advice for small business owners, specifically married couples with one W-2 and one side business?

I have been reading "LLC for dummies"-type books for a little bit and tax efficiency is rarely discussed. Pointers would be appreciated.

AllieVaulter

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #44 on: August 30, 2015, 07:00:49 PM »
Following!

Malaysia41

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #45 on: September 07, 2015, 02:43:04 AM »
OK- this is great- but how does it play out for expatriates living in non-tax countries?  Maybe think of it as the next step of information provision?

Thanks.

Dr. John,

I've been doing (read obsessing) on the relative merits in living overseas in retirement, mainly because we're currently living overseas in retirement, and are ready to move to somewhere new.  How about I start a new thread?  I'll come back in here and post the link.  If it's a duplicate thread please let me know, but an initial search came up goose eggs.
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flagdude

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #46 on: September 14, 2015, 11:32:10 PM »
Following

thrifted

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #47 on: October 05, 2015, 10:28:52 AM »
this is amazing advice. so straight forward and succinct.

JustGettingStarted1980

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #48 on: November 11, 2015, 10:33:49 AM »
Hi Cheddar (or anyone else who knows the answer),

Love the LC series, by the way :)

Question on Dependent Care FSA's.
-so I get a Tax deduction of $6000 from the IRS for my childcare expenses (well over 6K)
-i have a workplace Dependent Care FSA that does a pretax deduction of 5K, and then reimburses this money later. But it's a pain, have to fill out reimbursement paperwork, and can't get the money back until after I already paid the Nanny anyway.

-my question is, which is better?
-per my crappy math:

IRS Tax Deduction = $6000 x .28 = $1680
Pretax Dependent Care FAS = $5000 x .28 = $1400 and more money out of circulation as well as more paperwork

Is my math right?

Thanks,

JGS

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #49 on: November 11, 2015, 10:53:19 AM »
Hi Cheddar (or anyone else who knows the answer),

Love the LC series, by the way :)

Question on Dependent Care FSA's.
-so I get a Tax deduction of $6000 from the IRS for my childcare expenses (well over 6K)
-i have a workplace Dependent Care FSA that does a pretax deduction of 5K, and then reimburses this money later. But it's a pain, have to fill out reimbursement paperwork, and can't get the money back until after I already paid the Nanny anyway.

-my question is, which is better?
-per my crappy math:

IRS Tax Deduction = $6000 x .28 = $1680
Pretax Dependent Care FAS = $5000 x .28 = $1400 and more money out of circulation as well as more paperwork

Is my math right?

Thanks,

JGS

Aren't dependent care FSA's pre FICA tax? If that's the case, add another .0765 to the .28 and you get a deduction of $1782.50.

Are you sure this is a deduction? I searched the internet for a dependent care deduction, and I could only find a mention of a credit, not a deduction. Can you link the appropriate IRS documents on this tax deduction?