Hypothetical Tax Situation

[TheDude]

Here is a question that I was talking to my coworker about and I wanted to see what MMM Forum would say.  My wife and I both work and together bring a pretty decent income (100K). My wife would like to possibly have a second kid. If we do we think it would be best for her to stay home. Based on my income alone I could get our AGI down to 34000 with some IRA and HSA Contributions. At 34000 I believe our taxes after just the standard deduction and exemptions would be 540. We would then qualify for 2K savers credit (non refundable), 2K child credit (maybe partially refundable), and 2.5k Earned Income Credit (refundable). In the end I believe my tax liability would be about -2.5K (they would pay me). In addition we would qualify for CHP insurance for the kids. Its only $105 a year and killer benefits from what I can tell.

My co-worker thinks following thorugh withe the above would make me a parasite. I say although I don't really agree with the system its there and I am only playing within the rules. Do you think you would take advantage of all the tax credits? What about the health insurance?

[shedinator]

First off, if you and your wife want to have another child, and one of you wants to stay home with the baby, and you're willing to sacrifice income to do it, then go for it. Unless money is your number 1 priority, then there are always going to be things that are more important to you, and there's nothing wrong with that. Once you've made that decision to give up income in order to invest more time/resources into something else, if there are things built into the tax code that will help you support your family, whether they're deductions, exemptions, or credits, go ahead and take advantage of them. You're not quitting your job so you can go on welfare as a form of paid vacation, or defrauding the state, you're just saying that money is not your top priority.

Once you make that decision, however, I'd say that it could be unethical if you attempt to implement a sort of "cap" on your income. Work within your principles and priorities, and don't do things that are going to violate them in order to up your salary, but if the chance to increase income comes along, and it's compatible with your way of life, take it. That may ultimately result in not getting the same tax credits, or it may not. That, for me at least, is the only real quandary here. I've known people who intentionally worked jobs that paid below a certain threshold so they could maximize government benefits (tax credits, TANF, SNAP, etc.), which makes those resources harder to get for people who really need them. IMHO, that's gaming the system. Taking a pay cut to take advantage of tax loopholes and credits is not cool. Taking a paycut so you can do what you love is awesome... and if the tax credits and up in your favor, so much the better.

[sol]

I do not think it is at all unethical to claim the tax benefits offered to everyone else in your income bracket.  Whether your income is low because you have a shitty job or low because you live frugally and take advantage of deductions shouldn't make any difference.

[arebelspy]

I do not think it is at all unethical to claim the tax benefits offered to everyone else in your income bracket.

+1.  In fact, unless I'm misunderstanding the situation, I think it's quite Mustachian.

[Dee]

I agree with the posters who say this is in no way unethical. There's a principle in Canadian tax law that says that is is absolutely permitted for tax payers to arrange their affairs in the most fiscally advantageous way to them. I wouldn't be surprised if it's the same in the US. It's not for every tax payer to question the foundation of every tax credit they can take and then make a more choice about whether to accept the tax credit based on whether they fit into the rationale they think it was intended for. You just pay the taxes you're required to pay, and no more.

TheDude, your coworkers sound like the kind of people who think early retirees are parasites as well. I doubt very much they are coming at this situation with the same approach you are.

If, for some reason, you had qualms about taking the tax advantages you'd be entitled to, I'd still suggest taking them and then re-distributing them yourself where you thought they'd do the most good. I doubt very much giving money to the government coffers that we aren't required to provide is the way most of us would put extra money to good use!

[velocistar237]

"Tax avoidance is perfectly legal and encouraged by the IRS"
- the IRS

[The Money Monk]

I do not think it is at all unethical to claim the tax benefits offered to everyone else in your income bracket.  Whether your income is low because you have a shitty job or low because you live frugally and take advantage of deductions shouldn't make any difference.

+2

Don't forget you have been paying for other people to use these benefits with your taxes over the years, so how can anyone say it's wrong to use the benefits when they are applicable to you?

I don't even think all these social programs should exist, but they do, so might as well use it.

[Guitarist]

MY GF's mother recently lost her job (she quickly found another one) and refused to collect unemployment. She didn't want to be a parasite... Seriously, you've worked since before you were 20 basically non-stop and you think you could ever be considered a parasite?

Good for you for figuring out any way possible to lower the taxes you owe. Ask that coworker if he includes every deduction he can. Tell him he should consider not filing if he finds out he is owed a return.

[TLV]

If you've been working a non-self-employed job (and not under-the-table) in the US, then your employer has been paying the unemployment insurance tax for you - something like 6% of the first $7k you make each year. It doesn't make sense to not take unemployment payments if you lose your job any more than it would make sense to turn down reimbursement from your health insurance if you get cancer. Of course you still do what you can to fix the situation (ie get another job if you're not FI yet), just like you would if you were sick.

[Guitarist]

Preaching to the choir with that one.
My thought process is, it is money that is going to the government to take care of you should something happen (like being laid off), instead of going directly to your checking account. It is your money, take it.

[Mirwen]

We recently had a discussion on the ERE forums about this one too.  There was a good mix of people for and against which led to a rather lengthy debate. 

I'm all for tax planning.  I do it myself and encourage my clients in my tax prep business to do so.  Although I feel that the EIC is given to people with too high an income these days (55k?  c'mon), if I qualify for it I will still take it.  My situation now is exactly like the one you described and it's great.  DH works and I stay home with our son most of the time.  Last year we paid in about 300 plus FICA and got about 2700 back.  You should get the same more with the 2nd child, but you should keep some things in mind.  First, I believe it is impossible to get the entire 2000 savers credit because if you fall in the 50% category (income <34000) and have kids, you aren't going to have 2000 worth of tax unless you own your own business and owe fica or have tax penalties.  Last year I put enough money in our 401k and HSA to get our taxed income down below the magic $34000 number.  My tax was 1200 before credits. 

Second, EIC can be tricky.  In order to qualify, your gross income has to "qualify" and then the amount of the credit is based on AGI.  So if you make more than ~50k (I don't remember the exact figure) you had better put that money in a 401k, HSA or some other place where it is taken out pre-tax, so it doesn't show up on your w-2.  However, your analysis of the situation is generally correct and if you put enough money in tax advantaged accounts to get your agi under 34000, then you will get a substantial refund: probably more than the 2400 you mentioned.  I'd estimate 3500-4500.  You will get the full 2k back for the "additional child tax credit" with this income range.

[TheDude]

Wow Mirwen thanks for all the info. I will check the ERE boards. The more I think about it the more I realize that most people must be pretty bad tax planners. There is all kinds of money up for grabs. I do realize the savers isnt refundable but I really had no idea about the additional child tax credit works.  If I could pay off the house I could really shelter enough income to get down to 26000 or so and really  bring in the credits.

[Guitarist]

We recently had a discussion on the ERE forums about this one too.  There was a good mix of people for and against which led to a rather lengthy debate. 

I just don't get it. CPA's have to live by a code that states they will do whatever is best financially for their clients. This includes saving as much from taxes as they can within the law.