Author Topic: What are the tax benefits of having a low AGI?  (Read 4003 times)

lhamo

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What are the tax benefits of having a low AGI?
« on: January 10, 2015, 02:42:38 PM »
Just noticed on another thread someone mentioned that if you have an AGI of less than 60k you qualify for something called the saver's tax credit on US federal taxes.  I recall reading about this, but don't have personal experience with it as our income has never been that low.  As we contemplate FIRE, I'm wondering what other tax benefits there are to keeping your AGI low.  Could we possibly use this as a place to compile a list, and for people to explain how these things work?  I know I could probably look everything up on the IRS site, but thought it might be fun to glean the collective wisdom here and get some real-life case studies.

A few things that come to mind immediately, some based on discussions in recent threads:

Child tax credit
Retirement contributions as a way to reduce AGI
Living primarily off interest, dividends and capital gains and keeping those at levels that minimize taxable income
Keeping your AGI below ACA subsidy levels

I'm sure I'm missing a ton of things -- look forward to everyone's input!




Exflyboy

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Re: What are the tax benefits of having a low AGI?
« Reply #1 on: January 10, 2015, 02:56:53 PM »
Well first off, as a married couple your first $20k are completely tax free.. assuming no additional deductions beyond the Federal standard.

I notice that State taxes in Oregon are nowhere near as generous as your income goes down.. In fact you can easily pay 3 times your Federal tax to the State!


LadyStache

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Re: What are the tax benefits of having a low AGI?
« Reply #2 on: January 11, 2015, 12:12:24 PM »
With a low AGI, you can deduct student loan interest.

sol

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Re: What are the tax benefits of having a low AGI?
« Reply #3 on: January 11, 2015, 12:38:33 PM »
With an AGI below $50k, your net worth is not considered in your kid's FAFSA application for financial aid for college.  That's potentially worth many tens of thousands of dollars of aid if you have several children.

With an AGI of less than 138% of the FPL, you qualify for free health insurance for your kids.  Depends on family size but for my family of five the limit is $38,516 per year in Washington.

With an AGI of less 400% of the FPL you qualify for subsidized health insurance and cost sharing on silver plans for your entire family.  For my family of five the income limit is like $100k per year, but the subsidies are on a sliding scale so they're worth more if your AGI is lower.  In my case, at an AGI of $40k the subsidy alone is worth about $5k/year.

The earned income tax credit is only available to people with low AGI.  It's potentially worth over $6k/year if you have three kids and show an AGI of less than $25k/year.

sol

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Re: What are the tax benefits of having a low AGI?
« Reply #4 on: January 11, 2015, 12:55:06 PM »
Looks like a ton of benefits are available to people at 100% of the FPL, which shouldn't be too hard for an early retiree to achieve if living off invested assets.  For my family the limit is about $28k/year, and we would potentially qualify for SNAP (food stamps) and TANF  (for two years only) and Section8 housing (not useful).

Some of those programs also have net asset tests which may disqualify you.
« Last Edit: January 11, 2015, 01:07:51 PM by sol »

Gin1984

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Re: What are the tax benefits of having a low AGI?
« Reply #5 on: January 11, 2015, 01:13:12 PM »
Looks like a ton of benefits are available to people at 100% of the FPL, which shouldn't be too hard for an early retiree to achieve if living off invested assets.  For my family the limit is about $28k/year, and we would potentially qualify for SNAP (food stamps) and TANF  (for two years only) and Section8 housing (not useful).

Some of those programs also have net asset tests which may disqualify you.
In my state those programs require you to be looking for work or working.

teen persuasion

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Re: What are the tax benefits of having a low AGI?
« Reply #6 on: January 11, 2015, 01:45:18 PM »
With an AGI below $50k, your net worth is not considered in your kid's FAFSA application for financial aid for college.  That's potentially worth many tens of thousands of dollars of aid if you have several children.

With an AGI of less than 138% of the FPL, you qualify for free health insurance for your kids.  Depends on family size but for my family of five the limit is $38,516 per year in Washington.

With an AGI of less 400% of the FPL you qualify for subsidized health insurance and cost sharing on silver plans for your entire family.  For my family of five the income limit is like $100k per year, but the subsidies are on a sliding scale so they're worth more if your AGI is lower.  In my case, at an AGI of $40k the subsidy alone is worth about $5k/year.

The earned income tax credit is only available to people with low AGI.  It's potentially worth over $6k/year if you have three kids and show an AGI of less than $25k/year.

Making this even more lucrative, my state matches EITC at 30%, so that $6000+ refundable credit becomes $7800+.  The state also matches the Child Tax Credit @ 33%, so $3000 CTC becomes nearly $4000.

These credits are refundable, unlike the Saver's credit.  The Saver's credit is worthless to anyone whose AGI is below taxable level (like when we had 5 kids at home, or even now with just a few).

ETA: Just realized the OP wanted an explanation of how this works.  For us, putting as much as possible in DH's 401k and HSA lowers our AGI, which makes us eligible for a greater EITC than saving elsewhere.  The phaseout rate for the EITC is something like 21%, so every dollar put in the HSA saves us 7.65% FICA + 21% EITC phaseout + 6.3% state matching + 4% state income tax + 10% fed tax, or nearly 49%!  A dollar in the 401k saves 41.3% (not FICA), at least until we hit federal taxable income minimum, then it is 31.3%.

You could use those refund monies for living expenses, but we use them to fund our Roths, totally tax free.
« Last Edit: January 11, 2015, 02:05:51 PM by teen persuasion »