Author Topic: AGI of $91,752 and a tax bill of ZERO - here's how it's done  (Read 8795 times)

MarciaB

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AGI of $91,752 and a tax bill of ZERO - here's how it's done
« on: March 24, 2014, 07:15:29 PM »
There's a nice blog by a couple of 30-somethings who FIRE'd and are travelling the world called GoCurryCracker. They just posted their 2013 tax returns, and it's enlightening. An AGI of $91,752 and a tax bill of zero...wow! I understood this stuff (vaguely) intellectually, but seeing the actual numbers and thinking on this brought it home in a palpable way.

Um, what am I doing working a full-time day job in the US for again?

http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/#more-2676

sirjonathan

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #1 on: March 24, 2014, 09:10:03 PM »
I've been thinking about ways to structure business / life to lower (or eliminate!) taxes and this post got those gears turning again.

So, the takeaway message for me is to eliminate "earned income" - get my money working for me. Alright, got it..

So I have a consulting business and I have a product line. Is there a way that I can structure and organize my business (even so far as to remove me from the equation) in order to create either qualified dividends or capital gains?


Cheddar Stacker

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #2 on: March 24, 2014, 09:23:20 PM »
So I have a consulting business and I have a product line. Is there a way that I can structure and organize my business (even so far as to remove me from the equation) in order to create either qualified dividends or capital gains?

Gocurrycracker is awesome and he's somewhat active on this forum as well. He posted a link to his article on another thread here today. See this link - http://www.mrmoneymustache.com/forum/ask-a-mustachian/capital-gains-tax-and-the-mmm-approach/msg251374/#msg251374

You can set it up as a C-Corporation which will pay corporate tax, then you can pay yourself dividends. This is a poor strategy since it's double taxation, but it's one way to create qualified dividends.

There's another very complicated structure call an IC-DISC but it only works for exported goods, so if you manufacture anything and sell it overseas you can look into that.

Short of those 2 options, my only other thought is you would have to sell the business for a gain, and the structure of the sale is very important and might not create capital gains.

ichangedmyname

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #3 on: March 24, 2014, 09:42:58 PM »
 really wish I was smarter so I could grasp this concept. :(

MarciaB

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #4 on: March 24, 2014, 09:48:31 PM »
Hey Cheddar Stacker - I didn't see that other post you referenced, sorry. I just went to the GCC blog and was so blown away that I just had to post this!

Seriously, talk about smart planning and working the system well, these folks have their act together. I salute them (and want to be them!)

innerscorecard

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #5 on: March 24, 2014, 09:51:30 PM »
The key is the Bush tax cuts which set taxes on long-term capital gains and qualified dividends to 0% IF your total income falls within the 15% tax bracket for earned income.

Cheddar Stacker

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #6 on: March 24, 2014, 09:51:57 PM »
You really don't need to fully uderstand it to execute the plan. Save a lot of your earnings, invest them in US companies, retire when you have enough. Investment gains are taxed differently, or not at all if you do it correctly.

MarciaB - no biggie, I wasn't trying to trump you, just linking to the other one. It was actually a stale thread where someone referenced his website, then when he posted today he linked to the article. I've linked to his never pay taxes again post here 20+ times. It's a very exciting concept.

Jeremy

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #7 on: March 24, 2014, 10:19:18 PM »
Now if somebody would only put that post on reddit :P

Abe

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #8 on: March 24, 2014, 10:55:55 PM »
Does the 0% tax bracket on long-term gains & dividends only apply if your income is below the threshold, or is it progressive and apply to whatever is below it, then the 15% tax apply to that above the threshold?

Jeremy

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #9 on: March 25, 2014, 04:00:08 AM »
Does the 0% tax bracket on long-term gains & dividends only apply if your income is below the threshold, or is it progressive and apply to whatever is below it, then the 15% tax apply to that above the threshold?

It is progressive, but based on a combination of earned income and dividends.  You can play with the numbers a bit using Intuit's TaxCaster

I think this is the link (it's not working for me at the moment): https://turbotax.intuit.com/tax-tools/calculators/taxcaster/


Abe

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #10 on: March 25, 2014, 08:13:55 PM »
Yep, it looks like anything from $92,500 - $250,000 is taxed at 15%. Above that, another 3.8% surtax to cover the ACA kicks in. Above $420,000 the alternative minimum tax comes in.

EscapeVelocity2020

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #11 on: March 25, 2014, 08:43:58 PM »
The other bummer for me (personally), I have short term and long term capital gains losses that I should probably use up while I'm working and in a high tax bracket.  This being taxed 0% but having offsetting losses bums me out, so I won't retire just yet....

ch12

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #12 on: March 25, 2014, 09:40:24 PM »
What an amazing blog post! I'm mesmerized by people who bring their federal taxes down to $0. The icing on the cake is being a resident of a state without income tax.

It reminds me of Justin's projections of four different zero to .1% federal tax scenarios: http://blog.personalcapital.com/financial-planning-2/average-american-pay-no-taxes/

It sounds so great. I'm going to dig deeper into what they're doing over there at Go Curry Cracker.

payitoff

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #13 on: March 25, 2014, 09:53:40 PM »
any idea how much they have in their portfolio to earn this much in dividends in a year?

payitoff

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #14 on: March 25, 2014, 10:22:35 PM »
found it, its $836K at 4%. wow im impressed. cool stuff, now my head is spinning.

TomTX

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #15 on: March 26, 2014, 07:45:11 AM »
What an amazing blog post! I'm mesmerized by people who bring their federal taxes down to $0. The icing on the cake is being a resident of a state without income tax.

It reminds me of Justin's projections of four different zero to .1% federal tax scenarios: http://blog.personalcapital.com/financial-planning-2/average-american-pay-no-taxes/

It sounds so great. I'm going to dig deeper into what they're doing over there at Go Curry Cracker.

With one kid, if we can get earned income and AGI below the Earned Income Tax Credit threshold, (~$44k) - zero federal income tax. Still paying FICA, property taxes, sales taxes, et cetera.

foobar

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #16 on: March 26, 2014, 09:33:07 PM »
AMT is a different topic. You tend to get hit by it when you have deductions (state taxes is the big one) that are not allowed under the amt rules. I am not sure you can ever get there just by having capital gains with no ordinary income.

Somewhere in the 400s, the capital tax rate goes up to 20%+3.8%.

Yep, it looks like anything from $92,500 - $250,000 is taxed at 15%. Above that, another 3.8% surtax to cover the ACA kicks in. Above $420,000 the alternative minimum tax comes in.

lordrtype1

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #17 on: March 27, 2014, 04:14:04 AM »
Thanks for the post!

I'm glad they posted their actual 1040, since you can also see how you would account for these things at tax time.  You could have all of these things going on, and put it all on the form wrong, and end up paying through the nose on the same thing, rather than owing nothing.  I will say that the reason a lot of billionaires don't pay a lot in taxes is because of how capital gains works.  Think about it: you own a company, and your pay is in dividends, and you don't buy/sell shares likely ever.  So, you would only pay taxes on the dividends at that long term capital gains rate.  Even if you are above the penalty rate, you're still taxed WAY lower than the income rate, so you consider that move alone a win (15-18% vs 39% roughly).  I'm grossly oversimplifying this, but it's why its better to own a company, and let it pay taxes (which are even LOWER), than pay them yourself. The corporations that paid the most still only had an effective tax rate of around 15-25% and that's on BILLIONS of dollars; some even got tax CREDITS!!!)

For Example: http://finance.yahoo.com/news/companies-paying-most-taxes-174550448.html ; http://money.msn.com/tax-planning/companies-paying-the-most-and-least-in-taxes

Once you reach that level of money, you care about keeping more, only because it helps keep costs in line, not because you actually need to.  There are ways around many of the tax laws, and most are so legal, even the IRS will recommend them. (i.e., savings credit if you earn less than a certain amount, etc.)

foobar

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #18 on: March 27, 2014, 09:36:21 PM »
How many people making 69k have the opportunity to put 39k into a tax deferred account? I don't mean people that can but choose not to but who simply can.  You need to be in a special class of employee (government worker)..  I also worry about these people are investors. They always seem to have 3k in capital gains losses:) And is paying 600 in interest to save 90 bucks on taxes really a win?:) 

They are also right at some inflection points where slight changes can ramp things up for example lets make a couple of minor changes
a) No Pension
6k*.15 = 900 on the pension income
5500*.15 = 825 since they would no longer be in the 0%

b) No 401(k) also
17.5*.25 = 4.3k
6k more in taxes

c) Now lets get rid of kids 2+3 (imagine they graduated from college): 1950 in exemptions + 2k in tax credits: 3950

Or basically 10k/yr in taxes.

It is easy to come up with some fun situations (imagine the above couple was 50+ and could do 23k to the 401(k) + 457 and had 3 kids under 16. They would be getting a 2k check from the government) but most of them require the stars to align in ways that you can't control.



What an amazing blog post! I'm mesmerized by people who bring their federal taxes down to $0. The icing on the cake is being a resident of a state without income tax.

It reminds me of Justin's projections of four different zero to .1% federal tax scenarios: http://blog.personalcapital.com/financial-planning-2/average-american-pay-no-taxes/

It sounds so great. I'm going to dig deeper into what they're doing over there at Go Curry Cracker.

Nords

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #19 on: March 28, 2014, 01:11:56 PM »
I also worry about these people are investors. They always seem to have 3k in capital gains losses:)
A lot of investors did a humongous amount of tax-loss swap selling in 2008-09, switched back to their original asset allocation, and then simply held on for long-term capital gains.  It was widely discussed on Early-Retirement.org and Bogleheads.

We just used up the last of our carried-over cap losses in 2013.

Miss. Takes

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #20 on: March 31, 2014, 09:41:48 PM »
I don't understand this article. Why isn't he taxed if he makes less than $72,500? I understand the standard deduction and personal exemptions, but why isn't he taxed on income of $20k to $72.5k?

He mentions qualified dividends too...What are these? What's the difference b/w ordinary and qualified dividends? Is one taxed different? Other than the tax difference, what exactly is it?

Cheddar Stacker

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #21 on: April 01, 2014, 08:44:21 AM »
To be considered qualified dividends you have to hold the stock for a couple months, and I'm fairly certain it has to be a company operating in the U.S. If you are investing in mutual funds qualified dividends are paid based on the underlying stocks those funds invest in.

ch12

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #22 on: April 01, 2014, 06:31:45 PM »
Quote
You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.

You can read more about qualified dividends on the Fidelity website.
https://www.fidelity.com/taxes/tax-topics/qualified-dividends

EscapeVelocity2020

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Re: AGI of $91,752 and a tax bill of ZERO - here's how it's done
« Reply #23 on: April 01, 2014, 07:54:29 PM »
I don't understand this article. Why isn't he taxed if he makes less than $72,500? ...

He mentions qualified dividends too...What are these? ...

Qualified dividends and long-term capital gains get taxed at a special rate.  Those rates are:

0% on any amount that otherwise would be taxed at a 10% or 15% rate.
15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.
20% on any amount that otherwise would be taxed at a 39.6% rate.
...

Which reminds me of 'the moral of the story' when you are saving a significant % of income, there is a low-risk break-even point between working one more year and hanging it up to minimize taxes going forward.  I have started playing with http://www.i-orp.com (EDIT:  maybe type the site in manually, it pops up an angry message when I click directly on it, but still seems to work, FYI).  The nice feature IMHO is that it leans toward someone who understands assumptions as opposed to this 'fashionable trend' in Monte Carlo analysis.  Basically, if you assume current tax law and what you want your retirement income to be, it gives you one answer as to how to optimize withdrawals between Roth, tIRA, taxable, etc.  It's not as sophisticated as FIRE-calc in terms of rolling investment returns, but I think people get deluded by a 95% success rate.  Who cares about 95% of the time in history there was success if the 5% failure periods look just like the CAPE and bond yields when I retire... 
« Last Edit: April 01, 2014, 07:59:21 PM by EscapeVelocity2020 »