Author Topic: Not paying a lot of taxes (legally)  (Read 1541 times)

J.P. MoreGains

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Not paying a lot of taxes (legally)
« on: February 26, 2025, 07:42:20 AM »
I had a great year of barely paying any taxes at all. Really suprised me to get a refund. With how much I saved I wasn't really expecting it would be possible to get a refund but I did.

Maybe the IRS knows everyone hates paying taxes so they auto deduct a little more than needed throughout the year so they can give people refunds and then everyone feels a little better about paying taxes.

Anyway... here are my stats for 2024:

Saved: $75,346.38

Total Gain in Net Worth: $110,571.35

State Tax Job 1 & Job 2
667 + 819 = 1,486 minus refund of 501 = $985

Federal Tax Job 1 & Job 2
1,513.46 + 2,905.74 = 4,419.20 minus refund of 1460 = $2,959.20

Medicare Tax Job 1 & Job 2
1,060.60 + 347.56 = $1,408.16

Social Security
$0 (Job 1 pays into pension account which I keep if I leave, job 2 paid into 401a)

TOTAL TAX PAID (not including sales tax or things like that)
$5,352.36

Thoughts
This was all possible through nearly maxing out my contributions to 401k, 457b, HSA plus the 401a. My last contribution from 2023 hit in January of 2024 and I didn't factor that into my calculations so I maxed out for 2024 but with one contribution from 2023... so I didn't have the max deducted from 2024.

I think with these tax advantages I'm statistically an outlier. I don't really earn that much... so to max these out is a big deal and makes this possible. Paying only a little over of 5k of taxes I think is pretty good.

Glad this is possible.

« Last Edit: February 26, 2025, 07:45:29 AM by J.P. MoreGains »

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #1 on: February 26, 2025, 07:44:19 AM »
Some more shots. This refund makes me happy. More money to invest.

Life is so good being able to live off of a little and save a lot. Being Mustachian is the way to go. This was my first calendar year doing this all in... I really believe in this stuff.

Wish I would've known about this in 1997 when I got my first job!

Car Jack

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Re: Not paying a lot of taxes (legally)
« Reply #2 on: March 06, 2025, 04:51:42 PM »
This year, I'm mainly doing long term cap gains.  I'll pay 5% of the gains as state tax and zero Federal.  It'll be about a hundred grand of LTCG and then "income", meaning interest, non-qual dividends, Roth conversions, savings bond interest, I need to only stay under the $30k standard deduction amount.  I use a tax tool to run scenarios and have documented them in my spread sheet.  Oh, there will also be the tradeline sales included in income.

minority_finance_mo

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Re: Not paying a lot of taxes (legally)
« Reply #3 on: March 07, 2025, 03:33:47 AM »
That's awesome, well done! Access to a 401k and a 403b really is the ultimate cheat code 👏🏽

Tasse

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Re: Not paying a lot of taxes (legally)
« Reply #4 on: March 07, 2025, 07:07:36 AM »
Maybe the IRS knows everyone hates paying taxes so they auto deduct a little more than needed throughout the year so they can give people refunds and then everyone feels a little better about paying taxes.

This is absolutely intentional, yes. Also, it's easier for them to give everyone back a little money than to track everyone down for a little more money.

My happy tax surprise this year was the reminder that Colorado lets you deduct charitable contributions even if you didn't itemize federally. Bit of a pain because I hadn't been tracking those tax receipts, but I've got them all together now and they're worth several hundred dollars of refund.

TyGuy

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Re: Not paying a lot of taxes (legally)
« Reply #5 on: March 07, 2025, 10:12:38 AM »
This is incredible, I have access to a 457, which I max out yearly and would like to do more. How did you also get access to a 401k through the same employer? Did you ask your employer? Or did you set it up through the financial institution distributing the 457 plan and have it added?

41_swish

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Re: Not paying a lot of taxes (legally)
« Reply #6 on: March 07, 2025, 10:22:30 AM »
So, the classic one for me was switching to a traditional 401(k) and HSA. I am going to max out my 401(k) this year, so there is a $23,500 reduction in taxable income and then I will put $4,300 in my HSA. It is not groundbreaking, but it helps.

I also have some individual stocks that I can harvest losses on if need be

bluecollarmusician

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Re: Not paying a lot of taxes (legally)
« Reply #7 on: March 07, 2025, 10:25:09 AM »
This year, I'm mainly doing long term cap gains.  I'll pay 5% of the gains as state tax and zero Federal.  It'll be about a hundred grand of LTCG and then "income", meaning interest, non-qual dividends, Roth conversions, savings bond interest, I need to only stay under the $30k standard deduction amount.  I use a tax tool to run scenarios and have documented them in my spread sheet.  Oh, there will also be the tradeline sales included in income.

Hi @Car Jack what tax tool do you use to run scenarios?
I have used the one on engaging data, but it's pretty simplistic...

recs welcome!


Thanks

dandarc

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Re: Not paying a lot of taxes (legally)
« Reply #8 on: March 07, 2025, 10:25:39 AM »
Good on you! Fair number of folks do have a similar setup available - 2 teacher (or other government employee) households right off the bat. Not very many actually do it though.

https://www.gocurrycracker.com/never-pay-taxes-again/

Sandi_k

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Re: Not paying a lot of taxes (legally)
« Reply #9 on: March 07, 2025, 12:24:10 PM »
This is incredible, I have access to a 457, which I max out yearly and would like to do more. How did you also get access to a 401k through the same employer? Did you ask your employer? Or did you set it up through the financial institution distributing the 457 plan and have it added?

He has two jobs, with two different employers and two different retirement plans.

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #10 on: March 07, 2025, 12:57:14 PM »
Exactly, one local government employer and had a part time job at the university. So this year was a great year for me.

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #11 on: March 07, 2025, 12:59:47 PM »
Maybe the IRS knows everyone hates paying taxes so they auto deduct a little more than needed throughout the year so they can give people refunds and then everyone feels a little better about paying taxes.

This is absolutely intentional, yes. Also, it's easier for them to give everyone back a little money than to track everyone down for a little more money.

My happy tax surprise this year was the reminder that Colorado lets you deduct charitable contributions even if you didn't itemize federally. Bit of a pain because I hadn't been tracking those tax receipts, but I've got them all together now and they're worth several hundred dollars of refund.

Good to know about the charitable contributions.

Good to know my hunch about refunds is right... I mean it make sense. They'll deduct and you'll be happy for getting soemthing back each year.

secondcor521

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Re: Not paying a lot of taxes (legally)
« Reply #12 on: March 07, 2025, 02:35:21 PM »
Paying only a little over of 5k of taxes I think is pretty good.

Depending on your entire financial situation over the remainder of your life, you may be optimizing to the wrong variable.

When I first FIREd, I was living off of savings and my taxable account.  And with low spending (paid off house and car and simple lifestyle), I could end up with a low taxable income like you and pay really low taxes.  Which I did for the first few years.  Then my three kids were in college and I could get the AOTC for each of them for four years, so that made it even easier to pay really low taxes.  It was lovely and easy to have those small tax bills.

Here's the problem that I found:  All of my tax deferred money was growing and growing.  I also found out that my SS benefit is given in current year dollars, so I needed to inflation adjust that amount for planning.  And there is a possible inheritance.  If I kept going the way I was going, then in my 70s I'd be paying quite high marginal tax rates.

While there are arguments to the contrary, most people who look at this situation realize that it probably makes sense to pull forward that income from those future higher marginal tax rate to a current year lower marginal tax rate.  So in my case, if I can pay 2x% now at 55 instead of 3x% in my 70s, then I've increase my lifetime after-tax spendable income.

In your case, if you're filing single and those two jobs are the majority of your income and you take the standard deduction, your taxable income is somewhere around $25K which puts you in the middle of the 12% bracket.  You left about $20K of the 12% bracket unfilled.

If you project out to when you're in your 70s, those tax-deferred accounts and SS and any additional contributions you make, I bet you'll find that you're in at least a 2x% bracket.

My suggestion would be to consider changing your contributions into Roth-like vehicles such that you fill up that 12% tax bracket every year.  Yes, you'll pay more taxes now.  But I think you'll have more after-tax spendable income over your life time because you're paying taxes at 12% instead of 2x%.

Personally I've determined what I think is my tax-equilibrium rate - if I can pay taxes at that rate or less voluntarily now, I'll do so.  If I would have to pay at above that rate now, I'll defer and pay taxes later.  There are some details that go into figuring this out.  But basically, I sit down every tax season and do a combination of Roth conversions in December and small HSA contributions in February to dial my AGI in to where I pay up to, but not above, that tax-equilibrium rate.

In any given year, the effect is not particularly great, but over a few decades it can add up to real money.

Side note:  refundable credits and things like the ACA and FAFSA can make this analysis tricky because your actual marginal tax rate can vary from what the tax bracket would nominally say.  It also means my guesses as to your tax situation this year might be off base.  I use the Case Study Spreadsheet each year (updated in a thread here on MMM by MDM) to look at the actual federal tax effects of things like ACA subsidies and tax benefit cutoffs and phase out ranges.

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #13 on: March 07, 2025, 06:28:59 PM »
@secondcor521

Good observation on this. I am vaguely aware of this but don't understand in depth. I had a math teacher I know who is good with financial stuff suggest a similar approach...

...but early on in my journey I opted to go all in on just putting away as much as I possibly can to make progress as quick as possible. There has been a positive result on my psychological state because of this. I feel like I'm winning.

So I think after I get to maybe 400k I'll reassess. I think I can do Roth options for both my 401k and 457b.

Basically - this comes down to being a beginner and being kind of ignorant of tax brackets and optimizations like this.

Question


I'm under the assumption that when I retire and I'm old if I don't spend a lot of money - say I only take like 24k out a year to live off of... then I wouldn't really have to pay much tax at all.

So more or less my assumption is that I'll take money out of these accounts and that would be my "income" if I don't take a lot out or use a lot I won't get taxed much.

Or do taxes in retirement work differently?

Or do I have unrealistic expectations of what I'd spend in retirement?

MoseyingAlong

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Re: Not paying a lot of taxes (legally)
« Reply #14 on: March 07, 2025, 06:36:25 PM »
@secondcor521

Question


I'm under the assumption that when I retire and I'm old if I don't spend a lot of money - say I only take like 24k out a year to live off of... then I wouldn't really have to pay much tax at all.

So more or less my assumption is that I'll take money out of these accounts and that would be my "income" if I don't take a lot out or use a lot I won't get taxed much.

Or do taxes in retirement work differently?

Or do I have unrealistic expectations of what I'd spend in retirement?

One of the issues is RMDs. That's required minimum distributions. When you get to your 70s, you'll be required to take a percentage out of your tax-deferred accounts even if you don't need or want it to spend. So some people with very large tax-deferred accounts have very large RMDs which bumps their taxes up. And the percentage you are required to take goes up every year as you get older.

secondcor521

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Re: Not paying a lot of taxes (legally)
« Reply #15 on: March 07, 2025, 06:48:32 PM »
@secondcor521

Good observation on this. I am vaguely aware of this but don't understand in depth. I had a math teacher I know who is good with financial stuff suggest a similar approach...

...but early on in my journey I opted to go all in on just putting away as much as I possibly can to make progress as quick as possible. There has been a positive result on my psychological state because of this. I feel like I'm winning.

So I think after I get to maybe 400k I'll reassess. I think I can do Roth options for both my 401k and 457b.

Basically - this comes down to being a beginner and being kind of ignorant of tax brackets and optimizations like this.

Emphasis added.

Yes, you may feel like you're winning now, and in the big scheme of things you definitely are.

But understand that all those tax-deferred dollars have a pending tax liability that you (or your beneficiaries in the 10 years after you die).  And that pending tax liability grows with your account balances.  If you're taking out at 25% and you have $1M, then the pending tax liability is $250K.  If you have $2M, then the pending tax liability is $500K.

If you wait until you have $400K and are young enough, then you may already be past the point of no return.  As an example, I've been doing Roth conversions for nine years now since I FIREd, and I'm not making headway - my tIRA grows faster than I can convert, so I'm losing ground even as I'm doing the best I can taxwise now with the hand my younger self dealt me.  (See below under "good problem to have".)

Question

I'm under the assumption that when I retire and I'm old if I don't spend a lot of money - say I only take like 24k out a year to live off of... then I wouldn't really have to pay much tax at all.

So more or less my assumption is that I'll take money out of these accounts and that would be my "income" if I don't take a lot out or use a lot I won't get taxed much.

Or do taxes in retirement work differently?

Or do I have unrealistic expectations of what I'd spend in retirement?

Your assumptions hold true until SS/RMD age.  If you're happy living on $24K a year and only take that much from your various accounts, you can continue to have a low tax bill in your 50s/60s.

But at SS/RMD age, things will change.  You will have forced income.

If you start SS at 70, then that will be income that you will pay tax on regardless of whether or not you spend it.  So your SS benefit might easily be $48K a year in today's dollars.  That'll go on your tax return on line 6a/6b.

If you start RMDs at age 75, then that will also be income that you will pay tax on regardless of whether or not you spend it.  So your RMDs might easily be $100K per year in today's dollars.  That'll go on your tax return on line 4a/4b.

With those two things, you're in the middle of the 24% bracket before you even consider other forms of income, like interest, dividends, capital gains on taxable.

Some people will say "It's a good problem to have".  Some people will say, "I might not live that long or want to spend that much money then".  Some might say that future tax rates are unknowable, or might be lower.  All good arguments to consider.  But most people I know who are FIREd and in their 50s/60s can see the reality of the problem and most would counsel their younger selves to have made more Roth conversions or Roth contributions earlier and voluntarily pay 10%/12% instead of being essentially forced into paying 22%+.

Note:  I'm assuming current tax laws.  I assumed you put $45K away for 20 years at 10% real growth.  The growth rate is probably too ambitious but I also don't know how old you are so maybe 20 years is too short of a compounding period.  Everyone should do their own math and use their own goals, assumptions, values, etc.
« Last Edit: March 07, 2025, 06:53:16 PM by secondcor521 »

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #16 on: March 08, 2025, 09:44:09 AM »
@secondcor521

I think it would be worthwhile for me to hire a tax professional and just get some advice and a plan in place.

I think I will look into switching my 457b to a Roth option so I can make progress with that.

About me is I'm 45 years old and I lived outside of the country a bunch and was a general drifter for awhile so my social security is only on track to be like in the $700 a month range.

I'm coming up fast though... in September of 23 when I started this job I had only 115k. At the end of this month I should be at 290k.

So in a few more years at this rate I'll have completely transformed my finances.

But I want to optimize and understand this stuff which I don't.

Thank you for pointing all of this out.

secondcor521

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Re: Not paying a lot of taxes (legally)
« Reply #17 on: March 08, 2025, 12:17:18 PM »
Good luck!  I'll mention it's hard to find tax professionals who understand and can help with multi-year tax planning.  They do exist.  The one I found was a partner at a very respected local CPA / tax prep firm.  He charged $250 just to answer questions, but I only needed his expertise for an hour maybe once every few years.  I would go back to the drawing board, research stuff, do math, then identify more questions to ask him.  So when I did use him, it was pretty rapid fire Q&A and very efficient.

Always do the math, but just switching some contributions to Roth is probably smart.

At 45 and at $290K and with smaller SS, you're not probably at risk of the 24% bracket.  Again, do the math, but you might be able to see and avoid the 22% bracket.

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #18 on: March 08, 2025, 02:12:09 PM »
@secondcor521

Thanks a lot!

I mean if I can avoid the 22% bracket looks like I go down to 12%.

Yeah I would like to ask around. To me the $250 will be worth it for the reassurance that I'm doing things for a reason and intently.

Having a plan and knowing I'm doing the right things would be great.

Now that the first phase of just save as much as I can ASAP is on track the next phase is to do things with intention.

I admit I need to learn along the way. I feel like I'm doing a lot right and from here it's optimizing.
« Last Edit: March 08, 2025, 02:17:50 PM by J.P. MoreGains »

secondcor521

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Re: Not paying a lot of taxes (legally)
« Reply #19 on: March 08, 2025, 03:09:26 PM »
Right.

Again, big picture you're doing fine, but when you can you might as well optimize.

This topic is one that I didn't fully understand my first few years of FIRE, and I wasn't fully optimized.  That's OK, I still have more than enough.  And it does take time to understand all the moving parts that change when your tax situation changes.  And there's very few people who think about this stuff.

Noticing that 12% to 22% jump is a good start! :)

I'd encourage you to try to do the math and predictions yourself first, then figure out what questions you have based on that for the expert.  It's not worth $250 an hour just to learn the basics of tax brackets and ACA subsidies and so forth.  Well, not to me anyway.  Doing the math first also will help you understand what matters, what you don't understand, and what to pay attention to in the expert's answers.  Oh, and also if you've got a good expert or not.

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Re: Not paying a lot of taxes (legally)
« Reply #20 on: March 08, 2025, 09:44:43 PM »
My suggestion would be to consider changing your contributions into Roth-like vehicles such that you fill up that 12% tax bracket every year.  Yes, you'll pay more taxes now.  But I think you'll have more after-tax spendable income over your life time because you're paying taxes at 12% instead of 2x%.
+1 to that recommendation, for all the supporting reasons given.

I think I will look into switching my 457b to a Roth option so I can make progress with that.
The traditional 457b has the advantage that distributions prior to age 59.5 are not subject to a 10% penalty, unlike 401k/403b distributions that may be subject to such penalty.

With that in mind, you may wish to keep the 457b traditional and switch the 401k to Roth instead.  Keeping in mind where the 12%/22% boundary is, it may not be an all-or-nothing choice.

2Birds1Stone

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Re: Not paying a lot of taxes (legally)
« Reply #21 on: March 09, 2025, 03:09:40 AM »
Great discussion! One thing to remember, if you make it to 75......paying slightly more taxes might be the least of your worries. These are all 1st world problems.

Kapyarn

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Re: Not paying a lot of taxes (legally)
« Reply #22 on: March 09, 2025, 11:21:49 AM »
I don't get the $0 social security.  I thought the recent law means WEP and GPO were eliminated and now everyone must pay into SS?

TyGuy

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Re: Not paying a lot of taxes (legally)
« Reply #23 on: March 09, 2025, 11:29:02 AM »
@secondcor521 Thanks for all the thought provoking comments related to taxes, I will definitely approach my accounts with a different perspective now!

TyGuy

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Re: Not paying a lot of taxes (legally)
« Reply #24 on: March 09, 2025, 11:33:52 AM »
I don't get the $0 social security.  I thought the recent law means WEP and GPO were eliminated and now everyone must pay into SS?

The law changed in regards to those that are/were paying into social security, had a defined pension and are/were public/government employee (i.e. some teachers, firefighters, etc). These folks are now entitled to the full SS payment. Previously, they were recieving approximately 1/3 of the full social security payment even thought they were paying the full amount into SS.

J.P. MoreGains

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Re: Not paying a lot of taxes (legally)
« Reply #25 on: March 11, 2025, 08:59:00 AM »
Yeah certain government jobs don't have to pay in - so this has the effect of me not getting a large social security payout since I haven't paid in a lot.

But the windfall elimination program makes it so it looks like I will be able to collect the full 700 or show that I earned when I was contributing when I was younger.

So the idea of getting around 900 in a pension sounds good ... that would give me 1,600 a month between them both.

I'm in the position of really having to take care of things in my 40s since I never did it when I was younger.

41_swish

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Re: Not paying a lot of taxes (legally)
« Reply #26 on: March 11, 2025, 10:25:11 AM »
I have a buddy who is in the teacher's union and does the pension and he pays $0 in social security.