How to reduce investment income for EITC?

[thatsdifferent]

With the recent addition of a second child, I'm starting to see how the EITC could really come through for me, at $4,000 a year. However, years ago, I came into chunks of money that I 1) Maxed my Roth IRA, then 2) Put into a regular taxable Vanguard account (primarily VTSAX; more recently some into VTINX- Target Retirement Income Fund, [which was going to be a lower risk investment to be used in a few years {which never happened and so now it sits}]).

And the stock market went up over the years!

As did dividends and capital gains!

EITC investment income limit is $3650- this year I could be looking at $8,000 (which is a bit high, VTINX had some distributions apparently).

Obviously(?), I would have to sell funds (or rather, pull out my principle so there's no taxes...?). But then what do I do with it? I couldn't trickle it into my Roth because that's already fully funded.

The only option I see is to buy into a total stock market index that doesn't throw off dividends, which would be...?

Or putting it into a tax-advantaged account, which would be...?

Thoughts?

I could be looking at $60-70,000 EITC for the two kiddos if I could drop my investment income. :-/

[secondcor521]

FWIW, there is some discussion of changing the law to ignore investment income for EITC.  Who knows if it will pass or not.

A couple of thoughts:

If you sell your taxable investments, you'll probably have capital gains that year that exceed the EITC, so no EITC that year for you.

You could try to funnel the money over time into your Roth IRAs (including your spouse's if you're married), or your workplace retirement plans.  Do you have a 401(k) or anything like that available to you?

You could gift money to your kids, which would shift that income to your kids and get it off your tax return.  I don't believe EITC would look at their returns.  But the kiddie tax may affect this effort.

You could open 529 plans for your kids, which would get the income off your return.

There are individual stocks that don't pay dividends.  BRK.B is probably the most well known, but a lot of tech stocks could be included in that list.

Rental real estate might work.  I'm not sure if rental income is considered investment income or not for EITC.

...

Or you could just give up and be a high-income person that EITC isn't really intended to target.  Yes, it's a juicy tax benefit, but it's intended for low income working families.  I've looked at trying to get it in the past when my circumstances were different, but the contortions I would have to go through to get the credit would have damaged my financial wellbeing more than the credit was worth.

If you're still going to try anyway, note that even once you manage to qualify, there are limits based on two different things (AGI and earned income I think) and you get the lower of the two amounts.  Also note that claiming EITC will delay any refund you might get until mid-February, and also probably increases the probability of your return being audited.  Finally, if you claim the EITC but were not entitled to do so, there is some lockout stuff that the IRS can do if you try to claim it again later (possibly legitimately).

[thatsdifferent]

FWIW, there is some discussion of changing the law to ignore investment income for EITC.  Who knows if it will pass or not.

Where would one find this discussion? I couldn't find anything via google.

Your other thoughts would have me re-conclude that it's not feasible (for my situation anyway).

I was not aware EITC tests your income twice and gave you the lower amount. Interesting!

...but it's intended for low income working families

Which is what I am- a family of 4 making $30,000. It just seems I have too much money, in the wrong accounts. FWIW.

[secondcor521]

Apparently it was part of the HEROES Act, which I believe was passed by the House but not brought up in the Senate.  Here's a link, see top of page 5:  https://fas.org/sgp/crs/misc/R46358.pdf

If you're a family of 4 making $30K, and at least you or your spouse are working, then it does seem like you're the targeted kind of taxpayer for the EITC, except, as you note, your investment income.  I think you're the kind of taxpayer the HEROES Act had in mind with that provision.

If I were you, I'd look into shifting those assets into places where they don't impact your EITC.  The two most likely places to move large amounts quickly would be workplace retirement plans (like 401(k)s), and 529s for your kids.  Still might take you a while to rearrange things.

[reeshau]

However, years ago, I came into chunks of money that I 1) Maxed my Roth IRA,

I couldn't trickle it into my Roth because that's already fully funded.

Just to check my understanding...are you contributing to your Roth and maxing *each year*?   Or do you believe you reached some absolute maximum when you came into the money?  Just to be clear, there is no account maximum; It's only about annual contributions.

Also, how are you receiving the $8k of investment income?  Are they coming out as dividends, or are you selling shares?  If you are selling shares, you can withdraw Roth principle (aka your large deposit) before retirement, which won't add to your income.

[thatsdifferent]

However, years ago, I came into chunks of money that I 1) Maxed my Roth IRA,

Yes, each year. This has happened 3-4 times- this year being the most recent, having done a cash-out refi mortgage. The Roth was already maxed, trickled the rest into a standard taxable Vanguard over a few months.

Also, how are you receiving the $8k of investment income?  Are they coming out as dividends, or are you selling shares?  If you are selling shares, you can withdraw Roth principle (aka your large deposit) before retirement, which won't add to your income.

Usually dividends. This year there seems to be some turnover in my VTINX, triggering short and long term capital gains? That's how I understand what I'm seeing on Vanguard's website- I assume the 1099-DIV I'll receive from them will confirm this. Anyway, historically it's been 6-6.5k yr. 

Anyway, going back to secondcor521- I don't have a work retirement plan, and I'm too hesitant about locking money into educational expenses/529. I'd rather chip off the 'investment nest egg' when the time comes.

At least all this tells me that I'm not missing anything; that my options have less appeal than skipping the EITC completely.

[seattlecyclone]

You mentioned taking a cash-out refinance from your mortgage. Selling a big portion of the stock and using it to wipe out a big chunk of the mortgage would seem to be a pretty straightforward way to start qualifying for the EIC. I know there's some wisdom in holding a mortgage while having money invested because the stock gains will probably be larger than the mortgage interest over time, but in your case the EIC gives you a few thousand dollars a year for having less stock giving you dividends. That would tilt the balance toward paying down the mortgage. If you did this you'd likely have some capital gains large enough to disqualify you from the EIC this year but you'd be in good shape to claim it in future years.

Another thing you can do is invest in a mutual fund that pays lower dividends. Vanguard's Growth Index (VUG) pays about half as much dividend as VTSAX. You're holding a particular slice of the market that way, and if you want to approximate the total market you might decide to hold the Value Index in your IRA to balance things out. Again, rebalancing in this way is likely to disqualify you from claiming the credit this year, but it would help make you more likely to qualify in the future.

Rental real estate might work.  I'm not sure if rental income is considered investment income or not for EITC.

Rental income does count as investment income, but it's only the net after mortgage interest, depreciation, and other expenses. Real estate activities often lose money on paper even while being cash-flow and equity positive, so this is another avenue to explore.

[MDM]

Obviously(?), I would have to sell funds (or rather, pull out my principle so there's no taxes...?).

Net capital gains will increase your investment income for the EITC, but net capital losses will not decrease it.   

But then what do I do with it?

Berkshire Hathaway class B (BRK.B) Doesn’t Pay Dividends and would be one option.  Might or might not prove to be a good option.

[jpdx]

I'm in the same boat, and I think it's worth waiting to see what the new admin and Congress do with the EITC -- before making any big moves like paying off the mortgage or overstuffing a 529.

As someone mentioned, there was a provision in the Heroes Act to do away with the investment income cap, and Congress could decide to pass this provision, and likely can do it with a simple majority in the Senate through budget reconciliation.

[thatsdifferent]

I'm in the same boat, and I think it's worth waiting to see what the new admin and Congress do with the EITC -- before making any big moves like paying off the mortgage or overstuffing a 529.

As someone mentioned, there was a provision in the Heroes Act to do away with the investment income cap, and Congress could decide to pass this provision, and likely can do it with a simple majority in the Senate through budget reconciliation.

This is what I've concluded as well.

[JSMustachian]

There are a number of Vanguard funds that pay out less dividends than the Vanguard Total stock. Growth funds and small cap funds tend to pay out less dividends.

The easiest way to check the amount of dividend payout for me is to look up a fund on Morningstar, click performance, and then distributions.

[Chris Pascale]

You might have some years in the future where the income is lower and you'd then qualify for the EITC. But for now, perhaps best to keep the good income coming in rather than possibly jeopardize it.

What do you think?