Reduce investment income for EITC?

[thatsdifferent]

I brought up this subject a few years ago, but now I'm older- dunno about wiser, so I'm asking you fine folks.

Problem- I'm consistently ~$1,000 over the investment income threshold to claim the EITC, which would be worth $4-6,000 for me. My investment income is too high, because I have a lot of money in a regular (not tax-advantaged) investment account.

I currently take the dividends from this account as cash, as well as another $18,000/year to supplement my W-2 income (which isn't much- I downshifted a while ago). 

I've got $86,000 in VSMGX and VTINX in this account, throwing off $5500 in dividends and capital gains this past year. I also have a lot more of VTSAX, which throws off a little more dividends and capital gains (ie, the VSMGX and VTINX are giving off tons more of investment income dollar for dollar than VTSAX).

I'm debating selling all the $86,000 of VSMGX and VTINX to drop my investment income. This would probably disqualify me from EITC for one final year, and then I would qualify in future years. I would keep the $86,000 as cash and use it on living expenses as I have been, at $18,000/yr, so I wouldn't withdraw anything more for 4-5 years.

How does this part sound?

Part II- In discussing this with the SO, I talk about how VTINX and VSMGX threw off $5500 of income this year, which would be comparable to what I'd get from the EITC. Which sounds like it'd be a wash- keep it and collect the income, or sell it, and claim the EITC. What am I missing with that discussion point?

Thanks!

[merula]

(1) Are you sure that the EITC is actually worth that much to you? I do volunteer taxes through the VITA program, and see a lot of EITC but very rarely that high. I would try to do your taxes leaving off the investments and see how much you actually get.

(2) You could also consider a tax-advantaged fund like VTMFX. This is what I have in a taxable account, with about $300k in assets in 2024, which resulted in a 1099-DIV of  about 1500 in ordinary dividends (box 1a), 1400 of qualified dividends (1b), 70 in 199A dividends (5) and 4300 of exempt interest dividends (12). You could try to put something like that in your pro-forma taxes and see what the EITC impact is. 

[thatsdifferent]

(1) Are you sure that the EITC is actually worth that much to you? I do volunteer taxes through the VITA program, and see a lot of EITC but very rarely that high. I would try to do your taxes leaving off the investments and see how much you actually get.

Yes, I believe so. I ran through the EITC worksheet with different earned incomes and investment incomes, and the credit would amount to $6-7,000, for earned income of $15,000-30,000 (MFJ, 2 kids). And it appears that with earned income of <$29,640 (MFJ), they ignore your adjusted income (as long as you're within the overall inclusion limits of the EITC).

(2) You could also consider a tax-advantaged fund like VTMFX. This is what I have in a taxable account, with about $300k in assets in 2024, which resulted in a 1099-DIV of  about 1500 in ordinary dividends (box 1a), 1400 of qualified dividends (1b), 70 in 199A dividends (5) and 4300 of exempt interest dividends (12). You could try to put something like that in your pro-forma taxes and see what the EITC impact is.

If I were to re-invest the proceeds, I would look into the 529s I have established.

[seattlecyclone]

(1) Are you sure that the EITC is actually worth that much to you? I do volunteer taxes through the VITA program, and see a lot of EITC but very rarely that high. I would try to do your taxes leaving off the investments and see how much you actually get.

Yes, I believe so. I ran through the EITC worksheet with different earned incomes and investment incomes, and the credit would amount to $6-7,000, for earned income of $15,000-30,000 (MFJ, 2 kids). And it appears that with earned income of <$29,640 (MFJ), they ignore your adjusted income (as long as you're within the overall inclusion limits of the EITC).

This is not accurate. Look at the EIC worksheet again. On Line 5 you need to compare your AGI to $29,640, not your earned income. If you have an AGI over $29,640 you need to look up the corresponding value in the EIC table and that's your EIC credit amount (if less than the credit amount calculated based on your earned income on line 2).

One problem with converting your index funds to cash is where will you put the cash? If it's in a high-yield savings account that interest will also count as investment income for EIC purposes, and this interest could very easily be larger than the dividend your current funds pay. If it's a non-interest-bearing account you're forgoing interest to potentially get the tax credit, which lessens the value of the tax credit.

Investing the proceeds in a 529 like you suggested sounds like a potentially better path forward to being able to claim the EIC without skipping out on the value of investing.

[merula]

I don't have the forms handy, but what @seattlecyclone says is accurate as far as I remember.

If you self-prepare your taxes, take off the investment income and see what the change is. If you pay a preparer, ask for a pro forma.

[thatsdifferent]

(1) Are you sure that the EITC is actually worth that much to you? I do volunteer taxes through the VITA program, and see a lot of EITC but very rarely that high. I would try to do your taxes leaving off the investments and see how much you actually get.

Yes, I believe so. I ran through the EITC worksheet with different earned incomes and investment incomes, and the credit would amount to $6-7,000, for earned income of $15,000-30,000 (MFJ, 2 kids). And it appears that with earned income of <$29,640 (MFJ), they ignore your adjusted income (as long as you're within the overall inclusion limits of the EITC).

This is not accurate. Look at the EIC worksheet again. On Line 5 you need to compare your AGI to $29,640, not your earned income. If you have an AGI over $29,640 you need to look up the corresponding value in the EIC table and that's your EIC credit amount (if less than the credit amount calculated based on your earned income on line 2).

Yes- you are correct. I either mis-typed or mis-understood. As it is, my AGI would still be $15-30,000, so my scenario would still stand. But I appreciate somebody checking my thinking that I'm not missing something! :thumbs up:

And yes, putting $86k in a 3.5% High-yield gives $3,010, which is less than the ~$5,500 I got this year from dividends and capital gains. I'm open to risk losing interest on the amount, depending on how bullish I feel on the political state of the country.

Otherwise 529 'stays the investing course'

[forummm]

You are in high payout funds. Instead of a savings account you could shift them to something that should generate a little better than 3% total return.

VGSH/VSBSX pays around 4.3%, and doesn't have stock exposure and shouldn't have capital gains (very small amount gain or loss possible based on the price when you sell, unless interest rates change a lot).

If you want stocks, some blend of VGSH/VSGSX (4.3%) for bonds, VTI/VTSAX (1.25%) for US stocks and VEA/VTMGX (3%) for developed country international stocks will yield a lot less. Pick the blend that meets your portfolio stability goals. And you can decide how much capital gain/loss to take depending on what you choose to sell, and when (obviously, depending on what the market does).

If you already have a lot of VTSAX, you're already pretty exposed to US equities. If you need this money to live on, then VGSH/VSGSX might be a good choice to maintain portfolio stability. Your current funds have stocks as well the separate VTSAX you have.

[jpdx]

I had a similar problem last year, except for me it was because VTIAX international index fund pays significantly higher dividends than VTSAX. I had once made the choice to keep much of my international allocation in a taxable account so that I could receive the foreign tax credit, but this turned out to be a poor choice due to losing the much more valuable EITC.

I have since exchanged those for VTSAX in my taxable account and I keep VTIAX in retirement accounts.