Financially Possible

$14 — my household’s obligation to “Uncle Sam” for US income tax. I was aiming to pay $0, so this amount was the result of a slight error on my part. I was using TurboTax to model my 2018 taxes in early December so that I could make decisions and take actions prior to January 1st. My Roth conversion ended up being $117 too high. Had I converted $117 less into the Roth IRA, then the tax owed would have been $0.

In case you like the image of this novelty bill, it’s sold on Amazon for $3 — ironically the same amount as the optional presidential election campaign fund on your US tax return. I did succeed in my goal of paying $0 in Social Security tax and $0 in Medicare tax. Not having W2 income eliminated those payroll taxes. Our family’s target for US income tax in future years is also $0.

Do You Want Your Tax Dollars Spent on War?

I have no love lost for the US government. A government is a body of people, usually notably ungoverned. Currently, the US government is responsible, at least in part, for crimes against humanity in Yemen. Also, this is not new behavior. The US has a long history of involving itself in conflicts in which it has no business. Our government perpetuates war, ending lives prematurely or otherwise reducing people’s quality of lives, tarnishes its own image, and needlessly increases spending on “defense” funding. The true costs of war are very high and multi-generational.

Talking and discussing is a much less expensive option in both lives and dollars. Diplomacy is always the superior choice.

As an individual citizen, I have next to no say as to where my tax dollars go. I’ve paid plenty in taxes over the years. I cringe at how much of my past taxes have gone to fund war and disturbing peace in this world. For many Americans, taxes are their single largest expense.

Investing In Our Future

I also like this Valentine’s Day Bill, because February 14th is the day when I make my annual selection of a recipient for the C-Bold Scholarship at Round Rock High School. Investing in our future generation, rather than funding war, is a cause that I am fully behind.

A $0 income tax liability is only possible because I have consistently chosen to live far below my income. Early retirement helps create unique situations leveraging the US tax code that may seem like magic. I hope you are enticed by the prospect of paying no income tax and no payroll taxes. There are ways to reduce your current tax liability during your working years while simultaneously setting yourself up to retire early and avoid costly income and payroll taxes.

How To Reduce Your Tax Bill

The best way to reduce your tax liability is to invest more money. A precondition for that is to save more money which requires either earning more, spending less, or a combination of the two. Long term capital gains and dividends are taxed more favorably than income earned from labor. Interest payments from investments in municipal bonds aren’t taxed by the US government at all (they do increase your modified adjusted gross income though).

No Social Security taxes nor Medicare taxes are taken on dividends from stock funds, long term capital gains from sales of stock funds, and interest from bond funds. Additionally, having multiple streams income is always beneficial.

How Was Our Tax Bill So Low?

Last year, we converted approximately $45,500 from a traditional IRA to a Roth IRA. This process is call a Roth Conversion and the amount converted is treated like normal income. However, no SS taxes nor Medicare taxes are taken. The benefit of a Roth IRA is that when money is taken from it later, no taxes are due. There are rules regarding the withdrawal of funds from a Roth, but those rules are not overly burdensome. Early retirees make use of something called a Roth Conversion Ladder.

Additionally, we had approximately $20,000 in long term capital gains. A long term capital gain is the difference in price between what you bought at and what you sell at. For the sale to be considered long term, you must have held for a year or more. Not all of the sale proceeds have to be taken out as cash. Optionally, you can reinvest the proceeds into new investments with a more current cost basis. If you’re doing this kind of reinvestment with the expectation of not paying taxes now and setting up to pay less taxes in the future, then that’s called Tax Gain Harvesting.

Lastly, we had approximately $6,000 in dividends and $500 from miscellaneous sources. Income from all sources brought our adjust gross income to approximately $72,000. In 2018, up to $77,200 for married, filing jointly was subject to a 0% tax rate for long term capital gains and dividends. This means that only our Roth conversion and miscellaneous income of around $46,000 were subject to income tax.

The first $24,000 was the standard deduction for married, filing jointly. I also refer to the standard deduction as the 0% tax bracket. We had two child tax credits for our two children which offset the rest of our tax liability in the 10% and 12% brackets. The 10% bracket was $1,905 in tax on $19,050 in income. The remaining $3,000 or so was in the 12% bracket.

The child tax credit was $2,000 per child. Those two credits offset all of our tax liability except for $14. This was how my family paid $14 in tax on an adjusted gross income of about $72,000.

I want you planning for your future. I want you to be in a position to “free self from self” and to be able to retire early. I want you to pay as little in taxes as possible while using your time to make our world a better place. Obviously your mileage will vary depending upon how you lay out your investments and how many children you have.

Trip Seibold 子兴

Do you plan to make any adjustments to your investment and retirement planning after having learned about my family’s tax situation?

What actionable steps can you take to accelerate your retirement?

What else would you like to learn about?