$150,000 Income, $150 Income Tax

Taxes.  It is our duty as patriotic Americans to keep our individual taxes as low as possible.  I want to show you just how patriotic I am.

Over the years our income has grown steadily.  Not long ago our combined incomes crossed into six figure territory.  In 2013, our earnings peaked right around $150,000 from our jobs plus some dividend and interest income from our investment portfolio.

In my overview of my path to early retirement at 33, I briefly discussed our tax strategies and the benefits of a low tax rate.  Our tax rate has stayed very low throughout the last few years.  Two factors played a big part in allowing us to pay almost no federal income tax:

  • Taking advantage of all available tax deferred savings options
  • Having a bunch of kids (well, just 3, nothing too crazy)

Almost all wage earners can take advantage of tax deferred savings plans.  Having a bunch of kids isn’t necessarily a great way to save a bunch of money, but I will demonstrate how having kids led to big tax breaks in our situation.  On a $150,000 income, we pay 0.1% of our income in federal income taxes.  Even without kids, our tax rate would have been under 4%.

You won’t find any clever or unique tax dodges here.  No shady or questionable tax treatments.  No one is committing federal tax fraud.  We simply did the research and put a plan in place to maximize our tax savings.

Shrink Your Paycheck

This seems like backward advice, but do everything you can to make your take home pay as small as possible.  Employers offer all kinds of opportunities to reduce your taxable income before you even get your paycheck such as:

  • Retirement plan contributions (401k, 457 or 403b plans)
  • Pension contributions
  • Employee Stock Purchase Plans
  • Employee Stock Ownership Plans
  • Health Insurance
  • Dental Insurance
  • Flexible Spending Accounts (for health/dental or child care)
  • Health Savings Account

Here’s how you make your income look tiny when you get your W-2’s during tax season.  Our combined gross salaries (before any deductions) were around $141,000 in 2013.  My salary was around $69,000 and Mrs. RootofGood’s salary plus bonus were around $72,000.

W-2 Salaries

 We took advantage of all the benefits offered by our employers.  I worked for the government where I had access to a 401k and a 457.  I found this unbelievable, but you can actually contribute the IRS maximum of $17,500 to EACH of these accounts.  I chose to contribute the maximum of $17,500 into the 401k and the 457.  I was also required to have 6% of my salary (or $4,200) withheld to fund my pension (which I never intended to take).  The cash value of my pension contributions (without any earnings) can be withdrawn and rolled into an IRA when I would like to do so.

Using these tax deferred savings plans, I turned my beefy $69,000 salary into a puny $29,800 per year.

Mrs. RootofGood was lucky to work for an employer that offered really good benefits.  She contributed the maximum to her 401k ($17,500) and also contributed $5,000 to her Dependent Care Flexible Spending Account (daycare for the little one), $6,450 to her Health Savings Account, and paid $500 for the year for health insurance (yes, per year!), and $600 per year for dental insurance.

Mrs. RootofGood’s $72,000 salary magically metamorphosized into a scrawny $41,950 W-2 salary.

At tax time, our W-2’s will arrive telling us that our total earnings (for federal income tax purposes) are $71,750.  We basically cut our $141,000 gross salary in half for federal income tax purposes.


Even More Deductions

In addition to our earned income, we expect $9,000 in investment income from our taxable investments at Vanguard and Fidelity ($8,000 dividends and $1,000 interest).

We have $15,000 in capital losses from tax loss harvesting our mutual funds over the years (What is “tax loss harvesting”? – sounds delicious!).  Each year we take a $3,000 capital loss write off against our other income ($3,000 per year is the maximum deduction).

Adding up our income (including the $3,000 capital loss), our total income for 2013 will be $77,750.

2013 taxes

Our deductions include $11,000 in traditional IRA contributions (maxing out $5,500 into each IRA), and $600 in student loan interest payments.

Subtracting the deductions from our total income, we end up with an “Adjusted Gross Income”, or AGI, of $66,150.

But wait, there are more deductions!  A $12,200 standard deduction plus $19,500 in personal exemptions ($3,900 x 5 people) further reduce our “taxable income” to $34,450.

The party doesn’t stop here.  Out of our $8,000 in dividend income, $5,500 were “qualified dividends” that are tax free if you are in the 15% tax bracket or less (in 2013, that means $72,500 or less taxable income).  We are in the 15% tax bracket with our $34,450 taxable income.  In effect, we pay tax on $28,950 ($34,450 taxable income minus the $5,500 qualified dividends taxed at 0%).

Our total tax owed on $28,950 works out to be $3,450.  Part of the income is taxed at 10%, part at 15%.

That’s not a bad tax bill considering we made $150,000 in 2013.  But we still have to take a few tax credits.These things suck down milk and poop out tax deductions

We have three kids.  In addition to having superhuman powers of massive cereal consumption, they also generate a $1,000 Child Tax Credit per Cap’n Crunch-stuffed mouth.  That adds up to a $3,000 tax credit (that reduces our taxes owed dollar-for-dollar).

We somehow managed to pay $300 in foreign income tax through our international mutual fund holdings.  Owning tiny slivers of luxury shopping centers and office buildings in Zurich, Shanghai, Singapore, and Dubai sounds totally sweet until you realize the countries you invest in are siphoning off tiny slivers of your income (they have Uncles too, just not named “Sam”).  Fortunately, the federal income tax code, in its infinite generosity to the privileged few, allows a tax credit for any foreign income tax paid.  Poof – another $300 in income tax liability gone!

Our tax liability went from $3,450 before subtracting tax credits to a bottom line tax bill of only $150.  Yes, that is right folks.  Through our Houdini-like usage of tax-defying strategies, we managed to earn $150,000 and pay only 0.1% tax.

I am always a little dumbfounded around tax time.  The tax code seems strange and convoluted, and I don’t think a family with our level of earnings should have such a small tax bill.  But hey, that’s the law!

The tax savings don’t stop with a tiny 2013 tax bill.  We also managed to contribute over $74,000 into tax deferred savings plans that won’t be taxed until we withdraw them at some later date (if we ever pay tax on the withdrawals at all!).  Tax deferred accounts are the gift that keeps on giving year after year.  Note that we had $9,000 in investment income in our taxable accounts, and we had to pay tax on part of it.  We have over $10,000 income in our tax deferred accounts that we don’t pay tax on each year (the tax is deferred – that’s why they call the accounts “tax deferred” I think).

Out of curiosity, I re-ran the tax calculations to see what our tax burden would be if we didn’t do any tax planning.  Our tax liability would increase to $19,883.  Good thing we know our way around the tax code!


I Don’t Have Kids, So I Can’t Pay 0.1% Taxes Like Mr. RootofGood

Unfortunately, if you don’t have any little booger-encrusted tax deductions running around your house, you’re gonna pay more taxes.  Sorry to tell you this, but you are subsiding me and my burgeoning empire of miniature RootofGoods.  I thank you, and also want to offer my condolences.

The good news is that you could still pay under 4% of your income in federal taxes if you use all of the deductions and tricks that we did.

I re-ran our tax situation assuming we have zero kids.  Aside from the utter peace and quiet throughout our house, a few other things change.  The $5,000 Childcare Flexible Spending Account deduction goes away (as does the childcare expense itself!).  The personal exemption drops by $11,700 to only $7,800.  The child tax credit goes to $0.

After losing all of these deductions and credits, we would end up paying $5,655 in federal income tax on our $150,000 income.  That works out to a 3.8% average tax rate.

2013 Taxes Without Kids

Moral of the story: have 3 kids, save $5,500 in federal income tax.  However, kids can be pretty expensive, so don’t have kids for the income tax benefits alone.  They are cute though.  And they can fetch beers on command.


Readers, did I miss anything?  Have you been able to keep your tax burden low while earning a hefty paycheck?  


Need help keeping track of expenses and investments to prep for tax time?  Use the same personal finance tools that I do.  And you’re in luck because it’s free!  Check out Personal Capital today (review here).

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  1. Lucky you. We do not have access to a 457, pension, health savings account, nor does my wife have access to a 401(k). Consequently our AGI is high enough that IRA contributions aren’t deductible and our child tax credit is phased out.

    1. Lucky or smart, I can’t say. Part is luck. Part is the fact that I look for benefits like these in employment opportunities. Access to a 457 and a 401k and being able to max out both was a total surprise I found out about after I took the job.

      And the pension – I would have done just about as well not contributing to it at all and eating the tax bill. I’ll get back my 6% contributions without any interest or earnings on them. So my money sat there for almost 3 years when I could have invested it and obtained a ~10% return each year.

      You are right though, once you hit a certain AGI level, you get phased out of all kinds of deductions and credits. It is all very convoluted to figure out what the impact of, say, earning an extra $10,000 might be on your tax situation. It unfortunately isn’t as easy as saying “I’m in the 25% bracket, so I’ll make $7,500 more and pay $2,500 more in taxes”. You might lose a few thousand more dollars in deductions or credits on top of your tax burden (making your effective marginal tax rate jump to 50-60%).

      1. The $300 foreign tax credit is still tax paid to other governments so I suppose your total income tax paid is $450 and not $150. I guess it might have been a good thing your qualified dividend wasn’t much bigger because I think those credits aren’t refundable credits meaning you can’t get a refund if you are due more credit than causing your U.S. tax to go to 0. There was a small window of opportunity where state government can create a 401(k) plan. The states that didn’t take that opportunity do not have 401(k) plans and have a 401(a) defined contribution plan instead where you are stuck with whatever percentage of contribution you declared when you were hired (no changing percentage until you switch departments at least). The old federal rules on 401(a) plans have 15% maximum contribution and many state plans didn’t change that so even if you had the means to contribute more, you couldn’t. But fortunately, 457(b) plan is still there so it is still a combination of 401(a) plan plus the 457(b) plus a small defined benefit plan based on years of service. I prefer the Roth approach as much as possible especially with Obamacare charging health insurance based on income (it’s a hidden tax worth about 15% flat rate for those in 200% to 400% federal poverty level which is hardly the rich). Tax deferral can only do so much as required minimum distribution rules kick in at age 70 1/2. By virtue of more easily converting small amount of money to a Roth than after the balance is much bigger, it usually pays to start with the Roth even though you’ll pay tax upfront. How much Social Security Income is taxed based on base income calculated by adding 1/2 of social security income + other taxable income. The arcane calculation sometimes leads to very high tax bracket for social security income earner. But if you had the Roth, that income is not counted in the social security base income calculation. Roth IRA do not have required minimum distribution for the original owner and the beneficiary spouse. Medicare Part B and drug coverage premium is also based on income. Some of these thresholds have not been indexed to inflation so this can be a problem later on. Still feel like all these deductible IRA and pretax retirement plan was a good choice? The kids will grow up and eventually not be in your tax return. One of the spouse will die at some point and cause the income brackets to shrink along with the threshold for social security tax and medicare tax and also Obamacare premium. Unfortunately, I have only tax deferred options right now and I’ve been pestering my employer to add the Roth option on the 457(b) plan for 7 years sense it was made available by federal legislation.

        1. I’m still happy with my choice of focusing on the tax deferred retirement plans. Massive tax savings while working and I’m currently converting those assets to Roth status each year while paying basically no tax. Maybe I get screwed when I’m 67 or 70 and on Medicare, drawing SS, and facing RMDs and have megamillion dollar traditional IRA and 401k balances. If so, I’ll have more money than I’ll ever need and therefore I’ll feel like I won the game!

          1. Just started reading these blogs. Fascinating. It’s just different fir everyone. I make more than you and your wife combined. My wife gave up a tenured teaching position 15 years ago to raise our now 3 kids. After 15 years she is now reverting the workforce. But if she had stayed working I figure we gave up in excess of $1mm in income and benefits. Now at 43 we will put the pedal to the metal again with the saving. Hope to be out by 52.

          2. Not sure what investment vehicles you are using in retirement, but you are appear to be too young to have experience a secular bear market (maybe a cyclical) in your investing years.

            While I admire your savings approach and tax hound skills, you are extremely short sighted when it comes to deferred taxes and how much you benefit from it now versus the future (unknown but currently taxes are historically low).

            The tax savings you bank on now could come back to beat you in the future. With the threat of social security and other long accepted entitlement programs becoming insolvent, we’ll all be paying a lot more in the future (well, maybe less for me since I’m a lot “longer in the tooth” than you). Like a previous poster, in my case I prefer using the Roth approaches where I know what I’m paying now. Then I can let it grow without too much worry.

            And while growing your “megamillion dollar traditional IRA and 401k balances”, pray that we don’t go through a secular bear market….. (assuming you’re still putting it in investments that realize that kind of growth).

            I’m old enough to have seen, witnessed, lived through such cycles. It “aint’ pretty”. I can tell by your writings that you are oblivious this could ever happen. Good luck and be prepared. You sound like smart guy.

            Again, kudos on the savings and tax planning, but there is still a lot more to come.

      1. No! Isn’t that awesome?

        There are income limits to contribute to IRAs and receive tax deductions for those contributions. But if you are below the IRA limits, and you have access to a 401k at work, you can contribute to both!

        Last, there are also creative yet legal ways to contribute to IRAs if you are above the income limits (backdoor IRA and mega backdoor IRA)

  2. Wow, that’s amazing! How does your government pay for services such as roads,education, police protection, healthcare, etc.? If everybody has such a light tax burden, I just don’t see how it adds up!

    1. Roads – gas tax and tolls
      Education – local, state and fed $$ (I pay a fair amount of state taxes in the thousands, and half my county property tax pays for education)
      Police – municipal expense, a big part of my city property tax bill (37% to be exact)
      Healthcare – mostly the feds, you got me there!

      It adds up because there are a lot of others out there paying a ton more taxes than me. Some because they can’t get these tax breaks, others because they are oblivious to the concept of tax planning (or don’t think the sacrifices are worth it?).

      1. I have to clear up that common misconception: Gas taxes and tolls only pay for about half of road maintenance in the USA. The rest comes from general tax funds. This number is more like 80-90% in other countries with sensible (read: high) gas taxes.

        Also, I want to point out that a lot of the taxes you’re avoiding today are deferred, not eliminated. Realistically, living on as little as you do, you won’t pay much/any tax on those savings when the time comes, but still in some economic sense they’re still there.

        1. You are right, user fees (like gas tax and tolls) pays for roughly 1/2 the road maintenance and construction in the US. Here’s a handy link summarizing transportation funding in the US: http://www.transportation-finance.org/funding_financing/funding/

          I’m not sure I would describe the other 50% of funding as coming from the general fund (ie general personal or corp income tax returns). AASHTO says 16%. Maybe 20-25% if you include their “other” categories and some bond proceeds if the bonds are being serviced out of the general funds (like our “appropriations” bonds on toll projects in NC – debt service is paid for out of the general fund I believe, in addition to “revenue” bonds being repaid from the tolls charged to drivers on the toll roads).

          Unfortunately I have yet to find a way to avoid property taxes and sales tax! Other than having cheap cars and a cheap house and not spending much money.

          Yes, my taxes are definitely “deferred” on roughly 2/3 of my investment portfolio. You are right that we won’t pay a large tax bill with moderate withdrawals each year. Particularly while the kids are still in the house. We couldn’t, for example, pull a half million out of an IRA to buy a beach house without some very ugly tax bills (which we would have to withdraw hundreds of thousands more to pay those tax bills!)

          1. Just for fun you may want to include the “inflation tax.” Yes this is a real tax as stated by Ben Bernake and famously Ronald Reagan stated it was the worst of taxes.

            So if your assets are say 700 K (home and investments), a 3 % inflation tax would be in the 21K range.

            This tax is perhaps the hardest to avoid. I’m open for avoidance suggestions. I suppose not having real estate assets and investing via a currency that is not inflated each year would help. But I have no idea what currency that might be or if that is even feasible?

            Nice blog by the way!

            1. Thanks for stopping by Bob!

              They only way I fight against inflation is by owning stocks. Long term they tend to beat inflation. It shouldn’t be too surprising if you consider what inflation is fundamentally. When prices of goods and services creep up 2-3% per year, we, as consumers pay more. But on the flip side, we, as capitalists own those companies that are selling the goods and services at inflated prices. As a result, their revenues inflate as prices go up. In the end, it’s sort of a wash for equity investors.

              Inflation is definitely a force to be reckoned with, and one of the stealthy killers of early retirement dreams (ie if you make 7% per year, you are only making 4% per year in real terms after 3% inflation). But from a macro level, yes, inflation is a hidden tax on wealth. If you aren’t beating inflation, you’re losing value in real terms. It’s one of the reasons I keep very little in cash/nominal bonds/CD’s. Rates barely beat inflation.

            2. I know I’m jumping in on this conversation ~27 months late, but I have an important inflation-related distinction to share. Bob asserts that seignorage (inflation tax) on $700k worth of home + investments would be $21k (based on 3% inflation). This is not the case as inflation only impacts currency… other assets (e.g., property) ARE NOT subject to inflation tax because the land doesn’t lose value as a result of inflation (ΔM).

              Let me explain with an example. Assume you have $500k in currency (cash, cash equivalents, stocks, bonds, et cetera) and a $200k house. Rapid inflation occurs and the monetary supply is devalued by 50%. The currency is now worth half its original value ($250k) but the house hasn’t lost any value—it will appraise for double ($400k) after the inflationary period.

              All that said, I don’t know of any legal strategies to avoid real estate taxes. But… property might be a valuable asset to hold if you expect the US to enter a period of very high inflation.

              Not to go too deep into fiscal causes of high inflation, but this would occur if (1) lending institutions deem the US incapable of loan repayment and impose higher interest rates and (2) domestic tax increases are not enough to cover the debt service. In this situation, in accordance with the government budget constraint (G = T + ΔB + ΔM), the government would be forced to print money to pay it’s debt…

    2. Because many others of us are paying for it in taxes, but about half the country doesn’t pay income tax at all. Also, the government in its infinite wisdom spends more than it takes in – to the tune of around $20 trillion in debt now, and climbing.

      1. Yes, it is a shame since Clinton ended with $0 debt at the end of his term. When Bush decided to begin the Iraq war, our national debt has done nothing but climb. Very sad, indeed.

  3. We made too much money in 2012 and couldn’t take advantage of many deduction/credits.
    This year we should be able to do much better.
    I have never heard of the 457 plan. It sounds like a great deal.
    Do you use a tax accountant? I’m pretty sure you can’t max out 401k ($17,500) AND contribute ($5500) to a traditional IRA.

    1. Sorry to hear you made too much money in 2012! 😉

      457 is apparently very similar to 401k in all practical aspects except withdrawal rules. We can withdraw at any time, and just pay ordinary income tax on withdrawals. 457s are often available to government employees and teachers. I figure it makes up for crappy pay and otherwise lackluster benefits (in my state at least).

      I prepare taxes by hand. There is an income limit to be able to deduct the IRA contributions if you also have a 401k. I think it is around an AGI of $100k. Below that you can do 401k to the max and $5,500 IRA. For you and your spouse!

      1. Great post and thanks for sharing! I’m totally surprised that we can fund both a 401K and traditional IRA, provided our AGI is below a certain threshold. I have always thought I’m not illegible for traditional IRA, because I already max out my 401k. It just seems too good to be true! I’ll have to check this out.

          1. I still don’t see how your AGI is below the threshold. Money paid into a 401k still is part of your AGI for the year. Kudos to you if you haven’t got caught, but I don’t think you are allowed to deduct your traditional IRA deposits with the numbers you report.

            1. 401k contributions come out of the paycheck and it is never included in “Earned Income” from your W-2 that gets listed on line 7 (??) of the 1040. AGI is very specifically defined on the worksheet to determine whether the IRA contributions are deductible.

          2. Thanks for the response, though my comment did not really warrant it being so stupid (I got a bit confused with where stuff gets pulled out of AGI…obviously).

  4. Justin, the real magic (I think) is that your family of 5 lives on $72,000 per year. Most people would be very, very tempted to use the money for consumption now rather than save it for later! Kudos to you.

    1. Our spending is actually way less than $72k/yr. We pay a ton in payroll taxes, and only the health, dental, childcare, and HSA deductions let us avoid payroll (SS+Medicare) taxes. There’s probably $10k in payroll taxes that comes out of our $72k/yr. And we were able to save some of that $72k in IRAs and a taxable brokerage account. But yes, the ability to take advantage of these deductions arises out of not spending a lot of money!

      1. Hi Justin. I just found this, but was curious if you could share roughly how your money is spent during the year in large buckets? For example 20% housing, 10% food, etc… Sorry if that is too much personal information. I always find that interesting (lifehacker has had a few articles about that but never show the tax situation). Thanks!

        1. I don’t have percentages but here’s the actual breakdown of actual spending and our forecasted spending in retirement (which is based on actual spending plus fun money):

          Historical Spending: https://rootofgood.com/root-of-good-household-spending/ $24,000 per year core expenses plus some work related expenses and a soon to be paid off mortgage payment
          Retirement budget: https://rootofgood.com/developing-a-retirement-budget/ $32,000 per year

  5. Great stuff, Justin!

    It still amazes me that people spend so much time trying to beat the market indices but then ignore things that are actually within their control, like taxes, that could “earn” them tens of thousands of extra dollars every year.

    Forget the star mutual/hedge fund manager and get a good tax accountant instead (or better yet, learn the tax code yourself)!

    Excellent post and thanks very much for the link 🙂

    1. Tax savings are certainly low hanging fruit. Probably the next best wealth builder tool after “save a bunch of money”. Fund selection is probably 3rd, then asset allocation 4th. Maybe those latter 2 tie for 3rd??

      And you are welcome for the link! You are my number 4 traffic generator today – people are finding me from my comments on your site. If you ever want to add me to your blogroll I would be ecstatic (since I would be next to some rockstars on that list!). I’m going to add you to mine when I get a chance. I think we fall in the “financial independence” niche of the personal finance blogosphere, so the fact that your readers find my articles interesting isn’t too surprising.

      1. I learned by filing my own taxes and preparing them by hand (still prepare them by hand in fact). I don’t have a good book to recommend on learning taxes, but walking through the 1040 tax form line by line might be useful to see what is AGI, what’s taxable income, how the standard deduction vs itemized deductions work, where tax credits fit in (refundable vs. non-refundable).

        Then once you have an understanding of the basic tax framework, you can understand more advanced tax concepts and where they fit in to the bigger framework. Take the traditional IRA – your adjusted gross income has to be low enough to take the deduction, so you have to figure out how to get a lower AGI if you want to save even more in taxes.

  6. I was pretty excited to see this as I hate taxes until I realized the $150,000 income was split between two people! Doh.

    Either way, nice job paying so little. I think I paid over $100,000 in federal income taxes alone for the past 10 years! But alas, I don’t get treated special at all by the government. In fact, I think the IRS treats people who pay more taxes worse b/c they want MORE taxes.

    I’m doing my best to pay nothing like you!

    1. It’s a lot of work to not work not pay taxes. Wait, that doesn’t sound right.

      Anyway, best of luck at avoiding taxes! Definitely some big savings to be had if you don’t mind dancing a little jig. As a small business owner, I think there are tons of ways to shelter income:
      SEP IRA
      Self Employed 401k: https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview
      And for the fancy people, defined benefit pensions for one!

      Unfortunately our $150,000 income is all we made in our best year, and part of it came from taxable investments. We never made the big bucks from W-2 jobs (compared to I-banking salaries for example).

      1. Yeah, I’m definitely working hard to be poor in the government and public’s eyes actually. Stealth wealth!

        Perhaps it is our patriotic duty to pay as little to no taxes as possible so that the government can take care of us. The $100,000 in federal taxes was paid per year and not over 10 years, so I feel I’ve paid my fair share.

        I can only contribute $50,000 of a $200,000 income to a SEP-IRA. Which means I still have to pay taxes on $150,000 = ~ $35,000.

        But, at the end of the day, I’m not complaining. It’s fun to figure out how to pay less taxes.

  7. I’ve been terrible about optimizing our tax strategy, but like you I’m amazed how low our taxes end up being every year. This is my first year without a “job” so it’ll be interesting to see how things work out.

  8. Have you thought about doing Roth IRAs instead of traditional? Seems like you’d be locking in a pretty low tax rate on those, although I’m not sure what your state tax is.

    1. State tax rate is 7% unfortunately. I always do traditional IRA’s when I am eligible to deduct the contribution. I will be able to convert from Trad IRA to Roth IRA in retirement, and don’t plan on paying high taxes on the IRA withdrawals.

      In fact, I need a certain level of income (somewhere around $32000 to $40000) to qualify for the Obamacare subsidies. Below a certain income level, and we wouldn’t have enough income to qualify for subsidies. And our state (NC) didn’t extend Medicaid, so we would be left paying the full insurance premium. My strategy years ago of contributing to trad IRA’s instead of Roth’s had nothing to do with Obamacare (obviously), but it worked out to our great advantage to have trad IRA’s that could be converted in order to generate taxable income to qualify for Obamacare.

    1. Thanks for bringing up the ESPP, as I debated about whether it belongs on the list of “opportunities to reduce your taxable income before you even get your paycheck”. I ended up including it. It doesn’t fit the mold of most of the other ways to reduce your taxable income, but it is still a way to receive compensation from your employer today, and not pay tax on that compensation until some future date (possibly when you are retired and in a lower tax bracket).

      I have never had the option of an ESPP, so I had to research the issue a bit. Here’s my understanding of how it works tax-wise. XYZ corp gives you the option to purchase 100 shares at, say, $20 when shares are trading at $22. You buy 100 shares for $2000, and sell them two years later for $3000 ($30/share). You then pay the tax for the tax year in which you sold them as follows: ordinary income tax on $200 (the difference between the purchase price ($20) and the open market price at the time you were granted the option to purchase the shares ($22) ); long term capital gains on the other $800 in gains. In my tax bracket, the long term cap gains rate is zero.

      If I participated in the ESPP and bought and sold as explained in this example, I would say that’s a way to keep my W-2 income low but still get some compensation from your employer. I would end up paying at my regular 15% tax rate on $200 (2 years in the future) and 0% (the long term cap gains rate) on the other $800 in income.

      Maybe that’s not much different that simply buying the shares of XYZ corp at the market price of $22 and selling to get LT cap gains status, but I kept it on my list since I wanted to draw the slight tax advantages to the attention of any employees that might read this article and have skipped over the ESPP in the past. The company is giving you free money, and you get to defer taxes for at least a couple years on some of the free money, and any gains are generally taxed at favorable cap gains tax rates.

      The ESPP is complicated. For more details on taxation of ESPP stock sales, check out the IRS’s publication here: http://www.irs.gov/publications/p525/ar02.html – search on “employee stock purchase plan” to jump to the right section.

    1. You mean “tax avoidance”, right? 🙂 Tax evasion is never the right thing to do. Tax avoidance is totally legal and more or less encouraged by the IRS (they will certainly help you understand the minutiae of the tax code if you get a knowledgeable representative on the phone).

      1. There is nothing morally wrong with tax evasion, either, it’s comes with penalties. I hope you know the difference between immoral and illegal.

        1. I have a problem with tax evaders. I’d say it’s morally wrong because you’re short-changing the system we all rely on for support (I’m not just referring to social safety nets and welfare; also things like national defense, border patrol, FEMA, etc).

  9. Wow, talk about tax efficiency…very impressive! My wife and I are teachers who use every available account to reduce our taxable income: 457, 403b, traditional IRA, HSA, and teachers’ pensions. We also contribute to an ESA and 529 plans. We only have one child, but you’re correct that it’s very easy to come in under 4% effective federal income tax rate. It’s always nice to see money end up on our side of the ledger. Great article.

  10. Awesome breakout of showing how with a little effort and thought, you can avoid paying most income tax. Everything you did is perfectly legal and I applaud you for your efforts. My fiance and I have done everything we can to minimize our income taxes for this year since we will be married by year end.

  11. Are you retired? You show two salaries and two 401ks. Both factors lead me to conclude you’re still working.

    I ask because you focus on tax deferred investments to reduce your tax bill. This is fine, but it also makes it more challenging to retire early (and by retire, I mean not have to spend your time making money) since you won’t be able to access those tax deferred funds without penalty.

    I appreciate the information on tax minimization, but I am curious how you handled the reduction to after tax earnings and your ability to generate sufficient passive income for financial independence during your pre-55-60 years.

    1. Hmmm, good question. Would love to know about the passive income too given there is no active income anymore. Always a fascinating topic.

      If you click my website, I’ve laid out my passive income streams in early retirement. I still am only half way to my target.


      1. Thanks for sharing. I’ll be spending down the taxable portfolio and that will get us to our late 40’s. Then 72t withdrawals plus a couple other things to get us to 59 1/2.

    2. I just retired a couple months ago, but due to vacation pay out, paychecks lagging 2 weeks behind when I worked, and a few other things, my earned income is basically for a whole year of working. Next year the income will be about 1/2 2013’s income.

      I’m working on a series of blog posts that outlines withdrawal strategies for pre-59 1/2 early retirement spending.

      The answer in a nutshell is that we have a large taxable portfolio that amounts to roughly 1/4 our total portfolio that will support us for 10-15 years, and we can also access tax deferred money using the “72t rule” or Substantially Equal Periodic Payments”. Here’s a link to a similar question and my response discussing the 72t rule. https://rootofgood.com/a-simple-way-to-retire-15-years-earlier/#comment-268

      We can basically pull ~4% from our tax deferred accounts each year without paying a penalty (just ordinary tax).

      I get asked this question often enough that I need to put together a good post on accessing funds before 59 1/2, because it is relatively easy to do. You don’t have to wait till 59 1/2 to access those funds, and missing out on the tax deferral benefits is a bad thing generally.

        1. The allowable withdrawals each year are tied to interest rates, which have been historically low for a couple years. Since the recent uptick, I think you can get closer to 3-4% now vs. the 2-3% previously. I’m not aware of a minimum age required to start SEPPs. I think the bankrate calculator assumes it is impossible to retire before age 35, so the calculator has the min. age set to 35.

          I’ll work on an article, as there is true magic in the rule of 72t.

          1. The Rule 72t is great. I wrote about in this past May and it’s linked in the Website section.

            I’d probably hold off as long as possible Justin. Are you seriously considering withdrawing down principal from your taxable portfolio to live? I’d just feel bad doing that now. How about just living off your wife’s income and letting her work for a couple more decades instead?

            A post with numbers will probably help address all questions.



          2. Sam, Mrs. RootofGood said working another few decades is a no-go for her. Good idea, but I don’t think it will work out!

            Yes, we plan on consuming the principle in our taxable accounts (and doing Traditional to Roth IRA conversions each year).

            We would also be keeping our hands off our deferred and Roth type accounts for 10-12 years. Imagine letting three quarters of your investments sit back and grow for 10-12 years. Pretty good odds they will double in that time period (with a 6%+ real rate of return).

            I look at our investment portfolio overall. Taking 3% or so from an overall portfolio (even if that comes from consuming the principle in a sub account) is a very sustainable practice.

    1. This made me laugh… The government are a piece of shit because with some planning you can pay nearly zero percent tax on a six figure household income? 🙂

      Brilliant article by the way. We don’t have anywhere near the amount of little tricks and loopholes here in the UK, although you have inspired me to do some more research on the subject.

      The main annoying omission is that there is no equivalent to the 72t rule, as far as I am aware, which makes piling all of your wages into the tax deferred pension accounts we have a bit pointless for an extremely early retiree wannabe

      1. Some here never want to touch retirement accounts till full retirement age of 59.5. So they might save save save in tax deferred “pension” accounts (401k/IRAs for my predominately US based readers) and call it quits around 50 and do some part time work and live off taxable savings for a decade or so. Perhaps that translates across the pond to the UK?

        1. Yep thats not a bad strategy to be fair and would work if you wanted to retire “semi early” at around 50 I think. I don’t really know of anyone in that age bracket that is doing that though… everyone around my Mum and Dad’s age I know have simply worked full time up untill they decided to retire, some a bit earlier than others but I don’t think I know anyone who has done so at anywhere near age 50.

          The other thing we have is ISA’s which are tax free investment vehicles: the caveat being that you can only put 10K(ish) per year into them per person. The other thing is you have to pay tax on your earnings before you put the money in them. We also have something called a “SIPP” which to be honest I don’t know much about, so as mentioned before, further research needed.

          I am currenly in the 40% tax bracket, plus we have around 10% National Insurance (I think you call this social security?) payments, which boils down to a fairly big chunk of my (or anyone’s really) wages coming out each month before I even see it (no option to defer till the end of the year unless you are self employed). The last month for example worked out as 27% of my paycheck coming out, and as far as I know there is no way you can reduce this as once again it is automatic (barring becoming self employed or starting up a business… which I am looking into of course 🙂 )

          Then you have Council tax on top of that (property tax): which if you think about it you are paying for twice as you have to pay for this out of your after tax wages, what a swindle! Plus you can’t offset mortgage interest against your tax bill. On the plus side we have free healthcare etc… so no need for health insurance, plus a few other bits n bobs I can’t really think of right now. I am sure on the whole it nearly works out evens. 🙂

          A quick summary: It’s a complicated subject, as it is in the USA, but if you can master some of the techniques and methods (legally!) available then you can avoid paying tax where you don’t really need to. (I would imagine that 90% of people do not bother though).

          Cheers again for an eye opening and thought provoking article,


          1. That’s a bit rougher than our “direct” tax rate in the US, but we also have state taxes (like North Carolina’s at 7%). So a professional (who does little tax planning) might typically pay 25% fed, 7% state, 7.65% Social Security. Basically 40%.

            We still have property taxes, but ours are only $1550/year (about 1% of house and car actual values). In some places like New York or Massachusetts I have heard reports of $6000-10,000 per year property taxes.

            And for health insurance, my former employer charged $8000 per year for family coverage of not so great insurance. And that was the State of North Carolina! The health insurance would have added another 12% “tax” to my salary in effect.

            So yes, it works out “evens” But don’t tell anyone we’re socialists here in the US like the Europeans 😉

            1. I know this is like 5 years later but I’m in Illinois and my property taxes are about $14,000 on a house worth $350k. Just so the Firestarter gets the idea that this tax varies WIDELY.

  12. Hey RoG,
    I really like this post and referred to it in another Mr. Money Mustache forum post about the 457b and how you can double your limit.

    I realized, looking at the numbers yet again, that you might be eligible for the Saver’s Credit.
    Exact details on the form: http://www.irs.gov/pub/irs-pdf/f8880.pdf

    Even if you aren’t eligible in 2013, it’s probable that you’ll get to eligibility after finishing work. Even if you are at the upper edge ($57,500 for married filing jointly in 2012 http://www.irs.gov/pub/irs-pdf/p590.pdf), you are eligible to get a credit for 10% of your retirement account contributions – at $200, that would zero out your $150 in federal taxes. It’s nonrefundable, though, so it would only zero you out.

    1. Thanks for sharing! I’ll have to cruise over to the Mr Money Mustache forum to add my $0.02.

      We have always been very close to qualifying for the Retirement Savings Contribution Credit but usually exceeded the threshold by a few thousand dollars. We did get it for a few years, I think during college or soon after.

      I’m pretty confident we’ll get at least $200, maybe $400, in 2014 with just Mrs. RootofGood’s salary on the 1040. Another hidden tax on earning money – phaseouts of all these awesome little credits.

  13. I’d like to pay as little in taxes as I legally can, but taxes confuse the crap out of me (and I don’t have anything complicated going on – yet!). So, I am really glad that Living Rich Cheaply linked to this article, because when I have more time, I’m going to have to get a dictionary and look up everything you mentioned above. I am single making a bit less than the maximum limit for the second tax bracket (15% for under $36,000), and when I look at what I’ve paid in taxes over the year, it stuns me. I changed my W-4 with-holding from 0 to 1 earlier this year because I don’t care about how big my return is – I want more money now (why let the government borrow it for free for a whole year when I can invest the extra amount for a better return throughout the year?). Depending on how much money I still get back in my 2013 return next year, could I increase that 1 to a 2 for an increase in savings? Thank you for posting this article!

    1. I have always tried to owe roughly zero and get no refund when I file taxes in the spring. You got it – why give the government a free loan of your money. The only thing to watch out for is the “underpayment penalty”. It’s kind of complicated to explain here, but there’s a penalty if you have your withholding set too low during the year and you end up owing a lot in April when you file. So definitely tweak your withholding numbers to try to get your refund down to zero, or maybe owe a couple hundred dollars at most. But don’t set withholding allowances too high because you might not withhold enough to avoid the underpayment penalty.

      Here’s a little more reading if you want to get the nuances of the underpayment penalty: http://www.irs.gov/taxtopics/tc306.html

  14. My career currently has me in the position where I will be well qualified to be a school district treasurer or city finance director in a few years. I was wondering about your experience with the publilc pensions. (I currently work at a private sector cpa firm which audits these entities, so right now I have a 401k.)

    I know these pensions are tremendous deals with the only hangup being if you don’t stay in public employment for 25-30 years, you get screwed. Hence all the middle aged clients I meet with retirement countdown calculators on their desks. I was trying to do research on the different pension funds I would possibly be a part of and it boils down to https://www.opers.org (catchall for public employees) or http://www.ohsers.org/ (school employees other than teachers). It seems like PERS offers a refund with interest and SERS literally only offers you a refund. We have another fund in Ohio strictly for teachers, which I wouldn’t be a part of, STRS, which apparently offers a defined contribution plan but I can’t find anything about that on SERS or PERS.

    Obviously you aren’t an expert on all pension plans nationwide but I see you mentioned you don’t get interest back from your contributions in an earlier comment so I wanted to pick your brain on how you evaluated the pros and cons of working a job which requires membership in one of these plans.

    The employer contribution rate is tremendous here in Ohio (14% from the employer, also 10% from the employee) and the salaries, at least for school district treasurer, are quite competitive. And at a lot of school districts I audit I see their contracts are written to “pick up” the employee portion as well. So it’s a great deal, but I don’t know if I could do it for 30 years.

    1. Another interesting fact I thought I’d add in, I had an accounting professor at a state university who was a **national expert** on accounting for pension liabilities.

      He told us in class that he personally had opted for the defined contribution plan from STRS, which I’m sure he was in a teeny tiny minority among his peers. What does that tell you.

      1. Makes sense to me. You don’t have to analyze the solvency of your state or your pension plan. In my state, the legislature sets the cost of living adjustment for retired pensioners. It has been 1% per year lately (against 1.6% CPI-U inflation). Slow boiled frog…

        The main benefit of a defined contribution plan to me is the portability. You can walk away from your employer whenever you want and take your money with you. I can’t imagine being stuck at the same place for 30 years.

        I just shut my mouth about the pension at my state job. The lifers were in it for the pension and the shine of the golden handcuffs blinded them. The newcomers didn’t feel like analyzing the plan and determining the odds of them making it for 30 years, so they just figured it was a valuable benefit.

        The reality is that all of the employees that leave before qualifying for a pension heavily subsidize those that stay. When I leave and forfeit my pension, that 13-15% my employer put in on my behalf accrues to the benefit of all plan participants that retire and get the pension. That’s why they can pay such cushy pensions. It’s basically a pyramid scheme looked at a certain way.

    2. I didn’t get a chance to review the specific pension plans you linked to. When I was reviewing my options for employment with a governmental entity, I ran through the calculations of what it would take to get a pension. Options were pretty bleak for someone who makes a mid career jump from private to public employment. Our plan in NC has a five year vesting period. That was the maximum length of time I planned to work at my employer.

      Once you vest, you get interest on your contributions since you started contributing. Then, if you quit you can withdraw your contributions and your interest (ie forfeit your pension and take a lump sum of what you contributed plus a small amount of interest). Or you could leave the money in the plan and take a horribly reduced pension at full retirement age (60 or 65 in my plan – I forget). I was looking at $100/month at age 60 or 65 or $25000 or so lump sum at age 35 (if I made it for 5 years). Doing the math, withdrawing the lump sum is by far optimal (equates to getting a zero rate of return for 30 years I think – and not getting diddled by the legislature if they change pension rules/calcs). Probably somewhere around 10-15 years of service it might make sense to stay in the pension system (if you trust the legislature and pension plan to be solvent for a few more decades).

      Our plan required 6% employer contributions. The state kicked in around 13-15% per year (changed based on the whims of the legislature).

      I was planning on early retirement all along, so I considered the pension worse than worthless. It was actually a detriment since I didn’t get to invest the money in anything and didn’t get any interest for a few years. I missed out on a 20% return for the 3 years I worked at the state. At least I saved some on taxes on the contributions…

      So my advice would be to factor it into your employment decision, but if you are on track to retire early, it might not add much to your retirement plans. And 30 years is a loooong time to devote to a job. I’ve seen the zombies walking the halls at my employer just ticking off the years. Like prisoners. “I’ve got 9 more years” “Oh, you’re lucky, I still have 10 year 4 months left”. Ugg! What a horrible existence doing something you don’t like for another 10 years on top of 20 previous years of mediocrity. Explains why we get some of the results we do from the government.

      1. When I said “I don’t know if I could do it for 30 years,” what I really meant was “I have absolutely zero intention of doing it for 30 years.” So yes, the “golden handcuff” situation really is a negative when I consider this career direction. Still, the pay is good especially when considering the relative lack of overtime.

        Digging further it looks like my state has passed some pension reform law that says that the retirement system “may enact” a defined contribution plan and that “after that plan is created, employees will be allowed to choose between the traditional pension and that plan.” But I didn’t see any deadline for establishing that plan. So it’s going to be a few years for me anyways if I do this, I’ll just wait and see I guess.

        I know what you mean about the “8 years 6 months 13 days left” people. Golden handcuff is really an amazingly apt description.

        1. Sounds like you were in the same position as me – knowing you weren’t going to be able to take advantage of the sweet pension. I decided on the particular position in government for factors other than the pension, that’s for certain. Almost zero overtime was one of them.

          1. I know I’m a little late to this discussion…but this is exactly my situation! I have OPERS and I am forced to put in 10% of my pay while my employer matches it at 14%. I am not vested until 10 years. My plan is to retire early after I am vested because I can’t work here forever. I work with people who really do count down the days. After my first day here they said “Well, only 29 more years, 11 months and 30 more days!” I can’t do that. So it sounds like I can take a lump sum after 10 years? That sounds like a good plan. I wish I could talk to HR about it, but I’m too nervous. haha I’m 25 and I just past year 2…8 more to go! lol

            1. Renee, you probably want to research your plan a little more. I would read up on OPERS website, then call them if you have more questions. I wouldn’t be afraid to call the pension folks, since it’s doubtful they would ever talk to anyone at your organization. Here’s the contact info for OPERS: https://www.opers.org/about/contact/

              Here’s a start on your research:

              I found this tasty nugget here: https://www.opers.org/members/traditional/benefits/refunds.shtml


              You are guaranteed full recovery of all contributions you have made to OPERS. Upon leaving all public employment in Ohio, you may apply for and receive your accumulated savings.

              As a member participating in the Traditional Pension Plan, you may receive your accumulated contributions, interest on those contributions and, if you have five or more years of qualified service credit in the Plan, an additional amount that is determined based on your years of service credit.

              If you have at least five years of qualified service credit, the amount is 33 percent of your eligible contributions. If you have at least 10 years of qualified service credit, the amount is 67 percent of eligible contributions. Eligible contributions are the contributions you made to the Plan and any amounts paid to purchase certain types of service credit. ”

              It sounds like your plan is way better than my plan. Stay 5 years and you get your contributions back plus 1/3 of all contributions in addition. Say you put in $30,000 during your 5 years, you get back $40,000. Put in 10 years, you get back contributions plus 2/3 additional. If you contributed $60k in 10 years, you get back $100k! In a way it is like they are paying interest on your contributions. The takeaway from this news is that you might only want to stay 5 years to get the 1/3 additional return (if you have better competing alternative employment opportunities).

        2. Nick and Renee, I too have the OPERS Defined Benefit plan. Justin did a great job of quoting the basics. You can always take out the 10% that you are required to put inches you leave your public job. The 14 % match can be taken at 33% after 5 years or 67% after 10 years. However, if you don’t need to touch this amount, you can let it grow even after you leave employment. I have 5 years and am hoping to only work about another 5. But I don’t plan to touch this pension until I am 65 years old. This does two things for me. One I only have to save money to get me from 40 (age I plan to retire) to age 65. And two, at age 65 I am guarenteed an income for the rest of my life. Since I don’t pay I to social security with my public employment,and who knows it may not be around in 30 years, this is just another one of my saving strategies. I also put into my 457b, which I can withdraw from once I leave my job, and my husband maxs out his 401k. I hope this is helpful.

  15. I was wondering what you would do in this situation. I am trying to choose whether to put more into my 401k or pay more toward my student loans.

    I am currently putting $1000 a month into my 401k, and paying $2500 toward my loans (rates ~6%). For next year, I could either max out my 401k and pay a little less toward the loans per month, or keep the 401k and loan payment amounts the same.

    At my tax rates I save 29% or so federal + state on my 401k contributions, which is what makes it a tough decision. I’d like to retire around 40-45 and will likely have a much lower effective tax rate than 29%.

    1. You may want to set up a spreadsheet and dig into the details a little more for your specific situation.

      My gut says max the 401k and take the 29% instant tax savings (and deferred taxes while the funds remain in the 401k). Each year you have only a certain 401k contribution potential ($17500 for 2013) and it is use it or lose it. In a few years, you might be earning more and want to save 29% in taxes on more than $17,500 but find you have no other tax deferred savings options (although check out Roth IRA’s). In addition, maxing the 401k (which in your case means contributing an extra $5500/yr) will save you $1600 in taxes. You can put that $1600 tax savings toward your student loan!

      You are right about your retirement tax rate – you may pay zero or close to it.

      Good luck. Sounds like you have some massive earnings potential with $3500 per month going toward non-consumption activities.

      The only way I might “juice” your finances would be to seek out lower rate borrowing. Something I have done in the past with great success was 0% balance transfer offers for credit cards. The game doesn’t make sense for me any more (I used to borrow at 0-2% and put in the bank at 5%+). But for you, you can float some student loan balances on there and pay 0-3% per year and avoid 6% interest. Be careful that you understand the terms of repayment because managing cash flow can be tricky. But the savings can be decent. A large balance dropped on credit card balance transfers at 2% average interest/fees would give you a net 4% interest savings = $2000/yr saved in interest on a $50k balance. Check out the “credit cards” link under recommendations at the top of the screen if you want to see some zero or low interest rate credit card offers. Just make sure you understand “the system” before you jump in!

      Other sources of cheap borrowing are car loans and mortgages. You could possibly pay 2-3% instead of 6%, although I wouldn’t buy a new car or new house just to get low interest rates. If you already own a car or house, however, you could possibly cash out some equity at low rates.

      1. Thanks for the input, I think I will end up maxing out the 401k. Maxing it out vs. doing the $1000/mo will only be a $320 difference in take home pay, I can handle that.

        As for the balance transfers, I am already in the churning game, so I don’t want any more hard pulls for balance transfers. Between my girlfriend and I, we’ve gotten about $4000 worth of flights, hotels and statement credits so far this year, with a lot more still sitting in points/miles. If I can make my travel budget close to zero and still have some great vacations, I’ll take it. If the credit card offers dried up, I probably would do what you recommended.

        1. Good choice re: 401k maxing.

          You sound like us! Free travel is pretty sweet. I’ve become a credit card snob and won’t even apply for a cash back bonus of less than $150-200 or so. Glad to hear you already have the “extract wealth from credit cards” on an efficient course. 🙂

    1. I think we missed the AMT by $15,000 or so. Our AGI in the chart is $66,150 and there’s a $80,800 AMT exemption for married filing jointly. For kicks, I put $82,000 AGI plus a little foreign tax credit in the IRS’s online AMT calculator and it says I would have to fill out the AMT form to see whether I owe AMT.

      Great point about the AMT though, since some might be close to AMT in a slightly higher income situation.

  16. Unfortunately, I don’t have access to a 401(k), pension, HSA, or 457. Any tax avoiding ideas? I’ve been contributing the max to a Roth IRA. I’m single with no children. Can a 529 be opened for yourself? This post is motivating, to say the least!

    1. You can definitely open a 529 for yourself, but it’s usually best to spend the funds on education (eventually). You can always change the beneficiary in future years if you plan on having kids or want to help out nieces/nephews.

      If you are self employed, there are tools like the SEP IRA and solo 401k that can allow additional tax deferred savings.

  17. Hi Justin,

    I saw above that you talked about how to use credit cards to lessen the load of student loans. I’m getting married in July and combined we’ll have about 74k in student loans (majority at 6.55%), and combined we’ll be bringing in about 80k pre-tax. My plan was for both of us to contribute the minimum necessary to get our full 401k match from each of our companies, and put the rest towards paying off the student loans asap. Is this the best approach? Also, I was wondering if you could explain the credit card system you used for your student loans. For the credit cards I have, the interest on cash advances is 25% APR. Is the idea to max out the cash advance on one card, and use another card to transfer the balance which could be as low as 0% with some intro rates? I’m not sure if I’m understanding that right or not. Thanks for your help!

    1. You have the basic idea – find cards with 0% balance transfer offers with low fees (usually 2-4%). You could get a slight advantage in interest rate compared to your 6.55% rate. I don’t know if it has changed lately, but the credit card companies used to simply write a check to you for a “balance transfer”.

      Or the credit card company (for your new card) will simply write a check to your old credit card, thereby creating a credit balance on your old card. You can then call the customer service for your old card and request a check for the amount of the credit balance.

      It’s a dangerous game since you have to pay the balances off before the 0% rate expires (usually within 12-18 months). If you are interested in searching out a couple of cards, check out the “Credit Cards” link I have above under recommendations. One card I know that offers 18 months 0% on balance transfers is the citi simplicity card, but you can search through all the different cards at the “Credit Cards” link. The Barclay Arrival Card (look in the upper right corner of Root of Good or at the “Credit Cards” link) also offers 0% for 12 months, and $400 cash toward travel. So you can save on interest and get free travel! And your wife-to-be can apply for her own set of cards as well.

      1. Thanks Justin. I’ll have to play around with it a little more and see how much it’ll help me. I actually do have the Barclay Arrival Card, and redeemed the rewards for our honeymoon. And it turned out to be $440 towards travel because they give you 10% back on points redeemed for travel. Not too shabby!

  18. Have you considered whether you can claim the dependent care credit in addition to your dependent care FSA? The FSA allows you to set aside 5,000, but the credit is available for costs up to 6,000 (2 or more kids). You’re allowed to max your FSA and take the credit on the extra 1,000.

    1. Our child care expenses weren’t high enough to also take some dependent care credit, so I haven’t investigated it. I think you have it right though – you can do the dependent care credit for up to $6,000 (or whatever the number is this year) for any amounts not paid out of the FSA, after subtracting what you put in the FSA.

      1. But I thought you couldn’t get the FSA tax benefits PLUS the tax credit. Isn’t this double dipping?

        1. Ryan has it right (above). You can do $5000 in dependent care FSA then up to $1000 will count toward the dependent care tax credit. $5000 + $1000 = $6000 which is the max you can count toward the tax credit (but basically $6000 minus what you contribute to FSA). Can’t double dip on that $5000 put in the FSA.

  19. Oh man, this article just made me discover that my state employed wife can contribute to a 457, and that we could have been doing so instead of her 401k all along. So now this means that I am indeed NOT currently maxing tax advantaged space. Just started investing in taxable last month because I thought I was at that step. ALSO this means that now that I have opened and started contributing to the 457 that our AGI is down into deductible IRA territory. Contributing to traditional instead of Roth is not something I pictured ever doing while I was in the 15% bracket, but doing that exact thing is really the correct choice for an early retiree assuming existing tax law.

    Thanks so much for this blog post. You really helped me.

    1. Wow, so you’re due for some big tax savings by maxing the 457 and thereby gaining access to a deductible traditional IRA? Congrats! You can mail me my 10% cut of the tax savings if you’re feeling generous! 😉

    1. You have to be below the AGI caps. We are below the AGI caps because all the workplace tax deferred contributions lower AGI. Our AGI tends to be around $70k (roughly half our gross income).

  20. Although I 100% endorse this post, I definitely hope people don’t think that the government doesn’t get its unjust due. My effective tax rate (federal,state,local) is over 35%. Sure, I was still using a Roth 401k instead of a traditional like I am now, but I by no means did anything grievous to get to these numbers. Anyway, most people likely understate their tax burdens by a considerable amount. Things to remember when considering taxes:

    1. Don’t forget about FICA and Medicare Tax. The total tax for anyone’s base salary is 15.4%. This is straight off the top with no easy way to get around it (minus an HSA). Employees split this with their employer’s yet the fact remains, this is money all employers are willing to pay for their employees.
    2. Don’t forget about Property taxes. 2-3 k might not seem like a lot in relative to a 200-300 k house, but marked against one’s income it is quite another thing. If you are a renter, you are still paying this as well through higher rent prices.
    3. Sales Tax can be brutal on large purchases like cars and is like a death by a 1000 cuts when applied to yearly expenses. This number is easily over a 1000 for most families.
    4. Inflation is a never ending tax. If the powers at be decide to reward their rich banking friends with more Federal Reserve notes via QE, the purchasing power of your income is lowered into perpetuity. As a side note – inflation is often abused by the government in that growth in productivity and efficiency are used to offset the effects of inflation. Even with prices on general goods unchanged, a person can still experience inflation in that without the interference of government debt/central banks, they would have experienced deflation.

    In short, there is now way to eliminate taxes in a mainstream work life. Your best bet is to lower spending and save in tax advantage accounts, but in no way are you sticking it to the man.

    Even with RoG’s amazing saving to tax advantage accounts and children to lower his federal/state tax bill, I doubt his total tax burden (all in) was less than 15-20%. Good, but still quite a lot of money (20-30 K) that one forks over to the state.

    1. You are certainly correct! I like to brag about our ultra low federal tax rate because it’s very easy for many middle class folks to mitigate or completely avoid federal taxes.

      Your observation that we are still paying 15-20% in taxes is very astute. On roughly $150k gross for 2013, we paid:
      – $8600 in FICA/medicare (plus another $8600 the employer paid on our behalf)
      – $2500 state taxes (7% marginal rate, going to 6% next year but with fewer deductions)
      – $250 federal income tax (ouch – thought we would only pay $150 – I was off a bit)
      – $1400 property tax (on a $150k home) – actually a steal since we get free tuition in elementary school x2 kids!
      – $620 sales tax – 2% groceries, 6.75% all other goods
      – $180 gas tax – user fee? We drive on roads and they do have operating costs
      That’s $22,150 total. Or just under 15% of our gross. I didn’t even get into hidden excise taxes or import tariffs, or built in tax costs (fuel taxes paid by truckers driving our goods to the store for example), or fees like car registration and inspection.

      We get a lot back from the government. It’s hard to say if it’s $22,150 worth this year alone. Probably not. But those FICA/medicare taxes will drop big time in 2014 and be gone completely in 2015 or 2016. After that, our taxes will fall almost 90% to under $3000. Just our Obamacare subsidy alone will be worth thousands per year, so we will be a net recipient of government largesse starting in 2015-2016 or whenever we go on Obamacare.

      While you are working, taxes take a big, seemingly unfair chunk from your productive efforts. But when you are young or old, or early retired, the bite is much gentler.

      1. As far as talking getting back from the government what they took from you, I don’t really have a huge problem with that. You spent many years as a productive member of society and were charged a pretty penny for it. The problem with this type of thinking though:

        “We get a lot back from the government. It’s hard to say if it’s $22,150 worth this year alone. Probably not. But those FICA/medicare taxes will drop big time in 2014 and be gone completely in 2015 or 2016. After that, our taxes will fall almost 90% to under $3000. Just our Obamacare subsidy alone will be worth thousands per year, so we will be a net recipient of government largesse starting in 2015-2016 or whenever we go on Obamacare.”

        Is that this is your personal situation doesn’t reflect the mathematical reality of these larger social systems on a whole. Yes, one individual can find niceties that fit their personal situation and might be able to navigate the system to a slightly negative to neutral outcome like yourself. However, these sorts of systems (especially one like obamacare,ss,medicare,etc) are disastrous when viewed through the lens of the productive majority that feed into it. For instance, If a person making 50k annual salary were to save 15.4% for 40 years instead of paying payroll taxes, they would have 731K in real dollars!!! Sure some people might not save the money, but this is the yardstick the government needs to be measured against none the less.

        1. Believe me, I’ve done the calcs on what I would have had if I saved my SS taxes, and it’s not fun thinking about what I would have. But as a counterpoint, I’ve seen SS help older people who didn’t save a lot for retirement (sometimes for reasons largely outside their control).

          My thoughts on the give and take that’s part of living underneath a government. A cynical view: redistributing wealth keeps the masses from storming the gates of the richest few. I’m not one of the “rich” (with a NW barely in the 7 figures) but who knows when the unwashed masses will decide it’s their turn to be wealthy and help themselves to the wealth of others (by force or by a 51% majority vote to enact confiscatory taxation). Keep giving them bread and circuses, right?

          A more egalitarian view: we have enough wealth that we, as a people, can afford to stick a few social safety nets underneath those who need it from time to time. It’s obviously highly debatable as to who needs help and for how long, and what conditions or expectations we should place on those people.

          In the meantime, I say take your lumps in stride. The US is a pretty awesome place to live overall, warts and all. You pay your dues for a while, then you let others pick up the reins. You can lobby and fight for changes to make the system better (in the streets or at the ballot box), all the while living the best life possible given the constraints of the system that is in place right now.

    1. Deductible traditional IRA contributions, tax efficient investments, other workplace saving plans (health savings account or flexible spending account for medical). Those are the easy ones.

        1. VFIAX or VTI held in a taxable brokerage account. Both are tax efficient investments from Vanguard and are good core holdings in an investment portfolio.

          Depending on what tax bracket you are in, you will pay between 0% and 15% on the dividends each year and there won’t be any capital gains (most likely).

          You won’t get a tax deduction when you invest, but long term it’s hard to beat the tax savings of funds like I mentioned.

          1. I have some of my investments in VTSAX. Is that less tax efficient than the funds you mentioned (VFIAX, VTI)? They seem like pretty similar holdings, but I hadn’t considered tax efficiency. I have some vtsax in a taxable account (and some in a non-taxable).

            1. VTSAX is similar to VFIAX in terms of tax efficiency, and possibly even a tiny bit better. VTSAX (Vanguard Total Stock Market Index) is perfectly appropriate in a taxable account and is one of the best funds for taxable accounts honestly.

  21. I’m confused by your HSA listing. Did you somehow use that to cover your health insurance? If so, how? My HSA is ridiculously limited. Every time I try to use it, my claim gets rejected and I have to fight tooth and nail to prove it’s valid. As such, I’ve reduced it to like $200 per year.

    1. I guess you solved your own question, but I’ll comment about HSAs vs FSAs. My experience with FSA’s has been mixed – often times I experienced difficulties getting reimbursed with one plan sponsor, but with another sponsor, no problems at all. For the HSA, I’m the only one reimbursing myself, so I would never deny my own claims! 😉 But seriously, you’re only accountable to the IRS as to whether they are qualified medical expenses, and there is no custodian for my HSA (held at Fidelity).

  22. My husband makes $110,000. His employer matches only $2000 a year into a Roth IRA but it doesn’t get taken out from his check. We have 4 kids and an income property. Any thing else we can do to lower taxes if his employer doesn’t offer anything?

    1. Health savings account? Flexible spending account for childcare or medical/dental expenses? 529 contributions (if your state offers a tax break – mine doesn’t any longer).

      Don’t forget you can both max out IRA contributions even if you don’t have any earned income. That’s $11,000 per year. Your husband’s income of $110,000 would mean you probably make too much to deduct traditional IRA contributions. Adjusted Gross Income of $96,000 or less lets you contribute the full amount to a traditional IRA and deduct it all. You can still deduct a portion of the IRA contribution up to AGI’s of $116,000. That would mean a small tax break for you if your AGI is lower (things like health insurance, HSA, and FSA all lower your AGI, so it might be a lot less than $110,000).

  23. Great stuff. You may want to re-read instructions regarding the IRA deduction, though. I’m pretty sure that if you participate in your employer sponsored plan (e.g. 401k) you can no longer claim the deduction for IRA contributions. You can still contribute, but only with after tax money…

    1. I always follow the worksheet in the instructions and qualified for traditional IRA most years. Just have to get the AGI below the thresholds to qualify.

    1. I might be misunderstanding the question, but my taxes would be the same whether I reinvest the dividends or take them as cash. Buying a new investment doesn’t have any tax implications (as far as I know), and only when dividends are paid or investments are sold are there tax impacts.

      1. I read your sheet as you took the dividends as cash, therefore being classified as income. If you had just reinvested them then you would have reduced your taxable income by $2500 (8k-5.5k).

        I also see that you wrote Child Credit x3. Isn’t the child credit a flat 3k and not on a per child basis?

        1. Dividends are taxable whether you reinvest or not. And most of my dividends are tax fee (ie qualified dividends) although they do increase the AGI (just not taxable income).

          Child tax credit is $1000 per kid, subject to some rules.

          1. Are they tax free because they are from a Roth Account?

            When calculating my MAGI to see if I am eligible for an IRA contributions, where does that MAGI number fit in? How is MAGI different from Gross Salary or W-2 Salaries or Total Income? Which of those is it closest to?

            1. They are tax free because qualified dividends are taxed at a 0% rate when your regular income puts you in the 10% or 15% tax brackets.

              MAGI is probably closest to W-2 income (if you don’t have any other investment income or interest from savings, and no other deductions).

  24. Hey Justin,

    I’ve recently found you via the RPF podcast and GoCurryCracker blog and really like this post and will be reading more to learn about more advanced tax planning strategies. We unfortunately went through the first 10 years of our careers with our heads in the sand with regards to tax planning. I wish I would have found this info years ago as we would be with you in early retirement now. Thanks for sharing. I’ve linked this post to share with my readers in my latest post.



    1. Thanks for sharing this one, Chris! I checked out your latest post on taxes and it’s full of good advice and I think you highlighted a number of good resources like gocurrycracker and madfientist’s posts on taxes. It’s amazing how much impact smart tax planning can have on your net worth growth.

      1. When I started diving into the early retirement blogs about a year ago, I honestly didn’t think that what you guys were all writing could be correct and I sat down with a CPA friend and went over the strategies to verify that they were actually correct and legal.

        Highlighting your work and that of MF and GCC is the least I could do to thank you all for all that you’ve done to help us accelerate our path to FI and early retirement!

  25. I just listened to you on Radical Personal Finance and found it to be very interesting episode. I will link to this article because I am certain many others will find it as interesting as I did. Keep up the great work. David

  26. Holy cow. I am an accountant with some tax knowledge and try very hard every tax time to minimize tax but you are being so much more effective in tax planning. Thanks for sharing very motivational article!


  27. I think someone should report your ass to the IRS. You are doing your taxes like corporations do. Trying to swindle the system and not contributing your fair share. It disgusts me.

    1. Reporting like corporations do? No, I’m not filing corporate tax returns, just individual. Maybe your misunderstanding is why you seem unhappy with how I’m taxed?

  28. This is excellent tax saving strategy. It’s tax season right now. This year I’m overwhelmed with the house improvement and buying a rental. I want to maximize my deductions. I’m thinking hiring somebody for this year then next year, I’ll be back doing it myself.

  29. Wow, these are great tips. Would you recommend a couple in their mid-30s with $110k worth of student loans and a young child sock some money into a 457(b) plan, or should they pay the most they can towards their student loans from their ~$125k before tax income? I know we are in the same boat as a lot of folks nowadays with the student loans, but by the time we pay them off we won’t have any money saved towards retirement.

    1. If your student loan rates are under 4%, it will probably be better long term to max out a 457 for the big tax savings today and compounded growth long term. You can probably get your AGI low enough to max out traditional IRAs too if you want to get your taxes even lower. Also check out IBR repayment for student loans. They base your repayment amount on AGI, so you might be able to reduce your student loan payments significantly using IBR.

  30. Not to whine too much but although I had a miniscule federal tax when I made about what you do working as an engineer but paying a mortgage in CA, but now as a salaried doc married to a part-time cop, I am paying so much in taxes, I pay more than you and he make together. Nowhere to hide when everything phases out. No deduction for student loans, for rental loss, no IRA deduction, no kids, hit with high state tax, AMT. We are talking 35%.

    I negotiated a raise and now I am sorry I did. I should probably just work half time and have a side business. We can’t even get all our deductions this year as we are now over the agi that triggers them taking away deductions. Hard to complain too much since I do make a lot but we work pretty hard and get called at all hours. We both work a lot with folks who collect SSI, Medicaid and welfare benefits, it grinds you to see all your hard work translate into unappreciated financial benefits for people who smoke, don’t work, don’t finish school and breed with abandon. I have had patients say they couldn’t afford antibiotics when one grocery store pharmacy here provides them free and Wal-Mart charges $4. Why do I know this and they don’t? Because I pay for them myself and price shop. They don’t bother to price shop, can’t take responsibility enough to fill an rx and then show up to the ER with something that could have been fixed for less than $5 and a little responsibility. Then I get called at 2 am for this. We’re paying for this crap one way or another. Soon won’t be worth my while to work. Rant off.

    1. I certainly sympathize. One reason why I decided against a career at BigLaw was the tax structure. Earning $100-150k where many of the deductions and credits phase out and marginal rates are much higher just wasn’t worth it given the extra effort required.

    2. Just think, you could be making a lot less and still see the same problems and you would feel even more resentful! I mean, i work hard and long hours but make a 50k salary … never had the kids I dearly wanted because i could not afford them … and believe me the breeders, dropouts, smokers, ER “clinic” patients, etc., irk me just as much as they do you, except I am 600 percent less wealthy than you.

      So there’s that.

      I think when you talk about “soon it won’tbe worth my while to work” … That factor is so much more at play for the middle earner such as my level than at yours, becuase if you earn what most people do — around 40-50K — you really do see very little after taexs for your efforts.

      Just think how you would feel if you made 40k and all th other things you mentiooned were stil true … And sweetie most people making 40k are in working conidtions just as unpredictable and stressful as yours, but in different ways. We too get calls after hours and we have to sacrifice weekends to employer needs and we have unoredictable work schedules more and more, … but at the end of OUR working day we don’t go home to a comfortable house and healthy take-out food from a nice restaurant … we have to save money by shopping for pennywise ingredients and cooking from scratch, or when we finally sit down it’s in a hand-me-down sofa that’s not the cushy one we would love to afford.

      Far from your income level, it’s the little guys like me that ought to be excused for saying it’s not worth our while to work.

  31. I am a public sector employee with the City of Chicago and I max out my 457(b) plan. I cannot find anything online about a 401(k) option, although I sent an inquiry to the administrator of the plan. Any suggestions to learn whether I have this option? My husband contributes to a 403(b) plan — if we are both eligible to max out 401(k) plans, we could really take a chunk out of our AGI and probably become eligible for additional benefits, too!

    Thank you for this post – it really gives me a lot to think about!

    1. Just check with your HR department to see if you have a 401k and how to sign up.

      And you’re welcome, Sherry! That would be great to max out 4 savings plans (for $72,000+ of tax write offs this year). You might also qualify for traditional IRA deductions as well.

  32. Justin,

    Your $150,000 income and $150 income tax came up when i was searching for ways to pay less income tax. I want to get some help in understanding how we can bring it down as much as we can as well on our income of $150,000. I think you have done a great job of explaining, but some things are either beyond my understanding as I feel like a noob in this matter. I would appreciate if you could respond to my post.

    I wanted to say that I am glad to have found your blog, me and my wife are in our early 30’s and have saved some money but its all in our savings account. I had always thought that investing is hard and complicated. Through your website I signed up for personal capitol and have found other informative blogs as well. I bought the bogleheads guide to investing as you had recommended. I have only finished a few chapters, but I think its a step in the right direction, that your blog has inspired me to take a closer look at my finances and start saving and investing.

    I have a question about the 401k and 403b maxing out. My wife has a 5% match through her company and I have a 4% 403b through mine. I contribute the match and its only been a few years that I have done so and my wife didn’t have her 401k until this weekend and opened one after reading your blog.

    Now, you say to max out the 401k and 403b, but I am struggling to comprehend how that is going to impact our take home pay and in turn our expenses.

    We are not big spenders, but occasionally we do spend, but I can say we save about $1000 from our paycheck each month, but that still won’t be enough to max out the 401k, and besides we like to have some cash in our savings account for easy access.

    Is there some sort of calculator where i can plug in my gross annual/monthly income and see how it affects my take home pay?

    I have a lot to learn, and i have not even scratched the surface.

    1. You might try taxcaster from turbotax: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

      You can plug in your info and see what contributing extra amounts to your 401k or 403b does to your tax burden. You’ll probably find that contributing $1000 extra reduces your taxes by $300-400, thereby only costing you $600-700 out of your paycheck. So you might be able to contribute $1400 extra per month to 401k or 403 and only see a ~$1000 reduction in take home pay.

      Another option would be to simply up the contribution amount by $1400 or so and see if that leaves you with about what you need in your paycheck to get by month to month. You can fine tune it as you go along and hopefully get to the point of being able to max both accounts eventually.

      Good job on getting started on all this stuff. It is admittedly a lot of info to take in at first, and it’s best to try to make incremental changes and learn as you go.

      1. Thank you for the response, I wanted to get some clarification regarding the amount that one can contribute to 401k and ROTH IRA.

        I spoke to my company’s HR and they told me that the total contribution limit is $18,000 for 2015 for both 403b/401k and ROTH.

        But reading at some of the internet sites it reads differently, where they say 401k/403b max contribution $18,000 and $5500 max contribution to ROTH. Which is correct do you know?

        Also, I see that you and your wife have maxed out 401k’s and on top of that also have $11000 traditional IRA deduction, is this IRA account on your own meaning at vanguard or something outside of your work?

        And how do I find out how we can be eligible for that?

        1. Your HR probably meant you have a Roth 401k option and a regular 401k, and the max between the 2 of those accounts is $18000 for 2015.

          For an individual, you can put $18,000 into a 401k AND $5500 into an IRA (roth or traditional, but there are income limits for both types of IRA).

          For married couples, each spouse can contribute $18,000 into their own 401k ($36,000 total) and each spouse can put $5500 into their own IRA ($11000 total). Even if one spouse doesn’t work, that non-working spouse can still contribute to an IRA as long as the other spouse is working ($18000 for 401k + $5500 x 2 IRA = $29,000 /yr even if only one spouse works).

          In general, 401k = workplace plan and IRA = plan you set up on your own. There are exceptions where a small employer sets up a “SIMPLE IRA” for its employees and it’s sort of like a 401k as it’s provided by the employer. And self employed folks can set up a solo or individual 401k if they only employee themselves (I did this in 2014 for example).

          Hope that helps!

          1. I think you are right, I think they mean $18,000 combined between 401k and Roth that they provide.

            So I should be able to open an traditional IRA or Roth IRA through a brokerage firm and contribute additional $5500 correct? and $11,000 combined for myself and wife.

  33. Great great article. Brilliant. 1 question. What about social security taxes? Are you including that? What was that amount?

    1. No, the $150 tax is only federal income tax.

      We never figured out a way to dodge social security or medicare taxes. With a $141,000 earned income salary minus $6000 or so contributed to the HSA (which avoids SS taxation when contributed through the employer), we end up with $135,000 subject to SS taxation. At a rate of 7.65%, that amounts to just over $10,000 per year we paid for SS taxes.

      We never figured out a way to dodge SS taxes. It might be just as well, since we expect to get $20,000 per year roughly from social security eventually. I hope to explore the impacts of very early retirement on SS benefits in a later article. To the SS system’s benefits formulas, we look like low income workers so we’ll get back a proportionally large amount compared to what we put in.

      1. Great post! I was doing some of these same numbers on livingatfi, but yours is better. There was a nice analysis of social security, basically assuming a healthy life, anything below the second bend point ($60k annual over 35 years) will pay itself back. I am in a rare situation where it might be possible to get back that 15.4% but realized that its not in my interest plus the paperwork can be messy. Now there are 10 years of zero ss that won’t hurt your benefits since its based on 35 years (out of 45-7), but fire folks will get those easily.

        See this thread, halfway down by grabiner


        1. I don’t think paying more SS payroll taxes would be a good deal for us at this point. I haven’t run the math on it like in that thread on bogleheads, but from playing with the calculators at the SS administration online, more dollars paid today don’t increase my eventual payment that much. I’d much rather stick 12.4% of my self employment income into an index fund for the next 30 years and own and control the money instead of getting a slightly higher COLAd annuity in 30 years. SS payments and structure might change by the time I’m ready to take my SS.

      2. “No, the $150 tax is only federal income tax.”
        I’m glad you mentioned this!!! I could not fathom how you paid $150 in taxes when I paid $20,000, and on half the salary (the only deduction I can take is for my 401k contributions). When I look at my pay online, everything that goes to the government is lumped together and called “taxes” – both on the pie chart and the column view. But if I click on the dropdown menu for more, I can see the breakdown that shows federal taxes, medicare, social security, whatever else. I just checked my tax returns from a few years ago and I see that, while I did pay many thousands of dollars, it was not $20,000. I need to pay more attention to that breakdown as I work on my numbers now and for later.

        Phew. I am slightly less resentful now. Thanks for all of the useful info you share.

  34. One thing I would have liked to see is a calculation of how much would keep your credits but max the 15% rate? I guess you aren’t worried about dipping into 25% in retirement? Of course the HSA is a tax free withdrawal too. I guess my thought is 1. Tax rates are more likely to go up than down 2. Large health costs might require withdrawal 3. Its good to have some tax free (roth) accounts that you can pull from 4. But of course if you don’t use it up, your heirs won’t be paying taxes so why pay the irs early?

    1. As for your thoughts:
      1. Rates aren’t guaranteed to go up. Especially at my “lower income” levels. Of course who really knows? We could have a comprehensive overhaul of the tax code with a widening or narrowing of the tax base and resulting lower or higher tax rates.

      2. The HSA is a great buffer to protect against abnormally large health care costs in a particular year. We could withdraw enough to cover extra care and have zero impact on our AGI.

      3. We’re planning on converting Traditional IRAs to Roths over the years (read about it here), and slowly build up our Roth accounts to allow withdrawals to be a little lumpy as needed.

  35. So glad I found this blog hope the other post are just as good just bookmarked it…. I think we are similar in earnings and amount of kids but paid like 28K in taxes…. I have been using a tax accountant and I think I am doing taxes myself this year I would have paid closer to 35K if I didn’t catch some of her mistakes like our HSA contribution she put as employer contribution (additional income)

    1. Hi Jen! Glad you found the site and hopefully something here will save you money on taxes.

      I’d definitely look over any tax returns before they are filed and check out old tax returns too. If mistakes were made in past years, you can file an amended return and get back overpayments for up to 3 years.

  36. Would anyone know if I earned $40,000 at my job, would the federal income tax be roughly the same as if I quit my job and earned the same amount on only dividends (say non-qualified, not sure though)? Thx

    1. In general, dividends will be at least partially qualified, so you would actually pay less tax on $40k of dividend income than you would on $40k of earned income. In fact, if you bought an index fund that pays dividends, you would probably get a majority of qualified dividends and be in a low enough tax bracket to have most of those dividends taxed at 0%.

  37. Long time reader, first time poster. Currently my wife and I make a combined income of around $181 k and we are currently maxing out all of our pretax accounts (401k 457b, tsp). When we factor in our flex spending, pensions, and insurance it seems that we can only get our annual gross income (AGI) down to around $119 k. I am afraid that our agi will be to large for ira deductions, so should we be maxing our roth ira’s instead? I understand that we can do a recarcterization to convert between a traditional and roth IRA, or should we just be putting this money towards a post tax account such as betterment?

    Thank you all!

      1. Thanks RoG!

        I think i agree about switching over to vanguard or fidelity. I have been using betterment while the free trial in order to see if the tax lost harvesting out weighs the extra fee. So far we are about 1/2 through the trial and no losses harvested so its not looking so good.

        1. I think Vanguard makes it easier to tax loss harvest now since they track basis of individual lots for new purchases. Fidelity definitely makes it easy and I’ve picked specific lots to sell at a loss and it’s really easy. Long term you can really save a ton of money on investment fees if you skip the extra layer of management fees at the robo advisors like Betterment, which is why I recommend going straight to a broker/fund sponsor like Fidelity or Vanguard.

  38. Tax deferred accounts are crazy if you haven’t already maxed out tax FREE accounts (Roth, Roth 401k, etc.)

    I understand not wanting to pay the tax now, but think about interest on 30 or 40 years of money sitting in a growth account. Would you trade $3,000,000 dollars in 30-40 years for $3000 now? That is what you are doing by using a tax-deferred account. You will still be taxed, but now the government will get a much larger slice when you withdraw. A Roth has ZERO tax on principal and earnings when you withdraw.

    If a person, at age 18, makes a single max contribution $5500 and then NEVER puts anything else in the account and the account earns 10%/year, he will have $485,000 TAX FREE MONEY at retirement age. If he contributes as little as $100 each month after the initial $5500, he will have 1.5 million tax free money at retirement age. If you max out your Roth EVERY year until retirement you will have 5.5 million tax free dollars in that account.

    All of this is assuming the US government never does a Greek or Cyprus like stealing of your investment monies.

    Lets flip around and say you max out your traditional IRA every year until retirement (assuming contribution is fixed at 17,500 each year). You will wind up with 17.5 million at retirement. NOW you have to figure what your tax implications will be! You are required to start drawing at 70.5. This will work out to a MINIMUM of 650,000 you will be required to withdraw. That will explode any tax benefits you had ANYWHERE else. The federal government will take 40% (260K). Then the state and local governments will get their share of your “Wealth”. By the time you are done your tax rate will be between 65-70%.

    There is NO required minimum distribution age with a ROTH account. You can sit on the money until YOU want to spend it. And when you want to spend it there is NO TAX on ANY of the money. If you and your spouse BOTH max out your ROTH accounts now and EVERY year, then put the rest in your 401k, you will have MORE tax free dollars at retirement than with a traditional IRA.

    The 401k traditional IRA is mainly used by people trying to get their AGI down to avoid missing out on tax incentives. In the long run, money put into other investment vehicles (Land, Property, etc.) will be better tax shelters as well as being easier to unload without terrible tax consequences.

    Depending on where you want to live when you retire, it might make sense to send some after tax money (mailed cash) to a small island state bank for investment. US taxes are brutal.

    1. You raise some interesting points, but I think you’ve missed a key part of the equation and fall into the common tax advice spewed by the mainstream financial media. That advice unfortunately doesn’t serve many people well, and particularly hurts those aiming at early retirement.

      Tax deferral today frees up more money to invest today. Which means much more money tomorrow. In your example of a $5,500 Roth IRA contribution growing to almost half a million dollars of tax free money (which would be sweet!), you neglect to mention that the same amount saved in a traditional IRA would give you a big tax break that you could then invest and let grow. If you were in the 25% bracket, you would save $1,375 on your taxes and that amount would grow to nearly $125,000 at retirement age. That’s a lot of money to pay future tax liabilities with! And most retirees end up with less income in retirement than while working, thereby lowering their tax bracket.

      Skip 25% taxation, take the savings and invest them for your own benefit, then use the proceeds to pay a lower tax rate in retirement. What’s not to love?

      As for a 70% tax rate on wealthy people, I’d like to see the math behind that.

      You also forget that $650,000 in income in several decades won’t be taxed at the highest brackets since the tax brackets themselves go up every year with inflation. In 40 years, $650k income will be closer to $150k income today, and that won’t push you into the highest federal tax brackets. You would be in the 28% bracket (or possibly 25% if MFJ).

      As for your suggestion of sending money overseas to skip US taxes, I would not suggest doing so. You still owe tax on the income. Maybe you won’t get caught, maybe you go to prison. Tax avoidance is legal and wonderful. Tax evasion is lame (when there are so many clever and creative ways to legally avoid paying high taxes).

  39. I see you took the Standard Deduction instead of itemizing. Was that done on purpose or did you not have enough individual deductions (i.e. mortgage interest, student loan interest, property tax, etc.) to exceed the SD amount?

    1. We didn’t have enough to itemize since we paid very little in interest on our mortgage (1.99% on a small mortgage balance). Real estate taxes have been in the $1400-1600 range the past five years. Student loan interest is above the line deductible.

  40. I hate you 🙂
    Just calculated that I have paid over $155k in federal/state/SS etc and I owe another $20k…:(
    time to start looking for a Govt job 🙂

  41. So are you just screwed if your employer doesn’t offer the pension or dependent child or 450 whatever? My husband gets a 401k. That’s it. We have two kids and an HSA. So we will still pay a lot more by default just because we don’t have those plans from his employer.

  42. Time for a stupid question. If we really start to take advantage of all tax breaks and deductibles we could be looking at a healthy refund. My question is, since you end up owing such a small amount of taxes, do you make an adjustment in your withholdings so that you get that money upfront rather than a great big refund at tax time? In your case, you’re talking about a lot of money! We currently get approx. a 2K refund at tax time, but if we were able to lower our tax burden I’m guess you modify your withholdings so less tax is taken out during the year?

    1. While working, we adjusted the withholding to be close to zero for federal tax. Now that we don’t have paid income, we don’t have withholding. I guess we’ll have to look into estimated taxes since I have to pay self employment taxes on the blog income.

  43. Reading this made me really upset! My situation isn’t exactly has yours but it’s clear that I’ve been been paying to much in taxes. There is a lot of money I’ve been leaving on the table to be taxed! The only reason has been ignorance. So thanks for pointing out how ignorant I have been. Today, changes will be made and you Mr. Root of Good now have a loyal follower. (Well starting tomorrow since today, I’m just mad.)

    1. After reading the first sentence, I was afraid you were going to launch into a rant against my tax dodging moves! 🙂

      But then I see you are wanting what everyone else wants – to save taxes. 🙂

  44. Both of us his/her have access to 401k, 457, 403b with two pension contributions of 8% & 7% respectively.

    After reading your blog, we’re maximizing what you preach based on our taxes to project our taxes this year. So I’m excited to see how the number will work for us.

  45. Hey Justin,

    I make a good salary (well decent for SF) of $125,000 and wife is only part time and makes about $12,000. We were told by our CPA that we don’t qualify for Traditional IRA because we make too much. It’s confusing figuring out what can be deducted and what can’t for qualifying for the Traditional IRA (we have a large mortgage interest deduction and prop tax deduction ~ $40,000). I max out my 401k and both our Roth IRA’s, but there are no other tax deferred options (no HSA plan offered, no 529 break for CA, no self employed income yet). My wife’s company doesn’t offer a 401k plan and I read somewhere that if the spouse is not offered a plan at work then we might be able to deduct the full $5500 if we have earned income below $183,000. Just trying to max out our tax savings.

    Also, can you help me understand the Roth Conversion ladder a little better? Lets say we move out of SF and rent our place out for $5,000…so our yearly income would be $60,000, but then we still get to deduct the mort interest and prop tax as well as the personal exemptions (family of 4)?? Plus we would then get the child tax credits of $2,000 (for 2 kids). What about landlord deductions (such as utilities, prop mgmt, repairs, depreciation, etc)? are those also deducted from income?

    sorry such a long question, but i haven’t been able to find the answer to my specific situation…and i’ve learned a lot from your blog…appreciate it!!

    1. 1. Your spouse can contribute to a deductible traditional IRA if she has no employer provided retirement plan and if you are in a 401k and your combined AGI is $184,000 or less (in 2016). She can’t do $5,500 in a Roth AND $5,500 more in a traditional deductible IRA (of course).

      2. Link to my Roth Conversion Ladder article. Taxable income from rent = gross rent collected minus expenses (taxes, insurance, depreciation, repairs/maintenance, prop mgmt if not taken from gross, utilities, etc). So your $60000 gross rent might become $30,000 of taxable income after deducting all that stuff (mortgage interest becomes an expense deductible from your gross rent instead of an itemized deduction on Sched A). You can still take the standard deduction ($12k-ish) plus 4x personal exemptions (~$4k each x 4). Plus your tax credits.

      Hope that helps! 🙂

      1. That did help.
        Wow. Just amazing that the mort interest becomes and expense deductible from gross rent AND then can also take the standard deduction. All these deductions will probably put us in negative income territory thereby allowing us to do a ROTH conversion to Trad IRA without paying any tax. And then we can earn a little side income…say up to $11,000 that could be put into Traditional IRA accounts.
        If you ever make it to SF let us know…we owe you a beer!

          1. Hey Justin,

            maybe i missed it, but curious how the 2018 healthcare planning is going? Best i can tell the gov’t has all but eliminated the “gold-plated” silver plans (except for a VERY SMALL income window…approx $500 for a family of four, best i can tell). I’m not complaining too much as the subsidy was probably greater than it needed to be and one can still get pretty darn good insurance by playing with the numbers (i.e. family of 4 at $49,000 or less can still get a darn good plan…i’d call it a “silver plated” silver plan).

            Anyways, I’m about to enter the FI world in August and am thinking of signing up for one of the Bronze HSA plans for 2018 due to the fact that i’ve already worked half the year and therefore getting a “silver plated” silver plan isn’t practical. The thought is if we can stay healthy for 4 months our premium will be really low and it would allow for a large Trad to Roth Conversion. Then come 2019 can aim for the 87% subsidy max $ limit. Do you know of any reason this wouldn’t work? Some rule I’m missing for joining mid year?


            1. The gold plated silver plans are still in full effect. They are still mandated by federal law for those with incomes under 250% of poverty level (and the gold plating gets thicker as your income drops!). What changed is the govt no longer subsidizes the insurance company’s costs for the gold plating of silver plan, leading to bizarre behind the scenes actions (some states make other silver plans more expensive, others spread the pain more broadly I think). So the end result is that you’ll likely still be able to get a gold plated silver plan if your income qualifies you for the CSR subsidized plans and it won’t cost you any more (because the Premium subsidy goes up if the cost of the 2nd lowest cost silver plan goes up = taxpayers pay more but you don’t!).

              Your plan for lower cost bronze to run out the year of 2018 sounds reasonable. Hope for the best and pay up if you get sick. You’ll save on premiums. Then in 2019 go for the gold plated silver (or at 87% CSR maybe silver plated silver 🙂 ). Rule for joining mid-year is you need a life event or other exception. Quitting work and losing employer coverage works just fine. Apply before 15th of month if you want coverage to start 1st of the next month.

  46. My friend did what you did. Govt job, put max in tax deferred, had two kids. Problem was he got cancer at 36yrs old and expenses piled up. All the money was in one basket an he had to pay big penalties to raid the nest egg. He regretted saving so much and not enjoying life. He died at 39. To each his own.

  47. That is the way.

    We pay enough in VAT anyway, no one can escape from that, but there is a way to minimize it – DON’T BUY USELESS STAFF.

    P.S People forget about VAT as a tax, lol.

    1. We don’t have VAT in the US (yet!). Just sales tax in most states at 4-10% or so. Pretty much everywhere else it seems common. But yes, our sales tax is definitely still a tax and not as easy to avoid on essentials.

  48. Would you please share with us what are you going to do when it’s time to withdraw from your tax differed retirement accounts? What’s your game plan to avoid paying a hefty tax bill?! I’m very close to that stage and I’d like to see your point of view on this one? …..Please don’t tell me to move to Florida though 🙂

  49. Hi Justin,
    First- thank you for writing such clear, informative and interesting posts! I just discovered your blog and have been binge reading 🙂
    I apologize if you’ve already covered this topic- searched around for it but didn’t see one. Could you share your feelings on 529 plans? I have 4 nephews I want to contribute something to but wondering the best route to go- 529, trusts, or simply setting up a portfolio and trying to keep track of what to give to each one of the 4 when they turn 18. I saw you have 3 children but your income breakdown didn’t appear to contribute to a 529, hoping you can shed some light!

    1. 529s are pretty good. Even better if you get a state tax deduction! 🙂

      I have about $40-45k in 529s in total for my 3 kids from the days when North Carolina provided a tax incentive to contribute. Absent the tax break, I don’t think it makes a big difference where you save the money assuming it’s not a huge sum (like many tens of thousands of dollars).

  50. Thank you for this!!!! At 38 I’m a little late to the party but not totally starting from scratch.i feel like I just got a power charged super boost though. Just set up my 457 in addition to my current 401k just like your old employer I can do both!! Then I read thead scientist article about front loading but I am unsure I can front load these. My online account management system thinks I’m exceeding the maximum for the year. THANK YOU!!! This should definitely get me where i want to be by 46. Upside to starting late? I will already have earned lifetime medical from work. So it’s not a total loss.

    1. Better late than never, right? Lots of folks figure things out by age 40, start saving aggressively and still enjoy a rather early retirement (though not by 33! 🙂 ).

  51. Not sure if asked above but why contribute to an IRA? You are not really getting a great tax break for the $11,000 contribution. Why not fund a Roth instead?

  52. Hey! Love the article. Question: I’m 24 and contribute 10% to a 401k. I get a 4% match. I’m set-up to max my HSA and my IRA starting next year. With any raises I plan to increase my 401k contribution and am always finding ways to increase my savings rate. I just discovered I have access to a 457 as well, but the expense ratios seem high with the lowest gross ER on index fund options at 1.01%. Since I’m looking to retire early I see this 457 option as a bridge between early retirement (mid 30s?) and my 401k/IRA money. Happily, I just got a substantial raise, but my salary still won’t allow me to max out both accounts (yet). Any tips for determining how to divvy up my extra income between the 401k and potentially the 457? Should that high fund fee come into consideration, and if so how should I figure that math? Thanks for any insight!

    1. That’s a tough one. I would be hesitant to lock myself into a 1%+ fee investment for the next 10-15 years (or longer, since you won’t withdraw all of it immediately upon retiring early). So assuming your 401k has much lower investment costs (like 0.2% or less) I would favor the 401k. Hopefully you can get to the point of making enough to fully fund the 401k then start filling the 457 (or skip it and go with a Roth or trad IRA).

      1. Thank you for your input! Yes, .2% would be nice, but the lowest 401k expense ratio available to me is .6%. I believe the employer match and tax advantages still make investing worth it, though I’m hoping I can work with our administrators to get better investment options in the future. I do see your point about waiting on the 457 given its high fee. I think I’ll wait to invest there until I’m closer to actual retirement. I currently max my IRA with Vanguard which as you know has much better rates 🙂

  53. Thanks for this Grand article!! I had no idea some employers allowed both the 401k and 457. Turns out both my husband and my employers do!! We’re front loading mine, my HR had a bit of disbelief when I told them to zero out my paycheck after they withhold my taxes and parking…

  54. Glad I’m not the only one who does this.
    I went to the Nissan dealer the other day to check out a new Leaf (I didn’t buy it, but blame MMM for even looking at it). The salesman looked at me like I was an idiot when I told him I didn’t pay enough taxes to get the full $7500 EV credit even though I make ~100k.

    1. Uggg, that’s how I feel about energy efficiency credits. Not much help if they only offset tax liability and can’t be refunded for those with $0 tax liability. Just another example of welfare for the wealthy when the middle class and poor might be in a better position to take advantage of energy efficiency subsidies. A poor Hawaiian for example has a better solar profile than a wealthy New Englander for example.

  55. Can you max out a 457 and a SIMPLE IRA? I also work for the government (457) but have a side hustle with my Dad which has a SIMPLE IRA. Can I max out both?

  56. Hi Justin, I don’t normally comment on blog posts but to this article I must, as for me this is one of the most useful posts on frugality and finance that I have ever read on the internet, and yes, I’ve read and very much enjoy Mr Money Mustache, look at Rock Star finance, and all the rest. My family (wife and child) and I are going to apply this approach to our 2017 finances, where I also have a 403b, 457 plan, etc, making this idea New Year’s resolution for us (wish us luck!).

    Thank you for writing this, back in 2013!


    1. Glad to hear! And thanks for the kind words! This blog post is one of my all time most popular posts and for good reason – paying only $150 in tax while earning well into the six figures is amazing.

  57. I’m revisiting this post come tax time. I’ve tried my damn best to try and mimic your no tax household, but I can’t figure out how to pay less than $100,000 a year in income taxes! I’m contributing to a self-employed 401k, I’ve got business expenses, and S-corp, etc.

    What would you say is the realistic household income limit where not being able to not pay taxes stops working?



    1. I suppose you could concoct some theoretical huge gross income rental business with massive depreciation to get you back down to zero income (or negative!).

      Otherwise, I’m bumping up against the edge of what you can do in this post. Earn much more and you lose eligibility to contribute to deductible IRAs which then trickles down to higher taxes. I suppose you could have two government employees that each put $18000 in a 401k and a 457. Or make them both age 50+ and they can put $24,000 each into their 401ks and $24,000 more into each of their 457s. Add that to $6500 each into deductible IRAs, the HSA, etc and you’re up to about $115,000 deducted from income. Throw a half dozen kids in the mix and you might be able to hit $200k and still pay no tax. Sounds like a good article idea (feel free to steal it – would be an interesting read!).

      As for your $100k tax bill, get out your pen, start writing those zeroes and pat yourself on the back for reaching the level of success that you have to pay so much in taxes from your operating income (assuming 2016 is a fairly normal non-lumpy year for you). I’m curious if entrepreneurs like yourself feel the pain of the tax system more than a high income W-2 employee that pays $100k in taxes but has it taken out in “painless” $4,000 chunks 26 times per year in bi-weekly payroll? I know my measly $600 or so quarterly estimated taxes stings a lot more than the even higher sums I used to pay back in the full time working days (probably $10k+ due to payroll taxes).

  58. Good article. It’s amazing what one can do if they know what to do to lower their taxes. One question I had was wondering if one had the funds to pay off their student loans in full, why not do so instead of getting the $600 tax reduction on the interest?

    1. Our loans carry long term fixed rates of 0.75-1.0% which is less than inflation. In other words, I would never pay off the loans and hold them forever. As it stands under current law, the remaining loan balance will be forgiven after 25 years of payments, so there’s a good chance we won’t have to repay in full (Income based repayment plan).

  59. Our combine income me + spouse = 117,500 after our 403b’s deductions for 2016.
    Can we still contribute to T-IRA for 2016 and get a deduction to reduce our AGI?

    1. Probably not. Income of $118,000 or over = not able to deduct IRA contributions. Between $98 and $118k they phase out the deduction. So in your case you couldn’t do more than a few bucks of deductible IRA.

      1. Thank u for ur prompt reply
        I will contribute the max to a roth instead.
        Then keep saving for emergency fund which should be replenished by end of year.
        You are a great inspiration

  60. I’m so EXCITED to have found your page! The information here is invaluable. I’m a tax preparer, & owner of a small insurance agency (ALEM Agency that just started following you on Twitter) that found your blog through a random google search. Although I’m single and finally cracked the 6 figure mark in 2016, I didn’t maximize all of my contributions, and your post helped me to identify my mistakes. I also have 1 20 year old “kid” so I was especially appreciative of your example for peope without children. Thank you so very much for this great article. Signed your new Illinois fan.

  61. Funny you posted this article on Facebook today. We JUST got our Federal Tax Refund deposited today. Great article, that is also one of my crusades in life, outsmarting the tax man.

    1. That’s awesome! I’m literally taking a break from completing my taxes right now. Gotta love getting one over on the man when it comes tax time. 🙂 I appreciate our back and forth over the EITC. Just wish it was more within reach for me.

  62. Some great strategies, especially if you’ve gotten yourself to a place where can put so much into your 401k and 457. And I completely agree. I loathe the idea of getting a big refund back and try to get myself as close to zero as possible. This year our refund is $158 compared to over $4000 a few years ago (the wife likes a big refund but I’ve swayed her more to my way of thinking)! I’d much rather have my money in my hands on a monthly basis! Thanks for the great article.

  63. I manage to not pay any federal income taxes as a single taxpayer.
    W-2 income: $39800
    minus 401k contributions $18000
    minus Traditional Ira Contributions $5500
    equals MAGI- $16300
    taxable income after standard deduction and personal exemption approx. $6300
    The saver’s tax credit that I receive of $1000 more than wipes out the tax liability on the $6300.

    In addition, my employer has contributed 4% safe harbor contribution to my 401k as well as $16500 profit sharing to my 401k. These are great bonuses, as they do not count for any taxes, including social security and FICA taxes.

    So, in effect, I had a real income of $57,892, was able to contribute $41592 of that to my retirement plans, and had $0 federal tax liability, as a single taxpayer with no children.

    1. Congrats! You might be able to sweeten that a bit by contributing some to a Roth IRA or Roth 401k instead of a traditional version. At some point your $1000 saver’s credit will phase down to $400 (or some smaller amount) as your AGI goes up, so be careful to avoid that. But there’s probably some room to increase your Roth balance for $0 federal tax increase. 🙂

      1. I do have about $2000 of room to play with for the saver’s tax credit cliff, but by keeping my MAGI where it is, it also keeps my ACA premiums and deductibles very low. i.e. my monthly premium is $22 and my total out of pocket/deductible is $500 a year. By raising my MAGI, those numbers go up to $45 and $2000 which effectively taxes the extra $2000 at a 13.8% rate if I stay healthy and don’t actually use my medical, or an 88% tax rate if I were to get sick hurt and have to max out my deductible/out of pocket.

        I figure that if I can keep my expenses and spending low enough to live off of $13500 (after soc/fica) now, I should be able to lower that even more (inflation adjusted) without a mortgage in 5 years when I retire, thus not paying any taxes on the distributions.

        *I do also have a fairly substantial Roth account from previous years where I was not trying to optimize my income as well as taxable savings/investments that I can use to supplement if needed.

        1. That makes sense in the context of the ACA subsidy. I’m running my taxes the same way – losing out on part of the zero percent bracket in order to keep the ACA subsidies high. I did do quite a bit of Roth contributions and started the Roth conversions in order to use up a good bit of the zero percent bracket but that did result in a loss of some ACA subsidy (I think my implicit rate was 12% due to loss of ACA subsidies; much higher if we lost the $100 deductible plans we have due to excessive AGI for cost sharing reduction subsidies).

  64. The headline of this is misleading. You’re only paid $150 in FEDERAL income tax on about $85K of income (granted, that doesn’t change the percentage paid in absolute terms). What about state income taxes? The $56,700 of 401(k)/457/pension contributions are deferred income, so you still have a tax liability on that (though at a lower rate in the future, but likely not as low as the ~1% you claim to have paid). When that income is taxable, you likely won’t have dependent deductions or child tax credits to help, or the $3K of carry-forward loss. The carry-forward loss could be considered a pre-paid deduction, as you have already paid taxes on that $3K, by virtue of not being able to deduct the loss in the year it occurred. This is a bit like claiming that because you used a gift card (or coupon that won’t expire) worth $90, a $100 item only cost $10 (it cost $100 because you could have used the $90 value for something else).

    Those deductions are different than the standard deductions/exemptions/etc. which relate to the tax year in question and do not defer any income to the future.

    I find it useful to keep track of pre- vs. post-tax values, as well as unrealized capital gains, as they all have different usable values.

    1. Thanks for posting William/Denny (do you go by both names you’re posting by on here??)!

      There are still state taxes (usually much higher than fed tax, but that varies by state since some are 0%). And FICA which is a killer and one tax I didn’t figure out how to avoid other than HSA, FSA contributions and health insurance deductions.

      So far we’ve excelled at deferring taxes even during retirement. Fed income tax is $0 but I am paying a couple thousand in FICA due to self employment income ($ from this blog). But that’s definitely not due to “deferring” taxes by maxing out IRAs, 401ks, 457s, etc.

  65. So if I’m reading your chart right what was left to live on was $34,450 for
    a family of five ?? After today’s vote I don’t think any of us know how healthcare
    costs will affect future tax returns…

    1. That’s about what we spent many years.

      I have no clue what the healthcare situation will look like. I imagine we’ll be paying a bit more personally since our ACA subsidies will disappear and be replaced by a flat tax credit under the AHCA (should it pass in substantially the same form as today).

  66. I reported $127,800 last year with much of the same logic and very little earned income due to a job loss and paid 4.5% without kids. It is exceptionally beneficial to have a lot of qualified dividends and foreign tax credits. Plan on reporting around $100,000 this year and paying under 2% based on my prelim calculations. Should be interesting if we can pull off a year like your 2013 next year with our first born expected in Feb! Thanks for all of the great articles.

    1. Kids are great tax deductions, and combined with the tax planning you’re already doing, you’re well on your way to getting close to the magical 0% tax rate 🙂

  67. I am able to do the same strategy with access to all of the same deductions. If I retire with a few million dollars and end up spending more in retirement, would it not make more sense to do Roth IRA’s instead? You would pay more tax right now at a low rate and be able to withdraw tax free in retirement. In retirement, I would not have access to all the same deductions and would be in the 25% tax bracket.

    1. Depends 🙂

      If you’re making $100k/yr and spending half and saving the other half, you’re still taxed on $100k/yr while working. In retirement if you’re spending $75k/yr (50% more than when working) you’ll still be better off taking the deductions while working I think. Now if you’re planning on spending multiples of what you did while working, then yes you might be better off doing a mix of Roth and traditional today and then pulling from a combo of accounts in retirement to manage your income to stay in the 15% bracket (for example).

      However it depends on the numbers. For most people saving up a few million dollars, they run out of tax deferred space after a while and have to save in a taxable brokerage account. Withdrawals from a brokerage account often don’t have a huge tax hit since when you sell let’s say $10k investments you take part cap gain and part return of investment (your basis). Maybe $4k gains, $6k return of capital. At that rate you could withdraw some from taxable accounts, take modest cap gains, then pull from your trad IRA/401k/457 up to the top of the 15% bracket (which would keep your cap gains tax at 0%).

      So odds are you’ll be better off with traditional IRA/401k for immediate deductions then manage your withdrawals in retirement to stay within a target tax bracket. However you are right if you plan on spending many multiples of what you do while working then you could craft a scenario where Roths make more sense (so you don’t avoid 15% tax while working only to be taxed at 25% while retired!).

    1. There are income limits on the ability to deduct IRA contributions IF you have an employer provided retirement plan too. We were below those limits while working since all the 401k contributions we made lowered our adjusted gross income enough.

    1. We had access to an employer provided HSA where we could invest the HSA balance in mutual funds and ETFs. The advantage of an HSA is it’s tax deductible (even avoids payroll taxes!) when the $ is contributed. Then when you withdraw it for medical expenses it’s totally tax free. And it grows tax free for decades if you don’t withdraw it.

  68. Nice! Do one for Canada (eh!), please 👏I happen to have a bunch of kids as well 🙂 Good job and thank you for sharing these hacks.

      1. Yeah… Maybe you’re right. 😂 I wish there was some canadian tax hacking blog that I could follow, though. Have a great day!

  69. Very cool post . My husband and I also have 3 kids and contribute the maximum to our Roth IRA. Are the ROTH IRA deductions still applicable in 2018? Thanks!

  70. The $11K that you deducted ($5.5K *2) for an IRA – was that a ROTH or something different? It seems like your AGI is being reduced, am I missing something? Thanks

  71. Hello,

    I would like to ask you a question regarding Roth IRA ? If someone is withdrawing from their Roth IRA only their contributions not the gains and are under 59 1\2 .I thought they don’t have to pay any 10% fees or tax…
    They received form 1099R and in line 7 letter (J) but in his case was not a conversion it was from his $ 5500 contributions. Is their any form to submit to iras ?


    1. Not sure about that one! You should be able to withdraw contributions tax free, penalty free. Perhaps the custodian misreported the withdrawal. In any case, you do need to report the withdrawals of Roth IRA contributions since they reduce your “basis” in the Roth IRA.

  72. That’s simply awesome. It’s an eye-opener to see how far we can reduce tax bill with the right planning.
    I’m curious to see how your tax planning or tax bill was in your retirement years?

  73. Did you set aside any money to Roth IRA or Roth 457b? Where do you draw funds from after “retiring” from IRAs and paying 10% penalty?

  74. I recently moved from a state with below-average marginal income taxes to above-average marginal income taxes (but lower property & other taxes) and was surprised that we are actually going to be paying less in income tax since the new state has a much higher personal deduction/exemption even with on a relatively high income. Some states have as high as $24k personal deduction for MFJ so it’s pretty easy for retired people with mid 5 figure AGI’s to pay very little in state income tax even if their state’s marginal rate appears high at first glance. Property taxes tend to be the biggest tax when comparing different locales for retired people. Texas for instance might have one of the higher all-in tax rates for non-FatFIRE retired folks despite 0% income tax because of high property taxes.

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