Well Rounded Investor

My journey of becoming financial independence by 35 years old

Zero Taxes – One reason to retire early

If you’re not like Bruce Jenner who may spend upward $100K for sex change and didn’t put a ding on his $130 million net worth. If you are able to live a moderate lifestyle like the champion of personal finance bloggers like the Go curry cracker team and some others. The ones who have made it. Most of them will give out some tips on how they don’t pay a single penny in taxes. Right now I’m still in the rat race, I can’t enjoy it, but one day I will. I’m dreaming to this day.

You may owe 0% on your investment profits

Despite the tax hikes included in the misnamed American Taxpayer Relief Act, long-term capital gains and qualified dividends earned in your taxable brokerage firm accounts are still taxed at 0% when they fall within the 10% and 15% federal rate brackets.

Many more people than you might think occupy these bottom two brackets. Remember: your bracket is determined by the amount of your taxable income, which equals adjusted gross income reduced by allowable personal and dependency exemptions and by the standard deduction amount (if you don’t itemize) or your total itemized deductions (if you do itemize).

  • Say you are a married joint filer with two dependent kids. You claim the standard deduction for 2014. You could have up to $102,000 of adjusted gross income (including long-term capital gains and dividends from securities) and still be within the 15% rate bracket. Your taxable income would be $73,800, which is the top of the 15% bracket for joint filers in 2014.
  • Say you use head of household filing status. You have two dependent kids and your claim the standard deduction for 2014. You could have up to $70,350 of adjusted gross income (including long-term capital gains and dividends) and still be within the 15% rate bracket. Your taxable income would be $49,400, which is the top of the 15% bracket for heads of households in 2014.
  • Say you have no kids and claim the standard deduction for 2014. You could have up to $47,050 of adjusted gross income (including long-term capital gains and dividends and still be within the 15% rate bracket. Your taxable income would be $36,900, which is the top of the 15% bracket for singles in 2014.
  • If you itemize deductions, your 2014 adjusted gross income (including long-term capital gains and dividends) could be even higher, and your taxable income would still be within the 15% rate bracket.

To be perfectly clear, if your total taxable income, including long-term capital gains and qualified dividends, is less than the top of the 15% rate bracket, you will owe the Feds nothing for all your capital gains and dividends. If part of your gains and dividends fall within the 15% bracket and part of them fall outside, you will only owe 15% of the part that falls outside — unless your income is so high that the 20% maximum rate kicks in.

Impact of above-the-line deductions

The adjusted gross income figures cited above are after subtracting any above-the-line write-offs allowed on page 1 of your Form 1040. Among others, these write-offs include deductible retirement account contributions, health savings account (HSA) contributions, self-employed health insurance premiums, alimony payments, moving expenses, and so forth. So if you have some above-the-line deductions, your gross income can be that much higher, and you will still be within the 15% rate bracket and owe 0% to the Feds on long-term capital gains and qualified dividends.

Traditional IRA to Roth IRA

After all of your deductions is lower than that 15% taxes thread hole, you will then convert the amount of IRA to Roth IRA, and that, my friend will make that money TAX FREE FOREVER!! The only way to do it efficiently is when you’re still young, still have the time to convert it over.

Take Away Point

If you qualify for the 0% rate, congratulations. Thank George W. Bush, because the 0% rate was part of the so-called Bush tax cuts, many of which are still on the books.

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10 comments on “Zero Taxes – One reason to retire early

  1. Pingback: Dividend Stocks – Is it the answer? | Well Rounded Investor

  2. No More Waffles
    January 31, 2015

    Ha, zero taxes! Not in Belgium and the majority of Europe! 😉

    Kinda weird that you don’t have to pay any taxes when you’re probably one of the more wealthy citizens of your country. Seems like a societal flaw to me.

    Like

    • Vivianne
      January 31, 2015

      I’m still paying a lot of taxes, I figured of my 19 years working, 9 years after making a living wage, I pay over $300k in taxes. The progressive tax system is geer toward “earned income” instead of unearned income. Also, if one figured out the “loop hole” which in the past, the rich people always have taxes accountant and lawyers to help them. Now the middle class are figured things out too. At least with social media, this has gotten easier.

      If you can’t win, you join them, legally, of course.

      Like

  3. There's Value
    February 1, 2015

    And I though our tax system was complicated… no Obama just made yours a whole lot worse. We can shelter £15,000 per year in a tax free investment account, and we can also get £10,100 in capital gains without tax. On top of that, you can earn £10,000 without paying a penny in tax. Plus, you can put up to £40,000 a year into a pension scheme, and the government will give you a 25% boost.

    CHEERS!

    Like

    • Vivianne
      February 1, 2015

      I agree the US has a very complicated complex tax system, he only propose for the 529 plan to be taxes when the college student take it out. It will not get passed.

      Keep in mind we owe a lot of money. Geek only owe a fraction of the US. Will continue to see the deficit go up as every couple month, it feels like it, there is a government shut down, so they debate about raising the deficit ceiling.

      I feel like the European get it right better healthcare system, better retirement plan, very favoring the savers, good for women who wants linger maternity leave and able to come back to work. Quality of life seems to be so much better.

      Like

      • There's Value
        February 2, 2015

        Sometimes it seems better, and then I get sick of cramped cities and cramped houses and wish I was in America again!

        Like

  4. debt2retirement
    February 2, 2015

    Wow – this is something I definitely want to take advantage of. My total income for the year will be around 30k, so we will see how I do on my stocks to see if I will qualify for the 0% taxes. That would be awesome!!!

    D2R

    Like

  5. B
    February 3, 2015

    Hi Vivianne

    Over here in Singapore, dividend income and capital gain are tax exempted at individual level so we don’t generally pay taxes for that and net the benefit. It is no wonder that dividend investing is a pretty popular strategy here.

    Like

    • Vivianne
      February 3, 2015

      Man, no wonder so many American Expats are moving to Singapore. I thought it’s because of the weather being 80F year around, hanging around clean spotless beaches. Now, I know it also has very attractive, favorable taxing system.

      Like

  6. Pingback: Catching the Falling Knife | Well Rounded Investor

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