Opportunity to Pay Zero Federal Income Tax in 2010

Since taking early retirement in 2007, I've have been managing our taxable income to minimize our liability for federal and state income taxes. In 2008, I thought it might be possible to have zero federal tax liability, due to the 0% long term capital gains tax for 2008 - 2010 tax years. Unfortunately, the bear market of 2008 -2009 created enough losses that I probably won't have taxable long term capital gains for several years :-(

However, in doing a year end estimate of our 2009 tax return, I realized there was a possibility of have zero tax liability in 2010, by taking advantage of three tax credits, the Child Tax Credit, Making Work Pay Credit, and Saver's Credit, which would offer as much $2800 in credits for our situation. To take advantage of the credits, we would need to do the following:

1. Keep Adjust Gross Income (AGI) at $55,500 or less. $55,500 is the highest AGI for which a couple filing jointly can qualify for a 10% Saver's credit on the first $2000 of contributions. Our maximum possible credit is $1,000, which we can achieve by making contributions to our Roth IRA accounts and keeping AGI below $33,500 for married filing joint.
   
   At this AGI, we would also qualify for the Making Work Pay ($800) and Child Tax ($1000)Credits.



2. Earn a minimum of $12,903 in wages. This will qualify us for the maximum Making Work Pay credit of $800 for a couple filing jointly. In addition, it will qualify us to contribute $11,000 to our Roth IRA account, qualifying us for up to a $1,000 Saver's Credit.



3. Achieve taxable income of $20,250 or less. According to the 2010 tax tables, the tax liability for a couple filing jointly with taxable income of $20,250 (line 43 of 2009 form 1040) and filing jointly is $2,200. We would qualify for enough tax credits to completely eliminate the tax owed.

For our 2010 situation, we will have deductions of $22,350 for personal exemptions and the standard deduction. Thus, tentatively, our AGI can be as high as $42,250 to have a federal tax liability of zero. The concept of paying zero federal income tax is appealing and to achieve that goal we will need to significantly reduce the planned Roth IRA conversions in 2010.

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This is not financial or tax advice. Please consult a professional advisor.

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