Wednesday, April 19, 2017

Paying Zero Federal Income Taxes in Retirement

"People would rather stick a pin in their eye than think about taxes after April 15th."  ~ me

My goal over the next few years is to pay as zero federal income tax.   And it will be 100% legal.

How am I doing it?

Income Source
First, since we are retired, we can manage where income is derived and choose a source that is most tax efficient, dividends and long term capital gains, which has a special federal tax rate of 0% for taxpayers in the 15% tax bracket.

Itemized Deductions
Second, we have itemized deductions that can reduce ordinary income (wages, rents, IRA distributions) by 1/2. I am still not old enough to collect Social Security, but deductions can also reduce the amount included in adjusted gross income (AGI).

Tax Credits
Third, we have two children that each qualify for a $1000 child tax credit.  This enables us to eliminate any remaining income tax after itemized deductions.

These are legitimate strategies for reducing one's taxes.  I also know that tax laws may change and eliminate any or all of the three strategies that we plan to use.

For more on The Practice of Personal Finance, check back every Sunday for a new segment.

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

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