How I Might Pay Zero Federal Income Tax Under the New Tax Law

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury...for nobody owes any public duty to pay more than the law demands." ~ Judge Learned Hand

Being a tax geek, I've been evaluating how the Tax Cuts and Jobs Act of 2017 affects our 2018 tax situation.  It appears that the new tax brackets, higher standard deduction and higher child tax credit will allow us to earn more without any federal tax liability, if we choose to use them to that advantage.

Here's how we might pay zero federal income tax in 2018.

First as background, I am married and have two children under 17, which qualifies us for the $2000/child tax credit.

Scenario 1

Make $57,333.33 regular earnings or less.    After subtracting the $24,000 standard deduction, $33,333.33 is our taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  Zero federal income taxes is the result.

Scenario 2

Make $71,666.66 or less through a pass through entity, such as an LLC, partnership or S-corp.  20% of pass through income can be deducted, which equals $57,333.33.    After subtracting the $24,000 standard deduction, $33,333.33 is our taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  Zero federal income taxes is our tax liability.

Scenario 3

Make $24,000 regular earnings, 103,866.66 dividends and long term capital gains.  After deducting the $24000, our taxable income is $103,866.66.   The first $77,200 is taxed at a 0% tax rate.  The remaining $26,666.67 capital gains is taxed at 15%, equal to $4000, which is offset by the $4000 child tax credit.  Again, zero federal income taxes.

Scenario 4

Make $57,333.33 regular earnings and up to $43866.67 dividends and long term capital gains.  
 After subtracting the $24,000 standard deduction, $33,333.33 is our regular taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  The remaining dividends and long term capital gains is below the $77,200 threshold for a 0% capital gains tax rate.

We won't be completely free of income taxes, since we live in a state with income taxes.   But is still be nice to pay no federal income tax if we can qualify for one of the above scenarios.

For more on New Beginnings, check back Sundays for a new segment.

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

Copyright © 2018 Achievement Catalyst, LLC

Financial Armageddon...Not

"It really does now look like President Donald J. Trump. And markets are plunging. When might we expect them to recover? A first-pass answer is never."~ Paul Krugman, November 9, 2016

Here is the full editorial in the New York Times.

As I recall, the markets recovered by the open on November 9, 2016.  Since then, the stock market has reached record highs, advancing by 20+% in 2017.  

Glad I didn't listen and react.

When might we expect Mr. Krugman to publicly admit his error?  A first-pass answer is never :-)   

For more on Reflections and Musings, check back Saturday for a new segment.

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

Copyright © 2018 Achievement Catalyst, LLC

FORO

Fear Of Running Out (FORO) may be a financial challenge that we face should we reach our 90s.  By then, we will be retired at least 41 years which is longer than we have worked.  Unlike our parent and their siblings, neither of us have a pension on which we can depend.   Unfortunately, by 90 we probably won't have the wherewithal to solve the problem of running out funds.  So I am working on it right now.

The strategy I am developing is to create a reliable sustainable stream of income:  a pension like payment, without a pension.   Our approach is a three pronged approach:

• Real Estate -  We own part of a commercial real estate property.   As disclosure, we are accidental landlords, since I inherited ownership from my parents.  However, I have learned the benefits for being a landlord.    The property is paid off and fully rented with multi-year leases.   In addition, the partnership pays a management company to manage the property.   Currently this yields about 25% of our annual expenses.
  
  I like the idea of rental real estate.  However, I have no interest in acquiring other properties, given the hands on involvement that is needed.  So we are increasing our real estate exposure through the purchase of REITs.  Hopefully, we can boost the yield to cover 33% of our annual expenses.
• Dividend and Interest -   At one time, I was planning to have dividends and interest cover 50% of our expenses.   Based on where we are currently, I expect a 33% coverage of expenses is more likely.  My plan to get closer to the target is to execute an NUA this year of my company stock, which pays a 3% dividend.    We will purchase other dividend stock or CDs to cover the balance.
• Annuity -  We will depend on principal or Social Security to cover the remaining 33%.   In order to do so, we will need to wait until I am 70 to qualify for maximum Social Security payments.
• Bonus - Since we are invested in the stock market, there is a chance that we will get capital gains from our investments.  However, we are not counting on this, and if it happens, we will consider it a bonus.

So that's our plan.  Of course, there are no guarantees that it will work.   As Dwight Eisenhower once said, "Plans are useless, but planning is indispensable."   And so we will proceed with our plan, until circumstances require us to adjust.

For more on Reaping the Rewards, check back  Fridays for a new segment.

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

Copyright © 2018 Achievement Catalyst, LLC

Market is in Correction - How Long to Recover?

Today, the Dow and S&P crossed into correction territory of a greater than 10% drop from the high.  Is this a great buy the dip opportunity or not?   It depends on whether the correction becomes a bear market, a drop of 20% or more.

According to this CNBC article,  since WWII, corrections last an average of 4 months and take 4 months to reach a new high.  Bear markets last an average of 13 months and take 22 months to reach a new high.   The average correction falls 13%  and the average bear market falls 30%. 

At this point, the market is 1 week into a correction.  We'll see what tomorrow brings.

For more on Crossing Generations, check back Thursdays for a new segment.

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

Copyright © 2018 Achievement Catalyst, LLC

Volatility is Back

"It will fluctuate." - J.P. Morgan, when asked what the market will do.

Although many have forgotten what market fluctuations are like, the past four days have reminded us that volatility is normal.   No market goes straight up forever. 

Does the recent volatility mark the end of the bull market?   At this point, I don't think so.   The economy is doing pretty well and bear markets typically don't begin unless a recession is imminent.   Could there be a correction of 10% or more?   Yes, probably but not for certain.  Could it last a while?   I think a couple months will be likely since that will cause sufficient investing pain.

 For me, this is a good time to add funds back into the market.   Stocks and ETFs I like are going on sale, and likely to get cheaper.   So I am buying.   Of course, it make take several months or years to recover, but I won't need the principal for at least a decade.   In addition, I am buying stocks that have good dividends that are growing, to create a sustainable paycheck for the future.

There is a small chance that I am wrong... that this is the beginning of a major crash/collapse from which there is no recovery.  But history has shown that has never been the case and the market has always gone to new highs.   So I'm sticking with the event that has a 99.99999% probability of happening.

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

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

Copyright © 2018 Achievement Catalyst, LLC