Who says there is no Tax Haven in US?

[pb4uski]

To bring down their expenses.

So.... they have worked hard, saved and invested wisely and amassed a small fortune of $6.6 million.... but are now going to constrain their expenses in retirement because they want a $0 income tax bill? Now that is crazy... but I don't doubt that there are some people like that out there.

 

[pb4uski]

First of the $8, $1.5 is in the home which they can enjoy fully to the rest of their life . The $2mi in retirement fund will be spend after 65, so they will enjoy that too. It is so unusual to have millions of it is assets that have appreciated and not taxed go to heirs. They can enjoy a nice lifestyle with amounts taken out with not much tax.

Yeah, so what? Is there a point there?

Stepped up basis is well known... in fact, it is part of the reason why I am living on tax-deferred distributions rather than on taxable account savings... I'll let the taxable investments grow and get a stepped up basis later on.

 

[gwraigty]

Oh, And between standard deduction and zero tax bracket, they don't to pay tax on 103K of income.

That has nothing to do with their asset levels though. A married couple with the same income who have no assets wouldn't pay the tax either.

 

[pb4uski]

That has nothing to do with their asset levels though. A married couple with the same income who have no assets wouldn't pay the tax either.

gwraigty, please... don't confuse the debate with relevant facts.

 

[Cpadave]

That has nothing to do with their asset levels though. A married couple with the same income who have no assets wouldn't pay the tax either.

Zero tax bracket is only for qualified dividend and capital gains. So you would generally need assets to produce that type of income. A married couple with that much wage income would have to pay taxes.

 

[Cpadave]

Yeah, so what? Is there a point there?

Stepped up basis is well known... in fact, it is part of the reason why I am living on tax-deferred distributions rather than on taxable account savings... I'll let the taxable investments grow and get a stepped up basis later on.

There is no point and nothing new. Just pointing that you can be in a nice tax situation which I referred to as tax haven.

 

[audreyh1]

Our US tax system is based on annual income, not on assets.

Sounds like the real beef is the US estate tax which allows most appreciated assets (up to $11.8M per individual) to pass along untaxed to heirs due to the stepped up basis.

This does not include inherited 401Ks or IRAs in which heirs are still subject to income taxes.

 

[ivinsfan]

There is no point and nothing new. Just pointing that you can be in a nice tax situation which I referred to as tax haven.

Got it, clickbait ….well I fell for it....

 

[DektolMan]

That all the unrealized appreciation outside of tax deferred accounts will go untaxed. That there is no asset test for ACA, when the couple has a networth of over $8m.

There is no asset test to take the mortgage deduction, deduction for dependents etc etc etc.


Our lawmakers wrote the ACA, passed it in the middle of the night without anyone actually reading it. We are just following the law they created. If you don't like it complain to the lawmakers that voted yes on ACA law.

 

[audreyh1]

There is no question that early retirees get a good deal tax-wise once they not longer have earned income which in general is heavily taxed:

You are no longer paying FICA taxes - no SS taxes, no Medicare taxes (unless you become subject to NIIT).

You invest your after tax savings such that you have mostly dividend and capital gains income which as has been pointed out numerous times has a high threshold for being subject to 15% capital gains tax. This tax law change came into effect in 2008 and was ultimately extended to be permanent.

It's much easier to control your taxable income depending on how you organize your investments. You can even tax-loss harvest some years to reduce your capital gains income.

You are not yet drawing Social Security which is likely to be mostly taxable due to your investment income.

You are pre-RMD age as well, so if you choose you can put off drawing from your IRAs. That might not be the best decision in the long run, as you might be paying much higher taxes once you reach 70 1/2.

If you are within the zero tax threshold, you are also likely under the MAGI thresholds for IRMAA. so you can pay Medicare premiums at the lowest available rate. Once you are drawing SS and RMDs you may be pushed into a higher Medicare premium rate as well.

If avoid realizing income during your early retirement years means you have less to actually spend - well, I guess that is your choice. Lucky heirs!

 

[OldShooter]

"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. There is not even a patriotic duty to increase one's taxes.

"Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

-Judge Learned Hand, Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465 (1935)

 

[copyright1997reloaded]

Well, this has been an interesting thread.

 

[Dtail]

In the end, just more complaints about the tax laws related to assets and of course the ACA rules.
Will probably see a related thread months from now.

 

[gwraigty]

gwraigty, please... don't confuse the debate with relevant facts.

I'm not even sure what the debate is. Hence, my wading in with blinders on.

 

[gwraigty]

Zero tax bracket is only for qualified dividend and capital gains. So you would generally need assets to produce that type of income. A married couple with that much wage income would have to pay taxes.

True. I should have said "less substantial" assets than the couple in your example. Still...

 

[marko]

So "John and Sarah" have somehow managed to thread the tax needle, but in doing so, painted themselves into a corner of being rich on paper, but unable to really spend it. They can't cash in on their savings hence...income.

I don't think any of the painted picture here would surprise anyone on this forum. But I also don't think it's a position many of us strive to. If I had 8M I wouldn't hold myself to spending $50k a year or what would have been the point.

IMO the tax man saw us coming waaay before we even got out of bed. They've figured just about every possible scenario and headed it off.

A good accountant can minimize one's hit but in the end there is no real escape; pay one way or another.

Resistance is futile. Pay the tax, stop tying yourself in knots and get on with your life.

 

[cathy63]

Zero tax bracket is only for qualified dividend and capital gains. So you would generally need assets to produce that type of income. A married couple with that much wage income would have to pay taxes.

The obvious "solution" to this "problem" is that all investment income should be treated and taxed the same as wages earned from a job.

 

[pb4uski]

The obvious "solution" to this "problem" is that all investment income should be treated and taxed the same as wages earned from a job.

That sounds great... if you're the government... then corporate earnings get taxed twice.... once at the corporate level (21%) and then when distributed as dividends or realized as capital gains at the personal level (10% or more).

Meanwhile, wages get taxed at the personal level but the corporation that pays them get a deduction and a tax benefit so at the end of the day wages hardly get taxed at all.

 

[audreyh1]

The obvious "solution" to this "problem" is that all investment income should be treated and taxed the same as wages earned from a job.

Right, no question that certain kinds of investment income gets far more favorable tax treatment than ordinary income and earned income. Other investment income: interest income, income from REITs and various othe non-qualified income dies not get this favorable tax treatment.

Municipal bond interest income also gets very favorable tax treatment.

 

[USGrant1962]

I reject the premise in the subject line. There are lots of tax havens in the U.S. and I've never heard anyone argue that there aren't. Actually, there are whole industries around these:

tIRA/401(k)/403(b)
Roth accounts
Munis
iBond/EEBond interest
Real estate appreciation
Capital gains (and losses)
Charitable deductions
SALT
Mortgage interest
QBI and self-employed deductions
Etc...

But, we have an income tax system. If you think taxes are complicated and distorted now, just try an asset tax

 

[Bamaman]

I could have set them up in TN. This way they do not have high RE taxes and don't need to sell the house. Didn't realize TX has high RE taxes.

My best friend lives in North Dallas, and he sold the house when his property taxes hit $50K. It was a nice house, but far from the nicest home I've ever been in.

Now he lives in a luxury apartment. He does have a second home in Seaside (FL) that he's had 20 years.

 

[Koolau]

You had me at $8.1 million total assets. After that, I suppose I too would look for some tax loop holes, but that wouldn't be my main concern. I'd be more concerned about how I was going to spend that much money over the next 30+ years. ALL good problems to have. Honestly, with that nice a stash, I'd be more interested in living someplace I wanted to live - taxes would be a secondary (but not insignificant) distraction. YMMV

 

[HtownRose]

Keep in mind if they go on the ACA, they will have extremely restricted provider networks (only HMO & EPO plans are available in Austin if not all of Texas) to contend with & most likely will not be able to keep their previous docs, specialists, etc. unless they pay them out of pocket.

Not everyone is willing to accept such limitations for the years between 50-65 (55-65 in the husband's case), myself included - it's why I'm working part time instead of enjoying full retirement. The husband having had a career in health care himself, I am skeptical they would be OK with that, but they are the OP's fictional characters so he can make them have whatever attitudes he wants. Maybe they have a plan to become medical tourists if the need arises since it's a short flight from Austin to Costa Rica...

 

[W2R]

Pay the tax, stop tying yourself in knots and get on with your life.

This is my philosophy. This year is was SO HARD to do, because my AGI was higher than ever before, and thus so were my taxes. But finally I managed to just take a deep breath, let it go, and move on.

I am so glad that I am no longer wasting precious moments being upset and fuming about my taxes; instead I am spending those moments enjoying all the innocent fun that my idyllic retirement life has to offer.

 

[ziggy29]

I think we sometimes forget it because so many of the people in this forum are outliers, but if you look at the percentage of the population who are "millionaire next door" types -- with millions of assets but under (say) $60K in income -- I suspect it is small enough that not a lot of effort was made to account for them in tax law. It would add complexity and some added enforcement costs, which would at least partially defeat the purpose.