How Retirees Pay Zero Taxes

[haha]

Relying on municipal interest has been good move for some years. But in my book, the credit risk added to the rate risk is too large to make this a comfortable retired person portfolio.

I've given up on making interest rate predictions, but duration is risk, period- and if you don't have duration with munis you won't have income. I guess if someone has $10,000,000 in intermediate term municipals she could have both reasonable duration and reasonable income. But if you had that much money, wouldn't you want more income?

Ha

 

[audreyh1]

How about 10K SS, 40K LTCG/QDIV, 120K muni interest?

Assuming filing jointly:

This is not high enough SS to push into AMT - as long as the muni bonds owned aren't subject to AMT, and some are.

Note that muni income does count against your taxable threshold for social security income, but as long as the SS income is below ~34K, 50% of it taxable should have you in the 0% tax bracket as far as I can determine. Something like that anyway.

But once your ordinary taxable income plus LTCG/QDIV exceeds $80.8K, you'll start paying AMT rates on the ordinary income portion, including the taxable portion of the SS income, I expect. No AMT deductions either (except for charity and mortgage interest I think).

As long as most of your income is from munis, you're OK.

It's the high cap-gain rate income that causes taxes to rise on whatever ordinary income is taxable. Once it crosses $80.8K (just for the cap gains rate income), you'll probably start paying AMT rates on part of the ordinary income. And by then any cap gains income above $72.5K less ordinary taxable income is already subject to 15% cap gains tax.

The thresholds are much lower on AMT for a single filer. They are getting pretty close in the above scenario as far as I know - $51,900 for 2013.

 

[audreyh1]

How about 10K SS, 40K LTCG/QDIV, 120K muni interest?

Assuming filing single (widow case):

In this case, taxes will be paid on part of the capital gains since the threshold is $36.25K for cap gains plus taxable income. So whatever combined after deductions exceeds that.

This is not high enough SS to push into AMT - as long as the muni bonds owned aren't subject to AMT, and some are.

Note that muni income does count against your taxable threshold for social security income, but as long as the SS income is below ~17K, 50% of it taxable should have you in the 0% tax bracket as far as I can determine. Something like that anyway.

Once LTCG/QDIV income crosses $51.9K, you'll probably start paying AMT rates on part of the ordinary income (half the SS in this case). And by then any cap gains income above $36.25K less ordinary taxable income is already subject to 15% cap gains tax.

 

[Chuckanut]

The individual and corporate tax code in the US is far too complex, needs to be simplified considerably, though I am not holding my breath until when/if we ever have public campaign financing (not holding my breath on that either).

IIRC, Apple was a very recent example of what is wrong with our complicated tax code. I believe that the CEO of Apple recently testified that Apple's Federal return resulted in a two foot high pile of paper. Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.

 

[sheehs1]

Muni interest will also be taken into the calculation for ACA (ObamaCare) so while a person might not be paying a direct tax to the Federal government for it, it will hit you with ACA. Especially for the examples given above where there is significant muni income.

 

[FANOFJESUS]

Here's another one.

I do not believe this. I am single like this widow, have no earned income, no pension, modest social security, and sub $10,000 RMDs. Yet this year I expect to pay about $5000 federal tax as per Turbo-Tax, having taken some considerable tax losses that I got from badly timed gold equity investments though my overall trading has been positive. I've filed single since 2007, and 2007 through 2012 my average annual FIT paid was $7168.

I think the only way this wealthy widow could pay this low tax is have huge NOLs, and likely also huge capital gain losses. I could pay very low taxes too if I just saw to it that I lost money all the time. The other possible explanation is pure fabrication.

If anyone has actually accomplished this, please tell me how.

Ha

5k seems high but I am not a pro. What is your SS? Do you get a lot of CD interest?

 

[Bikerdude]

People forget that in order to have that dividend income, the original "earned" income was " taxed at ordinary income rates the FIRST time.

They also forget the dividend rate whether by design or not, was a way to encourage further investment of this already once taxed money, so that the government continued to "share" in it. Granted to a lesser degree but they still get a piece of it.

I don't agree that dividend income should be taxed at ordinary income rates. It doesn't really matter what I think however, since the government will do what it wants to do. But just like with everything else, if they change it, there may be "unintended" consequences perhaps.

+1

 

[Midpack]

Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.

Not to be too cynical, but complex tax codes that legally allow deductions and "tax expenditures" to narrow groups is exactly what campaign contributions buy. That's why they're never addressed despite populist support, they just add new ones and increase complexity. Campaign finance is at the root of many of our policy issues...often making debates on issues irrelevant.

 

[frayne]

Not to be too cynical, but complex tax codes that legally allow deductions and "tax expenditures" to narrow groups is exactly what campaign contributions buy. That's why they're never addressed despite populist support, they just add new ones and increase complexity. Campaign finance is at the root of many of our policy issues...often making debates on issues irrelevant.

Bingo, the tax code will only change with respect to complexity due to the lobbying groups who want to keep as convoluted and complex as possible.

We will never see a more simple tax code than what it is at present.

 

[ERD50]

IIRC, Apple was a very recent example of what is wrong with our complicated tax code. I believe that the CEO of Apple recently testified that Apple's Federal return resulted in a two foot high pile of paper. Apple also used some clever positioning to avoid paying taxes, apparently legal, but probably not what was intended.

Who is to determine the 'intent'? These are numbers, it's not like 'love' or 'fair' - they can and should be defined in unequivocal terms.

If the rules are so complex and ill defined, what can one expect? I put the blame on the rule-makers.

One simple example, AFAIK, regarding wash sales, the term ' substantially identical ' has never been defined. That's crazy - it either is or it isn't. The rule makers failed.

-ERD50

 

[pb4uski]

Hmm, I'm going to get hit with a big tax bill next year.

My speculation in HPQ made me $37k in short term capital gains this year. I'll also have about $8k in dividends by the end of the year. This is in my taxable brokerage account.

I don't have anything that I want to sell for a capital loss. So, it is what it is. It can be hard to pay low taxes when you are making a profit.

If you have the liquidity to do so, couldn't you buy a position in the stock that you have the capital loss in and then sell the first lot, which crystallizes the loss but doesn't change your overall investment position (assuming SID method)?

 

[pb4uski]

I'm skeptical of the claims in the article. Unfortunately, there is insufficient detail to confirm the claims. However, if I enter the income of the Case I Wisconsin couple and the $30k of deductions of the headline case, I get $8,059 in tax on $135k of income (since the $75k of muni-income is tax exempt).

While $8k of tax on over $200k of income is a very modest tax rate, it is a heck of a lot more than the minimal tax amounts cited in the article and, as others have mentioned, also ignores the income given up by investing in munis vs taxable bonds.

If I further assume $113k of taxable bond income in place of the $75k of muni income, the tax would be $29k more so the munis are probably a wash after state income taxes.

I used Taxbrain® | 2012 FREE Tax Calculator

 

[pb4uski]

5k seems high but I am not a pro. What is your SS? Do you get a lot of CD interest?

+1 If I enter $10k of pension income and $40k of SS for a single with standard deduction the tax is only $276.

per Taxbrain® | 2012 FREE Tax Calculator

 

[Beryl]

Well donations should be what one feels conformtable with and not some mandated amount or else what is the difference between that and a tax. Our income is around $1 million and our donations is around $9K so I guess we are far worse than this person using your standards.

Since you shared...

Some people don't want tax dollars to be used to help unfortunate people and expect charities to handle it. It concerns me when people who donate little (comparatively speaking) to charities AND don't want to pay taxes.

I respect people who strive to pay 10% of their gain in money and time to help others. If you never heard the parable of the "widow's mite", it is addressed reasonably well on Wiki.

Everyone has their own moral compass and fortunately, we have the ability to get our compasses re-calibrated as long as we are on the earth.

Be well.

 

[pb4uski]

10% is very unusual in my experience - in fact, virtually unheard of. Congratulations on your generosity.

See Charitable Giving Statistics | NPTrust

 

[RunningBum]

If you have the liquidity to do so, couldn't you buy a position in the stock that you have the capital loss in and then sell the first lot, which crystallizes the loss but doesn't change your overall investment position (assuming SID method)?

That's a wash sale, unless he wants to double up on the stock for more than 30 days.

 

[Beryl]

10% is very unusual in my experience - in fact, virtually unheard of. Congratulations on your generosity.

See Charitable Giving Statistics | NPTrust

You've never heard of "tithing?" That explains it. It is well known among Judeo-Christians but practiced by many others.
http://en.wikipedia.org/wiki/Tithe

Please do not congratulate me. Publicly disclosing how much I personally donate is not something I do (only on tax forms).

I didn't know the OP donated so little until it was shared. I was shaking my head about a fictitious person in the OP and not intending to criticize any particular person here. I guess I stepped on some toes!

 

[pb4uski]

That's a wash sale, unless he wants to double up on the stock for more than 30 days.

You're right, I forgot about that, but he could buy a call, wait 31 days, sell the long position and then exercise the call. Same as doubling up but less initial investment.

 

[pb4uski]

Of course I have heard of tithing. Only 5-7% of the US population does so. I just don't appreciate your holier-than-thou attitude.

You've never heard of "tithing?" That explains it. It is well known among Judeo-Christians but practiced by many others. .....

 

[ERD50]

This scenario has a person hauling in $200,000 and only gives $5000 in donations? People I know who earn $50K donate at least that. This stingy person can learn from the likes of Buffet, Gates (who was rightfully criticized for being ungenerous years ago), and Winfrey, IMO.

(Shaking my head at selfishness.)

That's pretty good @ 2.5% compared to some people that many would look towards to set a good example. I'll skip specifics to avoid taking this political, but a well know high level person donated the following to charity:

... $995 in charitable donations last year — about 0.3% of their income and the highest amount in the past decade. The low was $120 in 1999, about 0.1% of yearly income.

Over the decade, .... reported a total of $3,690 in charitable donations, or 0.2% of their income.

But it's of no concern to me, it's a free country they can do as they please. But knowing their info will be made public, I'm surprised.

-ERD50

 

[kmt1972]

Since you shared...

Some people don't want tax dollars to be used to help unfortunate people and expect charities to handle it. It concerns me when people who donate little (comparatively speaking) to charities AND don't want to pay taxes.

I respect people who strive to pay 10% of their gain in money and time to help others. If you never heard the parable of the "widow's mite", it is addressed reasonably well on Wiki.

Everyone has their own moral compass and fortunately, we have the ability to get our compasses re-calibrated as long as we are on the earth.

Be well.

Thank you for your thoughts and feedback. Feedback is a gift. I guess everyone has their own views and I strive to respect them even when I disagree. I will be very unpopular for sharing my thoughts on this and sorry if I am going off topic. I will write no more about this topic in this thread but simply put, helping people is not important to me, regardless if it is done by the government or private entities. My views are closely aligned with Ann Rynd's Rational self-interest. My "donations" are of a very utilitarian nature to achieve other goals which I will not get into so to set the record straight my donations toward helping others in the true sense of the word is zero and has been zero my entire life and I expect it to be zero for the rest of my life.

 

[REWahoo]

I will be very unpopular for sharing my thoughts on this...

I don't know how unpopular you will be, but I'm sure you'll be moving up in the standings on the list of Most Ignored Members.

 

[pb4uski]

I'm speechless. Doesn't happen very often.

 

[Chuckanut]

Tax returns do not reflect contributions of time many people put in to help others. They also do not reflect contributions that are not tax deductible, such as those bags of groceries you may provide once a month to the struggling single mother down the street.

 

[haha]

I don't know how unpopular you will be, but I'm sure you'll be moving up in the standings on the list of Most Ignored Members.

Not so sure about that. At least we know he says what he thinks, which is not the obvious default.

And he is not trying to prove how truly good he is.

Ha