Minimum (zero)taxes

[ferco]

I understand that ferderal taxes start at about 16k of annual income (though you still pay fica/medicare on all) and that a SIMPLE IRA allows you to contribute approx 11k/ year. In theory then can you earn 27k and only pay fica/medicare on the 16k and not owe any federal income tax on the remaining 11k since it went into the tax deferred SIMPLE IRA?This is a question as a self-employed individual.

To take it a step further, suppose your net rental "income" was 27K(passive) , there would be no fica/medicare since its not earned wages,but are you eligible to place 11k into a SIMPLE IRA and still not owe any tax on the 16K.

I realize this is a hypothetical and will f/u with my CPA, but just wanted to get some general feedback. Also would the ATM could into play.

 

[eridanus]

You'd pay the self-employment tax on the full $27k. Here are the income tax tables for 2005: http://www.irs.gov/formspubs/article/0,,id=133517,00.html.

Your rental income is not earned income (unless you're in the business of managing property). You could fund an HSA but you can't fund a retirement account. This also applies to any capital gains or dividends you receive.

 

[wstu32]

so interest and dividends are not taxed the same? my question, if you have $40k per year in dividends, interest ...you would not be taxed as if you had $40k per year salary?

 

[Martha]

Interest income (unless tax exempt) is taxed at ordinary income rates.

Qualified dividends are taxed at a top rate of 15%. If your regular tax rate is below 25%, the rate is 5% on qualified dividends. Same rule as for capital gains. The definition of qualified dividends is here: http://www.irs.gov/businesses/small/article/0,,id=122523,00.html

 

[maddythebeagle]

Also, there isnt social security and medicare taxes on investment income.

 

[wstu32]

mahalo!