Another year, another tax return.

For the 4th year in a row, we’ve had taxable income in the six figures range with income tax burdens of ~zero, or even negative. Uncle Sam is by far my most generous relative.

This year is much the same, although I decided to throw the IRS a token dollar.

Gross Income & Adjustments

Income came in many forms: interest of both the taxable and tax-free varieties, dividends, capital gains, and blog earnings. Multiple streams of income…

This is how it all looks on the 1040

Interest (Line 8a): $4,842
Tax-free Municipal Bond Interest (Line 8b): $1,151
Qualified Dividends (Line 9b): $29,829
Non-qualified Dividends (Included on Line 9a): $4,370
Blog profit (Line 12): $28,271
Capital gain harvest (Line 13): $28,113
Roth IRA conversion (Lines 15,16): $6,229
Total income (Line 22): $101,519

Some noteworthy things this year:

The dividend payout on VTI was up 7.4% over last year, but our total dividend income was DOWN 7%. That was intentional.

Total blog income was $34,916 with $6,645 in expenses and deductions. I could have made deductible employer solo 401k contributions (but didn’t) and fully expensed new business assets (camera, lens, and phone), but chose to shift those expenses into the future when I expect our marginal tax rate to be higher. Had I used these deductions now, I could have reduced business income by an additional $8,471. I also could have made deductible employee solo 401k contributions of up to $18,000, but chose to make Roth contributions.

I’ll review the blog Schedule C in a future post if there is interest.

Adjustments, Deductions, and Credits

We have only two adjustments to gross income this year.

Deductible part of self-employment tax (Line 27): -$1,983
Self-employed health insurance deduction (Line 29): -$600 (Taiwan national health system for W & Jr)

This means I paid $3,965 in employment taxes on blog income (Line 57.) Going forward, this could be eliminated by operating through an overseas corp. Still, the potential ROI on these additional social security contributions is not too bad.

For deductions, we use only the standard deduction and personal exemptions. In 2016, the standard deduction is $12,600 for a married couple filing jointly (MFJ) and our family has 3 personal exemptions (3 * $4,050.) Combined this provides us with $24,750 in tax free income.

Standard deduction (Line 40): $12,600
Personal exemptions (Line 42): $12,150

We have 3 credits that reduce tax burden this year worth $1,622.

Foreign Tax Credit (from VXUS) (Line 48): -$580
Childcare Tax Credit (Line 49): -$49
Child Tax Credit (Line 52): -$1,000


With $1,622 worth of credits available to offset our tax burden, I went looking through the tax tables for this exact number. The closest I could find was $1,623. With that knowledge, I tuned blog income to exactly the right value to provide this tax burden via the Qualified Dividends and Capital Gain Tax Worksheet. I could have subtracted another $50 in income but it would have only saved me $1 (a 2% tax rate) so I opted to pay $1 in income tax this year. It’s sad, I know.

Tax Forms

Here are the full tax forms as produced by Turbo Tax (click for a slightly larger version of each.)

Form 1040 Page 1

Form 1040 Page 2

Qualified Dividends and Capital Gain Tax Worksheet

Not shown on the 1040:
– we contributed $5,500 each to two Roth IRAs
– I contributed $18,000 to my Individual Roth 401k
– Jr made a $300 contribution to his Roth IRA

Closing Thoughts

So yeah, we paid $1 in income tax this year. Although I would have rather paid $0, it is important to let the math decide rather than ideology. I’m still ahead by $4 since last year the IRS paid us $5.

Due to making quarterly estimated tax payments this year we are due a refund of $798. I could use that to offset my Q1 estimated tax payment for 2017, but I’ll take it as cash and instead make the ES payment on a new credit card. It brings me great joy when Uncle Sam buys us plane tickets to exotic locales, such as Paris.

Sprinkled amongst these numbers and forms are examples of the core recipe to tax free living for early retirees; Roth conversions, capital gain harvesting, and living well for less. It’s what has helped us keep a zero/low tax burden for 4 years running. Hopefully by sharing we can help you do the same.

Haven’t done your taxes yet? Use this link to get 20% off TurboTax.

Retire Early.

Travel the World.

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