Here it is folks, the post exactly 3 of you have been waiting for… our 2017 tax return. Just in time for the October 15th deadline.
It’s an interesting one this year; 2017 is the first time we claimed the Foreign Earned Income Exclusion (FEIE) which allowed us to once again have income in excess of $100,000 and pay $0 in income tax.
Details on the FEIE were difficult to come by, and examples either lacking or confusing, so this FEIE example is for posterity.
Gross Income and Adjustments
We had multiple streams of income again this year: interest of both the taxable and tax-free varieties, qualified dividends, non-qualified dividends, long term capital gains, blog earnings, and book royalties. We also did a sizable Roth IRA conversion.
This is how it all looks on the 1040.
Some noteworthy things this year:
- Total taxable income without the FEIE was $113,563. Adjusted Gross income minus FEIE was $109,140, a few hundred dollars below the limit for full value of CTC.
- Dividends are up 5%+ over 2016, so still growing faster than inflation. (Dear corporate America, take it easy.)
- Business income nearly doubled over 2016. Blog income is up significantly (details here) and Winnie received the first royalties from her book. (Chinese only.)
- I prioritized Roth IRA conversions over Cap Gain harvesting.
To determine Adjusted Gross Income we have two adjustments to make, one for self-employment taxes and the other for self-employed health insurance.
A deduction for self-employment taxes sounds nice, but it means we paid $7,644 in employment taxes on blog and book income (Line 57.)
Going forward, SE taxes could be eliminated by operating through an overseas corp. Still, the potential ROI on these additional social security contributions is not terrible.
Taxes and Credits
For deductions, we use only the standard deduction and personal exemptions. For our family of three filing MFJ (married filing jointly) deductions total $24,850. I sometimes refer to this as the 0% tax bracket.
Adjusted Gross Income minus our deductions yields Taxable Income (Line 43) of $38,590
Determining total tax due involves multiple worksheets, which all comes to a head on the Foreign Earned Income Tax Worksheet, shown below.
If 100% of our income was from a job then we would be looking at a tax burden of $12,546 (Line 4a.)
Since part of our income is from qualified dividends and capital gains, this is reduced to $7,725 on the Schedule D tax worksheet, not shown (Line 4c.)
With the Foreign Earned Income Exclusion, total tax burden is reduced to $1,799 (Line 6.) That is a reduction of $5,926 from the FEIE (Line 5.)
Not bad!
The calculated tax burden then bubbles up to Line 44 on the 1040.
Tax credits reduce tax due dollar for dollar, and we have 3 of them.
Foreign Tax Credit (from VXUS) (Line 48): -$292 (reduced from $617 on Form 1116)
Childcare Tax Credit (Line 49): -$507
Child Tax Credit (Line 52): -$1,000
Total: $1,799
With tax due of $1,799 and tax credits of $1,799, we have a total Federal Income Tax burden of $0 (Line 56.)
In addition, we both made contributions to Roth IRAs: $792 to mine, and $3,782 to Winnie’s, and a full contribution to my Roth solo 401k of $18,000. All of these contributions are fully tax free going in and fully tax free going out.
The Foreign Earned Income Exclusion / Form 2555
Because our tax home is outside the US, we had foreign earned income, and we passed the Physical Presence Test, we qualify for the FEIE. The Foreign Earned Income Exclusion can be claimed individually by both spouses. We chose to claim if for Go Curry Cracker income, but not for Winnie’s blog or book income. This ensured we both had earned income for the Child and Dependent Care Tax Credit, and also allowed full deduction of our self-employed health insurance expenses.
Form 2555 is used to determine the amount of the FEIE. It’s a long form, so I edited out the empty content.
(This is as TurboTax fills out the 2555. Per the letter of the documentation, all math should start with Gross Revenue not Net Profit, but the results are the same.)
Go Curry Cracker gross revenue in 2017 was $56,524, well below the 2017 FEIE value of $102,100.
Business expenses were $5,650 plus $847 for business use of our home. This brings net profit of $50,027.
The IRS considers any income earned on US soil to be non-foreign earned income, so we need to make an adjustment. We were in the US 33 days this year, primarily for vacation but I also spent a few hours hosting meet-ups, 1 each in NYC, Philadelphia, Minneapolis, and San Francisco. There was zero revenue generated at these meet ups, but some minor expenses like food, beer, and Uber transport.
4 meet-ups on 4 different days is as close to 4 work days as I’m going to get. 4 work days is 1.7% of total annual work days (52 weeks * M-F minus 10 Holidays and 10 Vacation days.) Therefore, 1.7% of profit could be considered earned on US soil. 1.7% * 50,027 = $850. Thus, total foreign earned income = $49,177.
Some of the deductions allowed in figuring AGI are related to this foreign earned income, namely core business expenses and 1/2 of the self-employment tax deduction. Business expenses were $5,650. The SE tax on $49,177 is $6,948. Half of that is $3,474. Subtracting this from total foreign earned income yields allowed FEIE of $45,703.
An FEIE amount of $45,703 appears on Line 21 of the 1040. As shown on the Foreign Earned Income Tax Worksheet above, this reduced total tax by $5,926.
Our 2017 FEIE is similar to Example #2 in the post To FEIE or not to FEIE.
Learning, Always Learning
Every time I do our taxes I learn something new. This was the first year using the FEIE, so I learned and unlearned a great deal. And for better or worse, my inquisition led to the discovery of errors on a friend’s tax return which resulted in them firing their CPA (sorry, not sorry.)
A great example of lessons learned is I had severely overestimated the amount of Roth IRA conversion I could do in 2017. I originally converted $24,042 (Line 15a) and later recharacterized all but $12,700 of it. (Only half wrong!)
What led to such a large error? Beginner mistakes.
- I didn’t think I would have to claim some income as earned on US soil
- I wasn’t able to take full credit for foreign taxes paid on International investment income (credit reduced by $325 on Form 1116.)
- I didn’t realize I would lose deduction of SE taxes paid on excluded income
- I didn’t connect the dots that I couldn’t double dip on deducting FEIE and business expenses
These errors resulted in an interesting marginal tax rate situation.
Regular income was in the 15% tax bracket, so an extra dollar of income was taxed at 15%.
This pushed another dollar of qualified dividend income into taxable space, at a tax rate of 15%.
Child tax credit was started to phase out at rate of 5%.
Since I was also playing with Schedule C deductions, I was also adding income with SE tax of 15.3%.
All together I was seeing marginal tax rates of ~60%. Not good! (But not as bad as the 367,000% marginal rate @DataPK made me aware of in this tweet thread.)
tfw the US tax code gives you an effective marginal rate of 45%
(will make that ~0, but still… do they know how to make #taxes fun or what?)— Go Curry Cracker! (@GoCurryCracker) May 17, 2018
Fortunately, it was easily remedied, and now I’m ready for 2018 when a recharacterization is no longer allowed. Knowledge is power, which is one of the big reasons why I always do our own taxes. (And yet… I’ll make new mistakes next year.)
Closing Thoughts
2017 was another great tax year, where we had over $100,000 in taxable income and paid zero income tax. That makes 5 years in a row.
While paying zero income tax we were also able to contribute ~$5k to Roth IRAs and $18k to Roth solo 401k. Zero tax today and zero tax forever. A bit of Roth Conversion and Cap Gain Harvesting mean lower taxes in the future too.
One day soon we should decide if we will ever setup a forever home in the US… if not, GCC needs to become a Belize Corp to eliminate SE taxes. In the mean time I’ll continue to pay all estimated taxes with new credit cards to get more free trips.
The FEIE makes things a little more complicated, but it is worth understanding this powerful tool and taking steps to qualify if it will benefit you.
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On which line item does the US calculate dividends tax payable? Would they effectively see you have almost no US income therefore your divi tax rate is 0%? I’m looking at something similar from my country, but it seems despite similar Worldwide income tax rules, foreign exclusions and the like, they charge 15% withholding tax on dividends before you receive it…
Tax for all income type is on Line 44.
Sorry, I don’t understand your question, and I’m not very knowledgable about tax systems in other countries (non-US.)
Sorry for it being unclear. Does the US charge dividends tax as a function of your overall taxable income?
So if you’ve reduced your taxable income due to FEIE, does it impact what dividend tax rate you’ll pay as well?
All dividends are taxed as if there is zero exclusion. So no, it doesn’t change the dividend tax rate.
Oh ok, I see, thanks. So the FEIE assists with your business income, and then you can use your exclusions to reduce the amount of tax on dividend income since qualified dividends form part of taxable income.
You do have a lovely tax code in (/outside) the US!
Great job doing it again. I guess the tax cuts for 2018 aren’t going to help you. I am happy you figured out FEIE because I was looking into it when abroad but it wasn’t too clear to me.
It’s hard to cut taxes on $0.
Congress had a chance to pass real reform, but they really just changed a few minor things for individuals (with most of the $ gains going to the top.) I would have liked them to move to a territorial tax system as they did for corporations.
How does capital gains harvesting work when you use FEIE? I’ve been using the exclusion for years and wondering if I can take advantage of harvesting. It seems that for capital gains purposes, all of my income is counted even though I can exclude most of it for my AGI.
It works as if the FEIE doesn’t exist.
“it works as if the FEIE doesn’t exist.” Can you explain this a bit more please. Can one use the FEIE and take advantage of harvesting. For example, If we (married filing jointly) have a taxable income of 30,000 (USD-Line 43 on tax form) does this mean we can harvest another 40,000+ from our stocks and not have to deal with taxes?
You can only deduct up to $3,000 in capital losses per year against your ordinary/wage/business income.
I believe Jeff is referring to harvesting gains.
Right – of course he is! My mind is on tax-loss harvesting but that’s not what we do here in FIRE world!
No.
If Adjusted Gross Income (Line 37) with Line 21=$0 (FEIE=$0) is less than ~$100k (Married Filing Jointly), then you could harvest gains to the point where AGI = ~$100k.
“NO” We cant use FEIE AND harvest gains? Please clarify. Can we both use FEIE and Harvest gains based on your understanding of the tax code.Using the FEIE Our line 37 is 61,465.00 I’m assuming for line 13-14, we would list out our gains here (roughly 38,000 as a result of harvesting gains in our brokerage account)? Or are you saying we can’t use the FEIE AND harvest gains? Sorry for the confusion I might be creating here..trying to learn.
Yes, it is possible to use both. I harvested gains and used FEIE on our 2017 return. See above, Line 13 = $3,748.
No, you can’t just look at Line 43 and make a conclusion.
If Line 37 w/ FEIE = $0(*) is $61,465 and you are MFJ then you could harvest some gains US tax-free. Those gains need to be realized before Dec 31.
* You said “Using the FEIE our line 37 is $61,465” – if this is the case, you need to recalculate AGI with FEIE zeroed out.
So, if the US is using the Physical Presence Test to determine if your various income sources are foreign or not, what does your tax home (Taiwan?) do? Your post about tax friendly countries said that it is a territorial taxing country — does that mean they only tax income that is actually generated in country? If so, that combo sounds pretty good.
Yes, correct.
If total income were to exceed something around $250k, then Taiwan has an AMT that taxes worldwide income. But the core tax code is territorial.
Hi Jeremy. Quick doubt. So the income generated from the blog does not pay any taxes in Taiwan, even though you were present there most of the year?
Correct. None of it is Taiwan sourced. But also for 2017 we were in Taiwan <6 months.
Yes, I also find that interesting. Guess that’s the whole point of FEIE, earn US earnings from the blog in a foreign country and get the exemption. It’s the combination of US and Taiwan rules that’s so powerful.
Great job. You guys saved a bunch on taxes. I’d love to try FEIE at some point.
Last year, we paid a ton of taxes. My wife still has a job and I’m paying SE tax. It’s not fun at all. And we paid 10% Oregon state tax! Ouch… It’s time to move.
Oregon taxes are brutal, about 2x California.
Oregon is insane, absolutely. It’s like the state only wants poor people to move there and hates business. It’s our favorite state, but if we ever decide to live there, we would need a Las Vegas or Florida condo for residency purposes. I’m surprised RBF is still paying for the privilege. Nuts.
I noticed your comment on tax harvesting vs conversion of traditional al IRA to Roth. Could you speak to this (or point me to a previous post addressing this issue)? How do I decide which option is best for me?
I believe I discussed this a bit when highlighting income on our 2015 tax return.
For a married couple, we only get ~$24k in 0% tax bracket for ordinary income (like Roth conversions) from standard deduction and personal exemptions, but ~$75k in 0% tax bracket for long term capital gains and qualified dividends.
Because the opportunity to do tax free Roth conversions is smaller (24k vs 75k), I prioritize them. There is a double benefit in that all future gains are also tax free due to the nature of the Roth.
One reason to invert this priority is if there are short term spending needs. If I know I’m going to buy a boat in January, and I have to choose between a Roth conversion or realizing a capital gain in December, I can choose the latter if I believe a January sale would result in a 15% capital gain tax that year.
Form 1116 sucks big time (the foreign tax credit calculation I mean) that was my lesson “learned” this year. only a fraction is credited so now I have to figure out how to get the carry over credit next year. any ideas?
Sorry, you can’t. Any foreign tax which is reduced by the FEIE (line 12 of form 1116) is gone forever.
You can see if it still results in 0 tax and just forego the FEIE and use all FTC (and any carryover).
I did not use the FEIE, it is not earned income. I am pretty sure the chunk of that tax paid and not credited got treated as a carry over (“passive c/o” or something along those lines)
You need to keep records of the carryover. There is no field in any form where it is calculated, but essentially in form 1116 it is line 14 minus line 21 (for each respective category, in your case I imagine the passive category).
In the year which you wish to use the carried over FTC you need to attach a detailed statement with calculations regarding the carry over and to which year they pertain.
thank you. my next task is to understand in what circumstance can I claim it, in case I can make that circumstance happen…
thanks again
You can also carryback. So if you had a non-zero tax burden last year you can file an amended return and apply the FTC there. See IRS page w/ link to Pub 514.
Just for completeness, carry back is only up to 1 year while carry forward is up to 10.
@kindoflost, you would need to find a country that tax burden is lesser than the states for passive income. This is not so easy. The states is very competitive when it comes to taxation (especially now with the 21% flat rate for companies).
I didn’t pick the country, picked the stock (the ADR…). I don’t want the tail to wag the dog (I didn’t even know the dog had a tail to begin with)
My doubt is much more dumb (read 514 and did not get my answer), if the only condition to claim the credit is to owe taxes then why didn’t I get the credit this year?
This year I owed taxes: I paid about $1300 in foreign taxes but only was able to credit $200 (long calculation at tax return time) when I did my math to see how much to claim in long term gains I assumed I would get the full $1300 so I harvested more gains and ended up having to pay around $1100 (the difference between the two…). I already have dividends this year for which I paid foreign taxes so I guess I will be in this situation for a while.
Do you have a post on how to set up a Solo 401K…that would interest me…I believe I am one of the three that has been waiting all year for this post…ha! While I am not “retired” I am trying to reduce my taxable income, so real life examples are extremely helpful. Regards!
I haven’t written anything.
When I set mine up 3 or 4 years ago, there were only 2 main companies that offered Roth options – Etrade and Vanguard. Vanguard had higher fees, so I went with Etrade. The process was super simple.
Does Etrade accept 401k rollovers into their solo 401k? I know this has been an issue with Vanguard. What funds do you buy via Etrade?
Thanks
I believe so, but I haven’t done it myself so my memory is fuzzy.
I just buy VTI. Trades are ~$10 but I only make one trade per year on the full ~$18k contribution.
Take a look at mysolo401k.net the plan allows pretax, roth, and affter-tax (and with this one you can do the mega backdoor ROTH)
Just wanted to say thanks for sharing this. You’ve been very helpful and inspiring. As a side note, I had just recently finished reading Debt, the First 5000 Years that you recommended recently. I find all of this fascinating. Again, appreciate your time.
My pleasure :)
Glad you liked the book.
Just a couple random thoughts from when I was looking into this. It was a while back, so I apologize if I’m wrong on my notes:
– I didn’t think you could claim both the FTC & FEIE
– I didn’t think you could claim both the standard deduction & FEIE
You can’t claim FTC and FEIE on the same dollar. But foreign tax paid on investment income is fair game for FTC, even if you use FEIE for earned income.
Standard deduction is allowed. When you walk through the forms for Form 2555 and the Foreign Earned Income Tax Worksheet this becomes clear.
See this post for details and examples.
My first year, I spent way too much time digging up records to figure out how much of my income could be excluded under FEIE. Now, I meticulously track in real time my travel and what income was earned inside and outside the US…so that at tax time it’s the calculations and not the record-keeping that is the largest burden. Congrats on making it through your first year. It just gets easier after that.
Count me as one of the three who definitely appreciates this post, Jeremy. Great resource while thinking though my family’s own future planning options.
OK, 4 people :)
Glad it is useful, Andrew. Are you ever in Taipei?
Never been unfortunately. I’ll need to make it a point of getting over there sometime. You’ll have to let me know the next time you’re in Seattle and up for a coffee or a pint.
We were just there for a short stay in August. Will let you know next time we head that way!
I look forward to it. My email is listed on LinkedIn.
Jeremy, I thought you could claim self-employment OR FEIE…am I stupid for sending the IRS checks every year?
I already know it is stupid because my host country has a totalization agreement and I am not required to pay social security because I am covered here; I voluntarily pay it so I can get my social security credits up to 40, just in case I find myself in old age in the US, needing Medicare. But can you claim FEIE and still get social security credits from self-employment, without paying the IRS anything????
If so, can I get my money back!?!?
Oh wait, you are paying SE taxes, I got confused by you saying you paid zero income taxes. :(
I find expat taxes tough, on top of doing host country taxes in another language. What is tax-advantaged in one country is usually penalized in the other.
I am paying SE taxes.
As I allude to in the final summary, we could eliminate these if I make GCC an overseas corp. We just need to decide if we want to move back to the US at some point.
I believe some of the totalization agreements count work abroad as part of your 10 credits. (That’s how I read the Canada agreement.)
That SE tax is still a zinger. Besides an overseas corp, any ideas to offset it? I see the Additional Child Tax Credit is on line 67 – maybe try to preserve some of the CTC to offset it? Or is it just a zero-sum game?
Have you given any thought to setting up your own 401k plan through a Third-Party Administrator to do the Mega Back-door Roth? It looks like blog income is getting up to the “sweet spot” that the Finance Buff mentioned in his canonical articles about it.
We could do an S-corp and reduce SE taxes, but overseas corp is the only way to completely eliminate it.
I haven’t looked very hard at doing larger Roth contributions. It’s something to consider. I’ve been fairly happy with just putting the $ in a brokerage account since it has no restrictions on withdrawals.
With the FEIE we are ineligible for the ACTC in 2017. In the TCJA the CTC is higher ($2,000/kid) but any refundable portion requires earned income in excess of $2,500, and about $14k to get the full refundable amount ($1400 afair.)
I’m a little confused here. There’s no business expense a deduction allowed in the Example #2, but you did take business expense deduction on your tax return. Am I missing something?
I can understand the confusion.
If I were to ignore the tax forms and write the input in the same format as Example #2 it would look like this:
Income
Foreign Earned: $55,674
Deductions
Business expenses:
$6,497Standard: $24,000
1/2 SE Tax: $3,474
FEIE: $52,200
That is perfectly accurate, but it doesn’t translate well to the tax forms, unfortunately. The FEIE lives at the intersection of Form 2555 and Schedule C. Form 2555 does not include business expenses, but Schedule C does… and Schedule C results are what appear on Line 12 of the 1040.
Since Line 12 is $6,497 lower than Gross Income due to business expense deductions, the offset applied by Form 2555 on Line 21 is also $6,497 lower.
$52,200 – $6,497 = $45,703
(the actual value on Line 21 is $45,700, due to how TurboTax calculates everything with rounding to nearest whole dollar)
Thanks for all the detail and specifics here. I always learn so much from these posts.
The Belize Corp is an interesting idea. A couple things you should know:
(1) The IRS won’t like it if you pull 100% of the profits out as a salary/wage deduction. There is a line of “reasonable compensation” cases which dictate that a shareholder-employee must receive more than 0% and less than 100% of profits as wage. (The incentive for taxpayers is to go close to 0 for S Corps because of the SE tax savings but in your Belize Corp case incentive is to go close to 100 because of the FEIE benefit).
(2) This begs the question: how are the remaining profits taxed and what do I do with them?
(A) Belize Corp will be a CFC so you have to ask whether the profits are Subpart F income and, as of 2018, whether they are GILTI income. The profits are from an active business so not Subpart F income. However, as of 2018, we have the Global Low Taxed Intangible Income (“GILTI”) regime which basically pulls all profits from a CFC’s service/technology business into the US tax net. Your Belize Corp’s profits are likely GILTI income which will be taxable to you as the CFC-shareholder at ordinary tax rates. This will cut against your QDI/FEIE 0% strategy.
(B) If you reinvest the profits into a bank/brokerage account, you’ll start to earn investment income. This investment income will be Subpart F income. However there is a se minimis exception of 5% of the CFC’s gross income so you can shield a bit from US tax. Be careful not to have Belize Corp earn any US-source dividends though. Those will be subject to 30% withholding.
I love the creative ideas! Keep em comin!
Hey Jeremy,
Thanks a lot for another fantastic post! I did our tax return for the past several years after we fired our CPA (I caught quite a few errors of his many years in a row, arg..)
However I might not be reconciling some information correctly, but in the post below you mentioned Roth IRA should be considered after normal brokerage accounts? How come you decided to contribute to Roth IRA? Is there any new learning / information that you are not sharing with us?! (wink) https://www.gocurrycracker.com/roth-sucks/
Thanks again for sharing your learning with us!
Sandra
You are correct, I’m not following my own process. Over the past 5 years we’ve contributed $82,420 to Roth accounts.
I contributed to Roths for a few reasons:
– we have more than enough in our brokerage account to fund our lifestyle. (This is the biggest reason)
– I don’t want/need the additional dividends that these funds would generate in the brokerage account
– if we eventually move back to the US, the ACA can be a bit nasty tax wise, and having some Roth funds can minimize that.
– Overall flexibility with long term taxes can benefit from having some pre-tax/post-tax/taxable
Earn $45k in another country and don’t pay USA taxes… yay!
Hey Jeremy,
Thanks for sharing and this is super helpful! I have a question about the mechanics of your Roth IRA conversion. On line 15(a), you said you had $12,700 taxable IRA distribution, but where on the form did you say these $12,700 are going into a Roth IRA/401K? Is this just a simple journal entry with your IRA custodian/401K administrator?
Great post! A quick question.
If I’ve made deductible contributions to 401k (Line 28 of f1040) and IRA (Line 32), do I also need to add them to Line 44 of f2555?
For example, suppose
* 401k deduction : $500
* IRA deduction : $500
* SE tax deduction : $3474
Then Line 44 of f2555 would be $4474, correct?
You can’t make deductible contributions to an IRA unless you have non-excluded income. It wouldn’t make sense to contribute anyway as it creates a situation where you give up 0% tax now for a guaranteed tax burden on withdrawal.
The numbers ($500) in my above example are hypothetical. I did so to make the calculation simple to demonstrate my point. Didn’t expect to introduce misunderstanding…
My question is what kinds of deductions must be included in line 44 of form 2555?
In your case, you only had business expense (including home office) and self-employment tax deduction.
Suppose you had non-excluded income that allowed you to make deductible 401k and IRA contributions, and suppose you did make those deductible contributions, would you also need to include the 401k and IRA deduction amount attributable to the excluded income on line 44, form 2555?
The phrasing is “deductions directly related to excluded income”
Since 401k/IRA contributions would be non-excluded income, they would not be included on Line 44. At least that is how I read it.
I see what you’re saying. But from IRS:
A SE individuals Schedule C foreign expenses and applicable foreign self-employed adjustments on IRS Form 1040 line(s) 23-32 (including half of the SE tax and the SEHI deduction among other things) will reduce the amount of FEIE available dollar for dollar.
401k/IRA deductions are 1040 line 28 and 32 respectively.
Focusing on 401k, I think there’re 2 scenarios:
1) contributed excluded income to a 401k. If this is the case, you’ll need to include the deduction amount allocable to the excluded income on f2555 line 44. Otherwise, there’s “double dipping.”
2) only contributed non-excluded income to a 401k. In this case, you don’t need to include on Line 44 as you said.
Making sense or no?
Scenario 1 should never exist.
Can you explain why? In one of your other posts and its comment section, you mentioned people can contribute excluded income to a 401k, and cited section 911, and concluded “the self employed can contribute earned income fully ignoring the FEIE.”
Perhaps an example will help. Suppose a SE individual has $110,000 income (> max FEIE of $103,900), when calculating his max deductible 401k contribution, would you start with $110,000 or $6100?
Starting with $110,000 will give you a bigger 401k deduction amount, but a portion of that is allocable to the $103,900 excluded income. (My scenario 1 above). Starting with $6100 will give you a much smaller deduction amount, but none of that is allocable to the excluded income.
Am I thinking clearly or did I misunderstand something?
Contribute to a non-deductible Roth 401k.
If you contribute to a deductible / Traditional 401k, you are choosing to decline a 0% tax rate today for something greater than 0% in the future. Why?
Once again, I picked a number ($110,000) barely above the 2018 FEIE limit $103,900, wanting to show my point by a boundary case, but didn’t realize a Roth 401k contribution will bypass the problem entirely as you pointed out.
Let me pick a different number. Suppose a SE individual has $150,000 income. Let’s replace $110,000 with $150,000 everywhere in my previous argument, then I think the argument holds. What do you think?
Non-excluded income can be contributed and deducted, and is not directly related to excluded income.
Did you make any employer contributions to your solo 401k? If not, why not?
I did not.
Employer contributions are always pre-tax. With a $0 tax bill, pre-tax contributions would mean trading 0% tax rates today for unknown (but probably higher) tax rates in the future.
Makes sense. Thank you!
Seems like you have a special case situation. Not many retirees have children or the deductions to go with them. Not many
people have a business that can generate 50k foreign income while spending about a month in Taiwan (what about Taiwan taxes and state taxes?). Also your medical expense of $75/month is hard to believe with 2 adults and a child to cover. My estimate for 2 healthy adults is $900/month and that doesn’t include paying deductibles if we actually need care.
Do you have recommendations for more typical retirees that are drawing their income from pension, SocSec, IRAs and
401k accts? My estimate for a desired spending level is $130k/year or about $160k including tax, about 20k Fed and 10k
State (MN).
My recommendations revolve around designing your life to be atypical/special case.
Here is the overall strategy: Never Pay Taxes Again.