2020 was an interesting year in many ways including all things taxes… I mean, we paid $0 in income tax (again) on ~$143k income.
This was in part because dividends and blog revenue were lower due to COVID-19, which is a bummer. But it is also because we welcomed another child tax credit into the family, which is nice. Plus, he’s kinda cute.
But that’s not all… for all of you tax aficionados, this year’s tax return offers some good examples of both short and long term tax minimization, including use of the Foreign Earned Income Exclusion, the Child Tax Credit (with phase out), capital gain harvesting, Roth conversions, the Foreign Tax Credit (on International equities), and more.
2019 was our 7th full year of this thing we do. It’s been an incredible ride – we’ve traveled, adventured, and procreated, with the best yet to come.
We’ve also done a fair amount of tax optimization, paying little tax each year while taking steps to minimize future taxes. How effective have we been with our tax optimization strategery?
Do these optimization efforts actually work, or is this just fantasy? (Caught in a landslide, no escape from reality…)
The Retirement Savers Contribution Credit, aka the Saver’s Credit, is a nice incentive for households to contribute to qualified retirement accounts (IRAs, 401ks, etc…)
It’s also a nice incentive for early retirees who make a little hobby / side-hustle money to make MASSIVE Roth conversions on Uncle Sam’s dime.
Early retirees are an interesting bunch… on the one hand, it takes a lot of audacity to leave the workforce decades early. I mean, who does that?!
On the other hand, most of us are extremely fiscally conservative. People are even competitive over who is the most risk-averse… “You go ahead and target a 3% withdrawal rate, buddy, I’m going to keep working until I can spend less than 1.76852%!”
For most people though, the debate is primarily internal and manifests itself as One More Year Syndrome. “I’ll just work one more year to cushion the portfolio a bit more, THEN I’ll quit…”
It’s a very reasonable discussion to have with yourself. But working one more year also has some costs.
We will never have the experience of receiving an inheritance, but GCC Jr will.
In my role as fiscal steward, I would like to ensure that he, along with our other beneficiaries, receive the largest amount possible. (After we are done spending as much as we want, naturally.)
But Jr only gets what the IRS doesn’t take, so I’m taking my tax efforts to the next level: multi-generational tax minimization.
Note: The ability to withdraw funds over the beneficiaries lifetime was eliminated in the SECURE Act. Check out the details here.
