Many of we early retirees and aspiring early retirees are on the never ending quest to Never Pay Taxes Again.
With the Tax Cut and Jobs Act of 2017 about to be signed into law (aka the Largest Tax Cut in HistoryTM, perhaps a better name than The Mother of All Tax Cuts) it is worth assessing what impact this round of tax reform may have on the common tax minimization strategies.
Overall, I prefer a little more reform in my tax reform, but most individuals should see…
…at least a minimal reduction in their tax bill in the short term.
Let’s review the changes.
Tax Rates
Early tax reform proposals suggested that the tax code would be simplified by reducing the number of unique tax brackets. The old tax code had 7. The new tax code has… you guessed it, 7. See, reform.
The tax rates on those brackets have been lowered, as per the chart below.
The new tax brackets (purple) are noticeably lower than the old brackets (blue.) This results in lower tax paid and effective tax rates.
As reference, a Married couple Filing Jointly (MFJ) with no children will save about $600 on $50k income, $2.2k on $100k income, and $5.8k on $200k income.
Standard Deduction / Personal Exemptions / Child Tax Credit
One of the big talking points of the TCJA is that the standard deduction was doubled. Sounds nice, right?
However… while the standard deduction was (approximately) doubled, personal exemptions were eliminated. Repeat: there are no personal exemptions. This will induce fewer people to itemize, which will simply tax time for many.
As shown in the table below, this can impact people couples with children. To offset this, the Child Tax Credit was increased from $1,000 to $2,000 per child. (I share MFJ only to highlight the concept, single filers are slightly more complicated due to potential to file as Head of Household.)
Married filing jointly | ||
---|---|---|
Tax free income | Old tax code | New tax code |
No kids | $21,300 | $24,000 |
1 kid | $25,450 | $24,000 |
2 kids | $29,600 | $24,000 |
3 kids | $33,750 | $24,000 |
For early retirees with few dependents, this provides a larger play space for Roth IRA conversions. It also makes it easier to make generic spreadsheets :)
Roth Recharacterization
An useful tool for Roth conversion aficionados was the ability to recharacterize a conversion after the fact.
That is a mouth full. What it means is we could convert some $ from a Traditional IRA to a Roth IRA (a conversion), and then later decide to undo in part or full. A mulligan, if you will.
Mulligans are no longer allowed. If you want to recharacterize a conversion for the 2017 tax year, do it before Dec 31st.
Recharacterization was useful for filling up lower tax brackets, such as we have done with the 0% tax bracket in the past. (See tax return example.) I’ve never done a recharacterization since I run a pretty thorough year-end tax review, but it was nice to have the option.
Feel free to continue to do Roth conversions to your heart’s desire, but perhaps use a little more finesse in the calculations. For an example of our 30+ year long Roth conversion pipeline, see here.
Qualified Dividends / Long Term Capital Gains / Cap Gain Harvesting
Early House proposals included a 6% tax on dividends and capital gains. That is not in the final bill. This means another 8+ years of tax free qualified dividends and long term capital gains.
Early drafts of the bills also included provisions preventing specific lot sales. Instead, whenever you sold stock you had to sell the oldest shares first (FIFO.) This had the potential to complicate capital gain harvesting a bit, and could have resulted in higher taxable gains for normal cash flow withdrawals. However, this did not make it into the final bill.
Capital gain harvesting is unaffected, and continues to be a powerful tool in the tax minimization game.
Under the new law, the amount of tax free dividend / gain income is no longer coupled with the other tax brackets. Now we have to look up another number (simple, right?) fyi, for 2018 those numbers are $38,600 for individuals and $77,200 for married couples.
Health Insurance / Obamacare / Individual Mandate
The TCJA eliminated the individual mandate, which assessed a penalty to anybody who didn’t want to have health insurance.
So feel free to self insure if you like starting in 2019 (after the 2018 elections, wink wink.) The IRS no longer cares.
This will probably result in more young/healthy people choosing to go uninsured or (maybe) to go with the old High Deductible Heath Plans (HDHP) that were disallowed under the ACA. This is expected to increase insurance premiums on the remaining insurance pool. People earning under 400% of FPL will just get larger subsidies, no big deal. Those earning over 400% of FPL would then have to decide if those plans were still of value.
For early retirees doing the previously mentioned Roth IRA Conversions, this potentially vastly simplifies tax optimization tradeoffs.
Expats
For US citizens who live abroad, the Foreign Earned Income Exclusion is alive and well.
The use of Overseas Corporations continues to be an effective way to eliminate Self Employment taxes. However, high earning businesses will no longer be able to retain earnings tax free.
Other resources
Clearly the above is just a brief summary of the total changes. Here are some great resources to review.
Detailed overview of changes, including SALT: Michael Kitces – Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017
Impact on high earners – Physician on Fire – Tax Reform! How Physicians and the Self-Employed are Affected
Business owners eligible for pass-thru deduction: Stephen Nelson – Pass-thru Income Deduction: Top 12 Things Every Business Must Know
Expats and overseas business owners: Stewart Patton – 2017 Tax Reform for US Expats: Either Nothing Change or Everything Changes
And of course, you could always just read the actual bill.
Summary
The Tax Cut and Jobs Act of 2017 appears to have minimal impact on taxes for the early retiree. I expect we will have more $0 tax bills in the future, with some slight benefit from the increased Child Tax Credit. Aspiring early retirees will benefit from the decreased tax rates.
Taxes on qualified dividends and capital gains remain at 0%, and the tax minimization tools of Roth IRA conversions and Capital Gain harvesting remain in full effect. The elimination of Roth recharacterization adds a small complication, but is easily overcome with some planning.
The biggest impact for early retirees is likely to be the elimination of the Individual Mandate. TBD how this affects the insurance market over the coming years.
As with any new law, full ramifications will take some time to understand. These are my initial impressions.
Feel free to ask questions / highlight anything I missed in the comments.
Another great overview of what’s happening in the financial world. Thanks Jeremy.
As an aside, the FEIE post you referenced inspired me to move abroad while working for my old company from my computer. Keep up the great work spreading the word.
Awesome! That makes my day, thank you
Thanks for this clear explanation! I really needed that after reading about all of the version of the bill.
My pleasure… there is so much to read (500+ pages.) My eyes glazed over many a time
Great overview! Your link to the actual bill isn’t the very final version – a few provisions were taken out after going through the Senate “Byrd bath” (including the provision that would have given the legislation its “Tax Cuts and Jobs Act” moniker). Here’s the final bill, which has reportedly now been signed by Trump:
https://www.congress.gov/115/bills/hr1/BILLS-115hr1eas2.pdf
thanks! I updated the post with the new link
Also, ’twas a pleasure meeting you and the family in NYC. Happy Holidays!
Likewise!
I’m nervous about the repeal of the individual mandate, as you point out – likely the biggest impact to early retirees. I have a feeling though, that healthcare will ultimately improve as administrations come and go, and the pressures of the wealth gap get to be too much.
I support the corporate tax reduction and the doubling of the standard deduction. But I wish congress had been more generous to the middle class and more mindful of the deficit.
I’m not terribly concerned about the individual mandate as an individual. If we can buy an HDHP and pay out of pocket for most things we will come out ahead, just like the olden times.
The expected outcome is that premiums rise (and therefore subsidies rise.) The subsidy cliff will become more severe, which will drive more people towards self insuring / HDHPs, which will increase costs, and so on…
Other developed countries seem to spend half as much per person on healthcare with better results, so there is opportunity for improvement.
Does this mean that if you live abroad but want to visit the U.S. for more than 35 days per year you no longer need to buy U.S. insurance for that time?
I plan to live outside the country during FIRE with expat insurance but would probably want to spend more than 2 months per year in the States and the mandate was killing my plans. It would be a huge win if that was no longer nee
Yeah, no mandate no problem.
2 months in the US may not have been a big deal. See Obamacare, Expats, and Limitations on Visits Home for the details. The limitations apply only if you are itinerant. If you will be a bonafide resident of another country, then there are no limitations.
Thanks! Your ‘limitations’ article was a big help. Not sure exactly how long I’ll spend in the US once FIRE and probably won’t pass either of the tests that would have exempted me. This makes life a lot easier!
Thanks for the summary. Helpful!
Nice job explaining how early retirees are affected by the bill. This would affect us in 2020 as early retirees. So this means that a retired couple can get $101,200 of income tax free? ($24k deduction + $77,200 qualified div/LT cap gains)
Hi Enchumbao! Yes, that is correct. Plus any offset from the CTC
An interesting review and worth adding these tidbits to the overall full-picture lore. The seven brackets (rather than the originally envisioned five) is naturally a walk-back of the original vision–a walk-back that occurred in the haggling. Haggling is reality, although it does always complicate rather than “elegantizing.” Note also that AMT is now gone, which will help a lot of people who were categorized as among “the rich” by a system that wanted them categorized as such for its own ends, even though they have been struggling like the poor courtesy of huge house taxes and mortgages in high-house-cost geographies. Overall I’m in favor of this attempt at reform–first, I’m a believer that enticing so-called “hoarded” money back into play is a far superior approach to confiscating it and then putting a little of it back into play, because it abandons the artificial and obstructing thumb of regulation in favor of the more balanced free market concept, acknowledging that the real leadership is in the private sector, where it has always been…and second, the mere attempt at tax simplification and tax reform is of value even if not a lot of simplification is achieved. The sentiment alone is a precedent that’s good to voice frequently. Again thanks for your analysis.
The AMT isn’t gone, but it will affect fewer filers. I believe I’ve paid the AMT each of the last 9 or 10 years, and due to both the law and changes in my income (working part-time now), I don’t imagine I’ll be subject to it.
From Heritage.org
“The exemption for the alternative minimum tax (AMT) increases from $86,200 to $109,400 for married filers. The exemption phases out starting at $1 million, up from $164,100. The new exemption is $70,300 for non-married filers and phases out beginning at $500,000.”
The best explanation I could find on how this will apply: https://taxfoundation.org/conference-report-alternative-minimum-tax/
I wish it were gone completely, but by remaining well under the exemption phaseout threshold of $1M, I don’t lose any of the already higher exemption. Sounds complicated, but the article above spells it out pretty well.
Best,
-PoF
The biggest reason AMT is no longer likely to impact many people is that SALT taxes are no longer deductible (except for a $10k tidbit). Without that add back, most folks won’t have to care about AMT. But this also means the new system is more LIKE the AMT than it used to be.
Nice overview. Just enough detail to cover the basics, and you hit the main topics.
Did you really mean to say that if we wish to do a recharacterization of a traditional IRA to Roth IRA conversion for tax year 2017 we only have until the end of 2017 to do so? Or did you mean to say we have until the end of 2018? And that for tax year 2018 recharacterizations would no longer be allowed? If you were right in what you say then I’ve got a lot to do between now and the end of the year.
Yes, that is my interpretation. Also see the other linked articles which seem to agree
I am in the same pickle as you, and I am having trouble finding clear, definitive information regarding whether recharacterizations of 2017 Roth conversions will or will not be allowed after 12/31/2017. Even Vanguard seems to be unclear about this point. They have the following to say in an article on their website:
“…What’s less clear is what happens to those who want to recharacterize a conversion made in 2017—the last tax year in which this can be done under the final bill. “Under current law, you’d have until October 15, 2018, to change your mind and recharacterize a conversion made in 2017,” Ms. Bruno said. “But it’s unclear under the new law whether retirement savers will have until the end of 2017 or until October 15 of next year to do a recharacterization. “
Absent guidance from the IRS providing otherwise, Vanguard will continue to permit investors to recharacterize their 2017 conversions through October 15, 2018. Investors who choose to recharacterize after the end of December 2017 should understand that there is some risk that the IRS could ultimately disallow their recharacterization transaction, potentially resulting in adverse tax consequences to them. Because of this uncertainty, Vanguard suggests that investors who are considering a recharacterization of a 2017 conversion consult a qualified tax advisor and make a decision by the end of the 2017 calendar year.”
The full text of this article can be found at: https://investornews.vanguard/the-new-tax-bill-and-ira-conversions-how-should-investors-respond/
Thanks for the Vanguard info. I imagine that was drafted by their lawyers.
It’s a mess. I’ve basically been doing our 2017 taxes in full over the past 2 days in order to get the right Roth conversion value…
Thank you for this overview.
Want to make sure I’m reading you right on the recharacterization that is and is no longer allowed:
We can still make a tIRA contribution in 2018, then later in the year recharacterize it as a Roth contribution, if we determine the tIRA deduction isn’t going to help that much based on income. This was possible before and is still possible in 2018 under the new law?
Recharacterization of contributions should still be allowed, although I haven’t read through this part in depth. The change is for conversions.
In your chart, wouldn’t tax free income for someone with kids be $24k + k*$2k/t?
Kinda sorta. You get the $24k deduction. Then you get an additional $2k credit per kid (used to be $1k.)
If you are at the 10% tax rate, that is equivalent to getting another $20k tax free. At the 15% rate, $13333… etc…
Thanks a lot for the post! And for the links to other similar posts by other gurus.
I also would like to clarify you statement: ” If you want to recharacterize a conversion for the 2017 tax year, do it before Dec 31st.”
Does it applies to the following situation?
I have contributed $5.5k to Roth IRA in 2017, but I am fearing that my MFJ MAGI is going to be >$186k. Therefore, I know I will need to recharacterize my Roth IRA into tIRA. I was hoping to do it before filing taxes (i.e., before April 2018) because I still have a small chance to fall into a Phase Out range of 186k-196k, and thus still keep some of $5.5k in Roth.
You suggested to do any recharacterization by Dec 31. Does it apply to my case? Where can I read more about it? I only have 4 days next week to make it recharacterization work if it makes a difference.
Thanks to anyone who can answer my question.
Keep up the great work!
Yes, applies in your case. See the linked Kitces article for more depth.
Thanks for linking out to my post, my man!
There are so many changes to process, and what helps one person or family may hurt another. High-income single people in states with high property taxes and / or high state income tax are less than pleased and potentially paying a slightly higher effective tax rate. Most other people will be paying less. Many paid on a 1099 will benefit an incredible amount.
Personally, I will finally see some benefit from having kids. A tax benefit, I mean. :) That’s puts $4,000 in my pocket annually. I’ll also be happy to drop from the 33% to 24% income bracket, and should get a nice deduction on the blog income, which is a pass-through business.
Cheers and Happy Holidays!
-PoF
p.s. You may not want to come home for Christmas. We’re expecting highs in the single digits below zero up here.
But of course
we probably won’t be in the US for the next year or two… I’m getting used to this perpetual summer thing we have going on
Since a lot of early retirees end up with a side hustle, it’s also worth mentioning the 20% business income tax deduction. From my preliminary review it appears that anyone with schedule C self employment income can deduct 20% of their total Sched C income. It’s a below the line deduction which unfortunately doesn’t reduce AGI. The net effect is that only 80% of your biz income is taxed. Put another way, your marginal rate on your biz income will be 80% of what it would otherwise be (8% instead of 10%, 9.6% instead of 12%, etc). Small gift for those with a little hustle in them. This 20% deduction phased out for MFJ with AGI over $315,000 (half that for singles).
Yeah, a little extra juice for the US based bloggers with that one. SE taxes still apply on the full amount if I’m reading it right
Yes, I believe SE taxes still apply to 100% of biz income. And SE taxes represent 100% of my tax bill since I end up with $0 due on the regular income tax side of things.
This article just saved me thousands in taxes! I didn’t put together that the elimination of recharacterization would apply to tax year 2017! Reading Kitces article that you linked to, he seems to concur that its not clear the IRS will allow the tax year 2017 recharacterization that’s typically allowed through October of the next year. Since I use Mad Fientist’s “race horse” roth conversion concept, where I convert twice as much as I think I’ll need, and then recharacterize the “losing horse” i.e. underperformer, I almost got stuck with twice as much Roth conversion as I wanted! Maybe the IRS will allow 2017 recharacterizations, but I’m not risking it. Just submitted my online recharacterization with Vanguard. Thank you, sir, for the heads up.
I just did the same thing for the same reason ;-)
Get yourself some extra shares of VTSAX as a Christmas bonus ;)
Great overview, saved me some time! We’re still finishing up our tax gain harvesting for 2017. I’m happy to see there aren’t any big changes to our capital gains and dividend rate :)
Mostly same same
I still have a Roth conversion to do next week
Can you explain what you mean about capital gain harvesting? What is different? Are you saying capital gains and dividends are tax free if your agi is under the numbers listed? What is the effect if your agi is higher? Is there a partial effect?
Basically, nothing changes.
Tax rate is 15% – 20% on the overage
So if the individual mandate is going away, does that mean we’re still required to have health insurance till 1/1/2019? Currently my wife has health insurance through her job, but it would’ve been $750+ to add me and there’s no way I’m flushing $9,000 down the drain for a year.
Any word on if the cheaper insurance plans (that don’t meet ACA standards) will suffice for 2018? We’re moving overseas around November 2018, so after that it won’t matter either way.
Yes, everything is the same until 2019.
Great article, glad to see the second monitor is indeed bringing us some long-awaited spreadsheets!
Having 2 spreadsheets open at the same time is a real pleasure, let me tell you ;)
GCC,
Are you saying that $77,200 of qualified dividends is totally free for MFJ regardless of their AGI or taxable income? I didn’t understand this paragraph below:
Can you explain some more if taxed at other than 0% rate? Thank you.
No, it is the same as before. Qualified Dividend and Long Term Capital Gain Income below the threshold is 0% tax rate, above is 15% or 20% depending on total income
In the tax rate chart, shouldn’t there be a bump from 25% to 28% in the blue marginal tax rate? I believe that it should occur at about $177,000 for MFJ. This may also result in small adjustments to the effective rate and the tax paid.
Yessir, it should. Spreadsheet typo, fixed now. Thanks for letting me know.
GCC, I’m sure you have already talked about this on your blog but what software do you use to do your taxes?
I do it in Excel and then file with Turbotax to ease the import of all the investment data. See here for more.
I’m surprised no one mentioned the potential impact on Medicare and Social Security. I’m a late retiree at 69 and in good health, for the moment, but I am very concerned with the cuts that are likely down the road. Is anyone planning for their parents to move in?
I’ll assess proposed changes to Medicare / SS if/when they come. I think the latest projections are the TCJA will add $1.5 trillion to the deficit over 10 years, which is about 10% of the current projected shortfall in the SS “trust fund.”
@ Lynne,
Yes, I’m quite concerned about my own future and the future of my next generation, but tell me how I can change anything in this grand scheme of things…? Yes, it’s clear that ‘the can is being kicked further’ and years from today we’ll be blaming somebody else. There’s always a coin w/ two sides, so are the opinions. E.g. GCC believes that the change will add $1.5T to the deficit of 10 years. I, OTOH, believe the forecast is quite optimistic, but it will have a much bigger impact for the worse. But hey, if they give my money (taxes) back to me, I will not object when everybody else is clapping. I have no plans to spend the savings though (opposite opinion than the government’s) unless I *need to*.
Thanks for the post. It would be nice if you could clarify the part “the amount of tax free dividend / gain income is no longer coupled with the other tax brackets”. Several articles on the web seem to suggest no change whatsoever in the LT capital gain taxation. Does your statement mean that a married couple could make up to $77,200 in LT gains and pay no taxes regardless of other income?
No change in taxation.
The amount of tax free dividends used to be tied to the 15% tax bracket. Now the amount is just a different number, separate from the boundaries of the different tax brackets.
Funny how these change get sold as tax reform, but it doesn’t seem like a huge change. Cap gains and dividends are treated the same. Maybe we take the standard deduction now instead of itemizing. Shouldn’t have a huge impact on our taxes.
Thanks for compiling the summary — very useful!
Yeah, it’s more lipstick on the pig
The elimination of personal exemptions has nothing to do with whether or not people itemize. The cap on state income and property taxes do.
Nothing is a strong word.
Many more people have $13k of deductible expenses than have $24k.
True, but personal exemptions are separate and distinct from itemized deductions reflected on Schedule A.
Indeed they are. Or were.
Jeremy –
Looks like your tax chart is off a little bit (unless I’m not reading it correctly).
For a couple filing jointly with 150k taxable income (1040 line 43) – the 2107 tax is 28,977. The chart shows an amount slightly LESS than 25k tax paid.
What am I missing??
Thanks,
Chris
Use Line 38 instead
I know you can’t use them, but I would appreciate any information on the Saver’s Credit and EITC. I can’t determine what is happening with them.
Thanks for sharing this. To be honest I had not seen something that laid the info and the effects on married filing jointly so this is definitely helpful for my wife and I. Not to sound political, but it seems like this will benefit a lot of people? I heard nothing but critical talk on TV and radio about the policy. Just goes to show that you need to understand how it will change your personal tax situation. I guess the only place I am losing (2 kids) is on the children deduction but it is more than made up in other areas. Thanks again for putting this together!
Whether it helps a lot of people is still tbd. Yes, having $20 more take home pay on each paycheck is great. If it comes with a $25 increase in the cost of health insurance, maybe not so great.
Then there is the matter of the deficit. Some people might quit a high paying job to pursue their music career, but still keep their mortgage and car loan and credit card debt. Is it smart to reduce your income without reducing your expenses? Maybe. Most of the people who vote for this stuff will be dead by the time the Millennials inherit the bill though.
I’m going to try doing my taxes for the first time this year without TurboTax, to familiarize myself with the forms. That is my goal this year after spending the last two years focused on paying down my $160k in business school loans (crazy ride). I think doing the taxes will be a little difficult since we married in 2017, have some carry-over losses, make too much to recognize any personal exemptions, and also make too much that our itemized deductions get phased out. I really do hope to simplify to your tax situation asap after we reach FI. I do have a few questions for you if you don’t mind.
How did you do it the first time and know which worksheets to use? Do you use the e-file site? Any other recommendations?
I know you were asking GCC, but I thought I might jump in.
First off, congrats on paying down that debt – that’s very impressive. Hopefully that same focus will serve you well going forward in your FI journey.
As for taxes, I can say that doing them “by hand” has been the best way that I’ve found for both understanding how taxes work and for identifying the opportunities to optimize. So you are making a wise (if possibly difficult) decision. The best way to conceive of doing taxes is like a giant treasure hunt or puzzle.
The best way I’ve found to do taxes is to just jump in with the information at hand. This usually includes your prior-year returns and any year-end documents (W-2s, 1099s, etc) that you receive. Each of these contains clues as to where to focus your attention (don’t forget the instructions for the forms – these often tell you where the information from each box should go on the tax return forms). From there, you can read the forms themselves and the accompanying instructions, which often contain pointers to other documents or worksheets. Say what you will about the IRS – they are very good about having all of the information you need somewhere on their site. I prefer the forms themselves and the instructions to the “publications”, but the information is equally valid in both places. As long as you read all of the print, big and small, you will find the answers you need.
For example, touching on two points you raised – itemized deduction limitation (the Pease limitation) and worksheets. If you pull up a copy of Schedule A (for itemized deductions), down at the bottom is the following question: “Is Form 1040, line 38 [your AGI], over $155,650? … Yes. Your deduction may be limited. See the Itemized Deductions Worksheet in the instructions to figure the amount to enter.” So then you pull up the instructions for Schedule A, and find the worksheet, helpfully titled “Itemized Deductions Worksheet”.
As for tactical implementation, I used to do the forms on paper, but I’ve switched over to the Free File Fillable Forms website, which I find to be a good balance of some automation of math and connecting values between forms while still retaining a lot of hands-on so I feel like nothing is going into a black box. Sometimes I will create a spreadsheet to automate worksheets or things like that that aren’t avaiable in the system. I then end up printing the whole thing out and sending it in (ironically), since their system can’t handle LAFCP (Living Abroad Foreign Care Provider) as the EIN for the child care credit. But it’s still worth using, even more so if your situation doesn’t prevent you from filing electronically there.
If you still get stuck even after reading all the IRS stuff, google is your friend – for almost all of the questions you could ask about income taxes, other people have already had them and asked online. And another group of people has helpfully answered them.
Good luck!
Thanks, Sam. I appreciate the advice. I’m looking forward to getting all the w-2 and 1099 forms in.
Great answer, thanks Sam.
It’s not an all or nothing thing. You can still use your preferred tax software and do things by hand in parallel, in full or part. That is basically what I do every year, as I figure the time savings for not having to enter all of the investment info makes it worth the cost.
Hi, thanks for your great posts. You write “I expect we will have more $0 tax bills in the future, with some slight benefit from the increased Child Tax Credit.” I am also an expat, and we’re expecting our first child this year. Will you be taking the Foreign Earned Income Exclusion (which you’ve done in the past) and the Child Tax Credit? It seems like that is not allowed, but I want to know for sure. Happy new year!
As I read it, the ACTC (Additional Child Tax Credit) is not available if you exclude all of your income with the FEIE. The regular CTC should be ok though.
So you would just need to ensure that you owe tax of equal or greater value to the CTC, which can be accomplished through Roth conversion.
This will be my first year claiming FEIE so still figuring it all out…
From schedule 8812: “If you file Form 2555 or 2555-EZ *stop* here; you cannot claim the additional child tax credit”. So merely filing 2552 will disqualify the ACTC, regardless of what percentage of income is excluded.
The main concern with the non-additional CTC when filing 2555 is that the excluded foreign income is added back into the AGI to get your “Modified AGI” (MAGI), which is used when figuring the income limits/phase-out of the CTC. In other words, if you make too much money worldwide to qualify for the CTC, FEIE will not bring you down to CTC territory.
This makes sense. Form 8812 is required if total credits exceeds total tax, so make sure that isn’t the case.
That makes sense, thanks! I wasn’t realizing the difference between the CTC and ACTC.
Hi GCC,
Just getting around to reading this article. Thanks for the great info! Based on what I read and the comments, is it safe to assume that an expat spending 9 months per year outside of the states can come back to the states without any limitations starting in 2019 with regards to the mandate being eliminated? If so, do you think world nomads is still a great option for insurance for expats while at home and abroad (assuming we stay at least 100 miles away from “home”)?
Hey Erik,
Even full-time US residents wouldn’t need to worry about the mandate, so it wouldn’t matter how much time you spend in/out of the US (unless you also wanted to claim the FEIE.)
I like World Nomads, they offer coverage at a reasonable price. For nomads in general it seems a good option. For bonafide residents of another country, local health insurance would be a better option… travel insurance is for accidents, not long term health conditions.