July 16, 2024: Tax Planning 'Free Money', Everything is Negotiable plus Community Wins
Tax Planning 2024: "Free Money" Concept
I’m going back and listening through all 650+ episodes of ChooseFI, and am picking up tons of gems that I plan to revisit here and on new podcast episodes.
In Episode 13, The Millionaire Educator talks about the concept of ‘free money,’ which, according to his 2024 Free Money article, is:
“The amount of income you can earn before you owe any federal income tax.”
Free Money is based on two things:
· Standard Deduction
· Child Tax Credit
Brad Note: The below might be the most important thing you read all month and I tried to simplify it as best I could, but this is detailed by its very nature:
For 2024 tax, if you have 1 child who qualifies for the Child Tax Credit:
The Married Filing Joint (MFJ) standard deduction is $29,200, so that amount of income would get wiped out to $0 in Federal Tax Liability.
Then you take the $2,000 Child Tax Credit and your income could be an additional $20,000 since all that income would be taxed at the 10% marginal bracket, which would lead to a $2,000 potential tax liability that would get wiped down to $0 with the Child Tax Credit.
For 2024 that means you could earn $49,200 and it would all amount to $0 in Federal tax liability.
For 2024 if you have 2 children who both qualify for the Child Tax Credit and you’re MFJ, your free money amount is $66,400
(For the math fans out there: The 10% bracket is $23,200, so you have $3,200 of the 10% bracket left after the first $2k Child Tax Credit plus you can earn $14,000 more that is taxed at the 12% marginal rate)
0% Long-Term Capital Gains Tax and Tax Gain Harvesting:
Another interesting factor is that you pay a 0% Long-Term Capital Gains (LTCG) tax rate on long-term capital gains when your taxable income (inclusive of the Long-Term Capital Gains) is nearly up to the top of the 12% tax bracket for 2024.
Note: The 0% LTCG tax bracket for 2024 goes up to taxable income of $94,050 while the 12% bracket goes up to $94,300. Weird, but okay...
This means your taxable income (with these LT Cap Gains) can be $94,050 for MFJ and $47,025 for Single taxpayers and you pay $0 in tax on LTCG.
We call this Tax Gain Harvesting and it’s incredibly powerful!
Example:
Let’s assume for 2024 the married couple with 1 child who is maximizing their ‘free money’ for federal tax purposes.
As noted above, they can earn $49,200 and pay $0 in Federal tax liability.
The interesting thing is that while their Fed Tax Liability is $0, their taxable income is $20,000 ($49,200 - $29,200 standard deduction = $20k taxable income).
That remaining $20k of taxable income does get wiped to $0 of tax liability thanks to the Child Tax Credit. But the $20k is still considered taxable income on the 1040 (and for our calculation of the LT Cap Gains you can add on top and still pay 0% tax).
This means they can actually ‘Tax Gain Harvest’ $74,050 of LTCG by selling shares of stocks, mutual funds, ETFs, etc. that they’ve held for more than a year (Long-Term definition) and pay a whopping $0 of Federal Tax Liability on it!
Think about that, just by knowing the rules they were able to:
Earn $49,200 of income (could be wages, Roth IRA conversions, distributions from retirement accounts, which all count as ordinary income).
Permanently erase the unrealized gain of $74,050 (and tax liability) on appreciated shares.
Pay $0 in Federal Tax in the process!
That’s the power of FI and knowing the rules of the game.
Everything is Negotiable
A major theme throughout the ChooseFI community is ‘everything is negotiable,’ which we take to mean that you can often ask for discounts, special access, concessions, etc. and you might just be shocked at how successful you are.
And what’s the worst that happens if it doesn’t work?
You’re in the same place you were otherwise.
I’m reading Andrew Wilkinson’s excellent book ‘Never Enough: From Barista to Billionaire’ in anticipation of interviewing him and this section stuck out to me from when he was a 16-year-old with a small technology blog about Apple.
“I sent a one-line email that would change my life.
“I’m going to be at Macworld next week and was hoping to interview Steve (Jobs). Possible?”
I knew this was bold. I was a nobody. Interviews were typically doled out to Newsweek and the Wall Street Journal, not tiny websites run by kids.
A few minutes later, I got a reply:
“Steve’s schedule is too hectic, but I can get you in for a group tour of the new Apple Store in Soho?”
I was shocked. I’d expected to get fully shut down or not even get a reply, and now I was getting a behind-the-scenes tour of their first ever Apple Store…While I was upset that I wouldn’t get to meet Steve Jobs, I realized something important.
I had asked for something amazing and gotten something great in exchange. If I’d asked for a tour of the Apple Store, I probably would have gotten a “nice try, kid” but by shooting for the moon and asking for something that was hard to give, I was met with a compromise that was better than I could have hoped for. It’s a strategy I went on to use throughout my career: there’s no harm in asking.”
ChooseFI Community Taking Action This Week
I'd love to share our 1% better story, although it's hard to quantify. My husband and I are in our mid 30's and have known that it was time to estate plan for a while. We meant to do it when we got married. We meant to do it when our assets passed a certain threshold. We meant to do it when we started traveling overseas more. But it stayed on my to-do list for years. I know!
I'd go down enormous rabbit holes every few months trying to find an attorney who understood our lifestyles (married, no children, travelers, heading towards FI), but I never found anyone I felt confident about. Then, the stars aligned, and another reader wrote in with his 1% better story and you published it.
That reader and his partner are also on the FI journey, and he is a deeply knowledgeable attorney who was able to leave his government job to start his own business. I can happily say that Patrick has been our attorney for more than a year and has guided us through situations we expected (estate planning for ourselves) and several complicated and unexpected situations in each of our families. I can't imagine how we would have made it through the last year without him.
I'm so grateful for this community's resources, and for connecting us to him.
- Kayla
[Brad Note: I haven't used Patrick's services, so can't vouch for him professionally, but Kayla obviously had a wonderful experience. Here's his tax and financial services site if you want to reach out.]
I have a big win this week. I was offered a job making with a 30% salary increase. I am now double what I was making 2 and a half years ago. I'm 33 and never thought I would make this much this young.
- Dan
After your last email, I FINALLY set my credit cards up on autopay. I had held out because we have high expenses, and I don't like to keep that much cash in my checking account, so I'm always moving money around. I solved this by opening up a Cash Management account with Fidelity. My brokerage and retirement accounts are already there, so it's convenient to have everything in one place. And I feel better about keeping a higher balance in the account since I can have my cash invested in money market funds earning a reasonable return.
- Shawna
My 1% was that I was able to employ a "Die with Zero" principle and gifted my 22yo son and his wife some money to help with their pending house purchase. He's in the Army and his wife is a newly graduated nurse.
They'll use the money for closing costs and to help with their emergency fund. He also crossed the $20k milestone in his IRA recently. I've been matching his contributions since his first high school job and it's been a great tool to teach him about personal finance and compounding.
- Ryan
My 1% better this week was I started biking to work instead of taking the bus, and mostly working from home.
- Connie
My 1% better this week was getting my school district to add Fidelity as a 403(b) and 457(b) vendor. School districts notoriously offer high-cost plans. For years, our only low-cost option was a 403(b) plan with Vanguard. For those educators looking to reach FI by loading up the pre-tax buckets, we now offer the opportunity to invest $46,000 in low-cost plans. I am thrilled and I would love to see everyone move their plans over from the high-fee vendors to Fidelity and Vanguard!
- Rashad