How I Might Pay Zero Federal Income Tax Under the New Tax Law

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury...for nobody owes any public duty to pay more than the law demands." ~ Judge Learned Hand

Being a tax geek, I've been evaluating how the Tax Cuts and Jobs Act of 2017 affects our 2018 tax situation.  It appears that the new tax brackets, higher standard deduction and higher child tax credit will allow us to earn more without any federal tax liability, if we choose to use them to that advantage.

Here's how we might pay zero federal income tax in 2018.

First as background, I am married and have two children under 17, which qualifies us for the $2000/child tax credit.

Scenario 1

Make $57,333.33 regular earnings or less.    After subtracting the $24,000 standard deduction, $33,333.33 is our taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  Zero federal income taxes is the result.

Scenario 2

Make $71,666.66 or less through a pass through entity, such as an LLC, partnership or S-corp.  20% of pass through income can be deducted, which equals $57,333.33.    After subtracting the $24,000 standard deduction, $33,333.33 is our taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  Zero federal income taxes is our tax liability.

Scenario 3

Make $24,000 regular earnings, 103,866.66 dividends and long term capital gains.  After deducting the $24000, our taxable income is $103,866.66.   The first $77,200 is taxed at a 0% tax rate.  The remaining $26,666.67 capital gains is taxed at 15%, equal to $4000, which is offset by the $4000 child tax credit.  Again, zero federal income taxes.

Scenario 4

Make $57,333.33 regular earnings and up to $43866.67 dividends and long term capital gains.  
 After subtracting the $24,000 standard deduction, $33,333.33 is our regular taxable income.   At a 12% tax rate, the tax is $4000, which is wiped out by the $4000 child tax credit.  The remaining dividends and long term capital gains is below the $77,200 threshold for a 0% capital gains tax rate.

We won't be completely free of income taxes, since we live in a state with income taxes.   But is still be nice to pay no federal income tax if we can qualify for one of the above scenarios.

For more on New Beginnings, check back Sundays for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

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