Wage slaves such as ourselves don’t have the ability (or the high-powered accountants) to bring our bracket down to 0%, yet there are certain times when we can enter a lower bracket. Image: supawat bursuk/Shutterstock.com
By: John GrobeIn 1966 the Easybeats said that they have Friday on their mind. David Bowie covered the song in 1973. While we might have Friday on our mind, today many of us also have taxes on our mind.
• We may still be reeling from preparing and filing our federal and state income tax returns.
• We may be wondering whether the 2017 Tax Cuts and Jobs Act will be renewed.
• We could be concerned about the effects of tariffs on our expenses. Tariffs are a form of consumption tax.
By now, unless we’ve filed an extension, we know our tax bracket and our effective tax rate. I bet most of us found our highest marginal federal income tax bracket to be 12%, 22%, or 24%. Wouldn’t it be nice if we could lower those brackets to 0%!
Wage slaves such as ourselves don’t have the ability (or the high-powered accountants) to bring our bracket down to 0%, yet there are certain times when we can achieve that elusive rate.
Having a Health Savings Account is one way. Withdrawals from HSAs for qualified medical expenses are exempt from federal income tax.
Selling our primary residence might net us an exemption from federal capital gains taxes up to a gain of $500,000. If you are married, filing jointly, and sell a house which you have used as your primary residence for at least two of the preceding five years, you pay no tax on $500,000 of gains. If your filing status is single, the tax-free amount of gain is limited to $250,000. Note that these dollar amounts have not been adjusted for inflation for thirty years.
We might also find ourselves not paying any tax on long-term (held more than one year) capital gains if our income is below $94,050 for joint filing status or $47,025 for single filing status.
Also, any withdrawals taken from a Roth account (either an IRA or TSP) after you’ve reached the age of 59 ½ and had the account open for at least five years are tax free. Now, this really isn’t a true 0% tax rate because you paid federal income taxes on your Roth contributions when you made them. Be aware that, even though most states that have income taxes mirror the federal treatment of IRA/TSP, not all of them do.
Pay attention to any potential changes in tax law; what we don’t know can hurt us. Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes” in 1789. What he did not note was that, while Congress cannot change death, it can and frequently does change taxes.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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See also,
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