The Taxman Leaveth: Low, Low Taxes in Early Retirement

AUGUST 01, 2016
Physician on FIRE
The Bensons, having paid a little over $1 million in federal income tax alone, don’t want to pay that anymore.  Like, not at all.  Zero. Zilch.  Can we get them $80,000 to spend without incurring federal income tax?  Sure.  Why not aim for $100,000?  Plugging some reasonable numbers into Intuit’s TaxCaster using 2015 tax rates gives us the following results.




In this example, the Bensons get their spending money from the following sources:

  • They receive $1000 in interest from the emergency account where they keep ready cash.
  • They set up the 457(b) to deliver $1500 a month, or $18,000 for the year.
  • Since they know that they can remove Roth contributions without penalty, they plan on taking out $11,000 a year for the next 20 years.
  • They sold $48,000 worth of index funds which had doubled in value, creating $24,000 in capital gains.
  • Their $1.1 million dollar taxable fund distributed $22,000 in qualified dividends.

They owe 0 federal income tax.  In fact, with only $44,400 in taxable income, they could have had a much higher taxable income and still paid no income tax.  This could be considered a wasted opportunity.  Nice going, Bensons. Way to go.

How much more capital gains could they have taken without owing federal income tax?

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