It’s possible to pay $150 in taxes on an income of $150K | Hacker News Reader

It’s possible to pay $150 in taxes on an income of $150K

rootofgood.com

42 pointssaadalem101 comments

The author has 3 children, and that's a _household_ income of $150000. 150 grand is not a huge family income to support 2 adults and 3 kids; as a country, we give people tax breaks to encourage having children and to help support people who make that choice.

Calling this "Houdini-like" (author's words) tax hacking seems like a bit of a misunderstanding of deliberate social policy!

>>150 grand is not a huge family income to support 2 adults and 3 kids

An awful lot of families are doing this on 1/3 of that amount.

When you subtract all the retirement savings, they're doing it on half that ($73,000).

Having the money to invest and deciding to do so does not mean you don’t have the money.

A family on the median household income would have negative net income with that level of investment.

About 46% of US families apparently, https://www.statista.com/statistics/183807/number-of-househo...

Small point, but the average household size in the US is 2.5, on half of the 5 people in this household, so you really can't compare their family income to family income statistics for much smaller families.https://www.statista.com/statistics/183648/average-size-of-h...

Yes, and an awful lot of families in Africa and Southeast Asia are doing this on 1/150th that amount. With more kids. Your point?

The existence of more extreme poverty doesn’t change the fact that 150k/yr is not a ton of money to support a family of 5 in most American metro areas.

> 150 grand is not a huge family income to support 2 adults and 3 kids

This could be anywhere between solidly upper middle class to struggling to make ends meet depending on where you're at in the US.

> 150 grand is not a huge family income to support 2 adults and 3 kids

It's more than double the median household income.

This is highly dependent on where you live obviously, so if we are speaking about a particular individual this line of reasoning is not relevant.

there is no such thing as loopholes and tax hacking, simply 'THE LAW'

noone is beholden to pay more taxes than the tax code requires.

anyone who uses emotional appeal to say otherwise wont help me when i need their help anyway so they can pound sand.

I think this will become a pedantic argument, but without defining loophole, we can’t say they exist or don’t.

Presumably a law is written with some intent. When that intent or spirit is broken because of poor construction or poor foresight in the text of a law, a lot of people call that a loophole. I think it is a fair definition.

along this line of thought, using a library written for one use case for a separate use case could pedantically be considered a 'hack'.

I simply share the opinion that the people writting tbe laws should recieve the heat, not those doing what they are legally allowed to

That's about 2.5 times the median family income. It's a huge family income relative to that.

It's more than $8000/mo take home. Anyone who can't afford to feed and house 5 people on that budget is probably a degenerate gambler or drug addict.

Childcare for 2 children under the age of 5 in my area will cost roughly $4000. Mortgage for a very modest 4 bedroom house is another $2500. $1500 for all the rest starts to get very tight. Insurance as a category alone can eat half of that. There’s not much left to gamble or drug with.

> October 16, 2013

In 2013 150k seemed a lot IIRC as the economy was in shambles and all those paid with these sweet RSUs and ISOs weren't having it.

What? You expect a near-complete tax breaks on a $150k family income? That's not a small amount of money.

I wish kids were deductible in the UK. We get a tax free allowance on the first £25k (combined earnings) and that's clawed back over £100k.

The two biggest reducers he cites are 401k contributions and tax-loss harvesting.

#1. 401k.

While this is a great idea, if he's trying to retire at 33, putting 17.5k away from his 70k paycheck is not going to help because he can't touch it until he is 59.5 (w/o penalty).

#2. Capital losses

Tax-loss harvesting means selling securities that are underwater to get a capital-loss deduction. I don't know where to start explaining why this is such a bad idea. I'll pick the two most compelling reasons why this is dumb. First, you can only do this so many times before you've whittled your investment to zero. Second, you are violating the most basic principle of standard-person (non-rich) investing: buy and hold.

That's all he's got in his back o' tricks.

What an awful post.

>because he can't touch it until he is 59.5 (w/o penalty).

That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.

I've not heard of that. So it goes from one IRA into another? Why? Plus, ROTHs have yearly limits of $6k. While it can be done I don't see the benefit of doing it, esp. given the tiny amounts (compared to what is needed for retirement).

You can rollover 401k money into a Roth IRA (but this is a taxable event and you will pay income tax on that - just a note because "Roth" in the name tricks people up). That money will count as a contribution (ie not a gain). There's also NO limit on how much you can convert.

You can withdraw any amount of contributions to Roth IRAs no penalty. But you have to wait 5 years for rollovers.

So basically

1. Pick how much money you'll need in 5 years

2. Rollover that much money from your 401k to a Roth IRA (pay taxes in this step)

3. 5 years later withdraw that money from your Roth IRA

Step two is a big deal. In fact, its kind of a headscratcher. You have to believe you can earn back the lost capital from taxation in your investment horizon for the tax free benefits of the Roth IRA to make sense. Tough computation to make. Or am I missing another benefit?

You’ll get taxed on the IRA gains regardless. In this case, they grow tax free in the Roth after the conversion. The math works out the same.

I think you're confused. 401k withdrawals are always taxed, even when you're over the age limit. The tax advantage is that you aren't taxed on the way in.

The benefit is that you don't get hit with the additional 10% penalty for early withdrawal from a 401k. The Roth IRA is irrelevant; it's just a vehicle for you get money out of the 401k without the penalty.

You'd do this as you enter early retirement - like with a normal 401k withdrawal, in this hypothetical your tax bracket will be far lower in early retirement (and not working) as you withdraw.

Basically, by doing the backdoor Roth ladder you get to pretend there's no penalty on withdrawing early. No penalty. Yes, you still get taxed.

Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.

>it is just the tax all at once that you would normally pay over the life of the distribution.

It's not. You don't have to rollover the ENTIRE account. You can choose to only rollover a certain amount of money.

The idea is say, you calculate that as a person you spend, say, $60k a year. So 5 years ago, you convert $80k of your 401k into a Roth IRA. It becomes ~$60k after being taxed. Your tax bracket is just the one that's an income of 80k would be at, because you only converted 80k.

Now you can take that 60k and spend it on your life. Repeat every year, that's the ladder part, and you can spend money out of your 401k no penalty, normal tax rate, as if you were retirement age.

So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.

No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty.

In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.

The light just went on. Got it. Thanks for the explaining.

Hey just wanted to say thanks for explaining that. I had a talk with my RIA and he never suggested it because my position for the past decade of working with him has consistently been that I would be working past IRA penalty age so it wasn't an issue. But we are considering it for other reasons now that I know it exists (e.g., early retirement).

$6000 is the annual limit for contributions

There is no limit for conversions. See also back door roth and mega back door roth.

Adding onto this, this article compares various approaches to getting money “early” out of a 401k/tIRA (Roth conversion ladder as said here, 72t SEPP’s, early withdrawal penalty), and has the surprising conclusion that even the “just pay the 10% penalty” comes out ahead of regular taxable contributions, at least in some situations.

https://www.madfientist.com/how-to-access-retirement-funds-e...

Sure, but if you're paying taxes you're defeating the purpose of the post of minimising taxes.

You're always going to pay taxes on 401k, even if you wait. The point is to contribute to it tax free while you're still working and have a high personal income.

You do the Roth ladder when you've going into early retirement - your personal income will be low because you're no longer actively working.

And because taxes are progressive you are minimizing taxes.

Most tax-loss harvesting strategies incorporate a re-buy of a similarly-performing but substantially different asset. Of course, selling an asset just to maximize tax losses is unwise, but in the context of diversifying your portfolio, tax loss harvesting has its place.

The suggestion in the link was to sell investments that are underwater and replace them with similar assets, in order to remain invested. Not similar enough to be considered a wash sale, though.

It's not strictly speaking incompatible with buy-and-hold, from my perspective. I'm not an expert though, I don't even live in the U.S.

he had a 457 in 2013 when he wrote this. You can draw from that as long as you are no longer working for whoever you had the 457 with.

That’s not what tax loss harvesting is.

Say you own VTI, a total US market etf. Then the stock market drops 20% next week.

You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds.

VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure.

That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now.

Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.

This is for a couple with kids, so both can max-out 401(k)s, IRAs are still a thing wen you make <$124k, so they could make out both, and because of the kids, you can use pre-tax money for dependent care, and there are tax credits for kids.

The other giant caveat is they merely deferred taxes on $46,000.

For any of our friends outside the US, this is not normal. As someone with a similar income (single - not married couple) but 0 children, 0 "special" government deductions, etc, here's a breakdown of my 2020 numbers:

- Income from employer: $168K

- Investment income: $41K

- Total income: $209K

Deductions (rounded numbers):

- $19.5K (private retirement 401k)

- $12.5K standard deduction

- $3.5K health care savings

- $3K MEME stonks losses :(

Approximate taxable income after deductions: $170K

Taxes paid:

- Federal Income tax: $32K

- Federal Social security (gov't pension / disability insurance): $8500

- Federal Medicare (gov't old age health care): $2500

- State Taxes: $10K

Total taxes: $53K

So I'm looking at about 25% taxes due. Also, my employer had to match my federal Social Security and Medicare (which is essentially taken out of my pay), so it's closer to about 31%.

That's certainly better than what (it sounds like) you guys pay over in the UK, EU, etc, especially as my salary over there would be taxed in one of the higher brackets, while in the US, I'm in the "middle", though I have very few deductions that larger families will have (especially if they own a very big house in an expensive state).

In high tax states like California, you would add another 4-5% or so - you'd end up at 35%.

Tbf your income is also very not normal. The article is a much more typically family income - their combined income is still less than your individual income by 50k! Because they are two people, they’re doubling up on things like the 401k deduction.

You make far, far more than them.

The “average” American would be able to get pretty close to what the article is doing.

But probably shouldn’t and won’t because you can also see they’re leaving a pitiful amount for themselves to live on in the moment.

My thought too 41k in income would need more than than $1,500,000 asuming your takin a sensible yield.

I get about £4k on the 180k in my ISA her in the UK

on $209k salary or £148k, here in UK the total tax is £46,632 and £6,838 for National Insurance. So about 36% which is almost the same as California. Source: https://www.thesalarycalculator.co.uk/salary.php

Might be lower when you factor in Pension and ISA - and that's not counting and approved share schemes, VCT EIS and SIS.

In the UK, I calculated I paid roughly 22% on a similar employee salary by putting enough money in pension contributions (+ employer match and government match). I also have a limited company where I do occasional work (without having to increase my income taxed at 40%) and that I use to draw dividends from (up to free allowance) yearly and get some other advantages, which was a decent way to get extra untaxed income. These days the allowance is 2k so there is not much to get.

The disadvantage of using a pension is that I won't get that money until I'm 60 (and they keep increasing the age where you can withdraw money). I'm kinda forced to do that and maximise I'd rather invest the money in buy-to-lets than the weird ETF a pension is, but then I would lose 40% of my money to the government.

Being employed in the UK is not very convenient over 50-70k (and it becomes especially painful at 100-120). You are always better as a contractor outside of IR35 with your own limited company, unless some of the benefits make it worth it (eg. long paid m/paternity leave, stock options you really care about).

Unfortunately being outside IR35 is getting more complicated, corporate tax rate is increasing and buy-to-lets lost some of the tax advantages they had.

Overall if I had to pick a country with bad weather to make money in, I'd go with Switzerland instead of the UK.

> Taxes. It is our duty as patriotic Americans to keep our individual taxes as low as possible.

Can someone explain that sentence? What's "patriotic" about paying less taxes?

The author is writing tongue-in-cheek.

I... usually hear this sentence sarcastically... but here it really seems as if the author isn't using it as such. I dunno, if you're a proponent of Starve The Beast [0], this is a consistent belief I suppose.

[0]: https://en.wikipedia.org/wiki/Starve_the_beast

They probably subscribe to an ideology like this: https://en.wikipedia.org/wiki/Starve_the_beast

$69,000 in salary, with $44,700 (65%) going (pre-tax) into a traditional IRA, Pension, 401K, and 457.

Holy shit, $500 a year for health insurance? I pay twice that a month and don't even get an HSA option.

Seems weird to put so much into retirement funds if your plan is to retire in your 30s, the penalties of touching that before 60 are pretty substantial.

I suspect there's some sort of inheritance of property or something they're not disclosing.

I'm assuming he's planning on getting the money out of the 401k via a backdoor Roth IRA ladder. It's fairly common for people doing FIRE.

HSA has nothing to do with the quality of the insurance plan btw. HSAs are only available in conjunction with HDHP (High Deductible Health Plan). Typically, HDHPs are Bronze level plans that don’t provide a good coverage (which is why HSAs are allowed to supplement such plans).

I guess I'm just lucky; my plan has a high premium, high deductible, and no HSA.

No, It's $500 + $6,450 so $580 a month plus an unspecified employer contribution. Because it is a HDHP with an HSA though they are incentivized to keep their costs in check and anything they don't spend of the $6k gets rolled over to the next year and once you hit retirement if you have a surplus at retirement age you can use the money like an IRA.

Wow... maybe I should find a different job with better insurance. I pay ~$12,000 a year for premiums, have an $8k deductible, and don't get an HSA.

If that's a PPO, yeah that's kinda atrocious.

As long as Congress, in its great wisdom, makes health benefits correlated to employment, then yes, job shopping for better health plans is a thing.

Not sure where you live but that is a rip off. You can get a better plan than that in the private market in my state.

The author is a federal employee which does help a lot

if the author were a federal employee, they would have a thrift savings plan; not a 401k and a 457. I'm surprised they have a 401k vs a 403b.

Good on the author for making use of these tax benefits. I don't see anything out of the ordinary here. For govt workers, the 457 benefit seems really nice. Having kids in an LCOL area seems to be very doable. I imagine the same article but for 10x the income would be "interesting".

As a side note, it's worth indicating that if you work at FAANGs and other types of companies, you can use the mega backdoor Roth IRA method [1] to put up to $38k away in retirement accounts a year.

[1] https://www.nerdwallet.com/article/investing/mega-backdoor-r...

No sure why you would never take your FS government pension.

This does assume your COL (with three kids) is so low you can max out all your pension

Their after tax is $70K. What’s their rent or mortgage? 3 kids, what do they pay for childcare?

and watch it come out that their parents take care of their kids and their house is paid off :D

There's not even enough money to buy food unless they are living off savings. They couldn't even pay property tax!

By definition, if they were living off dividends or capital gains - if they were doing things legally - they'd have a higher taxable income.

This is click bait to the extreme.

I used to follow their blog and they are at the forefront of the FIRE movement. No thanks. It's crazy the length they go to in order to minimize their expense. They def have a lot of help from their family. It def is click bait and what they're doing isn't "healthy" in my opinion. We let our kids be kids and that means spoiling them on many things. I'm not referring to iPhones or cars, but more like I'm not going to worry about whether I should buy two icees or one icee to split between both kids.

I’m always amazed that people think 401(k)s are a great idea. Yeah, that’s exactly what I want, the government telling me how I can spend my money, until I’m almost ready to die, with no guarantee the laws governing 401(k)s won’t change along the way, or that some moron politician won’t siphon from my retirement.

401(k)s are privately managed. They were originally designed as a technique to replace pensions, and are separate from government-mandated savings like Social Security. How would a politician siphon from your retirement? A 401(k) is basically just an IRA that a company manages for you and pays someone to administer so that the deferred tax burden can happen. Or do you mean that in the future, taxes may go up? If that’s your belief, nothing prevents you from using a Roth 401(k) if your company offers it (my previous 2 employers both offered this).

There's actually nothing in the United States Code that specifies whether or not "Cash or deferred arrangements" (U.S. Code § 401, subsection (k), or "401(k)"), is privately managed. A 401(k) can be a publicly managed pension! A 401(k) is a type of pension. A 401(k) agreement can straight up be cash payments!

> (A) [...] a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;

It's just that no one does that. That trust that is mentioned is the stock portfolio approach that nearly every organization uses.

> How would a politician siphon from your retirement?

I guess you weren't listening to political discourse for the last 8 years, you know, where politicians repeatedly suggested that we add additional taxes specifically to 401(k) trusts, annually, as another form of expense ratio.

(2013)

Good luck trying to qualify for a mortgage.

Most lenders use pre-deduction gross income (the gross amount before 401k/457 contributions).

They are just deferring taxes. Taxes will be paid anyway in the future.

In some ways I prefer to pay taxes now because you are free with your money and that is wealth in itself. A new crazy Bernie comes and changes the rules and you are f*ck$d with 30-40% of your savings disappearing in days by inflation, formal currency devaluation, new taxes and so on.

E.g If I were living in Peru today I will fly with my money as soon as possible with the new communistic guy in charge. Just hearing him talk in the past would be enough to take the decision.

Capital losses? In this market?

2013

Betterment auto-harvested a lot of losses in early 2020 during the covid drop.

2013

I mean why is this that surprising? Almost half the country doesn't even pay federal income tax.

Contrary to a lot of narratives at-least at the federal level it is almost completely funded by the "rich".

Now at the local level we can have a different discussion about regressive taxes like sales, gas, etc.

Yup.. you don't really start to get hit by federal taxes bad until after that 150k mark. You'd still be getting wrecked by property taxes or rent and sales tax in my state though.

This will be the first year I’ll be making more than $150k, not looking forward to next April considering im still basically broke.

Why? Tax brackets are progressive, so even if you had moved up a bracket it wouldn't change the fact you're still making more money (i.e., you don't suddenly go from paying 24% to 32%; you just pay 32% of the money made above the 24% bracket). And given the 2021 brackets, if you're single, you haven't even moved up a bracket ($86,376-$164,925 is the 24% bracket), but even if it had, your effective tax rate barely changes.

About the only thing you lose moving up in income is the ability to contribute to an IRA, and, of course, being able to claim various benefits that you aren't eligible for if you've been in 6 figures anyway.

I’ve never been able to contribute to an IRA.

But realistically for me the only change is I’ll owe instead of getting a refund on account of the withholding. Considering I don’t keep much in cash I’ll need to make some changes in a year.

That's not true, you can always backdoor Roth IRA. And if you have a 401k and depending on how it works you might be able to do a mega backdoor Roth IRA.

Why will you owe instead of getting a refund? What has changed this year? Are you a 1099 and you didn't contribute enough? Because if you're a W2, and you haven't changed any of your amount withheld, you're just making more, and you got a refund last year, and it's the same employer...I'd be shocked if you ended up owing.

Even if you changed employers, it's unlikely you'll end up owing (at least, not much); while the new employer won't know what bracket to start withholding from, the extra amount you'll be paying into social security is an extra 6% that will likely cover much of it.

The best tax optimization trick you can do is to open an LLC.

Costs $800/year to maintain in California, enables you to claim business expenses for a looot of things. Sometimes surprisingly.

You don’t even need a whole lot of revenue. Just sell something, anything, and go for it.

The penalty for going overboard is to pay back taxes with a bit of interest. As long as you don’t do anything crazy, you should be fine.

Remember: USA uses taxes to encourage you to spend money on approved activities. Like running a business, having kids, or buying your primary residence.

Also the extreme headache of an audit

I wonder if odds of that go up if you brag on the internet about your sort of shady approach to taxes and cavalier attitude that it's just some kind of game to be played.

OP probably owns an LLC and writes off things that would have him out of compliance based on the way he talks.

Yeah, for anyone reading who needs to read this: don’t do this. Unless you’re running a legitimate business, this is blatant tax fraud.

Also $800/yr in California? You people are being ripped off. LLCs aren’t laid any fees to maintain annually in Arizona, and they’re perpetual entities.

Not necessarily. There's a difference between tax avoidance and tax evasion.

Nope, it’s really neither. It’s just straight up breaking the law. You’re not evading taxes because LLCs still pay them, and you’re not avoiding them because LLCs have limited taxation benefits.

Definitely not tax fraud. You’re allowed yo be bad at business if you can afford it.

Afaik you are “running a legitimate business” as soon as you’re selling stuff. Even if it’s github sponsorships for your opensource projects or whatever.

Fraud is what most people (probably) do — not report that income on your taxes.

You can’t just form an LLC and start writing off your home furnishings as a “business expense” because you make $5 a month from a browser extension that some people donate to your Paypal account.

That’s tax fraud. That’s literally what that is. It’s incredible that anyone would think otherwise.

Yes it’s generally frowned upon to have more business expenses than revenue for multiple years in a row.

But claiming your home office (a part of your home explicitly used for work) as a business expense is definitely not tax fraud.

You can’t claim your kitchen tho.

Claiming a home office which you do not use exclusively for business purposes as a business expense is tax fraud. If you have a fake "business" which you spend an hour a month on then this is only useful if you have an extra room in your house that you're fine with effectively just boarding up.

Yeah, the IRS makes it pretty clear what the "Business Use of Home" is, and it's not your bedroom.

If you live in Cali and your Llc is incorporated elsewhere. You still need to report to Cali gov. Cali is not small business friendly

Opening the LLC and doing a little bit of business is not the fraudulent part.

Claiming expenses not linked to the business activity is.

You don’t need an LLC to do this, a single member LLC is a pass-through entity so you’re just buying legal protection for $800/yr, not tax benefits.

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