There are some huge advantages for having a low salary when tax season comes along. As I’ve explained in prior blog posts, my husband’s position provides him with excellent benefits that are not taxable, which bring down our cost of living substantially. In fact, our only expenses that are not discretionary are insurances (life, van, and rental, health is covered by his employer), gas for our van, food, toiletries, tithing, debt, and phone expenses. So while his $26,000 salary sounds tiny, it’s actually more than enough.
One “secret” of the low-income community is the AMAZING tax refund we can receive each year. Now, I know that this is extremely controversial in many circles, particularly the Earned Income Tax Credit. This article is not here to discuss whether or not these refunds should exist, but rather how one can get them if one does qualify. Our first time receiving a large refund was this year after working for a year at a children’s home. Our salaries were around $36,000 combined, and we received a federal refund of just over $8,000. We also received a small state refund. This year after moving, our approximate W2 income will be about $30,000 combined. These are rough, round numbers. We are anticipating a federal tax return of around $9,500. CRAZY!
Now, before I go further, please remember that I am not a tax professional and am not offering tax advice. This is an article to simply explain how taxes work for our family.
Let’s get a bit into the weeds of how I came to that crazy high number. First, we are married, filing jointly. We will be taking the standard deduction of $24,000. The other deduction that we qualify for is the Student Loan Interest Deduction. A rough estimation of student loan interest we have paid this year is $800. After subtracting the deductions from our earned income, we have a taxable income of $5,200. Under the new tax laws, dollars $1-$10,000 are taxed at 10%. So our tax before credits is $520.
Now, show me the money! We currently have three children. While they are each blessings on their own, they are especially so during tax time. First, we are eligible for the Child Tax Credit, worth $2,000 each, $1,400 of each is refundable. Additionally, we are eligible for the Earned Income Tax Credit. Here is a great page explaining that credit and how to calculate if you will earn it or not, and an approximation of how much:
I used the efile.com calculator, and our estimated EITC is $5,428.
If you add up all the credits together, our credits total $11,428 ($5,428 EITC plus $6,000 Child Tax Credit). However, only $4,200 of the Child Tax Credit is refundable, so the refund total is $9628. The other $1,800 of the Child Tax Credit wipes out our $520 tax liability. I verified these numbers using a couple of different online tax refund estimate calculators. The exact dollar amount will vary based on the specifics, but this gives me a good place to go from when planning out next year’s finances.
What do people do with that kind of money all in one chunk? Well, some pay their rent for the year. Others buy their kids the nicest Nikes out there. In 2019, we plan to use it to wipe out our remaining student loan debt. After that, it will be used to help fund Roth IRAs. That’s the ultimate tax hack in my opinion! Use tax-free money to fund your Roth IRA, let it grow tax free, and take out your contributions and earnings tax free!
My husband’s current position has several advantages to seeking FI while still designing the life that we want to live. I’m still able to stay home with our children, we live in a beautiful location with lots of free outdoor activities, his work is super flexible with time off and work-from-home opportunities, the work is in line with his life’s purpose, and in 2020, we plan to be able to save and invest the entirety of his income by keeping our monthly expenses less than $1,000, utilizing the incredible tax refunds, and working a couple small side hustles.
We will take advantage of the Roth 401k plan offered through his work up to his match once he is vested in May 2019. His employment offers a 4% automatic contribution and an additional 4% match. So by deducting $40 from his check biweekly, he will have $120 going into his Roth 401k for a total of $3,120 annually.
Next, we will fill up our Roth IRAs, mostly using the tax refund and then filling up the remaining IRA with post-tax dollars. This will be $6,000 each, or $12,000 total.
We are watching to see if the new Universal Savings Accounts make it through. If so, we will then fund those at $2,500 each, or $5,000.
Finally, we will open a taxable savings account and will pour money into investments there. This will either be for $7,960 if the USA’s don’t come through, or $12,960 if they do.
Total invested will be $28,080 with his employer contributions. So, fellow low-income FI folks, be sure to make the most of your current tax situation!
