The key: focus on long-term capital gains and/or qualified dividends.
The question of how much can we earn without paying federal income taxes is relatively easy to answer for most people.
With our daughter, we also qualify for the child tax credit , so we could actually generate another $13,333 per year in dividends or capital gains, taxed at 15%. The tax liability of $2,000 exactly offsets the tax credit, for a federal tax bill of zero. First, a disclaimer: This exercise is for federal taxes only. That’s good enough for us personally because we live in Washington state, one of the few places without an additional state income tax. If you do have state income taxes, you will probably start owing state income taxes at much lower income levels. Also, all the other disclaimers apply here as well, including contacting a tax expert before you apply any of this.
Tax-free limits with Social Security What about when we can no longer claim our daughter as a dependent and we file for Social Security? Instead of two, we’d now have three separate major income categories with their own distinct impacts on federal taxes.So it’s no longer feasible to display the tax-free income limits in a simple one-size-fits-all chart because our tax liability depends on three distinct variables, and I can’t easily plot that zero-tax boundary in three dimensions.
• How much “other income” is sustainable at zero taxes clearly depends on the composition: ordinary income vs. tax-advantaged income . So I plotted a line for three different cases: 100%/0%, 50%/50%, and 0%/100% in the two income buckets.
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