Did We Really Have a Federal Tax Bill of $0 in 2018?
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Now that our income tax returns have been filed for 2018 (both federal and state), I wanted to share a brief follow up about our results. Almost exactly one year ago, I published an article called – How Tax Optimization Will Save Us Thousands of Dollars as Our Income Grows.
In this article I shared our family’s plan to optimize our federal taxes so that our obligation would be $0 for 2018.
I am happy to announce that our planning worked!
Despite my numbers and calculations being a little off from our planning … we completely optimized my W-2 paycheck and leveraged other tax savings tools to put our total amount at – $0.
Here’s a recap of how our taxes turned out … and how we plan to optimize our taxes in 2019 and beyond.
How We Are Paying $0 in Federal Taxes for 2018
Here is a quick rundown of our W-2 salary, taxable income, and the federal taxes owed in 2018. For reference, check back in our tax optimization article referenced earlier to see what we had planned.
- Total W-2 Salary (after payroll deductions) – $75,199
- Taxable Income – $51,423
- Federal Taxes Owed – $0
Let’s take a more detailed look into how we optimized our salary and other income, along with exemptions and credits to put our federal tax bill at $0.
Optimizing My W-2 Paycheck
We were able to take my 6 figure income and reduce the total W-2 salary by over $27,000. These figures do not include any payroll taxes, state, and federal tax withholding’s.
Here are the following payroll deductions that were taken out of my paycheck … which were not taxed –
- Pension – $6,149.98
- 457b Plan – $12,905.00
- Medical Insurance – $7,176.00
- Dental – $878.64
- Vision – $139.92
- Term Life Policy – $151.20
- AD&D Insurance – $102.00
My pension is an automatic payroll deduction that is mandatory. We actually include this figure in our monthly savings calculations.
We setup a 457b plan back in late 2017 as a way to drive down our taxable income. I will admit that this is one of the biggest driving forces to helping us pay $0 in federal taxes.
Our goal in 2019 is to max our 457b contributions out at $19,000, which will open up space to earn some extra income.
As far as our insurance deductions (medical, dental, vision, life, and AD&D) … we have the basic plans offered by my employer. In the future, we would have the opportunity to elect for the higher coverage plans which comes with higher payroll deductions.
On the surface, this may not seem ideal … paying more for insurance.
However, if we earn more income and plan to stay in our 0% tax bracket … then there is some opportunity to purchase better insurance plans.
This comes with higher monthly premiums … but also comes with better insurance coverage and less out of pocket expense.
Finally, if our income in 2019 starts to take off from side hustles … then we also have the option of opening a 403b plan and contributing another $19,000.
Lowering Our Taxable Income
I won’t lie … we took advantage of the recent tax cuts by using the standard deduction for married couples filing jointly in 2018 of $24,000.
Besides contributing to my 457b account, the standard deduction was another huge benefit for our tax situation. In past years, we would itemize our deductions from – donations, property taxes, and mortgage interest. However, this past year the standard deduction was a lot more than what we itemized in the past.
We also had a small traditional IRA contribution which helped lower our taxable income.
And finally, most of our dividend income was from qualified dividends … which really helped reduce our taxable income even further.
As far as 2019 … there are not a lot of additional changes we will need to make to lowering our taxable income (other than from W-2 deductions). The only exception would be contributions to a traditional IRA if we need to lower our income even further.
Federal Taxes Owed – $0
Once we had our taxable income amount of $51,432 … the last step was to deduct our child tax credits. Which in our case was $6,000 based on having 3 children.
This is yet another big reason of how we were able to optimize our taxes so well … along with using the standard deduction and contributing a bunch to my 457b plan.
All politics aside, there is no doubt that the most recent tax law changes have helped our family better optimize our taxes.
Optimize Your Taxes for Current Tax Law
As you can probably see, the recent tax law changes were a big help in getting a $0 federal tax bill in 2018. But I can also say that if we hadn’t planned around those changes, then we would have still paid federal taxes.
The point is that if you want to optimize your federal taxes, then you need to work within the rules and use the tools available to you.
For example, we started leveraging a 457b plan as a way to defer our income. If we need it … we’ve also identified a 403b as another tool to use.
Others may leverage traditional IRA deductions to help lower their income.
There are many different ways to lower your tax obligation … but you need to take action by planning it out based on your situation.
We don’t know what future tax law will look like, but regardless of the rules … you’ll need to pay attention to the tools you can use to minimize what you are paying.
Note – One last thing I wanted to mention … we did not try and optimize our state taxes. There are not as many tax breaks available and it is more difficult compared to federal … at least in our state.
Do you optimize your taxes? What tools or levers did you pull in 2018 to reduce your tax obligation? What tricks are you using in 2019 and beyond?