I’m excited to share that we put a stake in the ground to help us follow through on our still-developing exit plan. We just booked one-way tickets to Sydney, Australia departing at the end of February 2016. Sydney will be our first stop on our travels after we leave our jobs. We’re still figuring out where to go from there, but having that ticket booked helps give us the resolve to leave our jobs (and possibly careers). Of course, since we used award miles to book the flight, we can always cancel 21 days before departure without any fees.* But let’s hope it doesn’t come to that.
The strategy of putting a stake in the ground, or dipping our toes in the water before committing, has helped me to follow through with tough courses of action in the past. For example, one of the ways I got myself to start investing in the stock market following the 2008 crash was simply to transfer cash from my bank account to a money market account at a brokerage. It didn’t make any difference to my asset allocation, but I nudged myself closer to taking what I thought was the right action. Now my money was in a position to be invested immediately. I suppose this is the same strategy salespeople use to close on sales. They start with small steps.
Anyways, how did we decide to leave in February 2016? Well that took a bit of thought.
February is likely going to be a busy time at my work and part of me doesn’t want to do anything to burn bridges. But the more I thought about it, February work the best for us — and that’s what really counts. Actually, I have to give a lot of credit to Go Curry Cracker. His Never Pay Taxes Again post really opened my eyes to the possibility of being part of the 47% while actually receiving a pretty good amount of income. We’ve been getting hosed by the federal and state IRS for years now. I think our tax liability for 2015 will exceed $250,000. It’s nuts.
But that’s all going to change in 2016. I’m planning on paying no income taxes for the first time in probably 15 years. We calculated the exact amount of time we should work so that we pay no taxes, and even qualify for an ACA subsidy. Here’s the rough math with some numbers tweaked to protect our anonymity.
The standard deduction plus personal exemptions equals $20,300. Our income after adjusting for things like 401(k) , IRA, and HSA contributions should not exceed $20,300. In addition, we can get up to two tax brackets’ worth of qualified dividends and long-term capital gains — that’s about $70K — without paying any capital gains tax.
Let’s say I gross $45K a month and my wife grosses $5K a month. I have a limit where I can’t contribute more than 50% of my gross pay to 401(k) and my wife has a limit of 90%. Plus, I’m required to contribute a certain percentage of my gross income to a defined benefit plan that is 100% vested. If we both work a month, then I’ve maxed out my 401(k) ($18.5K next year?) plus contributed another $4.5K to my DB plan and she’s contributed $4.5K. So our $50K in gross income gets chopped down to $22.5K. We can further contribute $11K to traditional IRAs (she would contribute $5.5K under the spousal option) and $6,650 to an HSA taking the AGI down to $4,850. That leaves us another $15.5K of tax-free income we’re leaving on the table. I did the math and we should work until February 10th to max out income before owing taxes. (We’ll actually owe a little bit since there’s not a lot of granularity on a day-to-day basis — I gross $22K a paycheck that covers 10 or 11 working days.)
On top of that, we’re expecting $25K in dividend payments. That takes our AGI to $45K and the modified AGI probably wouldn’t change much — maybe add another $1K because we have some municipal bonds. That makes us eligible for ACA subsidies. In light of all the taxes we’ve paid over the years, I don’t feel the slightest bit guilty taking something back.
I realize this entire exercise is a bit academic because the more we work, the more we come out ahead. For example, we would come out way ahead if we both worked the entire year. But the line has to be drawn somewhere and it feels good to be able to make $67K, receive $25K in dividends, save $47K in tax advantaged accounts, and pay almost no income tax.** If we decided to forgo subsidies, we could extract another $45K of gains from our investments.
* Booking early means we can make some use of my status and get a free bump to premium economy!
** We will have to pay approximately $5,300 in FICA taxes.