In this season of sending the equivalent of a small forest in paper to the IRS, there is always the dream that one can figure out how to make some money and not owe any tax to the IRS.
Well, if you are 65 or older, single, received some Social Security and needed to make about $34,400 more of cash flow to make ends meet, there is at least one source of income that would end up creating a situation where you have ZERO Federal Income Tax for 2009.
Congress loves to tinker with the tax law to try and "encourage" certain behavior on our part. Their incentives range from special deductions to refundable credits.
Aside from a break for Capital Gains, one "tax free" source of income is municipal bond interest. It's difficult to come up with a scenario where any of it is actually taxed. If you don't like investing in local governments (maybe it has something to do with fears of bankruptcies like the city of Vallejo?), but you like "safe" companies like Mercury General or Kimberly-Clark, etc. then there is a way to move some or all of your income into dividends from such domestic corporations and still pay zero tax.
It takes a big investment in common stocks that pay qualified dividends. (That's where a good stockbroker comes in handy.) Qualified dividends are from U.S. Corporations and their U.S. business operations. Many good "dividend stocks" are paying an average of 4 percent right now. (Better than most CD rates?)
Here's how it works. Let's look at "Wilma Chiprock" who is 65 years old, received $33,950 of qualified dividends, and $12,800 of Social Security (and total other income of $731, such as interest). That adds up to $47,481 of gross cash inflow. Wilma will reduce her Adjusted Gross Income by her standard deduction plus $500 of her property tax, and her personal exemption, ending up with $33,950 of taxable income. Now since Wilma can earn up to $33,950 of qualified dividends and have a tax rate of 0 percent on those dividends (which are taxed first and any other taxable income left over are taxed at the normal tax rates), she ends up paying zero tax. Wilma saves $4,671 from what she would pay in tax if all her income came from a taxable source instead of qualified dividends.
What if Wilma were married to 65-year-old Fred? Just about double everything above. But Fred still gets locked outside when he puts the kitty out at night.
The moral of the story? Congress is hoping that folks with retirement savings will be willing to invest in the stock market rather than park all their money in CDs.
• Kelly Bullis is a certified public accountant with over 30 years of experience. Contact him at 882-4459.