An Example of How to Find Your “Zero Tax Line”

I start another contract job . I’ve told my manager about my peculiar employment restriction — that is, that I can’t earn enough to put me over the tax line.

So I need to figure out where that line is. Because my crystal ball is in the shop, I’ll start by assuming that the tax law remains more-or-less the same . It would be dirty pool if Congress were to change the rules in the middle of the year when it’s too late for me to adjust, but there’s not much I can do about that.

The cornerstone of my method is the retirement savings credit. If my Adjusted Gross Income is under $15,000 and I’ve put $1,360 or more into an IRA, that eliminates my federal income tax entirely. So I can earn at least $16,360 (the money that goes into a traditional IRA doesn’t count toward my Adjusted Gross Income).

But why stop at $1,360? I can put as much as $4,000 into a traditional IRA , tax-free. So that makes the maximum $19,000 ($15,000 + $4,000). And IRAs aren’t the only thing that you get to omit from your Adjusted Gross Income.

If I want to, I can also take up to $4,000 off the top if I spend that money on classes at a qualified college or university. So that brings me up to $23,000, assuming there’s $4,000 in classes I want to take this year. There’s a good set of night classes and such offered in my area through U.C. Berkeley Extension, so I just might take advantage of this.

Because I’m self-employed, I can also deduct the cost of my health insurance, which (if I can’t find a better deal this year) is a whopping $3,960. So that boosts my maximum up to $26,960. Now if I’m earning somewhere in that ballpark, I’ll be paying upwards of $4,000 in FICA, and I can take half of that as a deduction as well. That makes my maximum something like $29,000. But I’ll probably pick up some income from miscellaneous small-change sources along the way, too (interest on my savings account, referral fees, sales of The Annotated Hasheesh Eater), so I’d better lower that by $1,000 or so just-in-case.

So I’ll say that $28,000 is my max-out line. I’ll probably want to stop a bit short of that because I don’t know what Berkeley will be offering in the coming year or how much interest I’ll have in taking classes.

I moaned and groaned about FICA and how I’m reluctantly paying up (to the tune of about $2,500). I gave myself three choices for , and if I go ahead and max out my income that cuts one of the choices out:

  1. I could decide I don’t mind paying it
  2. I could decide to evade it legally by not earning above-ground income
  3. I could decide to evade it illegally by not paying up

I’m having a hard time choosing. Maybe I’m just looking forward to milking the dilemma for a few more Picket Line posts before I make up my mind.