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Mike K
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Tax free income...  Reply with quote  

I dont pay taxes on my income (federal or state taxes) up to $88,000 a year i think it is. If i make ~$70,000 a year from my employer and i make $10,000 throughout that year from investments is that 10K taxed differently or is it tax free as well?

Just playing with numbers to see how i should be investing. Thanks for any help and if any more informaiton is needed i am willing to give it.

-Mike
Post Sun Apr 16, 2006 10:52 am
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Mike K
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I am a government contractor working in the Middle East. The Military (Air Force in this case) figured it would be cheaper to have civilians repair all the vehicles here on base so they sent the military home and contracted out vehicle maintenance. Northrop Grumman won the bid for the contract and that is who I work for and yes, income is 100% federal and state tax free up to $88,000 a year. I think it was $82,000 last year but I heard it was bumped up.

My question is, if I invest in the stock market, and hypothetically invest some money and make $10,000 is it taxed? OR do does it fall under my normal income and is still tax free as long as combined I donít go over $88,000 a year.

So to break it down even more, if I make $75,000 this year, find that hidden gem stock and make $10,000 from my investments during this coming year.... 75,000 + 10,000 = $85,000 for the year. 85,000 is under 88,000 so it should be tax free right? UNLESS money made from stocks (is this called capital gains?) is categorized differently then 'normal' income.

I havenít been able to find a straight answer. This is my second year being a contractor but my first year that i started investing.

-Mike
Post Sun Apr 16, 2006 12:53 pm
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coaster
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Dividends and short-term capital gains (ie gains from stocks held less than a year) are considered "ordinary income" and are included with and taxed along with earned income. EXCEPT at present, dividends paid out by companies that have already paid taxes on that income are considered "qualified dividends" and are taxed at a lower rate. Long-term capital gains (ie stocks held longer than a year) are taxed at a lower rate.

I'm sorry, I'm not familiar with tax code as applies to US Citizens living and earning income abroad. I see that my Ernst and Young Tax Guide 2006 has a whole chapter on it, so you might want to see if you can get that book. Also, I'm sure the IRS website has info on it (if you can find it, which isn't always that easy.) Most likely whatever rules apply to your earned income also apply to your dividends and short-term gains. I can't hazard a guess as to long-term gains. And sorry, but not enough time to educate myself on it right now.

~Tim~
Post Sun Apr 16, 2006 1:09 pm
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Mike K
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Thanks for your thoughts coaster. I think the short term stock info pretty much answered my question. I have a feeling i am not going to know FOR SURE untill next year when i file my taxes again. Just hopeing somebody would save me a little reading Smile

-Mike
Post Sun Apr 16, 2006 1:17 pm
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coaster
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Mike - you might want to just get a copy of TurboTax or TaxCut to run some what-if scenarios for your situation. Although you can't use it for next year's taxes, it might help your current tax planning. And the software might be on sale now that tax time is almost over.

~Tim~
Post Sun Apr 16, 2006 1:25 pm
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Kiaser
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quote:
Originally posted by Mike K
I am a government contractor working in the Middle East. The Military (Air Force in this case) figured it would be cheaper to have civilians repair all the vehicles here on base so they sent the military home and contracted out vehicle maintenance. Northrop Grumman won the bid for the contract and that is who I work for and yes, income is 100% federal and state tax free up to $88,000 a year. I think it was $82,000 last year but I heard it was bumped up.

My question is, if I invest in the stock market, and hypothetically invest some money and make $10,000 is it taxed? OR do does it fall under my normal income and is still tax free as long as combined I donít go over $88,000 a year.

So to break it down even more, if I make $75,000 this year, find that hidden gem stock and make $10,000 from my investments during this coming year.... 75,000 + 10,000 = $85,000 for the year. 85,000 is under 88,000 so it should be tax free right? UNLESS money made from stocks (is this called capital gains?) is categorized differently then 'normal' income.

I havenít been able to find a straight answer. This is my second year being a contractor but my first year that i started investing.

-Mike


How is the income from the contract job abroad signified on your taxes that it is exempt? I would assume that the income gained from sources other than the contract job in the Middle East would be classified as different income and be taxed accordingly. It's definetely a question that a professional would have to be consulted on, however.
Post Sun Apr 16, 2006 5:14 pm
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Mike K
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Kiaser,
I have to fill out a 'Foreign Earned Intcome' form (form 2555 i think???) ...

The only requirements for it are you have to reside outside the US for 330 (?) days in a 364 consecutive day period and your income must come from over here.

I tried to cut and paste from TurboTax online (where i did my taxes) but it wouldnt let me.

If i do my trading over here, and i am outside the US, then it may still count under the tax free income.

We have no access to professional tax help. The company wont even suggest or provide a tax rep due to legal reasons and we cant make phone calls longer then 15 minutes. Trust me when i say it is a big PITA if we have to call back to the states to take care of personal stuff. Thanks why i asked on here, thinking there might be somebody to shed a little light.

Being that i just started investing, i have a feeling that i am not going to hit a HUGE pot of money that is going to put a tax burden on me even if i do have to pay taxes on the earned money... so i think i will be ok. But i do appreciate your comments.
Post Sun Apr 16, 2006 5:52 pm
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coaster
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TurboTax Deluxe has a Form 2555 in it, so you should be able to what-if your situation with the software package.

I took a look at the IRS info available for Foreign Earned Income and Form 2555, and the instructions for the form specifically state than investment income, ie dividends and capitals gains, DO NOT count as income that you can put on Form 2555. So if this form is the basis for the exemption, as it appears to be, then your investment income would be taxable. I guess the question is, if the rest of your income is exempt, then you're probably not going to have enough investment income to hit the first marginal tax rate, and effectively there won't be any tax on it. That's just a guess. If you plug the numbers into TurboTax, you should be able to find out.

Here's links to the IRS forms & pubs:

http://www.irs.gov/pub/irs-pdf/p54.pdf
http://www.irs.gov/pub/irs-pdf/f2555.pdf
http://www.irs.gov/pub/irs-pdf/i2555.pdf

Hmmm....I couldn't get those links to work. I don't know if it's a temporary glitch, so if they're not working for you, then you can navigate to them from the index:

http://www.irs.gov/formspubs/index.html

Well, that's nuts. Now that's not working for me either. The IRS site must be overloaded today by last-minute tax preparers. Just go on the site when you can get it to work, navigate to the forms & pubs index, and select Pub 54, Form 2555, and Instructions for Form 2555.

Rolling Eyes

~Tim~
Post Sun Apr 16, 2006 6:55 pm
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Mike K
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coaster.... links work for me and i will look into it tomorrow, thanks for the help.
Post Sun Apr 16, 2006 7:13 pm
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coaster
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From page two of the Form 2555 instructions:

"Foreign earned income...does not include the following types of income....interest, ordinary dividends, capital gains...."

I guess that's pretty clear. Unusual for the IRS to make something clearly understood. Laughing

~Tim~
Post Sun Apr 16, 2006 8:00 pm
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prioritytaxgroup
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Salaried employees are always in god position, as far as tax is concerned. But professionals who earn in cash, are not bothered about tax, unless money is deposited in bank account. Its all about managing money, financial literacy and economic awareness that makes a person professionally successful.[/b]
Post Wed Aug 13, 2014 12:05 pm
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