So I am currently in the process of starting my family and began researching the tax implications of kids. They help a lot! In fact, I can envision a household with a six-figure income paying no income tax, and I wanted to bounce this off the community here to see if I'm thinking straight.

Situation: Married household, three kids. A single earner has a good job with a $90,000 salary, $5,000 401k match, and accrues $5,000 in the company retirement plan / pension. Total pay - $100,000. Here's how the taxes work out:

$90,000 in potentially taxable income

-$17,000 into 401k
-$10,000 into IRAs (one for worker, one for spouse)
-$5,000 into HSA / FSA (tax-deductible health account)
-$11,900 standard deduction
-$18,200 for five personal exemptions

=$27,900 taxable

I figure the taxes on this income to be just over $3,000. Fortunately, the child tax credit for three children is about $3,000, so this lucky guy has no income tax liability at all! (The IRS --> )

He still paid FICA, of course, but I was amazed at how much of an impact kids can have on taxes. After all the tax-sheltering, this family still has $63k to live on, which seems like plenty. Future taxes loom over the 401k value and the company pension, but if retirement income is relatively low there will not be much taxing going on then, either.

Does anybody have experience with this?

"'In this world nothing can be said to be certain, except death and taxes." ~ Benjamin Franklin

It's theoretically possible. Some of your numbers/line items seem unlikely (e.g. both a 401(k) and a pension). But there are some additional ones the Hypothetical family might qualify for. For instance, if they have a HDHP that covers the whole family, they could put $6250 into an HSA. And if they put the kids into day care, they could use a dependent care FSA for $5k and an additional dependent care tax credit of up to $1000.

In the real world, my household income is higher than $100k, and our taxable income is more than zero, but we are sheltering more than half of our income in various ways (when you include deduction and exemptions).

I suppose I am spoiled in the oil and gas sector, where pensions and 401k matching go hand-in-hand. It is only a matter of time before the pensions go away, though, just like they did everywhere else.

I pay what I consider to be a pretty high % in taxes now, but it looks like the savings that come with children will really help. I have decided to pursue my MBA, and when our income drops for school we may actually get a net payment from the government for the year. It's a strange idea for me to ponder (and really solidifies my right-leaning political views).

At any rate, I plan to use all the tax breaks the government makes available as I start my family, just like happy Mr. Hypothetical and his family.

Things change, the only certainty is you'll pay taxes it may go up or there maybe better tax breaks. Don't forget the costs associated with having children and one income.

Good point - we are definitely ready for increased costs. I'm planning on about $6,000 per year per child, which may or may not be exactly right, but it's a start. This is lower than the national average, but my wife will be staying home so we will avoid childcare costs, and we do not plan on upgrading our housing either.

You mention the challenge of one income, but in our situation things are actually reversed - we find that going to two incomes would potentially hurt us financially, and would certainly hurt our quality of life. Marginal tax rates for my wife would be pretty rough since her income would go on top of mine. After FICA, federal, and state income taxes she would only keep 60% of her income. Accounting for the added costs of day care and eating out more often, etc, I calculate that she would need to earn around $30,000 just to break even.

Her earning power is in the $25-40k range, so the net impact of her working is essentially a wash. To us it seems clear that sticking to one income greatly simplifies and enriches our quality of life, especially since our finances come out the same either way.

We are very fortunate to be in this situation with my income being high, but I do find the "full-cycle economics" of spousal income to be fascinating. Every dollar she saves us by staying home is worth almost $2 of income she could earn in the workforce.

From 2006 through 2009 our effective tax rate (as calculated by TurboTax) was around 13%. In 2010 our first child was born and our effective rate dropped that year and last year to around 9.5%. So it does make a pretty big difference. (We bought a house in November last year, so I expect our effective rate to be even lower in 2012. In fact we may struggle to stay in the 25% tax bracket.)

That said, it's not going to put you at zero taxes unless you're pretty close already.

And it's only hypothetical anyways. I think most of us would agree that contributing to a deductible IRA in the 10% or even 15% tax bracket is probably not the best move. Instead you would want to max out a pair of Roth IRA's.

do you typically pay taxes today on a company's pension and defined contribution match? I never have. This is better titled, "how much taxes you'll pay once you get knocked up 3 times and make $90k" (which is low for an oil & gas job).

I've searched and scoured to find a way to eliminate taxes without ever wondering how I look in stripes. Almost all tax deductions come with hefty spending. All my calculations show I would come out ahead if I didn't spend the money to get the deduction. ymmv.

even though my tax bill approached $40k last year, I find it to be an excellent value for living in such a nice country. Although, I wouldn't complain too much if congress somehow figured out how to lower that for me.

Can you give some examples? The examples given in the OP are tax deductions for saving money. Not counting the offspring, of course.

Stannius makes a good point about the IRA's. Once you're down to 15% marginal rates it would be hard to pass up the Roth option.

Bichon, I guess there is always some ambiguity in how you define total pay. Right now I have base pay, a biweekly retention payment ("Thanks for not getting recruited away - here's an extra $300!"), a yearly bonus, 401k match, pension appreciation, healthcare premiums, retirement medical benefit accrual, etc etc etc. I typically count things like pension appreciation as income, because my pension would not have grown in value unless I worked this year, so I "earned" it. And that is tax-deferred moey, just like a company 401k match.

90k may not be realistic for an office worker in oil and gas, but it is spot on for a mid-career field employee. And I wasn't necessarily shooting for a realistic pay... I started instead from the thought, "I wonder how much money one could possibly earn without having to pay income tax, given all the tax breaks that are out there?"

And just for clarity - I am having kids because I want to, not because they will impact my taxes It's just a nice bonus.

interesting, I have a pension from a former employer, not yet rolled over, and it appreciates (usually) without me working there. Should I count that as income? Or does it work more like investments in my IRA? or do I count the positive appreciation in my IRA as income as well?

and I guess you don't live in North Dakota....

outside of the "standard" tax deduction and the deduction for one's self, what deduction do you not have to "pay" for? Well, being blind, but I don't think I'll go as far to gouge my eyes out for a tax deduction. I guess for those of us who are fortunate enough to have our sight, we would "pay" to have that deduction.

The point is rather simple, minimizing taxes rarely means maximizing money in the bank. Those who claim they can own their own business and write everything off just need an audit to straighten out that attitude.

There IS a tax deduction on Roth IRA contributions IF you're low income. Recent reading shows that married filing jointly will max out the deduction if you make $33,000 or less.

We've run similar numbers in the past. The taxes paid in are a negative if you don't count FICA, social security, etc. Even if you do count all those, we still hardly paid anything in. Ok, I don't remember exact numbers, but around the neighborhood of $60k, family of four.

I'd definitely max out the Roth IRA when in such a low tax bracket.

I keep an eye on our taxes, and see if there's anything I need to do to keep them as low as possible. For example, one could increase their 401k contributions to reduce their taxable salary (thus qualifying for more deductions/rebates/etc.). If you live frugally enough, you have more options available to you.

Of course, some of us live frugally, but it is almost impossible to reduce AGI so these tax credits can be exploited.

BTW, there is no tax deduction for a Roth IRA contribution. You may be poor enough to qualify for certain credits which get paid out beyond your tax liability and justify that as paying taxes on a Roth contribution. In the Rube Goldberg machine we call our tax system, there is no direct way to deduct Roth IRA contributions from Income or AGI.

It is completely possible I'm using the wrong terms. But the point is...if you are low income (in the eyes of the IRS) and contribute to a Roth IRA, your tax refund may be higher than if you had not contributed to a Roth IRA. And if you're not quite low income enough...you can possibly up your 401k contributions, thus reducing your taxable income (and then qualify).

Here's what I was talking about in regards to the Roth IRA:

http://www.irs.gov/newsroom/article/0,, ... 38,00.html

Please provide which line of the 1040 ROTH IRA contributions are deducted? I understand there are credits to the "less fortunate," but there is no direct Roth IRA deduction.