The Government Pays Me: How I Save Thousands On Federal Income Tax

I have never received food stamps, or medicaid for myself, or cash assistance, or housing subsidies, but the Federal governments social engineering programs have benefited me greatly and I have received hundreds of thousands of dollars in benefits as a result… Did that make you twinge?  My guess is you have received a ton of money too, if not, you need to read the playbook (The US tax code) and learn to do the same. The number one rule of economics is that people respond to incentives.

Recently a friend of mine engaged me in a debate about whether or not Obamacare subsidies are a handout.  If they are, then so is everything else in the myriad of social engineering schemes that both the left and the right have cooked up.  Here’s a list of government incentives that I take full advantage of. In writing this, I feel kind of like John Stossel when he wrote the article “Confessions Of A Welfare Queen.” As a libertarian I am against the government using taxpayers money to funnel to other taxpayers who perform tasks the government wants them to perform; but as a consumer I am of course motivated by doing what is best for my wallet, in both the short and the long term.

The Government Paid Me To Go To School:

For two years I maxed the American Opportunity/HOPE tax credit, which is a 100% credit on the first $2,000 spent and a 25% credit on the next $2,000 spent. This adds up to $5,000 total.  I also received a tuition and fees deduction for multiple years, adding another $850.  This was before the American Opportunity/HOPE credit was expanded to cover 4 years. In total, I received $5,850 to go to college for the federal government. If the current credits remain in place my children will potentially all receive $10,000 in credits each.

The Government Pays For My Kids To Go To School:

This is somewhat indirect and is mostly state funding and not federal, but is worth noting.  My school system doesn’t receive any property tax money as a charter school, but it does receive the state funding amount of roughly $7,000 per pupil (as does every public school). My kids have combined done 11 years in school which adds up to $77,000.  On average over the past 10 years I have paid roughly $1,000 per year in state taxes, and about 1/4 of this goes to school funding. So I have paid in $2,500 and received $77,000 of benefits, for a gain of $74,500. By the time all 4 of my kids get through high school, this will amount to $392,000.

The Government Pays Me To Have Children:

We have benefited greatly from tax deductions and credits designed to help parents.

Our kids are 13 and 8, and this is the first year we have had custody of our nephews.  This gives us 23 kid years total.  The child tax credit/additional child tax credit is $1,000 each year and I believe we have maxed this every year.  This works out to $23,000.

We also receive an exemption for each kid. At 22 kid years total and an exemption rate of $4,000, this exempted $88,000 from income tax at a rate of 15% for federal and 4.25% for state of MI.  This adds up to $16,940.

We also have benefited from the Earned Income Credit.  Between 2005 and 2010 our income was low enough to qualify for the EIC. This is a sliding scale based upon earnings.  For the first 4 years Mrs. C. and I were not married, which upped what she would get based on 1 child. For 2009 and 2010 we had 2 kids, but a higher income.  At an estimated $2,500 per year benefit we have received $15,000 from the EIC. Effectively the EIC is designed to return Social Security and Medicaid taxes levied on low income workers.

The Government Pays Me To Save For Retirement (twice):

In my lifetime to date I have put roughly $45,000 into tax advantaged retirement accounts.  Because of this I have received an average tax benefit of 19.5% (15% Federal bracket and 4.5% State bracket) This amounts to $8,775.  Going forward I plan on contributing the maximum I can to these accounts, which is currently $17,650 (2 IRAs and an HSA). This puts my yearly tax savings going forward at $3451 for at least the next 11 years.

There is also the retirement savers tax credit, which is based on income. Based on income each person can receive up to a $1,000 tax credit per year. Mrs. C and I have been in the higher bracket for this credit for the 3 years we have put any substantial money into our retirement accounts, resulting in an estimated $1,200 in credits.

The Government Pays Me To Have Health Insurance:

Okay, this is once again a stretch, because my health insurance plan covering my whole family used to cost around $250.  Now just covering my wife and myself for a similar plan we are paying $120, but receiving a benefit of $320 per month. This means for 2016 I was subsidized $3,840; not including the CHIP program that covers my 2 kids. In fact the ability to save money in retirement accounts reduced my AGI, which further reduced the cost of my health insurance.

The only reference I can find for an at-cost plan for the CHIP program is $288 per child, which seems crazy high.  If this is truly the cost of the program, than we are receiving another $7,000 per year in subsidies.  A truly market based plan covering children would likely cost under a third of that amount, but this is the only number I could find.

Tax Based Plans I Haven’t Taken Advantage Of:

During the cash for clunkers program in 2009 The government was providing $4,500 tax credits to turn in an inefficient older car and buy a new car.  This program was announced just a few weeks after we got rid of a $300 clunker and bought a $15,000 van.  I probably would have taken them up on the deal and spent about the same amount of money, but bought new instead. Doh!

We bought our first home in 2006 and upgraded in 2011.  In 2008 an $8,000 tax credit was announced for first time home buyers and in 2009 a new credit was announced for $6,500 for home buyers who are already home owners to use, through April 10 2010.  The 2009 and 2010 purchasers did not have to pay back the credit, while the 2008 purchasers did.  We were just shy of being in the financial position to buy in 2010 when the credit expired. That $6,500 would have put a dent in the $29,000 we spent out of cash to buy our current home in 2011.

The Home Mortgage Deduction: This is a pet peeve of mine. The Home mortgage deduction ONLY benefits high earners with high cost homes.  I have never earned enough, nor had a mortgage large enough to get any benefit from it, even though I am solidly in the middle class.

I am about as small government as they come and I would love to see a complete demo of the US tax code to remove all social engineering schemes and replace it with a flat tax.  However, that is beyond my scope of control. What is in my scope of control is how I respond to government social engineering.  The number one rule of economics is that people respond to incentives.  We should all do our due diligence to reduce our taxes as much as possible. It is legal, it is encouraged by our government, and it saves us money.  In 2015 our 4 kids saved us $6,400 on taxes, while our retirement/HSA savings saved us another $2,600.  After our fees from Obamacare we still managed to get a net refund of over $2,000.

What government tax credits/ tax deductions are your favorite/least favorite?