School, new parents, tax optimization

[mountaintown]

So recently I learned my wife was pregnant (yay!!) and then I learned it was twins  (yikes!!!). Needless to say...my future is changing fast. Luckily, the FI journey has got off us to a nice start. Briefly our details:

Joint income: About 130k as of this year
NW: $465k (50k CD's, rest retirement account investments)
Family size: 4 as of July 2020. Just us two now.
Investment vehicles: As I said, very little in taxable except the 50k CD's. However a sizable amount is held in deferred compensation, and a bit in an inherited IRA(40k).
House: None. Renting at about a 40% discount so have not been too eager to leave.

I am considering going back to school. I know it's not a good time as having kids but I have wanted to for awhile and frankly not sure when it's going to be easier. Mostly the reason is a manager which no one tolerates, a rather isolated area, and just a general desire to pursue something I have always wanted to. Besides the merits of all that I am wondering the best way to manage tax consequences and any other ideas you might have. As I understand it there are a lot of different opportunities and tax vehicles to play with during these potential gap years. Can you help me out with any strategic ideas/pitfalls?

-Healthcare not an issue. Wife will be covered and have some parental leave to start us off
-American Opportunity Credit, Child tax credit, Savers credit should all be options
-Tax space to convert....due to me having little/no income and child credits, potential for a lot of tax space
-Plenty of vehicles: inherited IRA, deferred compensation from wife, traditional IRA's, 401k, etc.
-Around 50k cash
-No house...but a bit intrigued by low income housing opportunities(options to buy houses way below market that are nice, premium location due to low income)Note: Strings attached in that resale will be very limited by the community development trust to make it affordable
-No other taxable investments

Mainly my question is where you would start with strategy? I'm a bit bewildered to be honest because as soon as I start to think of a certain conversion strategy I realize it may disqualify me for a credit. Also I noticed that some of the credits are dependent on earned income so it may be critical to ensure I have some earned income. Anyways, any direction or strategic ideas you have would be great. Part of my overwhelm is also the idea of having twins lol. All strategies aside I'm figuring we are going to need more money and more space fast so the idea of efficient living/budgeting seems...tough.

[gocurrycracker]

Congratulations! 

>as soon as I start to think of a certain conversion strategy I realize it may disqualify me for a credit

Yes, that's the game. I'd make a spreadsheet to find the optimum point. Look at the phase-out income levels, and then make a chart, much like I did here:
https://www.gocurrycracker.com/massive-tax-free-roth-conversions-savers-credit/

You can start with just a 1-dimensional approach (the child tax credit) and then see if you can also benefit from the other credits.
e.g. With 3 kids, 6k in credit, just roth convert up to the $0 tax point - ~$78k

That disqualifies you for the Saver's credit ($64k phaseout) but leave's you open for the opportunity credit ($160k+ phaseout.)
That means you also have room to do some capital gain harvesting.


You could then look at keeping income low, and trying to get more credits and the biggest refund possible. Maybe you can get a large refundable child tax credit (up to $1400/kid), plus some EITC, plus the Saver's credit.
https://www.gocurrycracker.com/earned-income-tax-credit-guest-post/


I'm not really clear on your comment about earned income - your wife will have earned income and insurance through work, no?

[mountaintown]

Correct on wife and insurance.

My take on some of the credits(Child credit, dependent credit) was that both must have earned income. My interpretation is that being a full time student qualifies...

[gocurrycracker]

The child and dependent care credit requires both spouses to have earned income. This is the only one.

The child tax credit only requires earned income for the refundable portion. It isn't necessary for both spouses to have earned income. Both spouses also don't need earned income for the eitc.

[mountaintown]

Thanks!!