Author Topic: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?  (Read 6211 times)

jwilliams0215

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Alright Mustachians. Let's talk taxes, primarily for those who aren't FI yet and are in the wealth building stages with relatively high earned income. I've tried to read some of MF articles and others, but am having trouble applying it to my situation. Here's a newer article by MF with post-tax contributions if you haven't seen it yet.  http://www.madfientist.com/retire-even-earlier/. What strategies would you use to reduce the effective tax rate and help position for early retirement?

Residence - Florida
Status - Married / Filing Jointly
Deductions - Standard (no mortgage, student loans, etc).
No children.
Current employers don't offer HSA options.

Combined Income - $178K (estimated based on last year's bonus, but has the potential to increase in 2015 above the $183K - $193K Roth IRA limit).

This year we maxed out our traditional 401K's ($35K) and contributed the $11,000 combined to the Roth IRA's. Next year we'll wait until the bonus is known before committing to the Roth IRA's.  What are other steps should we be implementing?

ioseftavi

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #1 on: November 25, 2014, 12:03:01 PM »
1)  Get an HSA for each of you, max them out.  You can still do this for this year, too, if you scurry.  Go outside of work and do it if you must.  You're already reading madFIentist - his post there is a good overview on why they're so badass.

2)  Practice tax-loss harvesting on your taxable portfolios whenever possible.

3)  Consider contributing after-tax money to your 401(k) if your plan allows it.  You will get no tax break for putting the money in, but the funds contributed will grow without taxes, and you'll only pay taxes on the gains when you withdraw them.

That's all I can think of at present.  My spouse and I anticipate paying quite a few taxes in 2015, so we may discover more as we go.  If you don't have kids, student loans, or mortgage debt, and your income is above the roth contribution limits, you run out of things you can do pretty darned quickly.  It's a nice problem to have, though.

ZiziPB

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #2 on: November 25, 2014, 12:17:06 PM »

3)  Consider contributing after-tax money to your 401(k) if your plan allows it.  You will get no tax break for putting the money in, but the funds contributed will grow without taxes, and you'll only pay taxes on the gains when you withdraw them.


I would advise this only if you can do in-service rollovers of the after-tax dollars to a Roth IRA.  Check your plan documents to see if  your plan allows (a) after tax contributions, and (b) in-service rollovers or in-service Roth conversions.

If you no longer qualify for a Roth IRA because your income is too high, you can do backdoor Roth (provided you don't have traditional IRAs currently).  To do that, make non-deductible contributions to a traditional IRA and immediately convert to Roth before the money has any earnings.

BarkyardBQ

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #3 on: November 25, 2014, 01:22:43 PM »
1)  Get an HSA for each of you, max them out.  You can still do this for this year, too, if you scurry.  Go outside of work and do it if you must.  You're already reading madFIentist - his post there is a good overview on why they're so badass.

Aren't HSA's only available if you have a HDHP? We don't and it seems like all the reading says you have to have a high deductible. This is annoying cause we would like to put money into an HSA for use down the road when we have a HDHP.

webguy

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #4 on: November 25, 2014, 01:50:45 PM »
1)  Get an HSA for each of you, max them out.  You can still do this for this year, too, if you scurry.  Go outside of work and do it if you must.  You're already reading madFIentist - his post there is a good overview on why they're so badass.

Aren't HSA's only available if you have a HDHP? We don't and it seems like all the reading says you have to have a high deductible. This is annoying cause we would like to put money into an HSA for use down the road when we have a HDHP.

That's correct. They're only available with certain qualifying High Deductible Health Plans.

ioseftavi

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #5 on: November 25, 2014, 02:26:44 PM »
Is it possible to get an HDHP through your job, or get insurance outside of work?  Anyone want to chime in?  My current job offers an HDHP, but if they didn't, I'd love to know what options I had.

seattlecyclone

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #6 on: November 25, 2014, 02:36:09 PM »
Is it possible to get an HDHP through your job, or get insurance outside of work?  Anyone want to chime in?  My current job offers an HDHP, but if they didn't, I'd love to know what options I had.

If you really wanted to, you could decline coverage on your work plan and sign up for an HDHP through your state exchange. However, since your job offers a plan you would not be eligible for any of the income-based premium subsidies that are normally available for exchange plans, and you would lose out on any subsidy your employer kicks in for the employer-based coverage. For most of us, the ability to save a little bit more tax-advantaged money in an HSA probably isn't worth the trade.

hodedofome

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #7 on: November 25, 2014, 02:38:21 PM »
Start having kids and get a mortgage...

Workinghard

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #8 on: November 25, 2014, 02:49:24 PM »
Since you don't have kids, I'm assuming you're not old enough for catch-up contributions?

jwilliams0215

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #9 on: November 25, 2014, 03:28:27 PM »
Since you don't have kids, I'm assuming you're not old enough for catch-up contributions?

Correct assumption, I'm not able to make catch-up contributions as well.

Looks like tax harvesting and after tax 401k contributions are on the table right now (but only if the employers permits after-tax 401K contributions and in-service contributions to a Roth IRA).

In all reality, after 401K contributions / standard deductions / etc. the effective tax rate looks to be less than 15%.

gatorNic

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #10 on: November 25, 2014, 03:47:04 PM »
On the plus side you are able to atleast get yourself into the 25% bracket with those 401k's/other deductions at that income level.

cynthia1848

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #11 on: November 25, 2014, 03:49:06 PM »
Buy a house and take the mortgage deduction and itemize.

The first year of our mortgage I think we deducted like $43K worth of interest.

TN_Steve

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #12 on: November 25, 2014, 04:06:48 PM »
I've not found any [legal] way to hide/shelter wage income other than 401k/pension, and HSA.   Getting kids and a house mortgage (although good for other reasons in my personal experience) will save you tax money, but you are paying $3 for each $1 in Mtg. Interest savings (at 33%)--and far worse ratio with the kids!

Best bet is to put your savings in equities and have those gains taxed at long-term rate (and your qualified dividends get treated nicely as well).  In the end, you end up in the nice position of paying even more taxes, but at a lower effective rate.

Shade00

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #13 on: November 25, 2014, 04:10:28 PM »
Perhaps I'm missing something, but if your gross is 183-193k, and you're contributing 36k next year to your 401ks, there is no reason to wait on the Roth contributions. You will not exceed the MAGI limits for Roth contribution.

Icecreamarsenal

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Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #14 on: November 26, 2014, 06:02:03 PM »
Yes, you're under the magi for roth.
I make double what your wife and yourself make, and taxes have a huge impact on takehome.
My wife stays at home and we recently opened a business. She is going to file as an llc and so we will claim losses as pass through tax losses this year.
There are a lot of tax advantages as you progress through kiyosakis money quadrants.
I'm staying at e, and plan to progress to s, we are starting at b, with the eventual plan of I.  Capital gains at 'I' are taxed at 15%.
« Last Edit: November 26, 2014, 06:04:04 PM by Icecreamarsenal »

DavidAnnArbor

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #15 on: November 26, 2014, 08:22:15 PM »
If you want a portion of your portfolio in bonds then you can buy I-Bonds from the US treasury.  This does not help you shelter income from taxes, but paying taxes on the interest can be deferred til the bonds reach maturity (30 years). No state tax on federal bonds.

zolotiyeruki

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #16 on: November 30, 2014, 09:31:43 AM »
I'm not familiar with the income limits for a traditional IRA, but it seems like you'd want to prioritize the tax-deferred over the Roth. Also, if you plan to take advantage of a Roth ladder, make sure you have  sufficient funds in taxable accounts to covert your living expenses for the first five years of retirement.

DoubleDown

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Re: Higher Earned Income / Wealth Building stages - how to REDUCE TAXES?
« Reply #17 on: November 30, 2014, 10:21:33 AM »
Yup, real estate is an excellent way to lower taxes for relatively high earners, especially rental real estate. It's true that if you're carrying a mortgage, you're paying more in interest than you can deduct. However, there are many other deductions/deferrals available for rental real estate, including all taxes, insurance, repairs and maintenance, travel, professional services, management fees, depreciation, etc. If appreciation on the property is even just modest, it will often offset the costs that were not covered through deductions.

(Overly) Simplified example but hopefully good for illustration:

Carrying costs (including mortgage interest) = $1000/month
Deductions on interest, taxes, insurance and everything else = $500/month
Net "loss" = $500/month

As long as the property appreciates $6,000 in just one year, it will offset the entire loss. Anything greater than that is money in your pocket (when you sell). Plus, equity gains tend to compound over the years. If you buy a house for $200k and own it for 10-20 years, and its value grows to $400k, then a $6000 increase is only 1.5% -- super easy to achieve. Also, the tax savings can be invested every year and compounded instead of handing it over to the IRS.

Be mindful that passive losses (like those in residential real estate) are deductible only up to $150k MAGI, and start getting phased out at $100k MAGI (they go down on a sliding scale until they're completely wiped out at $150k MAGI).