Author Topic: Standard deduction games  (Read 6778 times)

Daisy

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Standard deduction games
« on: July 09, 2014, 11:16:47 AM »
I was thinking of how to play the standard deduction games while ER'd. I currently itemize my deductions but don't expect to go above the standard deduction ($6200 this year) while ER'd.

- I just moved and do not have a mortgage. So now there's no mortgage interest to deduct. I will still have property taxes to deduct to the tune of $3000 a year.
- I plan to have about $2000 - $3000 in charitable deductions a year.
- My state has no income tax so I can deduct an estimate of the sales taxes I have paid over the year. I think it is calculated based on income so I expect this number to be pretty low in ER.

I thought I could donate to charitable causes in December of one year for that year and in advance for the following year. That takes my charitable deduction to $6000. Then once I add property taxes of $3000 it takes me to $9000. I'm not sure if property taxes can be paid the same way. We can pay anytime between November and March of the year the taxes are due. Do you take the deduction the year you pay it or the year tied to the property tax? If it's the year you pay it, I can double up on property taxes one year and not have any to deduct the next year. So now I am at $12000 potentially to itemize my deductions.

Now I can itemize either the $9000 or $12000. The following year, I will have no charitable deduction or property taxes so I can just take the standard deduction. If I didn't do this, I would just be hitting the standard deduction every year.

Any flaws in this plan?


jawisco

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Re: Standard deduction games
« Reply #1 on: July 09, 2014, 11:39:27 AM »
It is a good plan - property taxes can be bunched into the same year like charitable deductions USUALLY - my area allows that no problem, although I have heard other areas won't let you pay like that.  It may be worth a late payment penalty to bunch like this if that is your only option...

There are a lot of options with taxes when you reach ER - it is worth your time and effort to understand them and implement them.  I usually print up a 1040 and roughly work through the next years likely taxes in order to take advantage of any opportunities.  I just did this for tax year 2014.

The best thing if you are ER and don't mind doing a smidge of work is to find someone to pay you as independent contractor to the tune of $2K/Year.  That would mean you get to deduct your health insurance (you are small business owner) and put 2K/year into IRA and get a saver's credit for an extra 1K (free money).  That can open up a lot of space to convert TIRA to RIRA and never have to pay taxes on those RIRA earnings (and make more accessible without penalties). 

Cheddar Stacker

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Re: Standard deduction games
« Reply #2 on: July 09, 2014, 11:52:42 AM »
Good stuff Daisy and jawisco. Daisy, to answer one of your questions, nearly all deductions count in the year of the cash outlay. A few small exceptions are things like IRA contributions you can do by 4/15 and the occasional other special items the IRS comes up with.

I see 2 small flaws/hassles/"things worth mentioning" in your plans Daisy:

1) As jawisco mentioned you might not be able to prepay your RE tax. If you can, great. If you can't you will have to incur a small penalty and defer your 2014 tax bill into 2015 so this would delay your plan for a year.

2) With the contributions you might have to put up with more solicitations from charities because a) you are making larger contributions in a single year so you might end up on a donor "list" and b) some charities will solicit annual donations and expect the same amount as last year.

Small problems for the tax benefits you will receive.

Daisy

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Re: Standard deduction games
« Reply #3 on: July 09, 2014, 12:17:35 PM »
Good stuff Daisy and jawisco. Daisy, to answer one of your questions, nearly all deductions count in the year of the cash outlay. A few small exceptions are things like IRA contributions you can do by 4/15 and the occasional other special items the IRS comes up with.

I see 2 small flaws/hassles/"things worth mentioning" in your plans Daisy:

1) As jawisco mentioned you might not be able to prepay your RE tax. If you can, great. If you can't you will have to incur a small penalty and defer your 2014 tax bill into 2015 so this would delay your plan for a year.

2) With the contributions you might have to put up with more solicitations from charities because a) you are making larger contributions in a single year so you might end up on a donor "list" and b) some charities will solicit annual donations and expect the same amount as last year.

Small problems for the tax benefits you will receive.

1) For a particular year, say 2015, we can pay anytime between November 2014 and March 2015. Yes, there is a small percentage increase or actually a percentage discount if you pay earlier than March 2015. But I think that would be negligible if it means I can max out deductions one year and go standard the next.

2) I get solicited by the charities now as it is because I give to charities based on the percentage of my income so currently I am in a high income situation and pay a lot. I have tried to get them to stop sending me stuff in the mail as I only give once a year. I suppose with this plan of mine in ER I can separate it out as two different donations throughout the year so they don't get used to one large chunk of money. I know they use that for estimating future contributions for their budget.

BTW, another neat trick with charities is to donate appreciated stock. Neither you nor the charity pays the capital gains tax on any appreciated stock.
« Last Edit: July 09, 2014, 04:24:02 PM by Daisy »

Daisy

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Re: Standard deduction games
« Reply #4 on: July 09, 2014, 12:30:11 PM »
The best thing if you are ER and don't mind doing a smidge of work is to find someone to pay you as independent contractor to the tune of $2K/Year.  That would mean you get to deduct your health insurance (you are small business owner) and put 2K/year into IRA and get a saver's credit for an extra 1K (free money).  That can open up a lot of space to convert TIRA to RIRA and never have to pay taxes on those RIRA earnings (and make more accessible without penalties).

Sounds interesting. I will have to give some thought to this.

johnhenry

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Re: Standard deduction games
« Reply #5 on: August 27, 2014, 09:37:07 AM »
Quote
The best thing if you are ER and don't mind doing a smidge of work is to find someone to pay you as independent contractor to the tune of $2K/Year.  That would mean you get to deduct your health insurance (you are small business owner) and put 2K/year into IRA and get a saver's credit for an extra 1K (free money).  That can open up a lot of space to convert TIRA to RIRA and never have to pay taxes on those RIRA earnings (and make more accessible without penalties). 

Can you elaborate on this strategy?  Right now, I'm employed and have insurance through my employer.  My wife is not employed.  It's cheaper for my wife and 2 kids to get a plan for them through the ACA state exchange.  Our household income is less that 400% of FPL, so if I didn't have access to an employer-provided plan, we'd easily get an ACA subsidy for their premiums.  Even though we don't, it's still cheaper for us to pay for their coverage with after-tax money than to put them on my plan through work and pay with pre-tax money. 

Anyway, my wife and I both do work for family businesses owned by family/friends that we don't currently get paid cash for.  We just trade our time/equipment in return for time/equipment from others when we need it.  It's just an arrangement where family/friends help family/friends.  We own rental property, but don't have a side business with any "earned" income or 1099s.  Right now, I contribute to a 401(k) at work, but only up to the match.  And then the wife and I each max out a Roth or T IRA, depending on the details of that year.

We know the people we "help out" well enough that we could work out an arrangement where we would get paid a few thousand each year for the work we do for them.  But then we'd be in a position where we needed to pay tax on that income.  I've always wondered if starting an S-Corp, LLC, or a sole-propietorship that made a few thousand a year(from that source) would be worthwhile for the purpose of funding a SEP IRA or Solo 401(k).  I have never thought it was worth it(for us) because:

a) I don't max my 401(k) now anyway.  In the future, if my wife is working but does not have access to a 401(k)... then we may make enough to fully fund my 401(k), both IRAs, and still want to defer more income by having a 401(k) for her.  I can see where a side-business with a 401(k) may be helpful then.

b) SEP IRA not worth it because of the 20 or 25% max contribution.

The question I have, sparked by this thread, is whether it may be worth starting that small side business now so that we could deduct the health insurance premiums for wife and kids?

Also, can you elaborate on the saver's credit.  I believe that's something we already get by maxing out our IRAs while below a certain income.  I wanted to make sure you aren't describing something different that is tied to having a business.

Let me know if this needs to be in a new thread....

johnhenry

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Re: Standard deduction games
« Reply #6 on: August 27, 2014, 09:51:49 AM »
Well, it looks like one can only deduct health insurance premiums when self-employed if they are not eligible to participate in another plan, including a plan offered by the employer of a spouse.  It looks like that would keep my wife from being self-employed for the purpose of making enough to pay for tax-deductible health insurance premiums.

Anything I'm missing?

sol

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Re: Standard deduction games
« Reply #7 on: August 27, 2014, 10:38:16 AM »
Bunching deductions to itemize in alternating years is a common strategy over at the bogleheads forums.  It's a sound plan for lots of retirees.  As mentioned, property taxes, charity, and health insurance are the usual biggies.

johnhenry

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Re: Standard deduction games
« Reply #8 on: August 27, 2014, 12:21:49 PM »
Bunching deductions to itemize in alternating years is a common strategy over at the bogleheads forums.  It's a sound plan for lots of retirees.  As mentioned, property taxes, charity, and health insurance are the usual biggies.

Thanks sol.  I'm in a low very cost of living area (with a cheap house) so my taxes, mortgage interest on residence, and health insurance premiums together still don't get me close to benefiting from itemizing. Even if I double up (pay for 2 years in year) for RE taxes and health insurance, and add in mortgage interest.... that doesn't get me above the standard deduction amount.  I guess that's good in a way.... it means I'm getting my money's worth from our standard deduction.

An HSA is on my radar too.  But right now my employer plan doesn't qualify.  And even though the plan that my wife and kids pay for through our state exchange has a very high deductible, it is not registered with the state as a high-deductible plan compatible with an HSA.  I'm hoping for 2015 I can find a plan (worth the money) that is HSA compatible.

Anyone have ideas/advice to funding a Solo 401(k) with side-business income or deducting health insurance premiums in a situation where one spouse works and has access to an employer-sponsored health insurance plan?

Daisy

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Re: Standard deduction games
« Reply #9 on: August 27, 2014, 07:41:13 PM »
Bunching deductions to itemize in alternating years is a common strategy over at the bogleheads forums.  It's a sound plan for lots of retirees.  As mentioned, property taxes, charity, and health insurance are the usual biggies.

Thanks. I will check it out. One forum is currently enough for my online distraction budget, but I guess the bogleheads have been mentioned enough that I should go check it out soon.

ender

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Re: Standard deduction games
« Reply #10 on: August 27, 2014, 07:59:18 PM »
This is genius.

I never have thought about bunching deductions into one year but it makes complete sense.

Considering I am in the $7k range for deductions per year. I also am likely getting married next year and definitely won't have 12k in itemizations as a couple... I might have a lot of charitable contributions in December of this year :)

That would save me close to $2k on taxes overall! Sweet!
« Last Edit: August 27, 2014, 08:13:11 PM by enderland »

Daisy

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Re: Standard deduction games
« Reply #11 on: August 27, 2014, 08:26:03 PM »
This is genius.

I never have thought about bunching deductions into one year but it makes complete sense.

Considering I am in the $7k range for deductions per year. I also am likely getting married next year and definitely won't have 12k in itemizations as a couple... I might have a lot of charitable contributions in December of this year :)

That would save me close to $2k on taxes overall! Sweet!

Awesome! I'm glad it will save you so much. I haven't run the numbers to see what it would save me.

I don't think I can do this until I FIRE. I think my charitable deductions, property taxes, etc. take me just over the standard deduction in my new interest-free non-mortgage situation. Although now thinking about it more, I probably could do it now. Something to think about towards the end of this year.

In my FIRE days it will mean I can do a higher Roth conversion that one year I bunch deductions. I want to get as much into my Roth IRA from the traditional IRA before Social Security or age 70 kicks in.

ender

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Re: Standard deduction games
« Reply #12 on: August 28, 2014, 03:47:58 PM »
Yeah, I think this will work out very nicely for me to save quite a bit given my circumstances.

MoonShadow

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Re: Standard deduction games
« Reply #13 on: October 08, 2015, 12:11:18 PM »
Reviving an old thread to ask a more current question...

If I have a well funded HSA in retirement, can I use funds from the HSA to pay my premiums?  Can I deduct those premiums? Can I double up?

sirdoug007

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Re: Standard deduction games
« Reply #14 on: October 08, 2015, 12:54:15 PM »
Reviving an old thread to ask a more current question...

If I have a well funded HSA in retirement, can I use funds from the HSA to pay my premiums?  Can I deduct those premiums? Can I double up?

They answer seems to be: it depends.  In some cases it looks like yes, others no.

http://finance.zacks.com/health-insurance-premiums-deductible-deduction-hsa-5592.html

sirdoug007

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Re: Standard deduction games
« Reply #15 on: October 08, 2015, 01:02:47 PM »
Here are the cases when you can use a HSA to pay insurance premiums.

Quote
Exceptions
Generally, you can't use your HSA to pay for health insurance premiums. But there are exceptions. You can use your HSA for health plan premiums if:

You are receiving federal or state unemployment benefits.
You have COBRA continuation coverage.
You have eligible long-term care insurance.
You are enrolled in Medicare.

https://www.optumbank.com/using-your-health-savings-account/withdrawals-payments/qualified-medical-expenses/

So basically you have to wait until you are on Medicare (65+).