Tax Planning: Check my math/how can I improve?

[minority_finance_mo]

Hi all,

I am currently in the process of planning out my tax strategy for 2015, as I know many of you are. I've done some research into the types of deductions/credits I can take advantage of, but would love some more input:

EDIT: I've edited my projected numbers to include some of the suggestions from below:

W2 Income:
Job 1: 42,500 + 6,750 bonus (can be as high as 9,000)
Job 2: 8000 (estimate)
Total Income: 57,250

Deferred Income:
401k: 18,000 (max for 2015)
Total Deferred Income: 18,000

Deductions:
IRA: 5,500 (max for 2015; traditional, but looking into Roth)
HSA: 0 (need to check with HR to see if we offer a HDHP. If so, 3,350)
Tuition and Fees: ~750
Total Deductions: 6,250 (w/ HSA, 9,600)

Adjusted Gross Income: 33,000 (goal: increase deductions to reduce this number to below 30,500)

Post-AGI Deductions:
Standard Deduction: 6,400
Personal Exemption: 4,000
Total Post-AGI Deductions: 10,400

Taxable Income: 22,600


Projected Tax Obligation:
10% Bracket: 9225 x 10% = $922.50
15% Bracket: (22,150-9225) x 15% = $2,006.25
Total Projected Tax Obligation: $2,928.75

Assuming I can reduce AGI by another $2,500+ to be eligible for the retirement saver's credit, this would be  $2,354 (922.50 + (20,100-9225)*.15 - 200.) That's literally a $500 tax savings...


About Me:

• I am 21 years old, filing single independent. No children.
• Finishing up my final semester as an undergrad (nights/weekends, part time. I heavy-loaded courses in the first three years.) I'll spend roughly $750 in fees in 2015 for college before I graduate.
• Living in NYC, projected spending (you can check out my journal here http://forum.mrmoneymustache.com/journals/moe%27s-journal-starting-from-zero/) is ~$15k.

Can someone check my math on this? Am I missing any deductions/credits that I can take advantage of?


Thanks so much in advance for your help.

Last Edit: 7:41, 1/2/2015

[dandarc]

Nothing really to add, but in making your Roth vs. Traditional decision, remember to think about state and local taxes.  Even though you're in the 15% bracket, high state taxes (particularly if you're open to moving to a lower-tax state when you retire) can tilt things towards Traditional.

If you want to defer more, you could open a SEP-IRA or similar for your side job income - gives another ~2K of tax advantaged space.

15K expenses in NYC is impressive - good work on that!

[dandarc]

I should clarify - SEP IRA if that side-gig is an independent contractor thing.  If it is another job, then that is not an option.

[Psychstache]

Couple of other tax considerations:

HSA: If you can land a job that offers a HDHP, you can set up an HSA account and get another 3350 in tax free space.

Saver's Credit: With a low enough AGI, which you look to be close to, you can get an additional tax credit based on your retirement savings. It's not much, but it is a credit for doing what you are already doing. You might want to research this further.

Student Loan Interest: Not sure if you have loans, but if you do and you start paying back on them, student loan interest up to 2500 per year is tax deductible.

[minority_finance_mo]

15K expenses in NYC is impressive - good work on that!

Thank you!

I should clarify - SEP IRA if that side-gig is an independent contractor thing.  If it is another job, then that is not an option.

The side job is a tutoring position for a large test-prep company. I am an employee with a W2, so unfortunately the SEP IRA isn't an option, yet.

That said, I have been itching to "go rouge" and start tutoring on my own as an independent contractor. The income will be 50-75% higher per hour, though I'll have to come up with my own clientele. This is certainly one of my goals for 2015. I have not done enough research yet on the tax implications on the decision, so I left it out in the calculations above.

In making your Roth vs. Traditional decision, remember to think about state and local taxes.  Even though you're in the 15% bracket, high state taxes (particularly if you're open to moving to a lower-tax state when you retire) can tilt things towards Traditional.

The Roth vs. Traditional decision is one that's haunting me, and I am still looking for more resources to help me understand the math behind both options. My challenge is the decision seems to require me to project my spending/income levels years in the future, and I don't feel confident doing that at all.

I'm leaning traditional because the immediate returns from tax savings (I know, I should do the math, but free moneys! Haha) and my understanding is that I can convert the funds to a Roth over time anyways.

Honestly, it really is a cop-out decision, and if you know of a comprehensive source on the math behind both options, I'd be incredibly grateful!

[minority_finance_mo]

Couple of other tax considerations:

HSA: If you can land a job that offers a HDHP, you can set up an HSA account and get another 3350 in tax free space.

That's a great idea. I have to check in with my HR department and see if this is an option - thank you!

Saver's Credit: With a low enough AGI, which you look to be close to, you can get an additional tax credit based on your retirement savings. It's not much, but it is a credit for doing what you are already doing. You might want to research this further.

It seems like these are the current requirements for the Saver's Credit:


According to this, I fall within the 10% rate with my current MAGI (correct me if I'm wrong, please), which would mean a $200, credit on my taxes? If that's the case, that's AMAZING! Thanks ksaleh :)

Student Loan Interest: Not sure if you have loans, but if you do and you start paying back on them, student loan interest up to 2500 per year is tax deductible.

No student loans, thankfully. I was fortunate enough to have scholarships/part time jobs cover all of my tuition expenses to date. I think I'll have spend roughly 3000-4000 out of pocket by the time I graduate from my public university.

[seattlecyclone]

For the saver's credit, your AGI needs to be under $30.5k. The AGI takes your traditional retirement contributions into account, but it is computed before subtracting the standard deduction and personal exemption. You're currently projecting an AGI of $33,250 with your income numbers ($57,250 - $18,000 - $6,000) if you make traditional retirement contributions. The HSA deduction and/or tuition and fees deduction could push your AGI low enough to qualify for this credit this year.

[minority_finance_mo]

For the saver's credit, your AGI needs to be under $30.5k. The AGI takes your traditional retirement contributions into account, but it is computed before subtracting the standard deduction and personal exemption. You're currently projecting an AGI of $33,250 with your income numbers ($57,250 - $18,000 - $6,000) if you make traditional retirement contributions. The HSA deduction and/or tuition and fees deduction could push your AGI low enough to qualify for this credit this year.

Thanks for the response, seattlecyclone. I was afraid there was some miscalculations there on my part. Just to confirm, then, the formula for AGI for tax purposes is:

	Gross Income
LESS:	Deferred Income (IRA/401k/403b/etc.)
LESS:	Deductions (itemized?), but not the standard deduction or any exemptions
	Adjusted Gross Income
LESS:	Standard Deduction (if you didn't itemize)
LESS:	Exemptions
	Taxable Income

Is that correct?

Any idea why HSA and tuition/fees are subtracted from gross income for AGI purposes, and not the standard deduction? Are all itemized deductions subtracted in AGI calculations?

[seattlecyclone]

Take a look at Form 1040. Everything on the first page is used to calculate your AGI (Line 37). Everything on the second page happens afterward. That will show you what is and is not counted for AGI. As to why are some things included and not others? Ask Congress.

[minority_finance_mo]

Take a look at Form 1040. Everything on the first page is used to calculate your AGI (Line 37). Everything on the second page happens afterward. That will show you what is and is not counted for AGI. As to why are some things included and not others? Ask Congress.

I see, thank you so much for including this! Silly me, I should have looked to the form itself first.

[minority_finance_mo]

I've edited my original post to reflect some of the awesome suggestions above. Thanks all, so far.

[dandarc]

HSAs are awesome, particularly if you can contribute through payroll - saves you another 7.65% from FICA.  So if you have the option, and you're pretty healthy, the HDHP + HSA often makes a lot of sense.

Run the numbers to make sure it all works out.

This brings up another thing - do you contribute towards your health or dental insurance premiums?  If so, reduce your salary by that amount before computing AGI and such.

[Shade00]

Am I missing something? IRA max is $5500.

[dandarc]

Am I missing something? IRA max is $5500.

You are not.  The catch-up contributions for over 50 went up, but the IRA limits did not.

OP - decent Roth / Traditional Calculator
http://www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx

Be sure and expand all the "advanced" options.  The general advice is if you think your effective tax rate in retirement will be lower than your marginal tax rate today, traditional is better.  You're in a bit of a difficult situation to analyse - just out of school, still living at home.  Hard to get a handle on your long-term expenses, which are what will drive your "retirement" income if you are careful. 

The calculation for many here is "we're making 100K and spending 30K, so when we retire, no more than 30K taxable income" or something similar - that makes it pretty easy to go traditional, because it seems quite likely that the tax rate on 30K will be less than the tax rate on 100K, even decades down the road.

[Gin1984]

Couple of other tax considerations:

HSA: If you can land a job that offers a HDHP, you can set up an HSA account and get another 3350 in tax free space.

That's a great idea. I have to check in with my HR department and see if this is an option - thank you!

Saver's Credit: With a low enough AGI, which you look to be close to, you can get an additional tax credit based on your retirement savings. It's not much, but it is a credit for doing what you are already doing. You might want to research this further.

It seems like these are the current requirements for the Saver's Credit:


According to this, I fall within the 10% rate with my current MAGI (correct me if I'm wrong, please), which would mean a $200, credit on my taxes? If that's the case, that's AMAZING! Thanks ksaleh :)

Student Loan Interest: Not sure if you have loans, but if you do and you start paying back on them, student loan interest up to 2500 per year is tax deductible.

No student loans, thankfully. I was fortunate enough to have scholarships/part time jobs cover all of my tuition expenses to date. I think I'll have spend roughly 3000-4000 out of pocket by the time I graduate from my public university.

Are you going full time for any part of the year?  If so, you are not eligible for the saver's credit.

[minority_finance_mo]

Am I missing something? IRA max is $5500.

You are not.  The catch-up contributions for over 50 went up, but the IRA limits did not.

OP - decent Roth / Traditional Calculator
http://www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx

Be sure and expand all the "advanced" options.  The general advice is if you think your effective tax rate in retirement will be lower than your marginal tax rate today, traditional is better.  You're in a bit of a difficult situation to analyse - just out of school, still living at home.  Hard to get a handle on your long-term expenses, which are what will drive your "retirement" income if you are careful. 

The calculation for many here is "we're making 100K and spending 30K, so when we retire, no more than 30K taxable income" or something similar - that makes it pretty easy to go traditional, because it seems quite likely that the tax rate on 30K will be less than the tax rate on 100K, even decades down the road.

Thanks guys. I just confirmed and you're both absolutely right. I've corrected that above.

dandac, thanks for the calculator above and the advice!

[minority_finance_mo]

Couple of other tax considerations:

HSA: If you can land a job that offers a HDHP, you can set up an HSA account and get another 3350 in tax free space.

That's a great idea. I have to check in with my HR department and see if this is an option - thank you!

Saver's Credit: With a low enough AGI, which you look to be close to, you can get an additional tax credit based on your retirement savings. It's not much, but it is a credit for doing what you are already doing. You might want to research this further.

It seems like these are the current requirements for the Saver's Credit:


According to this, I fall within the 10% rate with my current MAGI (correct me if I'm wrong, please), which would mean a $200, credit on my taxes? If that's the case, that's AMAZING! Thanks ksaleh :)

Student Loan Interest: Not sure if you have loans, but if you do and you start paying back on them, student loan interest up to 2500 per year is tax deductible.

No student loans, thankfully. I was fortunate enough to have scholarships/part time jobs cover all of my tuition expenses to date. I think I'll have spend roughly 3000-4000 out of pocket by the time I graduate from my public university.

Are you going full time for any part of the year?  If so, you are not eligible for the saver's credit.

I think you mean full-time student, as that would exclude me according to IRS's eligibility for the saver's credit (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29.) No, I'm going to be part-time for my final semester, so I should still be eligible.

Retirement Topics - Retirement Savings Contributions Credit (Saver’s Credit)

You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan.
Who's eligible for the credit?

You're eligible for the credit if you're:

• Age 18 or older
• Not a full-time student; and
• Not claimed as a dependent on another person’s return.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29