Ideas to reduce IRA MAGI?

[dandarc]

So our nominal gross is ~175K, but we get this down to about 113K MAGI by maxing a 457 and a solo 401K.  We are well within the Roth IRA limit, however we are pretty solidly in the 25% bracket right now, so making traditional IRA contributions would be preferable to Roth for us.  This 113K puts us near the top of the phase-out range for the traditional IRA.  With another 10K in above-the-line deductions, we could make traditional IRA contributions, which would be pretty ideal for us.  Any ideas on how to make this happen? 

We are already maxing retirement accounts that we have available to us.  I've looked at starting a defined benefit plan for myself, but the fees are absurd on the ones I've found (Schwab has one, and so far it is the cheapest I have found at $1200 per year).  Any other ideas?

[Cheddar Stacker]

Re-negotiate wages and benefits. If I remember from your journal you are self-employed, your wife is employed, and you work for the same place correct?

You likely don't have much wiggle room in your pay, but you do control your taxable SE income and can look into legitimate ways to increase your SE expenses. Possibly you have long-term capital needs and must invest in some technology. Maybe you can defer some expenses (and/or recognize some income early through aggressive collections) at the end of 2014 increasing taxable income this year. Contribute to a Roth this year. 2015 taxable SE income will be lower since you are making 2014 higher, and you can do the reverse at the end of 2015. So every other year your SE income goes from $70K to $50K and you contribute to a TIRA in the years when it's low.

Can your wife discuss with the employer a trade - less wage and more non-taxable benefits like health insurance, employer match of retirement contributions, etc.?

Also, maybe you could make HSA contributions. Tax loss harvesting.

That's all I got for you.

[seattlecyclone]

If you can arrange to have a net capital loss for the year, you can deduct up to $3,000 of it. HSA contributions could also get you closer if you aren't making them already. Beyond that, seems like increasing your business expenses to reduce your net self-employment income would be your best bet, but you'll have to decide whether spending more on your business just to deduct your IRA contributions is a good trade-off. Contributing to a Roth IRA instead of a traditional one because your income is too high really isn't the end of the world.

[dandarc]

It occurs to me, that I've only got 11 months of income for this year - my January payment from my contracting firm was processed by them on December 31st, they reported it for 2013 and I didn't argue with them.  Have to add this up as the figures become more concrete, but I think we might already be there for this year.

Can you contribute to traditional initially, then change it to Roth if it turns out your income is too high?

[dandarc]

If you can arrange to have a net capital loss for the year, you can deduct up to $3,000 of it. HSA contributions could also get you closer if you aren't making them already. Beyond that, seems like increasing your business expenses to reduce your net self-employment income would be your best bet, but you'll have to decide whether spending more on your business just to deduct your IRA contributions is a good trade-off. Contributing to a Roth IRA instead of a traditional one because your income is too high really isn't the end of the world.

Yeah - this definitely falls under good problems to have.  Don't really have expenses for my business - maybe I could track mileage for the occasional cross-town meeting, but that would be miniscule.  Guess I could go to a conference or something on my dime, but that kind of defeats the purpose of the exercise.  HSA I should look in to - the analysis on the insurance options came out to about a wash last year, so we stuck with the non-HSA plan, however we didn't really intend to contribute beyond the 1K the employer would have when we did that analysis - we've done a "tax strategy 180" since the early part of this year.

[Cheddar Stacker]

Can you contribute to traditional initially, then change it to Roth if it turns out your income is too high?

Yes, you just have to re-characterize it.

This should be your "down year" then. Make sure any business expenses you have are paid before 12/31. If you need to purchase anything for the business do it this year. You should absolutely be deducting mileage and anything else business related. You are paying a large amount of taxes on your SE income, so you need to attempt to reduce it in any legitimate way you can.

Are the checks you receive from your contracting firm manual/paper, or are they automatically transferred into your bank account? I ask, because you are a cash basis taxpayer unless you're filing an entity tax return and elected accrual status. If the checks are paper and you take them to the bank, you can take the December payment on January 5th, 2015. The firm will report the payment on a 1099 for 2014, and you need to report it as gross income, but when our firm prepares tax returns with a situation like this many times we will back out these "timing differences" as an expense in order to report the revenue you actually deposited into your bank during the year. Just another thought, but you need to keep close track of all this stuff just in case you ever get audited.

[dandarc]

Can you contribute to traditional initially, then change it to Roth if it turns out your income is too high?

Yes, you just have to re-characterize it.

This should be your "down year" then. Make sure any business expenses you have are paid before 12/31. If you need to purchase anything for the business do it this year. You should absolutely be deducting mileage and anything else business related. You are paying a large amount of taxes on your SE income, so you need to attempt to reduce it in any legitimate way you can.

Are the checks you receive from your contracting firm manual/paper, or are they automatically transferred into your bank account? I ask, because you are a cash basis taxpayer unless you're filing an entity tax return and elected accrual status. If the checks are paper and you take them to the bank, you can take the December payment on January 5th, 2015. The firm will report the payment on a 1099 for 2014, and you need to report it as gross income, but when our firm prepares tax returns with a situation like this many times we will back out these "timing differences" as an expense in order to report the revenue you actually deposited into your bank during the year. Just another thought, but you need to keep close track of all this stuff just in case you ever get audited.

It is an automatic transfer - went 'out' on December 31st, but was not available in my account until Jan. 2nd or 3rd.  They sent me a 1099 for 2013 including that payment.  Like I said I didn't argue - we made a big shift in tax strategy and got a huge refund anyway because we had already sent in way too much per our earlier plan.  My set up is pretty common in IT (at least it is here - lets the client get around their own pay-scale limitations - this is not a private-sector client, so changing the pay scale is not easy - literally requires an "act of congress") - I work through a contracting firm, and was given the choice of being a W-2 employee of that firm or (what I chose) to be paid as a 1099 sub-contractor.  I really have no out-of-pocket costs for this arrangement.  I've got a very small side business that does have expenses that I track, but that is less than 1% compared to the day job.  Client provides equipment, and a desk.  The commute is not deductible, if I understand the law around that correctly (particularly if I get better about doing it by bike) - I'd have a hard time making the case that the client's office is not my principal office because that's where I work every single day.  Rarely I work from home, but I don't have a dedicated home office.  I might be able to come up with 100 miles per year there that is not-commute related.

Would me under-reporting expenses ever be a problem in case of an audit?  Seems they'd be looking harder for people over-reporting expenses.

[Cheddar Stacker]

Would me under-reporting expenses ever be a problem in case of an audit?  Seems they'd be looking harder for people over-reporting expenses.

No. I was referring to tracking when you claim the monthly revenue. If you were ever to back out December to include it the following year, you need to make sure it gets added the next year.

[dandarc]

D'oh, reading comprehension is failing me today.

Thanks for the tips - might be interesting to alternate high and low income years by shifting December (and / or November).  We could definitely float 2 months if we had to, so this is a possibility - have an 11 or 10 month year followed by a 13 or 14 month year.  Because of the 18.5% Solo-K contribution, the tax-rate doesn't change much at all for us.  Traditional IRA in one, Roth in the next.  Might run that one by both bosses and see what they say.  I'd have to essentially sit on my invoices and send them in in January - not sure the contract firm will go for that, but I believe he could still bill the client and just not send me my end until later- he'd make a little interest on the float, I'd get to have more fun with the playing the tax game.  Win-Win, right?

[Cheddar Stacker]

Yeah, only 2 real draw backs:

1) They might be cash basis and would want the deduction for paying you.
2) The IRS might not like deferring 2 entire months of pay.