Double the income....tax implications?

[kimmarg]

Hi,
We are in the incredibly fortunate situation of having doubled our income this year having gone from 1 income + student to 2 incomes. I am wondering what I should be considering in terms of tax implications. Here are some rough details.

income 1: $85k
            tax free witholding  $1500 FSA Flex spending
                                 $5000 FSA Childcare
                                $18,000 401k

Income 2: $72k
            tax-free witholding: $12500 401k (full amount per pay check after eligibility began after 3 months employment)

Married filing jointly, 1 dependent, standard deduction.

Currently we are using 100% of income 2 to pay down student loans (6%) from school and anticipate loan payoff at the end of the year.  Are there any other tax advantaged things I should be doing? Any other tricks I don't know about? I tried to change the witholding to increase the amounts from both our checks. I'm a bit nervous to have a ginormous tax bill this year.

[Arbitrage]

Congratulations on the extra income.  The limit on 401k is 18,500 this year, but I assume you're funding to the max.  You're likely ineligible for deductible Traditional IRAs, but could be funding Roth IRAs (doesn't help your current tax situation).  However, with your student loan rate, I don't see an issue with prioritizing loan paydown over a Roth IRA.

For tax withholding, if you take two similar incomes and have them both withholding as MFJ+1, you are likely going to end up with an unpleasant tax bill.  A decent solution is to have the higher income withholding filed as MFJ+1, and the lower income as Single. 

You could also play around with tax software, or even just forms + tax tables, to predict your tax bill vs your current rates of withholding, and adjust your W-4s accordingly. 

[Proud Foot]

Don't forget that health insurance premiums typically are pretax when payroll deducted.  After that run your numbers and see if you are both eligible to contribute to traditional IRA's (5,500 each)

[kimmarg]

 

Congratulations on the extra income.  The limit on 401k is 18,500 this year, but I assume you're funding to the max.  You're likely ineligible for deductible Traditional IRAs, but could be funding Roth IRAs (doesn't help your current tax situation).  However, with your student loan rate, I don't see an issue with prioritizing loan paydown over a Roth IRA.

For tax withholding, if you take two similar incomes and have them both withholding as MFJ+1, you are likely going to end up with an unpleasant tax bill.  A decent solution is to have the higher income withholding filed as MFJ+1, and the lower income as Single. 

You could also play around with tax software, or even just forms + tax tables, to predict your tax bill vs your current rates of withholding, and adjust your W-4s accordingly. 

Thank you. I'll try running the tax witholding numbers again.This is great but now I just have more questions!
  At what income can I not contribute to an IRA? Also do I have to do the Aternative Minimum Tax I've heard about? 
  I remembered we also have a college savings account for our child can I contribute more to that?  We have a big goal of paying off the student loans in one year but I'd rather take advantage of all the tax breaks I can even if it means going a month or two into the following year to pay the loans.

[Arbitrage]

Congratulations on the extra income.  The limit on 401k is 18,500 this year, but I assume you're funding to the max.  You're likely ineligible for deductible Traditional IRAs, but could be funding Roth IRAs (doesn't help your current tax situation).  However, with your student loan rate, I don't see an issue with prioritizing loan paydown over a Roth IRA.

For tax withholding, if you take two similar incomes and have them both withholding as MFJ+1, you are likely going to end up with an unpleasant tax bill.  A decent solution is to have the higher income withholding filed as MFJ+1, and the lower income as Single. 

You could also play around with tax software, or even just forms + tax tables, to predict your tax bill vs your current rates of withholding, and adjust your W-4s accordingly. 

Thank you. I'll try running the tax witholding numbers again.This is great but now I just have more questions!
  At what income can I not contribute to an IRA? Also do I have to do the Aternative Minimum Tax I've heard about? 
  I remembered we also have a college savings account for our child can I contribute more to that?  We have a big goal of paying off the student loans in one year but I'd rather take advantage of all the tax breaks I can even if it means going a month or two into the following year to pay the loans.

You can always contribute to an IRA (given sufficient income), but the contributions aren't tax-deductible above a certain limit.  Best place to go is the source, IRS publication 590-A:

https://www.irs.gov/publications/p590a

Looks like the deductibility limit for MFJ is from $101k - $121k (starts to phase out at $101,000 in MAGI).  Note that AGI reductions from Traditional IRA contributions don't affect this MAGI, so you're probably near the upper end of the phaseout, unless you've got particularly large employer health premiums. 

For a college plan, assuming you're talking about a 529, contributions won't reduce your federal tax bill, but you could potentially have state tax benefits. 

[MDM]

You may find the Investment Order sticky and the case study spreadsheet useful for
- investing priorities appropriate for many situations, and
- tax and withholding estimation
respectively.

[MustacheAndaHalf]

@kimmarg - one good bit of news, the 2017 tax brackets had a marriage penalty that kicked in at about your level of income, but now in 2018 tax brackets doesn't occur until both incomes are around $300,000.

[Arbitrage]

Also, you're not going to have to worry about the Alternative Minimum Tax.  With the new tax law, very few people will be hit with it for various reasons (for instance, much lower deductibility limit of state taxes).

Even if you were hit with it, there's not much to do to prepare.  You just have to suck it up and pay it at that point.