Author Topic: federal income tax deductions with baby?  (Read 1313 times)

clarkfan1979

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federal income tax deductions with baby?
« on: July 26, 2017, 08:55:41 PM »
I had my first baby 2 months ago. From what I understand, I get a standard deduction of $4,050 to reduce my taxable income and a tax credit of $1,000. Is this correct?

For 2017, I will make $62,000 and my wife will make $10,000. We will have $10,000 of taxable rental income for a total of $82,000. The standard deduction for a married couple is $12,000 + 4,000 for the child. I should have around $2,000 of student loan interest that is tax deductible, reducing our taxable income to $64,000.

I just want to make sure that we stay under $75,000, which is the 25% tax bracket.

Joel

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Re: federal income tax deductions with baby?
« Reply #1 on: July 26, 2017, 09:02:25 PM »
I don't know the amounts off hand but you should be eligible for the married standard deduction plus three exemptions. You don't seem to be factoring both in correctly to determine your taxable income.  You also may be eligible for the child tax credit and potentially some other lower level credits.

You also should know that just because you reach the 25% tax bracket, it's only for the marginal dollars in that bracket and not everything. It wasn't clear if you knew that by your post.

ijingle

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Re: federal income tax deductions with baby?
« Reply #2 on: July 26, 2017, 09:46:24 PM »
Congratulations on your new baby! We have an 8 month old so I've recently enjoyed her impact on our tax situation. Yes, you get an extra $4,050 exemption. So you're up to $12,150 in exemptions. Plus $12,700 standard deduction, if standard is your style. And, as if that baby wasn't cute enough, you  get $1,000 credit. This is worth another $6,666 in deductions in the 15% marginal tax bracket.

So your baseline situation seems to be...

$82,000
-12,700 standard deduction
-12,150 exemptions
_______
=$57,150 taxable income (you are already at the 15% marginal rate)
That works out to be $7,664 in taxes
Then $1,000 Child Tax credit brings that tax burden down to $6,664.

Pretty good. Pretty. Pretty. Pretty good.



It's the fermentation, stupid.

Abe

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Re: federal income tax deductions with baby?
« Reply #3 on: July 26, 2017, 10:23:49 PM »
Also remember any child care costs, which can be deducted also.

http://www.taxpolicycenter.org/briefing-book/how-does-tax-system-subsidize-child-care-expenses

MDM

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Re: federal income tax deductions with baby?
« Reply #4 on: July 27, 2017, 12:50:13 AM »
I had my first baby 2 months ago. From what I understand, I get a standard deduction of $4,050 to reduce my taxable income and a tax credit of $1,000. Is this correct?

For 2017, I will make $62,000 and my wife will make $10,000. We will have $10,000 of taxable rental income for a total of $82,000. The standard deduction for a married couple is $12,000 + 4,000 for the child. I should have around $2,000 of student loan interest that is tax deductible, reducing our taxable income to $64,000.

I just want to make sure that we stay under $75,000, which is the 25% tax bracket.

Is the $10K rental income net of all your real expenses (maintenance, mortgage interest, etc.) and depreciation?  If so, and assuming no other income and deductions (e.g., no IRA, 401k, medical insurance, dependent care, etc.), your 2017 taxes should look very similar to the tables below.  See the case study spreadsheet to enter more specific numbers.

I'd also echo Joel's question: do you "know that just because you reach the 25% tax bracket, it's only for the marginal dollars in that bracket and not everything"?

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$5,167$62,000
Salary/Wages for earner #2$833$10,000
Rental income$833$10,000
Rental taxable income$833$10,000
Federal Total Income (for IRS tax)$6,833$82,000
Federal tax$5282017 rates, MFJ, stand. ded., 3 exempt.$6,340
State/City tax$0Guess, using 0.00% * (AGI - Exempt'n)$0
Soc. Sec. tax$372Assumes 2 earners paying$4,464
Medicare tax$87$1,044
Total income taxes$987$11,848



Filing Status21=S, 2=MFJ, 3=HOH
# Exemptions3
# Children <171
# Children <131
# Children for EIC1
Adult #1Adult #2
Age3838
# of earners2
Total Income$82,000
Std. Deduct.$12,700
Act. Deduct.$12,700
Exemption$12,150
SL int. (approx.)$2,000
AGI$80,000
MAGI$82,000
Taxable$55,150
1040 Tax$7,340
Tax after n-r credit$7,340
Child Tax Cred.$1,000
Net Tax$6,340
Monthly$528
Item. Deduct.$0
VersionV9.02

clarkfan1979

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Re: federal income tax deductions with baby?
« Reply #5 on: July 27, 2017, 09:30:24 AM »
Thanks for the help.

Yes, I understand that the 25% bracket is marginal. However, I still want to avoid it. We will probably approach the 25% tax bracket in 5 years. At that point, I will start putting money into a 403B. I already have a teacher pension that takes out 8%.

Our rental income is around 22K after vacancy and repairs. However, after depreciation (8K) and travel costs for managing the rentals (4K), our taxable rental income is around 10K.

Heroes821

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Re: federal income tax deductions with baby?
« Reply #6 on: July 27, 2017, 09:54:09 AM »
Thanks for the help.

Yes, I understand that the 25% bracket is marginal. However, I still want to avoid it. We will probably approach the 25% tax bracket in 5 years. At that point, I will start putting money into a 403B. I already have a teacher pension that takes out 8%.

Our rental income is around 22K after vacancy and repairs. However, after depreciation (8K) and travel costs for managing the rentals (4K), our taxable rental income is around 10K.

You say you get  it, but lets make sure it is clear.  Tax brackets are actually buckets and you fill the up one at a time.  If you were married filing jointly and your income (not counting deduction think very simply) was $75,901, congrats your in the 25% bracket and only 1 dollar is being taxed at 25%.  Everything under that filled up your other lower buckets.

It has been proven mathematically on these forums several times that making more that pushes you into a higher bracket is not a bad thing.  So don't avoid making $75k just to lose 25 cents in taxes.

kpd905

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Re: federal income tax deductions with baby?
« Reply #7 on: July 29, 2017, 07:29:35 AM »
So don't avoid making $75k just to lose 25 cents in taxes.

I would still try to avoid having income in the 25% bracket, and I do by maxing out all pre-tax space.  It is usually not 25 cents, for me it is 25% federal + 6% state + either 7.65% for work wages or 15.3% for side hustle income.  So 38.65% to 46.3%.  The 10% drop down to the 15% federal bracket just seems much nicer to me.
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NoNonsenseLandlord

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Re: federal income tax deductions with baby?
« Reply #8 on: July 29, 2017, 08:45:41 AM »
I do not have a baby (now or ever), but I do have rental income like you.

I just bought a F350 truck for my rental business.  I will get a larger deduction for the truck than your baby.  You should have went the truck route, it would have been cheaper in the long run.

MDM

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Re: federal income tax deductions with baby?
« Reply #9 on: July 29, 2017, 12:33:30 PM »
I would still try to avoid having income in the 25% bracket, and I do by maxing out all pre-tax space.  It is usually not 25 cents, for me it is 25% federal + 6% state + either 7.65% for work wages or 15.3% for side hustle income.  So 38.65% to 46.3%.
That's true for some pre-tax income, most notably employer-sponsored cafeteria plans (HSA, medical insurance, etc.).

For the rest (tIRA, 401k, etc.), FICA is unaffected so it's "only" 31%.

Big difference between reducing taxable income by
- using pre-tax deductions, vs.
- choosing not to work (e.g., decline overtime).
Seems you are using the former - keep up the good work!

clarkfan1979

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Re: federal income tax deductions with baby?
« Reply #10 on: July 31, 2017, 12:29:45 PM »
Thanks for the help.

Yes, I understand that the 25% bracket is marginal. However, I still want to avoid it. We will probably approach the 25% tax bracket in 5 years. At that point, I will start putting money into a 403B. I already have a teacher pension that takes out 8%.

Our rental income is around 22K after vacancy and repairs. However, after depreciation (8K) and travel costs for managing the rentals (4K), our taxable rental income is around 10K.

You say you get  it, but lets make sure it is clear.  Tax brackets are actually buckets and you fill the up one at a time.  If you were married filing jointly and your income (not counting deduction think very simply) was $75,901, congrats your in the 25% bracket and only 1 dollar is being taxed at 25%.  Everything under that filled up your other lower buckets.

It has been proven mathematically on these forums several times that making more that pushes you into a higher bracket is not a bad thing.  So don't avoid making $75k just to lose 25 cents in taxes.

I don't think I posted anything about trying to make less money. If my taxable income is $80,000. I would rather put $5,000 into a 403B instead of having that last $5,000 be taxes at 25%. That's it.

clarkfan1979

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Re: federal income tax deductions with baby?
« Reply #11 on: July 31, 2017, 12:31:34 PM »
I do not have a baby (now or ever), but I do have rental income like you.

I just bought a F350 truck for my rental business.  I will get a larger deduction for the truck than your baby.  You should have went the truck route, it would have been cheaper in the long run.

I management myself, but I hire out 95% of the repairs because my rentals are out of state. I'm not sure what I would do with a F350 truck.