Author Topic: HELP! $285k income & $78k in taxes. Losing too much to taxes?!  (Read 3523 times)

Fi365

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HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« on: January 05, 2018, 08:14:13 AM »
Background:
 - Early 30s couple and 2-year-old daughter living ~50 miles outside of Washington, DC (fairly high cost of living)
- We spent freely throughout our 20s and only started contributing to retirement plans in our late 20s. Yikes, I know. We didn't acquire an ounce of debt though--paid for undergrad and grad school out of pocket ourselves--phew!
- In 2014, we heard the word "budget." Yikes, I know.
- From 2015 - present, I've become really good at making money. I started a consulting business and our household income was ~$285,000 in 2017.
- The "increasing income" side of the FI equation is covered. We're getting better at the "reducing expenses" side every day. But the tax strategy side is brand new and I feel lost and frustrated...

The challenge:
- Yesterday I saw the Root of Good tax info on this forum's sticky post. $150,000 and paying $150 in taxes?!?! I have so much to learn. In 2017 we paid $78,000 of our ~$285,000 income to taxes.

Details:
- Here's our info: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit#gid=0 (scroll down to line 273)
- More background if you need it: https://fi365.wordpress.com/2017/12/31/2017-report/

Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.

THANK YOU!!!!
- Mrs. Fi365, aka Good-At-Making-Money-and-Bad-At-Keeping-It



« Last Edit: January 21, 2018, 04:43:20 AM by Fi365 »
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Undecided

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #1 on: January 05, 2018, 08:51:26 AM »
Background:
 - Early 30s couple and 2-year-old daughter living ~50 miles outside of Washington, DC (fairly high cost of living)
- We spent freely throughout our 20s and only started contributing to retirement plans in our late 20s. Yikes, I know. We didn't acquire an ounce of debt though--paid for undergrad and grad school out of pocket ourselves--phew!
- In 2014, we heard the word "budget." Yikes, I know.
- From 2015 - present, I've become really good at making money. I started a consulting business and our household income was ~$285,000 in 2017.
- The "increasing income" side of the FI equation is covered. We're getting better at the "reducing expenses" side every day. But the tax strategy side is brand new and I feel lost and frustrated...

The challenge:
- Yesterday I saw the Root of Good tax info on this forum's sticky post. $150,000 and paying $150 in taxes?!?! I have so much to learn. In 2017 we paid $78,000 of our ~$285,000 income to taxes.

Details:
- Here's our info: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit#gid=0 (scroll down to line 234)
- More background if you need it: https://fi365.wordpress.com/2017/12/31/2017-report/

Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.

THANK YOU!!!!
- Mrs. Fi365, aka Good-At-Making-Money-and-Bad-At-Keeping-It

Somebody has to pay the taxes, and the system treats different situations very differently. You may not have the options Root of Good has.

Many deductions and credits phase out before your income level, although some of those limits change this year.

That said, it doesn’t look like you or your partner contributes to a 401(k). Are they available to you? Do you have other tax-advantaged plans (403(b), 457)? You likely can’t deduct IRA contributions, so it may not make sense to contribute to them and pass up other options that would be deductible but otherwise similar. Do you convert your IRA contributions to Roth IRAs?

Are you W-2 employees of someone else?

Proud Foot

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #2 on: January 05, 2018, 09:21:57 AM »
Does your spouse have a 401k available to them through work? Also since you are self-employed look into setting up a solo 401k for yourself so you can increase your contributions there.

Rocketman

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #3 on: January 05, 2018, 10:59:33 AM »
In your post you say consulting business. What structure is that business s-Corp love,sole prop.  Do you have employees?  There are many great ways to defer taxes and Save for retirement,but details really matter when starting the retirement plan.

There is a chance you could defer about $52,k per year -which greatly lowers your agi and taxes you pay -but details matter.

You need to look into all the different flavors of retirement plans.

Lucky Recardito

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #4 on: January 05, 2018, 11:16:26 AM »

Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.


Specific answers:
- You make too much to qualify for the CTC for 2017. However, the recent tax bill greatly expanded the CTC; at your current income level, I believe you will qualify for a $2K credit in 2018. https://www.hrblock.com/tax-center/irs/tax-reform/new-child-tax-credit/
- You make too much to deduct Traditional IRA contributions. You also make too much to contribute to a Roth IRA. https://www.fool.com/retirement/2016/11/05/ira-income-limits-for-2016-and-2017.aspx
- 529 savings are not deductible for federal taxes; helps on state taxes only.
- I'll let others be more helpful here, but I suspect your mileage will come from (a) making sure you're finding all the available retirement savings vehicles for your self-employed situation (which I don't know much about); (b) reducing your taxable  business profit via (legitimate) expense deductions; (3) adding an HSA if your health insurance plan qualifies, and (4) becoming a back-door (or mega-back-door) Roth-er (of which much has been written on these forums) -- this won't help your taxes now, but will help in the future!

ETA: It also looks like the doubled standard deduction will help you out in 2018, as your itemized deductions are below that $24K figure for MFJ (while the expanded CTC will help you more than the loss of personal exemptions will hurt you).
« Last Edit: January 05, 2018, 11:19:58 AM by Lucky Recardito »

LifeHappens

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #5 on: January 05, 2018, 11:20:10 AM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

Mr. Boh

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #6 on: January 05, 2018, 02:25:50 PM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

I completely agree.

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #7 on: January 05, 2018, 05:15:45 PM »
I mentioned in you case study as DH is a Fellow Fed, make sure DH is maxing out his TSP $18,500 for 2018,  if he has 26 pay periods it's $712 a PP, if he has 27 its $686.  He will have 27 pay checks if his pay is processed by the National Finance Center (a.k.a NFC). 

SeattleCPA

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #8 on: January 05, 2018, 05:34:11 PM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

I completely agree.

I work with tax attorneys. And I don't think you consult a tax attorney for your situation. You use tax attorneys when you need to go to tax court... or do big dollar estate planning ... or as one of the attorneys on the team from the big law firm you're using if you're selling your business.

The big things you need to do are exploit pension savings options... and if you're self-employed, look at the S corporation option.

As others note, somebody has to pay the taxes that fuel our government...
My blog Evergreen Small Business
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Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #9 on: January 05, 2018, 05:57:03 PM »
I mentioned in you case study as DH is a Fellow Fed, make sure DH is maxing out his TSP $18,500 for 2018,  if he has 26 pay periods it's $712 a PP, if he has 27 its $686.  He will have 27 pay checks if his pay is processed by the National Finance Center (a.k.a NFC).

Yes, since my income started going up, he's been maxing out his TSP and we've been maxing our IRAs.

Okay, based on all this fantastic feedback, the current game plan is:
- stop paying extra on mortgages;
- continue spending down our boring old savings account from ~$100,000 to ~$50,000;
- open a solo 401k for my one-woman-show LLC (according to the Vanguard folks on the phone, I should be able to contribute ~$50,000/year based on my numbers vs. ~$30,000/year in a SEP IRA, for a gain of ~$20,000);
- contribute to some sort of non-retirement account (?).

To be continued!!!
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Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #10 on: January 05, 2018, 06:27:00 PM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

Can anyone recommend a good accountant? I've spoken with a few different ones for several-hour consultations. None of them "get" FI.
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MrUpwardlyMobile

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #11 on: January 05, 2018, 07:54:41 PM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

Can anyone recommend a good accountant? I've spoken with a few different ones for several-hour consultations. None of them "get" FI.

You usually get an accountant for complicated tax situations.  Your business might warrant it depending on a ton of factors.  Do you find your taxes are difficult to prepare? If so, get an accountant.  If you’re aiming for FI, you don’t need an accountant to save and invest. 
http://upwardlymobile.life

Refinance Student loans with Earnest.  They’ll pay you $200 and their rates are cheaper than SoFi.

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #12 on: January 06, 2018, 06:20:23 AM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

Can anyone recommend a good accountant? I've spoken with a few different ones for several-hour consultations. None of them "get" FI.

You usually get an accountant for complicated tax situations.  Your business might warrant it depending on a ton of factors.  Do you find your taxes are difficult to prepare? If so, get an accountant.  If you’re aiming for FI, you don’t need an accountant to save and invest.

Yup you want your accountant to help you manage your taxes, it really had nothing to do with FI other than they can help manage your taxes if/when you RE.

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #13 on: January 06, 2018, 06:24:37 AM »
For future charitable giving due to the new standard deduction consider a donor advised fund (DAF).  My accountant recommended looking into "front" loading my charitable donations by grouping them to every other year.  A DAF will let me donate yearly to some chairities but take the deduction every other year.  It is also a way to fund retirement charitable giving during your higher taxed earning years. 

For more on DAF

https://forum.mrmoneymustache.com/taxes/let's-talk-about-dafs/   

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #14 on: January 06, 2018, 10:38:53 AM »
At your income and employment status, it would be worth the expense to speak with a good accountant and possibly a tax attorney. Spend $1000 to potentially save $$1000s in the long run.

Can anyone recommend a good accountant? I've spoken with a few different ones for several-hour consultations. None of them "get" FI.
Try sending a PM to CheddarStacker. He doesn't post much anymore (boo-hoo), but he lurks a bit. He's a CPA and he's in your general area. He will probably be able to give you some good, mustachian leads. And when you do contact him, please tell him he is missed!
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elysianfields

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #15 on: January 06, 2018, 11:51:41 PM »

Specific questions:

- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?


Specific answers:

- 529 savings are not deductible for federal taxes; helps on state taxes only.


We're Virginia residents and have two children.  The Commonwealth allows each person to deduct up to $4000 per account contributed to from our Virginia taxes, so my wife & I each contribute $4000 to each child, for a total of $16k/year.  At the top tax rate of 5.75%, that saves us $920 per year.  With one child, your savings would amount to half of that, viz. $460, if you both contribute $4000.

Our children did very well with the Invest 529 Stock Index funds over the years, and since one now attends college and the other will start in 2019, we've eliminated our market risk by shifting their portfolios to Invest 529 Stable Value (formerly "Piedmont").  We lose a little bit to inflation each year, but nowhere close to $920/year.  YMMV.

MMM wrote a post about why he no longer does his own taxes, and includes info about his accountant, here: http://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/
« Last Edit: January 09, 2018, 01:30:45 PM by elysianfields »

Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #16 on: January 07, 2018, 07:31:16 PM »
elysianfields, we've had H&R Block do our taxes for the past three years. Last year (the first time we'd contributed to a 529 plan for our infant daughter), the woman said we were over the income limits and couldn't count our 529 contributions anywhere on Virginia state taxes. However, I can't seem to find anything online about income limits. Any tips? Thank you!
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elysianfields

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #17 on: January 08, 2018, 01:11:41 PM »
elysianfields, we've had H&R Block do our taxes for the past three years. Last year (the first time we'd contributed to a 529 plan for our infant daughter), the woman said we were over the income limits and couldn't count our 529 contributions anywhere on Virginia state taxes. However, I can't seem to find anything online about income limits. Any tips? Thank you!

The resources I've found don't point to any income limit for 529 deductions in Virginia, assuming you are contributing to one of the Virginia plans.

The language at https://www.tax.virginia.gov/deductions and in the Instructions for 2017 Form 760 (Virginia Individual Income Tax Return) is nearly identical, here's the info from p. 24 of the 2017 Form 760 Instructions:

Quote from: 2017 Instructions for Form 760
104 Virginia College Savings Plan Prepaid Tuition Contract Payments, College Savings Trust Account Contributions - If you are under age 70 on or before December 31 of the taxable year, enter the lesser of $4,000 or the amount contributed during the taxable year to each Virginia529 account (Virginia 529 prePAID, Virginia 529 inVEST, College America, CollegeWealth). If you contributed more than $4,000 per account during the taxable year, you may carry forward any undeducted amounts until the contribution has been fully deducted. However, if you are age 70 or older on or before December 31 of the taxable year, you may deduct the entire amount contributed during the taxable year. Only the owner of record for an account may claim a deduction for contributions made.

The Code of Virginia § 58.1-322.03 has the following section:

Quote from: The Code of Virginia § 58.1-322.03
7. a. A deduction shall be allowed to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or college savings trust account entered into with the Virginia College Savings Plan, pursuant to Chapter 7 (§ 23.1-700 et seq.) of Title 23.1. Except as provided in subdivision b, the amount deducted on any individual income tax return in any taxable year shall be limited to $4,000 per prepaid tuition contract or college savings trust account. No deduction shall be allowed pursuant to this subdivision 7 if such payments or contributions are deducted on the purchaser's or contributor's federal income tax return. If the purchase price or annual contribution to a college savings trust account exceeds $4,000, the remainder may be carried forward and subtracted in future taxable years until the purchase price or college savings trust contribution has been fully deducted; however, except as provided in subdivision b, in no event shall the amount deducted in any taxable year exceed $4,000 per contract or college savings trust account. Notwithstanding the statute of limitations on assessments contained in § 58.1-312, any deduction taken hereunder shall be subject to recapture in the taxable year or years in which distributions or refunds are made for any reason other than (i) to pay qualified higher education expenses, as defined in § 529 of the Internal Revenue Code or (ii) the beneficiary's death, disability, or receipt of a scholarship. For the purposes of this subdivision, "purchaser" or "contributor" means the person shown as such on the records of the Virginia College Savings Plan as of December 31 of the taxable year. In the case of a transfer of ownership of a prepaid tuition contract or college savings trust account, the transferee shall succeed to the transferor's tax attributes associated with a prepaid tuition contract or college savings trust account, including, but not limited to, carryover and recapture of deductions.

b. A purchaser of a prepaid tuition contract or contributor to a college savings trust account who has attained age 70 shall not be subject to the limitation that the amount of the deduction not exceed $4,000 per prepaid tuition contract or college savings trust account in any taxable year. Such taxpayer shall be allowed a deduction for the full amount paid for the contract or contributed to a college savings trust account, less any amounts previously deducted.

You could file an amended 2016 Virginia return to claim the deduction.  You could also find a tax preparer who is actually familiar with the Virginia tax code - this one mistake is worth $460 (assuming you and your husband each contributed $4000 to separate accounts for your infant).

GrumpyPenguin

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #18 on: January 09, 2018, 12:04:21 PM »
This info RE Virginia529 is important to me as well.  In addition to opening the 529 for children, you should also be able to open a 529 with yourself as the current beneficiary.  My understanding is that you can then change beneficiary down the line as long as this change follows certain rules (new beneficiary needs to be part of the same legally defined family).  Am I mistaken? 

elysianfields

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #19 on: January 09, 2018, 01:29:30 PM »
This info RE Virginia529 is important to me as well.  In addition to opening the 529 for children, you should also be able to open a 529 with yourself as the current beneficiary.  My understanding is that you can then change beneficiary down the line as long as this change follows certain rules (new beneficiary needs to be part of the same legally defined family).  Am I mistaken? 

I refer you to the Invest 529 Program Description.

Because you're taking a risk in opening a 529 that the beneficiary doesn't use it (they could decide not to attend college, win an athletic, academic, or military scholarship), you're allowed to change the beneficiary once per year. 

It appears that you could open a 529 with yourself as the beneficiary.  Later, you can change the beneficiary to the child attending college.  As long as the beneficiary is in the same family, there should be no tax consequences.

If the funds become Non-Qualifying Distributions, Virginia can recapture the tax deductions claimed at the time of the contribution.

This seems to open a huge loophole.  Imagine you get married and you and your spouse decide you want children someday.  Each spouse could open 529s for themselves plus another 529 for the other spouse, and take Virginia tax deductions on up to $16,000 of contributions each year.  While waiting for the stork to bring you children, you can continue contributing each year, giving your money additional time to grow, tax-free, before the little bundles of joy arrive.

When a child arrives, you can additionally open two 529s (one owned by each spouse) and take Virginia deductions on another $8,000 of contributions each year.

When it's time for a child to attend college, you can just change the beneficiary from yourself or your spouse to the child attending.

Of course, if you over-save on one child, you can encourage them to go to Graduate / Medical / Law school, or have another child or "qualified family member" who then attends college.  Qualified family members include children, parents, spouses, siblings, first cousins, nieces & nephews and even aunts & uncles.  You start to run into generation-skipping tax and gift tax problems if you change the beneficiary to grandchildren or further descendants.

elysianfields

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #20 on: January 09, 2018, 01:37:36 PM »
One other thing: so long as the American Opportunity Credit exists in its current form, you must pay the qualified higher education expenses with your own funds - not 529 funds - in order to claim the credit.

This Federal credit is worth up to $2,500 per year, more than double the amount you'd save in Virginia taxes on each year's contribution to the various 529 accounts.  You'd need to pay $4,000 in qualified higher education expenses to claim the full credit.

In short: don't over-save in 529 accounts just to claim the tax deduction.

clairerebecca

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #21 on: January 17, 2018, 06:18:25 PM »
In Virginia your Invest529 deduction is basically unlimited, because it is $4,000 per account, not contributor. So one age-based account (Piedmont, for example) with $8000 in contributions is still a $4000 deduction for the account owner, regardless if each parent contributed $4000. Each account needs to have a different owner/beneficiary/allocation set up, so you could do Mother/Child 1/Piedmont and Mother/Child 1/Socially Targeted, but you couldn't do two Mother/Child 1/Piedmont accounts. So if you have $25,000/year to contribute to college, it is possible to get the full deduction regardless of the number of parents or children by opening different accounts, each with its own investment option.

Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #22 on: January 18, 2018, 09:55:51 AM »
In Virginia your Invest529 deduction is basically unlimited, because it is $4,000 per account, not contributor. So one age-based account (Piedmont, for example) with $8000 in contributions is still a $4000 deduction for the account owner, regardless if each parent contributed $4000. Each account needs to have a different owner/beneficiary/allocation set up, so you could do Mother/Child 1/Piedmont and Mother/Child 1/Socially Targeted, but you couldn't do two Mother/Child 1/Piedmont accounts. So if you have $25,000/year to contribute to college, it is possible to get the full deduction regardless of the number of parents or children by opening different accounts, each with its own investment option.

Thanks so much for clarifying.

We've realized that we were contributing to the "wrong" (?) 529 account. We use USAA for auto and motorcycle insurance. We also used to use USAA for the husband's IRA (and have recently switched to Vanguard for lower fees). USAA has some sort of 529 plan and we didn't realize that 529 plans were even linked to states.

We've since opened two accounts through the Virginia529 plan. I think $4,000 each / $8,000 total each year is going to be plenty to cover an in-state public college. I know that college costs are rising blah blah blah but that should amount to ~$100,000 by the time our daughter goes to school.

Now, to figure out what that USAA 529 plan even is?! And whether that money can be shifted or transferred somewhere?! The adventures continue!
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clairerebecca

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #23 on: January 18, 2018, 06:25:45 PM »
It can be transferred! It is called a rollover, you can do it either once or twice a year, and you can call USAA and/or VA 529 about how to do it.

Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #24 on: January 18, 2018, 09:26:52 PM »
Great! Then moving the money out of USAA’s 529 Plan and into... Vanguard? The Virginia 539 plan?...  is next on my list.

Also, my $100,000 estimate was way off. That’s the bare minimum we need. With $10,000 now, $8,000 going in each year, and 16 years to grow, that comes out to $300,000. So our not-yet-conceived kid #2 should be set, too.

Thanks to everyone for helping me learn!!!!
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DavidAnnArbor

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #25 on: January 19, 2018, 02:38:48 PM »
You should make your husband a co-owner of your consulting business, and then deduct $108,000 into your solo 401k plans, $54k for you, and $54K for him.

I'm not saying you'll be able to do the entire $54K for each of you, it will depend on your business income.
« Last Edit: January 19, 2018, 02:44:04 PM by DavidAnnArbor »

Apple_Tango

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #26 on: January 19, 2018, 03:26:07 PM »
Great! Then moving the money out of USAA’s 529 Plan and into... Vanguard? The Virginia 539 plan?...  is next on my list.

Also, my $100,000 estimate was way off. That’s the bare minimum we need. With $10,000 now, $8,000 going in each year, and 16 years to grow, that comes out to $300,000. So our not-yet-conceived kid #2 should be set, too.

Thanks to everyone for helping me learn!!!!

I KNOW you didn't ask for this advice and you are specifically looking for ways to lower your tax burden. But I will say as someone with newly printed diplomas, my parents could have paid 100% for my school easily and without blinking. But they didn't..I got a job with full time hours in the semesters off during undergrad and then through grad school I had 2 part time jobs while going to school full time. ALSO I went to two top public state universities (UVA and UNC) as in-state students both times, as I officially moved to North Carolina a year before grad school and could claim in-state tuition. Plus I got scholarships for grad school, and one school (not UNC) actually offered me a full-ride package. It's much easier to get grad school paid for with scholarships- I know several people who got full scholarships to even PhD programs.

And it was good for me to work. Number one, it builds the resume. Number two, it gets you outside of the university bubble. Number three, it gets some skin in the game so I graduated with my intended class. I knew I had to get out since I was on the hook for about 10% of my tuition.  And yes if I needed something of course my parents helped me out, and I never starved or wanted for anything. But just putting it out there that you might not need $300,000 for kids colleges :) If you're doing it for straight up taxes then that's different, of course. Also some savings accounts stipulate that you can ONLY use that money for educational purposes. I'm not sure if 529 is that way, but if it's way over funded you might have to transfer some of it to grand-kids later on, or transfer it to yourself and take some courses for fun.
« Last Edit: January 19, 2018, 03:31:30 PM by Apple_Tango »
It's a lateral freeze down during the melt up.  Soon to be followed by the transverse falling bounce and the transient index inversion short, both of which are also strong sell signals in this buyer's market.

NoraLenderbee

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #27 on: January 19, 2018, 04:05:49 PM »
RootofGood and his wife can essentially make double contributions to retirement plans, thus lowering their taxes enormously. It's an unusual situation and shouldn't be held up as a model for what the rest of us can do.

Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #28 on: January 19, 2018, 05:18:34 PM »
Great! Then moving the money out of USAA’s 529 Plan and into... Vanguard? The Virginia 539 plan?...  is next on my list.

Also, my $100,000 estimate was way off. That’s the bare minimum we need. With $10,000 now, $8,000 going in each year, and 16 years to grow, that comes out to $300,000. So our not-yet-conceived kid #2 should be set, too.

Thanks to everyone for helping me learn!!!!

I KNOW you didn't ask for this advice and you are specifically looking for ways to lower your tax burden. But I will say as someone with newly printed diplomas, my parents could have paid 100% for my school easily and without blinking. But they didn't..I got a job with full time hours in the semesters off during undergrad and then through grad school I had 2 part time jobs while going to school full time. ALSO I went to two top public state universities (UVA and UNC) as in-state students both times, as I officially moved to North Carolina a year before grad school and could claim in-state tuition. Plus I got scholarships for grad school, and one school (not UNC) actually offered me a full-ride package. It's much easier to get grad school paid for with scholarships- I know several people who got full scholarships to even PhD programs.

And it was good for me to work. Number one, it builds the resume. Number two, it gets you outside of the university bubble. Number three, it gets some skin in the game so I graduated with my intended class. I knew I had to get out since I was on the hook for about 10% of my tuition.  And yes if I needed something of course my parents helped me out, and I never starved or wanted for anything. But just putting it out there that you might not need $300,000 for kids colleges :) If you're doing it for straight up taxes then that's different, of course. Also some savings accounts stipulate that you can ONLY use that money for educational purposes. I'm not sure if 529 is that way, but if it's way over funded you might have to transfer some of it to grand-kids later on, or transfer it to yourself and take some courses for fun.

Geez, what great points.

And hello from a fellow UVA grad! I had 2 years of academic scholarships to UVA, was a resident adviser to pay for my room and board, and my husband paid the other 2 years (we got married the summer after 2nd year). I paid for grad school myself.

By the $300,000 projection, what I meant to say was that there's no way we'd need anywhere close to $300,000. The kid(s) are all definitely going to in-state public schools. Virginia has a dozen choices so we're lucky. Even with inflation and rising college costs, we're aiming for $100,000 per kid. I guess we'll stop when the account(s) each hit $100,000?

If there's any left over, I suppose it will go to the grandkids. The husband hated school and would never return. I guest-lecture in DC-area universities a few times a semester so there's no way I'm going to be a student again after being in the professor role.

I realize this doesn't address your larger message about teaching work ethic. My parents gave me very little (I literally had to buy groceries during high school---parents with mental health and alcoholism issues) so somehow I have to teach the kid(s) to work as hard as I did. Maybe I'll pay for tuition and make them be a resident adviser (or whatever) to pay for their own room and board. To be continued. There are a lot of thoughtful people on here who write about parenting so I'm hoping to continue learning lots from them.

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Apple_Tango

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #29 on: January 19, 2018, 06:01:35 PM »
Wahoowa! Sad that your husband didn’t enjoy his university days. I don’t think you actually have to enroll in a full university load to use some of the money. could be a semester of art, cooking, or music classes if a local community college has an open spot. One of my friends needed to burn some credits one year and signed up for African drumming. Only 3 people showed up to the first class and one was only there by accident because he thought he was arriving to a Russian intro class. He wasn’t going to keep coming but the professor said that if there weren’t at least 3 people in the class then it couldn’t run, so he gave everyone an automatic A for the semester for just coming and jamming out. I bet they would accept an adult continuing ed student lol. I wouldn’t count out fun classes especially if you wind up with a surpluses of education only dollars and plenty of time once you’re FI  :)

Heck, one of my own classes was Women’s Self Defense and it was the best class I ever took! It’s one of the only classes in my whole college career that I actually loved. Our final exam was fighting off a police officer who was “attacking” us.  Edit: not a political comment. He was fully padded and playing the part of an abductor
« Last Edit: January 19, 2018, 06:38:20 PM by Apple_Tango »
It's a lateral freeze down during the melt up.  Soon to be followed by the transverse falling bounce and the transient index inversion short, both of which are also strong sell signals in this buyer's market.

MrUpwardlyMobile

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #30 on: January 19, 2018, 06:26:47 PM »
Wahoowa! Sad that your husband didn’t enjoy his university days. I don’t think you actually have to enroll in a full university load to use some of the money. could be a semester of art, cooking, or music classes if a local community college has an open spot. One of my friends needed to burn some credits one year and signed up for African drumming. Only 3 people showed up to the first class and one was only there by accident because he thought he was arriving to a Russian intro class. He wasn’t going to keep coming but the professor said that if there weren’t at least 3 people in the class then it couldn’t run, so he gave everyone an automatic A for the semester for just coming and jamming out. I bet they would accept an adult continuing ed student lol. I wouldn’t count out fun classes especially if you wind up with a surpluses of education only dollars and plenty of time once you’re FI  :)

Heck, one of my own classes was Women’s Self Defense and it was the best class I ever took! It’s one of the only classes in my whole college career that I actually loved. Our final exam was fighting off a police officer who was “attacking” us.

My favorite classes were walking for fitness and history of rock and roll.
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Refinance Student loans with Earnest.  They’ll pay you $200 and their rates are cheaper than SoFi.

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #31 on: January 19, 2018, 09:16:11 PM »
Don't take anything even moderately complex to H&R Block and their ilk.  I've seen some, ah, interesting returns come out of there and Liberty Tax.

I notice that on your spreadsheet, you have your condo mortgage interest on Schedule A, Itemized Deductions.  If you are still renting it out in 2017, that interest belongs on your Schedule E, Rental Real Estate.

And, if you are going to compare your taxes to others, you should just look at income taxes, not payroll taxes, as others don't notice (to some extent) the Social Security and Medicare that are paid/remitted by their employers.  It's just more visible to you because you are self-employed.

Finally, why do you not have Solo 401(k) contributions starting in your spreadsheet until 2019?  I see that you have SEP IRA contributions entered for both 2017 and 2018, but it might be worth calling Vanguard to see if those can be reversed so that you can make Solo 401(k) contributions for those years instead.  (I never dealt much with Solo 401(k)s, so I'm not sure if you had to have created your account in 2017 to make 2017 contributions to it, so check me on this.  I think there's a good chance that you can fix this for 2018, though.)
Go soak your beans.  You know you keep forgetting.

NaN

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #32 on: January 20, 2018, 08:35:17 AM »
RE to Mrs. Fi365:
If I understood the new tax law correctly you will be getting a big tax break in 2018 from the 20% reduction in pass-through income that is taxed. Based on your sole proprietorship income of ~$200k, a 20% reduction is $40k, which means ballpark savings in taxes this year of $12k. This is not counting any of the tax gains/losses due to property/income deduction changes and marginal tax rate reductions. The latter is probably a gain, and the former is probably a loss with just the state income tax alone, not even considering property taxes (which I don't know where you are). Regardless, plenty of articles mentioning the tax savings for the 'gig' economy. So, hey, at least recognize what the new tax law does for you AND then target all of the other stuff.

Check out the Mega backdoor Roth by Mad Fientist.

Good luck!

Fi365

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #33 on: January 21, 2018, 04:51:37 AM »
Don't take anything even moderately complex to H&R Block and their ilk.  I've seen some, ah, interesting returns come out of there and Liberty Tax.

I notice that on your spreadsheet, you have your condo mortgage interest on Schedule A, Itemized Deductions.  If you are still renting it out in 2017, that interest belongs on your Schedule E, Rental Real Estate.

And, if you are going to compare your taxes to others, you should just look at income taxes, not payroll taxes, as others don't notice (to some extent) the Social Security and Medicare that are paid/remitted by their employers.  It's just more visible to you because you are self-employed.

Finally, why do you not have Solo 401(k) contributions starting in your spreadsheet until 2019?  I see that you have SEP IRA contributions entered for both 2017 and 2018, but it might be worth calling Vanguard to see if those can be reversed so that you can make Solo 401(k) contributions for those years instead.  (I never dealt much with Solo 401(k)s, so I'm not sure if you had to have created your account in 2017 to make 2017 contributions to it, so check me on this.  I think there's a good chance that you can fix this for 2018, though.)

Sigh. I need to find a good accountant. I hire one on an as-needed basis for my business (a few hours to ask questions here and there) but he generally tells me I'm doing great for my age and shouldn't worry because I'll have more than I need *when I retire at 65.* It's hard to find someone who *gets* FI.

Never heard of a Schedule E before.

The husband and I have been debating the "right" amount to devote to a solo 401k vs. a mortgage pay-down. I hate paying more taxes than necessary and am a fan of going heavy on a solo 401k this year. He hates paying for a mortgage. Math matters, but so does peace of mind. We talk about this daily so I adjust the spreadsheet to reflect our latest discussion. We're coming to FI from the Dave Ramsey mindset of investing just 15% and paying down the mortgage so discovering this forum has flipped our world upside down in a really wonderful but crazy way.
The steps we're taking 365 days a year to reach financial independence by… 45? 40? https://fi365.wordpress.com/

With This Herring

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #34 on: January 22, 2018, 06:49:06 PM »
Don't take anything even moderately complex to H&R Block and their ilk.  I've seen some, ah, interesting returns come out of there and Liberty Tax.

I notice that on your spreadsheet, you have your condo mortgage interest on Schedule A, Itemized Deductions.  If you are still renting it out in 2017, that interest belongs on your Schedule E, Rental Real Estate.

And, if you are going to compare your taxes to others, you should just look at income taxes, not payroll taxes, as others don't notice (to some extent) the Social Security and Medicare that are paid/remitted by their employers.  It's just more visible to you because you are self-employed.

Finally, why do you not have Solo 401(k) contributions starting in your spreadsheet until 2019?  I see that you have SEP IRA contributions entered for both 2017 and 2018, but it might be worth calling Vanguard to see if those can be reversed so that you can make Solo 401(k) contributions for those years instead.  (I never dealt much with Solo 401(k)s, so I'm not sure if you had to have created your account in 2017 to make 2017 contributions to it, so check me on this.  I think there's a good chance that you can fix this for 2018, though.)

Sigh. I need to find a good accountant. I hire one on an as-needed basis for my business (a few hours to ask questions here and there) but he generally tells me I'm doing great for my age and shouldn't worry because I'll have more than I need *when I retire at 65.* It's hard to find someone who *gets* FI.

Never heard of a Schedule E before.


The husband and I have been debating the "right" amount to devote to a solo 401k vs. a mortgage pay-down. I hate paying more taxes than necessary and am a fan of going heavy on a solo 401k this year. He hates paying for a mortgage. Math matters, but so does peace of mind. We talk about this daily so I adjust the spreadsheet to reflect our latest discussion. We're coming to FI from the Dave Ramsey mindset of investing just 15% and paying down the mortgage so discovering this forum has flipped our world upside down in a really wonderful but crazy way.

I definitely see a Schedule E on your Google spreadsheet right now (line 373 at the moment) with an amount for 2015.  I would hope that, if you had that rental going in 2016, one was filed for that year as well, even if it just resulted in a carried loss.
Go soak your beans.  You know you keep forgetting.

DavidAnnArbor

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #35 on: January 22, 2018, 07:34:27 PM »
You should definitely not be paying down your mortgage, and you should be instead investing heavily into your solo 401k plan, thereby saving thousands in taxes. That's free money.

Strick

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Re: HELP! $285k income & $78k in taxes. Losing too much to taxes?!
« Reply #36 on: February 17, 2018, 10:20:16 AM »
The spreadsheet kinda shows it, the huge expense is fed taxes from the LLC.  Of the 58k being paid from that, about 20k i assume is going to payroll taxes anyway (that exaggerates b/c of you paying both sides of SSI, as a W-2er it doesn't look as bad but thats just due to the little trick of them making the employer pay the other half as opposed to them just taxing it all from the employee side).

The rest is just due to making good earned income, you've really gotta take advanage of that solo 401k, I max mine out and its a huge help as that top 50K you're earning is probably the part thats getting really nailed.