Author Topic: How to make tax bracket go from 25% to 15%??  (Read 1595 times)

ejmyrow

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How to make tax bracket go from 25% to 15%??
« on: July 28, 2017, 11:27:05 PM »
Aloha Mustachians!!
We are new to this and having lots of fun!
We are trying to figure out how to make my tax bracket go from 25% to 15%. Can I do it this way:
$37,950 is the tax bracket threshold
therefore
even though I make more than that, do I simply need to contribute the difference to my 403b and 457?
For example, if I make $47,950 I need to contribute $10,000 over the course of the year?
Then I will be taxed at 15%?

Also does your standard deduction get added to the $37,950 cap? Standard deduction for singles is $6,200, so does that mean I need to contribute anything above $44,150 to my retirement plans?

Many thanks for any advice! Have a great day!

terran

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Re: How to make tax bracket go from 25% to 15%??
« Reply #1 on: July 28, 2017, 11:52:13 PM »
As a single person for the 2017 tax year the standard deduction is $6350 and you get a personal exemption of $4050, so anything below $10400 pays no tax. The 10% bracket is on the first $9325 of taxable income, so you will pay 10% on income between $10400 and $19725. Similarly the 15% bracket goes to $37950, so you will pay 15% of any income between $19725 and $48350.

If you have access to a 403b and a 457 (and also to a deductible IRA as does anyone who can keep their Adjusted Gross Income below $62k), then you could make $48350 + $18000 403b + $18000 457 + 5500 IRA = $89850 and still be in the 15% bracket. Health insurance premiums paid through payroll deductions, contributions to an HSA and things like that could increase that limit further.

You say we, so if you're married the numbers change and you get a personal exemption for both yourself and your spouse (and any kids), but the basic idea stays the same.

Some people don't realize that once you move up a bracket you only pay the increased rate on the income in that bracket, not all of your taxable income. The fact that the increased tax rate is marginal means that you don't have worry too very much about the brackets. Yes, if you earn $1 over that $48350 you will pay $0.25, but it does nothing to change the taxes on the income below that threshold.

MDM

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Re: How to make tax bracket go from 25% to 15%??
« Reply #2 on: July 29, 2017, 12:18:28 AM »
As terran said, "the increased tax rate is marginal means that you don't have worry too very much about the brackets. Yes, if you earn $1 over that $48350 you will pay $0.25, but it does nothing to change the taxes on the income below that threshold."

You can view marginal rates for various scenarios using the case study spreadsheet if you are so inclined.

YttriumNitrate

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Re: How to make tax bracket go from 25% to 15%??
« Reply #3 on: July 29, 2017, 06:31:09 AM »
As terran said, "the increased tax rate is marginal means that you don't have worry too very much about the brackets. Yes, if you earn $1 over that $48350 you will pay $0.25, but it does nothing to change the taxes on the income below that threshold."

One tangential question: If the income was from long term capital gains and the extra $1 pushes you from the 15% top marginal bracket to the 25% top marginal bracket, what is the impact on your taxes? If you are in the 15% bracket, the tax rate on capital gains is 0%, but at the 25% bracket the capital gains rate is 15%. In other words, does a $48350 income solely from capital gains result in a $0 tax while a $48351 income solely from capital gains result in a $7200 tax bill?

NoNonsenseLandlord

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Re: How to make tax bracket go from 25% to 15%??
« Reply #4 on: July 29, 2017, 08:48:20 AM »
Contribute the max to your 401K, 403B, 457 and HSA.  Put more money into a IRA of you can.  Do backdoor Roth's if you can.

After that, you can increase deductions with donations to charity.  You can buy index funds/ETFs which can be a buy and hold forever and not generate capital gains when you sell to reallocate or change your mind.

There is only so much you can do.

MDM

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Re: How to make tax bracket go from 25% to 15%??
« Reply #5 on: July 29, 2017, 12:24:31 PM »
As terran said, "the increased tax rate is marginal means that you don't have worry too very much about the brackets. Yes, if you earn $1 over that $48350 you will pay $0.25, but it does nothing to change the taxes on the income below that threshold."

One tangential question: If the income was from long term capital gains and the extra $1 pushes you from the 15% top marginal bracket to the 25% top marginal bracket, what is the impact on your taxes? If you are in the 15% bracket, the tax rate on capital gains is 0%, but at the 25% bracket the capital gains rate is 15%. In other words, does a $48350 income solely from capital gains result in a $0 tax while a $48351 income solely from capital gains result in a $7200 tax bill?
No.

There are relatively few "cliffs" in the tax code.  Some (all?) are discussed in Nasty Tax Cliffs.  But for most things, including ordinary income and capital gain tax brackets, the effects on total taxes are gradual.

terran

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Re: How to make tax bracket go from 25% to 15%??
« Reply #6 on: July 29, 2017, 11:50:49 PM »
As terran said, "the increased tax rate is marginal means that you don't have worry too very much about the brackets. Yes, if you earn $1 over that $48350 you will pay $0.25, but it does nothing to change the taxes on the income below that threshold."

One tangential question: If the income was from long term capital gains and the extra $1 pushes you from the 15% top marginal bracket to the 25% top marginal bracket, what is the impact on your taxes? If you are in the 15% bracket, the tax rate on capital gains is 0%, but at the 25% bracket the capital gains rate is 15%. In other words, does a $48350 income solely from capital gains result in a $0 tax while a $48351 income solely from capital gains result in a $7200 tax bill?
No.

There are relatively few "cliffs" in the tax code.  Some (all?) are discussed in Nasty Tax Cliffs.  But for most things, including ordinary income and capital gain tax brackets, the effects on total taxes are gradual.

To elaborate a bit, whether the income is from earned income or capital gains does nothing to change the brackets or what happens, it only changes the tax rates. So a $1 of capital gains that goes into the 25% bracket will cost $0.15 instead of the $0.25 that earned income would cost.

Michael in ABQ

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Re: How to make tax bracket go from 25% to 15%??
« Reply #7 on: July 30, 2017, 04:19:34 AM »
Just have a lot of kids :)

I make above the national median household income and my effective tax rate is still basically 0% because our many kids provide various exemptions and tax credits that basically mean all of our taxes paid in over the year get refunded. Of course, raising those kids costs a lot more than I save in taxes since we have to have a larger house, larger vehicle, food, clothing, diapers, etc.

While retirement contributions can lower your taxable income there are some deductions available as well, for instance if you run a small business. However, running a business or rental property at a loss to save on taxes has always seemed rather absurd to me. Better to make it profitable and come out ahead even after paying taxes. 
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runewell

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Re: How to make tax bracket go from 25% to 15%??
« Reply #8 on: August 01, 2017, 07:20:15 AM »
Sometimes I find it helpful to print out a 1040 form and enter numbers in pencil to see how changes to my situation affect my taxes.

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