Author Topic: Increase deductions to lower taxes and use savings instead?  (Read 886 times)

frugal rph

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Increase deductions to lower taxes and use savings instead?
« on: March 14, 2017, 08:47:46 PM »
I want to lower my AGI and taxes as much as possible, but due to ongoing divorce related legal fees and childcare expenses, I need most of my income.  I anticipate needing about $20,000 this year for legal fees and $12,000 for childcare.  I will gross about 90k this year, and I cannot count on receiving any child support at this time, although I will get a ton of back child support when my divorce is eventually settled (hopefully by the end of this year).  Also, starting in June, I will be buying health insurance through Obamacare or whatever it's replaced with  for me and my 2 kids.  Currently I expect that to cost $700 a month with no subsidy.

I have about $30,000 in savings accounts and $120,000 in a Roth IRA.  I also have about $300,000 in my 401(k), but I'm unwilling to touch that unless there is a dire emergency.  Would I be crazy to max out my 401(k) and HSA to lower my taxable income?  This will mean I'll have to spend at least $20,000 of my savings for my crazy legal fees.  I like having the $30,000 as an emergency fund since I'm a single parent, but I should be able to withdraw my Roth contributions in an emergency.

If I lower my AGI, I'll be able to benefit from any health insurance subsidies and the child tax credit.  I'm just a little nervous to draw down my savings and I'm wondering if anyone sees any holes in this plan.


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Re: Increase deductions to lower taxes and use savings instead?
« Reply #1 on: March 14, 2017, 09:01:42 PM »
Have you worked out the numbers? There's a pretty steep "cliff" with the healthcare subsidies, so if you can get your income below that you save a lot of money right away.

What do you anticipate your marginal tax rate (federal + state if applicable) will be if you don't contribute to your 401k/HSA? If you're contributing $18,000 401k and $6,750 to an HSA, I'd expect the hit to post-tax income to be less than $20,000 unless you're already in such a low tax bracket that it doesn't make sense to worry so much about getting your income down.

Condolences on the situation you find yourself in at the moment. Hopefully the divorce gets finalized smoothly and under budget.


  • Bristles
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Re: Increase deductions to lower taxes and use savings instead?
« Reply #2 on: March 15, 2017, 09:22:54 AM »
Ive used exactly this same technique for 2016, to lower my AGI in order to get the ACA subsidy. Like you, I had to subsist on my savings to effect this change. Running the #s (in my case) showed me that by spending  $1 of savings would bring in >>$1 in ACA PTC. It is going to be the best return on capital I have gotten in ages. The risk, in my case, is spending down savings over a time period where employment income is not guaranteed (is it ever?). I took a calculated risk as I expect to be able to build my savings back up in a time frame where my continued employment income is at "low risk" of ending.


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Re: Increase deductions to lower taxes and use savings instead?
« Reply #3 on: March 15, 2017, 11:06:02 AM »

Just a couple reminders: 

1.  I wouldn't be 'depending' on the back child support on any sort of 'timely' basis.  The court may order the other person to pay it, but they must have the money to make the payment, and follow through with it.

2.  I assume the Roth IRA is at least 5 years old based on its size and your plans.  Make sure to know what portion of the $100,000 is your original contributions and what portion is the earnings.  -  Of course you can withdraw the original contributions without penalty.

-  Overall it seems like a good plan to me.   It sounds like you're in a stressful situation, which I have a feeling is related to a (potentially) biased quest for full custody by your Ex Spouse. (Sure it could be something else, but it seems anytime I hear about divorce it's something along these lines.  - Even if they don't 'want' the custody they will seek it out of spite.)  I hope you can continue to do what's best for your family and keep both your legal and living expenses in check.  Divorce is an emotional time, so I'm glad you're not letting the other party roll over you.  Listen to your attorney's advice and if you get  a reasonable / fair resolution take it and stop spending money on this.  (Both you and the Ex-spouse likely have anger impacting your judgement currently, that's why I say to consider your attorney says.  They are the expert that deals with this on a daily basis.)

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Re: Increase deductions to lower taxes and use savings instead?
« Reply #4 on: March 21, 2017, 08:35:38 AM »
I don't see any holes in this plan at all.  We withdrew all of our Roth Principal to prepare for early retirement, a few years back, and I wrote about it on my blog.  I think this strategy is very wise.

If you wish to ER someday, socking money away pre tax, and saving on your biggest expense, taxes, is a prerequisite.

Honestly it sounds like you're doing very well given your situation. 
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