Author Topic: Please advice me on getting some extra tax dedecutions  (Read 685 times)

sidhu688

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Please advice me on getting some extra tax dedecutions
« on: September 24, 2017, 02:36:32 AM »
Hello All,

This is my first post here so :). First a little bit about myself I am 31 and make about 130k and my wife is 27 and she makes about 105k. I am currently contributing max to my 401k with my company matching 6% dollar for dollar. My wife is also contributing max to 401k with 3% match. I have HSA from my company to which I contribute max which is about 3700. Apart from this I have a home for which I pay 2050$ and about 900$ per month for 2 cars. We save almost all of my wife's salary after all the contributions and monthly expenses.

Now my question is what other ways do you guys think I have for saving money from taxes. I don't think I can contribute to Roth but is there any other way I should be able to invest more money in tax free assets.

Thanks
« Last Edit: September 24, 2017, 02:49:20 AM by sidhu688 »

Dictionary Time

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Re: Please advice me on getting some extra tax dedecutions
« Reply #1 on: September 24, 2017, 06:08:50 AM »
Have some kids, that should help.

GizmoTX

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Re: Please advice me on getting some extra tax dedecutions
« Reply #2 on: September 24, 2017, 06:58:21 AM »
Choose tax friendly investments, i.e. non-dividend qualified stocks that appreciate. Hold for long term capital gains treatment. Municipal bonds.

Beware of spending money just to save taxes.

terran

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Re: Please advice me on getting some extra tax dedecutions
« Reply #3 on: September 24, 2017, 07:27:51 AM »
Does your wife have her own insurance or is she covered by your high deductible plan? The family max HSA contribution is $6750.

EarthSurfer

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Re: Please advice me on getting some extra tax dedecutions
« Reply #4 on: September 24, 2017, 07:30:26 AM »
sidhu688, since this is your first post, I'll pull the face punch on $900/m on car payments, just promise you will drive the wheels off those vehicles...

You are caught in the W2 wage trap, and have done about all you can do to shield that income from taxes. Outside of ensuring you are getting the full value of potential Schedule A deductions, you don't have much more to optimize.

Since any marginal increase in income is being taxes around 50% (you don't mention your state), this is the point where you need to consider developing income or investment returns from other non-W2 wage sources that have favorable tax treatment.

My favorite tax treatment has been the capital gains exclusion on the sale of a primary residence. ($250,000 single / $500,000 married after a minimum of 2 yrs ownership) While this can be speculative depending on market conditions, I have done well with several 'slow flips' with sweat equity improvements. I particularly like this exclusion because the net gains are not restricted, and forever tax free.

Rental real estate works for many. Done properly, the depreciation write off on the rental property can effectively reduce your taxable W2 income. The challenge is capital gains upon the sale of a property must be rolled over to a new rental property to avoid taxation. Additionally, there is the dreaded "depreciation recapture tax" which can claw back those tax savings AT YOUR TOP TAX BRACKET. The crew at Bigger Pockets have this strategy down to a solid science: https://www.biggerpockets.com/

If you invest in mutual funds with after tax dollars, look for tax efficient funds which minimize trading.  If you follow the MMM / FIRE model of low cost index mutual funds, you should get this benefit without having to explicitly choosing 'tax efficient' funds.

Always check out the Mad Fientist. http://www.madfientist.com/ Brandon often focuses on tax avoidance strategies. Unfortunately, most of these only apply on the retirement side of the timeline when your income is lower and the tax law is favorable.

One final thought: Can either of you convert to a 1099 contractor / consultant? While you will have to pay self-employment tax, you can contribute up to 25% of the Schedule C business income (aka "business" contribution) to a Solo 401K in addition to the standard $18,000 "employee" contribution. Additionally, work related expenses are deducted BEFORE FICA/Social Security and taxes, if allowed.
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sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #5 on: September 24, 2017, 08:01:20 AM »
Does your wife have her own insurance or is she covered by your high deductible plan? The family max HSA contribution is $6750.

She has her own insurance which is pretty darn good and she only pays 30$ per paycheck for it. I also had the option of getting a low cost healthcare plan but it was little expensive for me and I just saw the HSA thing to which my company contributes about 600 so I just took it. Not sure if this was a good decision or not but so far so good.

sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #6 on: September 24, 2017, 08:14:56 AM »
sidhu688, since this is your first post, I'll pull the face punch on $900/m on car payments, just promise you will drive the wheels off those vehicles...

You are caught in the W2 wage trap, and have done about all you can do to shield that income from taxes. Outside of ensuring you are getting the full value of potential Schedule A deductions, you don't have much more to optimize.

Since any marginal increase in income is being taxes around 50% (you don't mention your state), this is the point where you need to consider developing income or investment returns from other non-W2 wage sources that have favorable tax treatment.

My favorite tax treatment has been the capital gains exclusion on the sale of a primary residence. ($250,000 single / $500,000 married after a minimum of 2 yrs ownership) While this can be speculative depending on market conditions, I have done well with several 'slow flips' with sweat equity improvements. I particularly like this exclusion because the net gains are not restricted, and forever tax free.

Rental real estate works for many. Done properly, the depreciation write off on the rental property can effectively reduce your taxable W2 income. The challenge is capital gains upon the sale of a property must be rolled over to a new rental property to avoid taxation. Additionally, there is the dreaded "depreciation recapture tax" which can claw back those tax savings AT YOUR TOP TAX BRACKET. The crew at Bigger Pockets have this strategy down to a solid science: https://www.biggerpockets.com/

If you invest in mutual funds with after tax dollars, look for tax efficient funds which minimize trading.  If you follow the MMM / FIRE model of low cost index mutual funds, you should get this benefit without having to explicitly choosing 'tax efficient' funds.

Always check out the Mad Fientist. http://www.madfientist.com/ Brandon often focuses on tax avoidance strategies. Unfortunately, most of these only apply on the retirement side of the timeline when your income is lower and the tax law is favorable.

One final thought: Can either of you convert to a 1099 contractor / consultant? While you will have to pay self-employment tax, you can contribute up to 25% of the Schedule C business income (aka "business" contribution) to a Solo 401K in addition to the standard $18,000 "employee" contribution. Additionally, work related expenses are deducted BEFORE FICA/Social Security and taxes, if allowed.


Well the first car I had was little expensive and it got about 87k miles on it so I bought a Honda so I can put more miles on it. I will be done paying for the first car next year and not planning to buy after that.

I was thinking about owning a rental property but was not sure if it's going to be a good investment and if it would require extra time from my side.

I am from Georgia and we cannot shift to contracting position at our jobs. Thanks for all the links I will definitely check them out.
« Last Edit: September 24, 2017, 08:16:31 AM by sidhu688 »

GizmoTX

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Re: Please advice me on getting some extra tax dedecutions
« Reply #7 on: September 24, 2017, 10:17:11 AM »
When our incomes got to the point that the house mortgage deduction was phased out, we paid off the mortgage. You can still deduct property tax. All subsequent houses (and cars) have been paid for in cash. Being debt free means you are interest expense free.

sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #8 on: September 24, 2017, 10:27:11 AM »
When our incomes got to the point that the house mortgage deduction was phased out, we paid off the mortgage. You can still deduct property tax. All subsequent houses (and cars) have been paid for in cash. Being debt free means you are interest expense free.

House mortgage deduction was phased out?? I was not even aware of that..what's the income limit for that.

Carrie

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Re: Please advice me on getting some extra tax dedecutions
« Reply #9 on: September 24, 2017, 10:28:02 AM »
Have a bunch of kids.  That's what we did....

sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #10 on: September 24, 2017, 10:45:18 AM »
Have a bunch of kids.  That's what we did....

LOL second time same advice..I guess time to think about it seriously now :)

slappy

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Re: Please advice me on getting some extra tax dedecutions
« Reply #11 on: September 24, 2017, 10:53:00 AM »
Charitable giving? You can use a donor advised fund to front load your charitable giving, but of course that may be something you only want to do for a year or two.

sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #12 on: September 24, 2017, 10:55:13 AM »
Charitable giving? You can use a donor advised fund to front load your charitable giving, but of course that may be something you only want to do for a year or two.

Hi..I am already doing that through my company since they match my contribution dollar for dollar and have adopted 2 kids through a separate charity.

sidhu688

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Re: Please advice me on getting some extra tax dedecutions
« Reply #13 on: September 24, 2017, 10:57:07 AM »
So there is no way I can invest in Roth?? Sorry if I am asking stupid questions..Previously I just kept it simple max 401k and HSA and trying to build a emergency fund which I have now so I am just exploring options to invest\save money now.

EarthSurfer

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Re: Please advice me on getting some extra tax dedecutions
« Reply #14 on: September 24, 2017, 11:06:22 AM »
When our incomes got to the point that the house mortgage deduction was phased out, we paid off the mortgage. You can still deduct property tax. All subsequent houses (and cars) have been paid for in cash. Being debt free means you are interest expense free.

House mortgage deduction was phased out?? I was not even aware of that..what's the income limit for that.

The mortgage interest deduction is only of value when your itemize deductions on Schedule A rather than take the standard deduction. For 2017, the standard deduction for married filing jointly is $12,700.

At present your state / local income tax + property tax is probably above the standard deduction, so you receive some tax relief from the mortgage. If itemized deductions drop below the Standard Deduction, you lose the tax advantage, and you should include that fact when examining the true cost of a mortgage. Generally, you have a tax advantage in high income years due to high state income taxes, and minimal advantage in retirement years (if you are using tax strategies).

NOTE: I am over-simplifying the itemized deductions for this example. There are a multitude of other items to deduct, but this is typically dominated by the state & local taxes. (Add charitable donations if you are a tither, etc.)
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GizmoTX

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Re: Please advice me on getting some extra tax dedecutions
« Reply #15 on: September 24, 2017, 11:20:46 AM »
A Roth is funded with post-tax earnings so is not deductible, but you are over the earnings limit so that ship has already sailed. There are ways to convert a traditional IRA to a Roth but you have to pay the deferred taxes as part of the conversion.

We live in a state with no state/local income taxes.

secondcor521

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Re: Please advice me on getting some extra tax dedecutions
« Reply #16 on: September 24, 2017, 07:14:45 PM »
So there is no way I can invest in Roth?? Sorry if I am asking stupid questions..Previously I just kept it simple max 401k and HSA and trying to build a emergency fund which I have now so I am just exploring options to invest\save money now.

It depends on your filing status and MAGI.

Assuming you're filing MFJ, your can contribute up to the maximum Roth contribution ($5,500 if you're young, more if you're older) as long as your MAGI is below $186K.  MAGI above $196K and you cannot contribute.  Between those two numbers you can contribute a reduced amount.

Your MAGI is not your income.  Generally it is line 37 of your 1040 plus a few other things.  Based on the numbers in the OP you might qualify or you might not depending on how much of that $235K you are sheltering via 401K, HSA, etc.

See https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017

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teen persuasion

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Re: Please advice me on getting some extra tax dedecutions
« Reply #17 on: September 24, 2017, 07:39:17 PM »
Does your wife have her own insurance or is she covered by your high deductible plan? The family max HSA contribution is $6750.

She has her own insurance which is pretty darn good and she only pays 30$ per paycheck for it. I also had the option of getting a low cost healthcare plan but it was little expensive for me and I just saw the HSA thing to which my company contributes about 600 so I just took it. Not sure if this was a good decision or not but so far so good.

Remember that the HSA limit includes your employer's contributions, so you can't contribute all the way to the top yourself.