Author Topic: Worth trying to get in a lower tax bracket?  (Read 702 times)

mominca

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Worth trying to get in a lower tax bracket?
« on: January 28, 2019, 02:49:52 PM »
I'm new to this website, I've been listening to some FI podcasts and trying to learn but I apologize if this is posted in the wrong forum and for my lack of knowledge on these subjects. I will greatly appreciate any and all advice.

We're a family of 3 in the "wealth accumulation phase". Our combined salaries are about $145K, plus about 6k in stock dividends. It's my first year making a decent income after college, being a stay at home mom for a couple years and working part time for a couple more years. I've made some smart investments (about $275k in taxable stocks) and we have no debt other than our $250k mortgage (home valued at 450k), but this will be the first time we'll be able to sock away a good portion of our salary so I'm working on calculating the best ways to do it.

If we max out our traditional IRAs, his 403b, my HSA (not sure if he has an HSA option, looking into it), we would be able to reduce it by $34,500. We also pay about $10k in house interest, have one child with childcare...

It looks like the tax bracket for 2019 is at $78,950. This is about what we spend a year at this point. If we get down to 78,950 the bracket jumps down 10%, so I'd be saving almost $8000 in federal taxes just by getting there, right? Are there other deductions I should be looking into?

I do have an LLC, I was looking to start a side business but decided to focus on just my family and current job for now and am planning on dissolving it to avoid the $800 minimum CA tax. I had about 10k of expenses in 2017 for that business, but no income and no expenses since. Could the LLC help at all or do I need to show financial activity to be able to deduct buisness expenses?

Thank you for any advice or guidance.

YttriumNitrate

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Re: Worth trying to get in a lower tax bracket?
« Reply #1 on: January 28, 2019, 03:10:11 PM »
It looks like the tax bracket for 2019 is at $78,950. This is about what we spend a year at this point. If we get down to 78,950 the bracket jumps down 10%, so I'd be saving almost $8000 in federal taxes just by getting there, right? Are there other deductions I should be looking into?
It's hard to tell from your post, but you might be misinterpreting how the tax brackets work. The first $78,950 of income gets taxed at ~12% regardless of whether your adjusted gross income is $78,949 or $500,000 total.

geekette

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Re: Worth trying to get in a lower tax bracket?
« Reply #2 on: January 28, 2019, 03:29:08 PM »
Apparently this misconception is very common.  Vox posted a very simple video that explains how tax brackets actually work.

mominca

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Re: Worth trying to get in a lower tax bracket?
« Reply #3 on: January 28, 2019, 04:02:21 PM »
Yes, totally misunderstood how it works. Why don't they teach this stuff in school? I've always gone the turbotax route, and a number magically calculates itself.

I'll just focus on maximizing our tax deductible accounts and not worry about hitting a specific number.

dhc

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Re: Worth trying to get in a lower tax bracket?
« Reply #4 on: January 29, 2019, 12:32:53 AM »
They do teach it in school (or at least mine did). The problem is few enough students have significant enough incomes to find it interesting enough to remember. Good for you for checking in your assumption so you learned how they actually work now, though!


On another note... Are you seriously saying you spend almost $80,000 a year? Holy cow that it a ridiculously high number. If you're serious about this FI thing, that's where you need to focus all of your energy, not on minimizing taxes. If you can reduce it to, say, $60,000, which is still crazy high around here, at your income you'd reduce your years until FI significantly!

nereo

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Re: Worth trying to get in a lower tax bracket?
« Reply #5 on: January 29, 2019, 05:02:57 AM »
specifically regarding the HSA - you have a family limit of $7,000, provided that your spouse is not covered under his/her own worker healthcare plan.
Typically that gets invested in a single HSA account.


mominca

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Re: Worth trying to get in a lower tax bracket?
« Reply #6 on: January 29, 2019, 01:07:54 PM »
Thanks for the responses. I agree it seems like a lot to spend and thanks for the push to start paring down rather than focusing on the increased income. The estimated cost of living for where I am is $90,000 for a family. Average house price is $450,000. We've thought about selling our house and downsizing, but the housing market is really tight here- I don't think anyone would take a contingency offer- and a cheap rental would be more than our current mortgage payment.

I know we spend too much on groceries (I really value organic and local food- but we rarely eat out) and wine- I'm a winemaker so I've always seen it as necessary for my palate but we've been working on reducing that cost...

My husband's health insurance is basically free, but it would cost $1000 to put my son and I on his plan, so we have a separate covered CA HSA plan.

We have no car loans, but I do drive my 8 year old economy car a lot- probably 15k a year because my job is in a remote location.

I really do need to start tracking expenditures. Mint? I set up a personal capital account but I'm having trouble getting all my accounts linked. Is that a good place to track spending?

nereo

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Re: Worth trying to get in a lower tax bracket?
« Reply #7 on: January 29, 2019, 01:20:07 PM »
Mint is great.  Some people prefer 'You Need a Budget (YNAB)' but that costs money and I personally don't think nit's worth the premium over the no-cost Mint.
Ultimately use whatever program or method which works for you.  Many on here use nothing more fancy than excel.  It's only 'good' if it works for you and you stick to it.

Please do NOT trap yourself into comparing your spending with the 'estimated cost of living for my area'.  Those figures are based on averages of what people spend, not on what they need to spend - two very different things.  Having lived in very high cost of living (VHCOL) areas before (San Francisco, Santa Cruz), I can attest that a family can live a very good and affluent life on far less than the estimated cost of living figures.

Track your expenses and check the Case Studies tab.  There are some brilliant people on this forum which can work wonders for cutting back thousand$ from your budget while increasing the happiness in your life.

HamsterStache

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Re: Worth trying to get in a lower tax bracket?
« Reply #8 on: January 29, 2019, 01:32:36 PM »
On another note... Are you seriously saying you spend almost $80,000 a year? Holy cow that it a ridiculously high number. If you're serious about this FI thing, that's where you need to focus all of your energy, not on minimizing taxes. If you can reduce it to, say, $60,000, which is still crazy high around here, at your income you'd reduce your years until FI significantly!

We're a fairly frugal family of four in a HCOL area and spent about $60k last year - over a third of that was childcare though, so we just have to make it through a few more years of this stage of life and then really start racking up the savings

mominca

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Re: Worth trying to get in a lower tax bracket?
« Reply #9 on: January 29, 2019, 01:58:42 PM »
HamsterStache, how much is your rent/mortgage payment?

The number I gave is a little inflated as my husband's work pays for some household expenses- he works from home. I really need to set up Mint and I would love to do a case study.

We have put money into capital improvement for the house, it's hard to separate those without tracking expenditures. We bought a fixer in a nice neighborhood and have been bringing it back to a more marketable condition with the thought we'd live here for 5-10 years (at 5 years now). Childcare went down for us this year as he's in kindergarten and we only pay for an hour or so of after care during the school year.

HamsterStache

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Re: Worth trying to get in a lower tax bracket?
« Reply #10 on: January 29, 2019, 06:39:28 PM »
HamsterStache, how much is your rent/mortgage payment?

A little under $1,800 a month