The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: IWannaGo on November 13, 2017, 06:37:29 PM
-
Looking for ideas/suggestions on how to bring my AGI down into the lower tax bracket. I've got approx $24K between me and the next lower bracket. I've already maxed out the 401K, HSA, made Roth contribution....is there anything else I can do? Non homeowner, and sometimes come close to itemized deduction.
What do I do? Fund a charity/start up my own foundation? Make a large donation? And yes, some of you may be thinking/asking - "why try to dump $24k...just pay the taxes of the higher bracket and keep the money yourself for investing!"
Might be a no brainer for some, but thought I'd throw it out there for comment - which is it - some option you might have to reduce the AGI, or just pay in the higher bracket?.... thanks in advance.
-
Just to make sure, I want to be sure you're not falling prey to a common misconception. When you are in a tax bracket, not ALL your earnings are taxed at that rate. Here is a source that explains it well: https://blog.taxact.com/how-tax-brackets-work/ (https://blog.taxact.com/how-tax-brackets-work/) So there is absolutely no reason to give away money. With extremely few exceptions, at no point does making more cost you more.
-
Fund a charity/start up my own foundation?
If interested, see Let's talk about DAFs (https://forum.mrmoneymustache.com/taxes/let's-talk-about-dafs/).
-
Fund a charity/start up my own foundation?
If interested, see Let's talk about DAFs (https://forum.mrmoneymustache.com/taxes/let's-talk-about-dafs/).
Yes, that's what I was going to say. I'm donating 50% of my AGI to my newly created DAF this year.
-
Roth IRA contributions do not reduce AGI.
-
What Bracken_Joy said, this sounds like the common misconception of how marginal tax rates work.
-
All good stuff and this is exactly where I also heard about foundations - DAF's, from that same JL Collins post. Thanks everyone for chiming in and the links.
-
Look at the front page of a Form 1040 and it will tell you what you can do to reduce AGI. Basically anything on the bottom quarter of that page is a reduction to AGI.
Off the top of my head, the two easiest things to do would be:
1. Recharacterize your Roth contribution to a traditional IRA contribution. That can reduce your AGI by up to $5,500.
2. Realize any capital losses you may have. These can reduce your AGI dollar for dollar.
And unless I am missing something, charitable contributions are a deduction on Schedule A, which come into Form 1040 after AGI is calculated. A great thing to do, but it won't reduce AGI. It will reduce taxable income and overall taxes owed to the extent they enable you to exceed the standard deduction, of course.
-
Yep, charitable contributions have no effect on your AGI. They still do get subtracted from your taxable income, which is what determines your tax bracket.
-
Great advice by brackenjoy, your maginal tax rate is far from your effective tax rate.