Author Topic: One income case study-Optimization/Tax Help  (Read 2380 times)

mrsggrowsveg

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One income case study-Optimization/Tax Help
« on: July 14, 2015, 07:56:01 AM »
We are switching to one income in just a few weeks.  I would like some ideas for lowering the spending and for what to do with the smaller leftover amount.   We have thought about refinancing our mortgage to a 15 year or increasing our current retirement contributions.  I am also having a hard time estimating our taxes on one income.  According to paycheck city they are at least as much as they are right now with two incomes.

Life Situation:  Married (33 and 26) 1 child and 1 on the way soon.  Our goal is to increase our income on our small farm and for both of us to work on our farm full-time.

Income
Salary:  $5,683.45 (There are bonuses, but I haven't planned with them)
Pretax Health Ins: $395.70
Vision:  $7.89
Dental: $39.50
FICA base salary/wages $5,287.75
401K:  $568.34
Income subject to IRS Tax $4,719.41  (The below figures are all estimated based on paycheck city calculator)
Federal Tax:  $518.14
State Tax:  $208
Social Security:  $352.37
Medicare:  $82.40
Total Income Taxes $1,160.90
After Tax Take Home $3,555.39
Auto Reimbursement:  $700
Rental Payment:  $350
Income before other expenses $4,605.39

Spending
Gifts:  $20
Mortgage:  $1256 (30 with PMI)
Water:  $50
Propane/Pellets:  $118
Electric:  $90
Cell Phone:  $32
Trash:  $26
Internet:  $54.95
Rental Mortgage:  $344.42
Rental Sinking Fund:  $100
Fuel:  $175
Car Replacement:  $300
Service/Parts/Reg:  $200
Insurance:  $110
Groceries:  $300
Pet:  $50
Clothing:  $25
Misc:  $100
Household:  $25
Alcohol:  $40
Farm:  $200
Travel:  $200

Total Spending $3,816.37
Leftover:  $789.02

Assets
Investments:  $66,000
Property:  $180,000 and $33,000

Liabilities
Home Mortgage:  $155,000
Rental Mortgage:  $35,000



seattlecyclone

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Re: One income case study-Optimization/Tax Help
« Reply #1 on: July 14, 2015, 08:48:58 AM »
Assuming these are monthly figures, I think you're overestimating your federal tax liability.

Quick estimate:
Annual income minus 401(k) contribution: $4,719.41 * 12 = $56,632.92
Standard deduction: $12,600
Four personal exemptions: $12,000
-------------------------------------------------
Taxable income: $56,632.92 - $12,600 - $12,000 = $32,032.92
Base tax: $18,450 * 10% + $13,582.92 * 15% = $3,882.44
-------------------------------------------------
Saver's credit: $2,000 (your contribution) * 0.1 = $200
Child tax credit: $2,000
-------------------------------------------------
Tax after credits: $1,682.44 ($140.20/month)

I'm ignoring the rental property here because the rent isn't that high to begin with, and you should probably have enough deductions from mortgage interest, depreciation, and other expenses to offset most (if not all) of the rent.

You should increase your allowances on your W-4 to the point where you get around $150/month withheld (or less, if you implement the suggestions below).

A few observations/questions:
  • If you contribute at least $2,000 to an IRA for your spouse, you'll get an additional $200 of saver's credit.
  • If you max out your pre-tax 401(k), you'll likely become eligible for the earned income credit. The amount could be up to $800 based on last year's tables, would be a bit higher this year because of inflation. However if your rental and any other taxable investment income totals more than $3,350, you'll get no earned income credit.
  • With PMI, you could probably benefit from refinancing to get rid of it, but you would have to bring some cash to the table to get a high enough equity ratio. Are all of your investments in retirement accounts, or do you have some easily accessible money that you could put down at closing to rid yourself of PMI?
  • Your rental seems to be cash flow negative, with the rent barely covering the mortgage and a $100 "sinking fund" on top of that. Are you sure you want to keep it? Seems like managing a rental plus two kids plus a farm is a lot to deal with, so consider ditching the rental unless you have a very good reason not to.

Personally, my top two priorities would probably be to increase retirement contributions and get rid of PMI. I would probably go with the retirement accounts first because of those tax reasons (saving 15% on the contributions plus an additional $1,000 or so in tax credits is a nice deal!), but if the PMI is really expensive you may want to try and knock that out this year and go full steam ahead with the retirement savings next year.
« Last Edit: July 14, 2015, 08:50:30 AM by seattlecyclone »

MDM

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Re: One income case study-Optimization/Tax Help
« Reply #2 on: July 14, 2015, 09:43:12 AM »
I am also having a hard time estimating our taxes on one income.  According to paycheck city they are at least as much as they are right now with two incomes.

PaycheckCity won't help as much with tax calculation as you might think.  See http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/ (although I'd be interested in more details from seattlecyclone's perspective).

You might try both
  https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ and
  the reader case study spreadsheet.
How closely do their results match?

seattlecyclone

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Re: One income case study-Optimization/Tax Help
« Reply #3 on: July 14, 2015, 10:27:36 AM »
That's right. PaycheckCity and the like will give you pretty accurate estimates of how much tax will be taken out of your paycheck given your income, payroll deductions, filing status, and number of exemptions claimed on your W-4. What it doesn't do is tell you whether or not that amount of withholding is right for your individual situation! For that, you should use one of MDM's links or just go through Form 1040 on your own. Once you do that, play around with PaycheckCity to see what numbers you have to put into your W-4 to make your withholding match pretty closely with your actual tax liability.

mrsggrowsveg

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Re: One income case study-Optimization/Tax Help
« Reply #4 on: July 14, 2015, 10:48:38 AM »
Thank you for the links and clarification.  I will try plugging some numbers in there later.