Author Topic: Should we invest or try to hack our 2019 taxes?  (Read 768 times)

onemorebike

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Should we invest or try to hack our 2019 taxes?
« on: October 28, 2018, 07:02:07 PM »
We have $60,000 in cash we are finally making a decision to put to work (I held for awhile with a real estate aspiration I was pursuing, but it failed me). We are either considering investing in the Schwab total stock market index fund OR , after listening to some tax hacking podcasts over at ChooseFI on tax hacking, we are considering changing our 401K and 457 contributions (max $36,000 annually x 2) to put our entire paychecks in and live off the $60,000 cash until we've contributed the equivalent pre-tax in our investment accounts. Wouldn't that make our taxable income in 2019 close to zero?

Which would be more advantageous? Anyone done this and have suggestions or ideas for how to implement?

lhamo

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #1 on: October 28, 2018, 07:44:49 PM »
Yes, putting as much as you can into tax-deferred retirement investments now would drop your tax bill for 2018 and 2019 -- and depending on how you plan to structure your income/work life over the future could give you a nice starting balance to work with on creating a Roth conversion ladder during future years of no/reduced income from paid employment.  How much of a tax break you would get would depend on what your base salaries/tax brackets are.

onemorebike

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #2 on: October 28, 2018, 08:32:51 PM »
lhamo,

We currently make between 90-100K a year as a couple (I moved to part time this year so don't have exact number just yet). We have two kiddos and file jointly. For 2018, I'm wondering if I can get us under the 77,400 by moving our next four paychecks into 403bs and 457 in their entirety - but it isn't super clear to me how much money we would gain by doing that.

In 2019, would it be beneficial get us into the 10 percent bracket? (36 + 36 + 5500 each into IRAs) or is that money better utilized by investing tomorrow in an index fund and taking advantage of an earlier investment and compound interest? We are relatively new to this concept so I'd prefer not to miss something.

Tax rate   Taxable income bracket   Tax owed
10%           $0 to $19,050                   10% of taxable income
12%           $19,051 to $77,400           $1,905 plus 12% of the amount over $19,050
22%           $77,401 to $165,000           $8,907 plus 22% of the amount over $77,400

terran

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #3 on: October 28, 2018, 08:45:03 PM »
Do both. Invest now, and then sell and live off the money while you get as much as you can into your tax advantaged accounts. You've made the decision to invest the money so all you're going to be doing is "moving" the invested money from taxable to tax advantaged through the intermediary of salary reduction. On average the investing sooner is better than investing later, so you should invest as soon as you have money you want to invest. If it does happen to go down you'll just be able to move the same number of shares from taxable to tax advantaged faster because while investments are measured in shares, tax advantaged account limits are measured in dollars.

The salary deferral limit for 2018 is $18.5k and for 2019 is expected to be $19k, so you can actually do $37k this year and $38k next year between a 401(k) and a 457(b).

lhamo

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #4 on: October 28, 2018, 08:47:40 PM »
Well, if you are putting most of your earnings into tax deferred accounts then by default you ARE investing.  And cutting your tax bill at the same time.

For me, if I had any kind of plan to retire early or reduce income significantly while kids are still home, I would max out the tax deferred accounts now while you can.  Those pots are use it or lose it -- you can't claim the tax deferral if you don't capture it by the end of the year.

For 2018 tax planning purposes, I find this online calculator to be really helpful -- it is easier to tweak than other online options like Tax Act, and shows you how the child and family credits apply to your tax savings at different income levels (once you put in the estimated income):

https://www.olt.com/main/home/taxestimator.asp

onemorebike

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #5 on: October 28, 2018, 09:03:02 PM »

Terran,

In this scenario, doesn't the sale of those funds count as income? I'm unclear.

Thank you in advance for your thoughts.

-onemorebike

Do both. Invest now, and then sell and live off the money while you get as much as you can into your tax advantaged accounts. You've made the decision to invest the money so all you're going to be doing is "moving" the invested money from taxable to tax advantaged through the intermediary of salary reduction. On average the investing sooner is better than investing later, so you should invest as soon as you have money you want to invest. If it does happen to go down you'll just be able to move the same number of shares from taxable to tax advantaged faster because while investments are measured in shares, tax advantaged account limits are measured in dollars.

The salary deferral limit for 2018 is $18.5k and for 2019 is expected to be $19k, so you can actually do $37k this year and $38k next year between a 401(k) and a 457(b).


terran

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Re: Should we invest or try to hack our 2019 taxes?
« Reply #6 on: October 29, 2018, 06:26:53 AM »

Terran,

In this scenario, doesn't the sale of those funds count as income? I'm unclear.

Thank you in advance for your thoughts.

-onemorebike

Do both. Invest now, and then sell and live off the money while you get as much as you can into your tax advantaged accounts. You've made the decision to invest the money so all you're going to be doing is "moving" the invested money from taxable to tax advantaged through the intermediary of salary reduction. On average the investing sooner is better than investing later, so you should invest as soon as you have money you want to invest. If it does happen to go down you'll just be able to move the same number of shares from taxable to tax advantaged faster because while investments are measured in shares, tax advantaged account limits are measured in dollars.

The salary deferral limit for 2018 is $18.5k and for 2019 is expected to be $19k, so you can actually do $37k this year and $38k next year between a 401(k) and a 457(b).

Yes, gains would count as income, losses would reduce your taxable income (up to $3000). Note that these are gains and losses that effect your taxable income, so you need to subtract what you paid from what you get for the investment to calculate the gain/loss.

If they're short term gains (which some likely would be) you'll pay tax on the gains at your marginal tax bracket. If you've held the investment at least a year by the time you sell then any gains will be taxed at your capital gains rate, which may be 0% depending on your income.

Let me ask you this: would you rather have $100 or $110 dollars on which you have to pay $1.50 tax? Your "worst" case scenario is that the investment makes some money before transferring to the 401(k) and you have to pay some tax on that money. You're still better off than if had left the money in cash until transferring it. If you lose money then you get a tax deduction which gives you a little extra money and you can buy more the same number of shares back in the 401(k) so you didn't have a "real" loss as it will rebound someday.

One important point: if you do sell at a loss, don't buy back the exact same investment as that would trigger a wash sale which negates the loss. You need to buy back an investment that is not "substantially identical," which basically means try to pick something that follows a different (but similar) index.   

Edit: for cash flow reasons I might not bother investing the amount you'll need over the next few months to max things out. It's still (on average) optimal to invest as soon as you can, but it might not be worth the extra work for a short time thing. I'd still do it with the money you'll be moving over to the tax advantaged accounts the following year though.
« Last Edit: October 29, 2018, 06:30:14 AM by terran »