Author Topic: tax planning and my effective tax rate...  (Read 4862 times)

FuckRx

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tax planning and my effective tax rate...
« on: March 26, 2014, 10:08:12 AM »

so i got my taxes done, and my effective fed taxes are 41% and my marginal is at 33%...i dunno if i fully understand the difference between marginal/effective but those are the numbers. for state i'm at 9% marginal and 7% effective. so how "normal" is it to pay this much in taxes? and does this mean i paid 41%+7%=48% of my money to uncle sam? my AGI is a little under 280k.
the other question is what is "tax planning" really? is it like family planning? back in the day i thought family planning was figuring out how to GET pregnant. so if tax planning is the same then ummm no thank you.

BlueHouse

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Re: tax planning and my effective tax rate...
« Reply #1 on: March 26, 2014, 10:47:09 AM »
With an effective tax rate like that, I would guess you're a working stiff like me, with the vast majority of your income coming from wages.  A fraction of a percent of my income comes from investments, so I'm taxed at higher rates too.  I'm hoping to change that in the next 10 years.
 
Tax planning for me this year meant that my accountant called me in September and said "stop paying yourself wages and cut a check to the government for more than the cost of a luxury new car, otherwise you will pay penalties for underpaying Estimated Taxes".   

MustachianAccountant

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Re: tax planning and my effective tax rate...
« Reply #2 on: March 26, 2014, 11:07:17 AM »
Without seeing your numbers here's my guess:

You're in the 33% tax bracket but you have Schedule C income where you have to pay Self Employment taxes of 15.3% (but then immediately deduct half of it). So you're tax bracket is 33% but you have to pay the extra SE taxes which raise it, then you have some dedictions (Schedule A stuff and whatnot) to lower it back down some to get to the 41%

Tax Brackets show what your last dollar earned was taxed at (but don't take into account SE taxes), Effective tax rates show what your average dollar was taxed at including SE taxes

ETA: Tax planning is planning on how to pay the lowest tax you can legally. Putting money into tax advantaged accounts, strategically planning deducatable purchases, etc

Yeah, you'd have to be more specific with numbers. You've stated elsewhere on the forums (I think) that you get a K-1 - what type of K-1 is that? A 1065 K-1? If your username is accurate, I'm guessing you're part of a medical practice that is organized as a partnership, in which case Maigahane is correct about the self employment taxes.
The good news (again, if this is correct) is that you have a lot of options to "tax plan" with the accountant that does your practice's tax return to shield your income from taxes through retirement planning. Find a good CPA who deals with a lot of doctors/dentists, and you should be golden.

FuckRx

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Re: tax planning and my effective tax rate...
« Reply #3 on: March 26, 2014, 11:51:36 AM »

thanks for the info. yes it's a K-1. don't know what kind.
I'll have to look for a CPA that can help me with tax planning, I can ask my current CPA and see if he he can do that. I know that he charges $375/hr for anything outside of doing actual taxes so I need to shop around.

MissPeach

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Re: tax planning and my effective tax rate...
« Reply #4 on: March 26, 2014, 02:07:57 PM »
My question is how you get your K-1? Is this for your primary wages? You can get K-1s through other ways like stock ownership as well.

If you are self-employed you will likely have more options for tax planning. You will also do better with tax planning if you can reduce your cash flow and invest, save, reinvest, etc. the money.

Basically if you can do without the cash, there are ways to save it or move it around that will make your taxes less. For example you can set up a 401K and pay yourself a good match out of your taxable income. I can't remember the upper threshold but your AGI might be getting high for that depending on your filing status (i.e., single, married, etc.). If you are married that is another option as you can fund 401Ks and possibly IRAs for a spouse. You may do better as a corporation than a partnership is another example. Many people are able to pay themselves a wage as a corporation and deduct 100% of the payroll cost from income.


MustachianAccountant

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Re: tax planning and my effective tax rate...
« Reply #5 on: March 27, 2014, 06:50:03 AM »
My question is how you get your K-1? Is this for your primary wages? You can get K-1s through other ways like stock ownership as well.

You wouldn't get a K-1 from stock ownership, but you can get one as an "investor" (i.e., tiny tiny share partner) in a publicly traded partnership. Most of the ones I've seen are oil and gas companies, but I've seen others (an amusement park once, I think).
However, USUALLY when someone gets into these, they buy into several different companies, and therefore get several K-1s. FuckRX stated he has ONE K-1, which led me to the conclusion above. Which is, admittedly, and assumption that could be totally wrong.
Of course, he (she?) isn't too forthcoming with details, so we're left to our own assumptions. :-)

Cpa Cat

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Re: tax planning and my effective tax rate...
« Reply #6 on: March 27, 2014, 09:22:00 AM »

...so how "normal" is it to pay this much in taxes? and does this mean i paid 41%+7%=48% of my money to uncle sam? my AGI is a little under 280k.

The answer to your first question is that it is fairly normal for newly successful people who have no idea what's going on with their taxes. Success takes you by surprise, suddenly it's the first year that you're "rich" and before you know it, you're paying 48% in taxes. And yes - you are paying 48% in taxes.

You need a new accountant. It's outrageous that your accountant is charging the kind of fees that you've quoted previously and at no point felt the need to say "GEE - This guy is paying 50% of his income in taxes. Maybe I should make some suggestions for next year. I wonder if it's a good idea to explain the difference between a Partnership and an S-Corp."

You are paying rich-person accounting prices and getting H&R Block services.

MustachianAccountant

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Re: tax planning and my effective tax rate...
« Reply #7 on: March 27, 2014, 11:34:39 AM »

The answer to your first question is that it is fairly normal for newly successful people who have no idea what's going on with their taxes. Success takes you by surprise, suddenly it's the first year that you're "rich" and before you know it, you're paying 48% in taxes. And yes - you are paying 48% in taxes.

You need a new accountant. It's outrageous that your accountant is charging the kind of fees that you've quoted previously and at no point felt the need to say "GEE - This guy is paying 50% of his income in taxes. Maybe I should make some suggestions for next year. I wonder if it's a good idea to explain the difference between a Partnership and an S-Corp."

You are paying rich-person accounting prices and getting H&R Block services.

^^^ +1,000

FuckRx

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Re: tax planning and my effective tax rate...
« Reply #8 on: March 27, 2014, 12:39:26 PM »

yea so i work for a medical group and instead of a w-2 i get a k-1. i only receive one k-1 usually in the ballpark of 300k+ and i have no property or anything else that i can write off. i'm single/no kids/no dependents.
so i did ask him about tax planning and his reply was for me to max out my 401k and buy a house/investment property. that doesn't sound like tax planning to me. so yes, need a new accountant for next year for shizzle. but damn so i really paid 48% in taxes?? ouch...

mcneally

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Re: tax planning and my effective tax rate...
« Reply #9 on: March 27, 2014, 09:17:58 PM »

so i got my taxes done, and my effective fed taxes are 41% and my marginal is at 33%...i dunno if i fully understand the difference between marginal/effective but those are the numbers. for state i'm at 9% marginal and 7% effective. so how "normal" is it to pay this much in taxes? and does this mean i paid 41%+7%=48% of my money to uncle sam? my AGI is a little under 280k.
the other question is what is "tax planning" really? is it like family planning? back in the day i thought family planning was figuring out how to GET pregnant. so if tax planning is the same then ummm no thank you.

Unless you're using some alternative measure of 'effective marginal tax rate' to account for phased out credits/ deductions, your effective rate has to be lower than your marginal rate because we don't have a regressive income tax system.

If you were single with only the standard deduction and all your income was subject to self employment tax, your fed tax would be $91,265 ($69,667 federal income tax + $21,598 SE tax). You almost certainly aren't paying that much tax on $280k income, but that would be 32.6% effective, including SE tax.

MustachianAccountant

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Re: tax planning and my effective tax rate...
« Reply #10 on: March 28, 2014, 01:09:09 PM »

yea so i work for a medical group and instead of a w-2 i get a k-1. i only receive one k-1 usually in the ballpark of 300k+ and i have no property or anything else that i can write off. i'm single/no kids/no dependents.
so i did ask him about tax planning and his reply was for me to max out my 401k and buy a house/investment property. that doesn't sound like tax planning to me. so yes, need a new accountant for next year for shizzle. but damn so i really paid 48% in taxes?? ouch...

Buying investment properties is good advice, get a property management company to handle them if you don't want to bother with the day to day.
Maxing your 401k is good advice too. Here's the thing about that though: if you have any say in what the practice's retirement plan looks like, there are better options.
Either way, it sounds like your accountant is just viewing you as a big bag of money instead of an actual client. That's how it seems you feel anyways. Probably time to move on.

Joel

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Re: tax planning and my effective tax rate...
« Reply #11 on: March 28, 2014, 06:57:19 PM »

so i got my taxes done, and my effective fed taxes are 41% and my marginal is at 33%...i dunno if i fully understand the difference between marginal/effective but those are the numbers. for state i'm at 9% marginal and 7% effective. so how "normal" is it to pay this much in taxes? and does this mean i paid 41%+7%=48% of my money to uncle sam? my AGI is a little under 280k.
the other question is what is "tax planning" really? is it like family planning? back in the day i thought family planning was figuring out how to GET pregnant. so if tax planning is the same then ummm no thank you.

Unless you're using some alternative measure of 'effective marginal tax rate' to account for phased out credits/ deductions, your effective rate has to be lower than your marginal rate because we don't have a regressive income tax system.

If you were single with only the standard deduction and all your income was subject to self employment tax, your fed tax would be $91,265 ($69,667 federal income tax + $21,598 SE tax). You almost certainly aren't paying that much tax on $280k income, but that would be 32.6% effective, including SE tax.

This was my first impression, but I did not run the numbers.