The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: jjones1438 on June 18, 2019, 10:46:27 PM
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Summary: SO and I will be married later this year and are experiencing a financial year unlike one we have ever had. My W2 wage will experience a lot of 35% federal bracket and hers in the 22% for the most part. I live with SO in a small house, so the interest is minimal and it doesn't make sense to itemize given the standard deduction.
No debt outside of the mortgage on this small house, we both max our 401Ks and maxed IRAs last year (not sure if I can do that this year given my high income?). Neither of us have an HSA plan available. I asked my accountant and he said basically there are no other options for me and I'm going to have to just pay a ton of tax. Surely this can't be the case right?
What are some other ways to minimize tax? The idea of Donor-Advised Funds sounded conceptually interesting, but it appears we would not receive any tax benefits as neither of us itemize. We have no kids yet, but the idea of a 529 seemed worth further review although I have very minimal knowledge on them?
For those that don't itemize, what are some other tax advantageous things to be thinking of?
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What are some other ways to minimize tax? The idea of Donor-Advised Funds sounded conceptually interesting, but it appears we would not receive any tax benefits as neither of us itemize.
You say this like you have a religious objection to itemizing. The advice you get will be limited because you have pre-supposed that you *won't* itemize, because you apparently *haven't*. Regarding this specifically, the idea would be to donate enough to the donor-advised fun to make it worthwhile to itemize. The standard deduction is $24,400, so that would be the starting point to consider. (don't forget to take into account your other itemizable things, like your mortgage interest, and local taxes up to the SALT limit)
More generally, don't look at this as an annual exercise; look for things you can double-up on: pay last year and this year, or this year and next year together. Could you do that with your property tax, and still stay under the SALT limits? Look to do that with your charitable contributions, as well. You will take a hit on the odd years (really, you still get to take a standard deduction) but you could make enough progress to itemize sometimes.
We have no kids yet, but the idea of a 529 seemed worth further review although I have very minimal knowledge on them?
A 529 won't help this year: while you may get a tax deduction or credit on your state's plan, it won't do anything for Federal taxes. You could designate yourself as a beneficiary until you have a child, but beware that if things don't work out, you will face taxes plus a 10% penalty for withdrawals, unless you want to do a favor for a relative. (by making them the beneficiary)
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Since you're maxxing your tax advantaged accounts already, assuming you've fully identified the ones you're eligible for, yeah, you're getting close to stuck.
RE the itemized/standard deduction - it's a math exercise, not a value judgement. Your wording is sounding a little less math-ey and more value-y. Get that straight.
Realistically, if you're making enough that you're maxxing out and still have to pay a bunch of taxes, congrats. You are contributing to society. Make sure you vote.
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Look at filing as Married Filing Jointly and see how that compares since you are getting married this year. Also keep in mind the restrictions on some deductions such as traditional IRA if you file as Married Filing Separately.
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What are some other ways to minimize tax? The idea of Donor-Advised Funds sounded conceptually interesting, but it appears we would not receive any tax benefits as neither of us itemize.
You say this like you have a religious objection to itemizing. The advice you get will be limited because you have pre-supposed that you *won't* itemize, because you apparently *haven't*. Regarding this specifically, the idea would be to donate enough to the donor-advised fun to make it worthwhile to itemize. The standard deduction is $24,400, so that would be the starting point to consider. (don't forget to take into account your other itemizable things, like your mortgage interest, and local taxes up to the SALT limit)
More generally, don't look at this as an annual exercise; look for things you can double-up on: pay last year and this year, or this year and next year together. Could you do that with your property tax, and still stay under the SALT limits? Look to do that with your charitable contributions, as well. You will take a hit on the odd years (really, you still get to take a standard deduction) but you could make enough progress to itemize sometimes.
We have no kids yet, but the idea of a 529 seemed worth further review although I have very minimal knowledge on them?
A 529 won't help this year: while you may get a tax deduction or credit on your state's plan, it won't do anything for Federal taxes. You could designate yourself as a beneficiary until you have a child, but beware that if things don't work out, you will face taxes plus a 10% penalty for withdrawals, unless you want to do a favor for a relative. (by making them the beneficiary)
Perhaps my writing came across wrong. I don't have any objection to itemizing, the general feedback from my Accountant was that it wouldn't likely make sense as the mortgage interest is only like $6K in a year and the other typical deductions she said would be minimal. I didn't discuss the DAF on that discussion as it is a new topic I'm learning more about.
Would the correct way to think of itemizing vs standard be that standard = $24,400, versus itemizing, we need to hit at least $24,400 in "itemized deductions" to be at equilibrium? For example, if mortgage interest is $6K and for sake of example say there are $2K other deductions = $8K, that opening a DAF at a minimum of the difference, $16,400 would be the starting point?
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As far as the donor advised fund goes, what's your motivation for that?
If it's (a) I want to give away money to a cause I believe in, then it can be useful to make it more affordable to do so by paying less taxes. (And good for you!)
If it's (b) I want to save money and I think it will help me, it won't. You'll have to give away more than you will save in taxes.
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Would the correct way to think of itemizing vs standard be that standard = $24,400, versus itemizing, we need to hit at least $24,400 in "itemized deductions" to be at equilibrium? For example, if mortgage interest is $6K and for sake of example say there are $2K other deductions = $8K, that opening a DAF at a minimum of the difference, $16,400 would be the starting point?
Right. At $16,401 in the DAF, you will have $1 more deductible than taking the standard deduction. But local taxes can add up to quite a bit, too: state income or sales tax, property tax, etc. And since you are getting married, if you are thinking of kids then the delivery may be another opportunity, although those would only be deductible over a floor of 10% of AGI.
Of course, SwordGuy's points are very valid: this is, essentially, preserving / magnifying the amount you have to do good for others; it's not really putting more cash in your pocket, in the end. But as I said, you can look at bunching up other things, like state taxes (to the SALT limit) and come up with similar calculus--but that, you keep.
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Your taxable income is over 204k? If you are in the 35% bracket and she is in the 22% bracket, have you looked at what bracket you are in when MFJ?
Also, putting 16401 in a DAF would just save you 35 cents by spending 16k, wouldn't it?
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Getting married will reduce your total tax bill, as the MFJ brackets are double the single brackets except for the 37% bracket. So you won't hit the 35% tax bracket until 408k with MFJ.
Other than that, maxing your tax advantaged accounts is really the best you can do. We're very similar to you - MFJ, $6k in mortgage interest and capped out at $10k SALT, so we need $8.4k in itemized deductions to reach the break even point. We did a DAF before the TCJA went into effect, so we got the full deduction for everything we put in, but that was only available one year. Basically you have to suck it up and pay taxes.
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You don’t want to spend a dollar to save 30 cents in taxes.
I’m not a tax advisor and I don’t play one on TV, so keep that in mind and take this with 2 grains of salt. You may need to hire a good tax/investment advisor. I did notice a few things.
W2 income is about the highest taxed income, and I noticed that your income is W2. Do you have a side business or an interest in starting one? I’d start from that vantage point in looking at future legal tax avoidance.
State taxes matter. Some times there are state tax angles that you can pursue that don’t help you with federal taxes, or not much. 529 plans are an example. They aren’t deductible on Federal taxes but might be deductible in your state. Tax savings are tax savings.
The other comments on arranging expenses to fall in one relatively advantageous year versus another are good
Keep in mind that thresholds increase when you’re married filing jointly, so what you could do is sometimes expanded.
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Congrats on your excellent incomes and good spending choices, it's quite a privileged to get to those tax brackets.
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Look into HSA's.
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DAF work best if you have greatly appreciated stock/mutual funds so you avoid paying capital gains tax. Is that your situation?
As at least one other person already mentioned you might choose to itemize every other year (or every third year as I will). Give 3 years of charitable donations to your DAF in one year. Pay SALT ahead (or even late) to ensure you get to 10K deduction. Then use standard deduction in the other years.
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QUICK, have kids!!!
2K per child in tax credits. Nice.
Triplets are a lot of work, though.
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Sounds like you have some high class problems. You can't hide from death or taxes, consider yourself fortunate.
Some type of self employment and a business of your own can provide lots of opportunities for write offs.
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Have some kids so that you have something real to complain about. (joke)
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You should do research on executive compensation and then consider engaging your company or making a move. Some industries start as low as $200K base for exec comp. But also keep in mind that it's higher risk so carefully consider that against the tax advantages.
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Tax loss harvesting: offset up to $3000 per year of W-2 income
https://www.fool.com/knowledge-center/what-is-tax-loss-harvesting.aspx
Rental property improvement depreciation:
https://turbotax.intuit.com/tax-tips/rental-property/tax-deductions-for-rental-property-depreciation/L8tf7BPWz
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The next step to tax savings is to invest in after-tax investments and reap the benefits of preferred rates on qualified dividends and long term capital gains. Back door Roth may also be a good option. A DAF is ideally funded with highly appreciated stock, and might be a good option once you have a chunk you'd like to donate, but step one is to build up some highly appreciated stock.
There's a point at which tax planning is less about an immediate tax deduction and more about reducing your long term tax bill via investments and retirement planning.
Rental properties are not a great tax savings vehicle for high income earnings, because they will hit passive activity loss limitations.
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DAF work best if you have greatly appreciated stock/mutual funds so you avoid paying capital gains tax. Is that your situation?
As at least one other person already mentioned you might choose to itemize every other year (or every third year as I will). Give 3 years of charitable donations to your DAF in one year. Pay SALT ahead (or even late) to ensure you get to 10K deduction. Then use standard deduction in the other years.
Unfortunately, I do not.
Itemizing in some years and not in others is something I had not strategically thought through prior. I would guess we will move in the next year or so though and the next house will have quite a bit larger than this and have a higher payment, interest, etc.
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The next step to tax savings is to invest in after-tax investments and reap the benefits of preferred rates on qualified dividends and long term capital gains. Back door Roth may also be a good option. A DAF is ideally funded with highly appreciated stock, and might be a good option once you have a chunk you'd like to donate, but step one is to build up some highly appreciated stock.
There's a point at which tax planning is less about an immediate tax deduction and more about reducing your long term tax bill via investments and retirement planning.
Rental properties are not a great tax savings vehicle for high income earnings, because they will hit passive activity loss limitations.
I'm not sure I follow "preferred rates on qualified dividends", could you explain? Sorry if I'm missing the obvious here
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The next step to tax savings is to invest in after-tax investments and reap the benefits of preferred rates on qualified dividends and long term capital gains. Back door Roth may also be a good option. A DAF is ideally funded with highly appreciated stock, and might be a good option once you have a chunk you'd like to donate, but step one is to build up some highly appreciated stock.
There's a point at which tax planning is less about an immediate tax deduction and more about reducing your long term tax bill via investments and retirement planning.
Rental properties are not a great tax savings vehicle for high income earnings, because they will hit passive activity loss limitations.
Qualified dividends are taxed at capital gain rates, which are lower than ordinary income tax rates.
I'm not sure I follow "preferred rates on qualified dividends", could you explain? Sorry if I'm missing the obvious here