Author Topic: high tax burden  (Read 4017 times)

willie

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high tax burden
« on: October 21, 2014, 09:14:51 AM »
I am a state employee and I make $55k.  I have a side business, where I average $25k a year in profits. 

I have $960,000 in the following 12 funds (listed in order of biggest to smallest fund):
•   Mutual Global Discovery Class A
•   Vanguard Healthcare
•   Templeton Foreign Class A
•   Vanguard Managed Growth and Income Adm.
•   Vanguard Mid-Cap Index
•   Vanguard Small-Cap Index
•   Vanguard Wellington
•   Vanguard International Growth
•   Vanguard International Value
•   Vanguard Emerging Markets
•   Vanguard REIT
•   T-Rowe Price New Era

My wife maxs-out to her 401k/457.  I contribute 30% of state salary to my 401k/457.  I also contribute 17% of my salary from my side business to a 401k. 

My wife (who is also a state employee) and I seem to be paying a significant amount in taxes this year and last.  We paid almost $20k in taxes last year and $24k this year. 

I did close two accounts in 2013:
•   An Equity Fund from Comerica Securities that had $81,000 in it; and
•   Janus Growth and Income with $8k in it.

My questions are:
•   Does it appear that my current funds are tax efficient?
•   Is there a way to have more tax efficient funds?
•   How do I determine how tax efficient my funds are?
•   Are there other things I can do to lower my tax burden?

matchewed

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Re: high tax burden
« Reply #1 on: October 21, 2014, 09:23:52 AM »
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement#Assigning_asset_classes_to_different_accounts

I'd browse through that given you haven't said which fund(s) is/are located in which accounts.

waltworks

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Re: high tax burden
« Reply #2 on: October 21, 2014, 09:25:29 AM »
Assuming your gross from salaries is ~$140k (assuming your wife makes the same as you do) and all your investments are in taxable accounts where you'll be paying tax on bond income and such, your tax burden does not seem excessive (assuming you're talking state/fed/self employment/FICA all together). You should take all your stuff to a CPA and make a specific plan if reducing your tax burden is a priority.

-W

johnhenry

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Re: high tax burden
« Reply #3 on: October 21, 2014, 09:28:00 AM »
Those taxes aren't bad.... if your wife makes $2M a year. :)   Care to tell us how much she makes?  That will be important if you file jointly.

Are the $960K in funds all held in the 401(k)s of you or your spouse?  If so, those are not generating taxable income, right?

Of the top of my head, without more info.... you may be able to each contribute $5500 to Traditional IRAs, reducing your taxable income by $11K.  If you own the side business, you may be able to put more than 17% of those profits in tax deferred accounting using a Solo 401(k) or SEP IRA.

You also don't say what entity is getting the $20 to $24K in taxes.  Is that all federal tax? Or all tax combined?

willie

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Re: high tax burden
« Reply #4 on: October 22, 2014, 08:40:41 PM »
Hello and thank you so much for responding to my post!  I really appreciate the time and interest!  My wife and I do file jointly, and she makes $84,000 a year.  And we do max out to our IRAs every year, and one goal I have is to contribute more to my business' 401k.

As for the funds:
--$334,000 are in 401k or 457;
--$132,000 are in IRAs;
--$500,000 are in funds that I just set up for myself. 

As for the funds:
--$334,000 are in 401k or 457;
--$132,000 are in IRAs;
--$500,000 are in funds that I just set up for myself. 

All of the funds that I listed are NOT in an IRA, 401k, or 457. 

As for my wife, she makes $84,000 a year and contributes close to 40% into her 401k and 457 combined. My wife and I do file jointly, we do max out to our IRAs every year, and one goal I have is to contribute more to my business' 401k.

Any thoughts or advice is greatly appreciated!  Thanks again!
 


waltworks

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Re: high tax burden
« Reply #5 on: October 22, 2014, 09:29:43 PM »
You just make a lot of money. $20k/year is not bad for taxes at ~$164,000 gross plus half a million in taxable accounts (if I'm understanding your post correctly) where you're getting dinged for dividend/bond income. In fact, that's crazy low taxes, all things considered. I'd say you're doing great. Your effective tax rate has to be something like 10% when all is said and done. The only way to drop that any further is going to be to more aggressively fund tax advantaged accounts or have some kids or cheat.

If FIRE is your goal, you should look at the spending side of your finances immediately. Many/most people here would probably be safely done with work on the portfolio you have built up.

-W

johnhenry

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Re: high tax burden
« Reply #6 on: October 23, 2014, 08:37:35 AM »
You just make a lot of money. $20k/year is not bad for taxes at ~$164,000 gross plus half a million in taxable accounts (if I'm understanding your post correctly) where you're getting dinged for dividend/bond income. In fact, that's crazy low taxes, all things considered. I'd say you're doing great. Your effective tax rate has to be something like 10% when all is said and done. The only way to drop that any further is going to be to more aggressively fund tax advantaged accounts or have some kids or cheat.

If FIRE is your goal, you should look at the spending side of your finances immediately. Many/most people here would probably be safely done with work on the portfolio you have built up.

-W

Agree with Walt, as usual.  In addition to making a lot of money.... you HAVE a lot of money!  I don't think I saw your ages posted, but most folks here would be really close to considering themselves FIRE with a stache like that.  Unless you are big spenders, you are probably already set.

For as long as you work, I'd continue to pump max money into tax deferred accounts.  If you didn't have that pesky (profitable) side business you could quit and bring your income down to zero so you could convert a chunk of T. IRA to Roth each year until you were too old (switching from tax-deferred to tax-free).

On that note, you don't tell us a lot about your business, but THAT is probably going to offer you the most flexibility for avoiding/deferring taxes, which seems to be part of your goal.  No one needs a business that doesn't make money.  But if your business is something that you could pump some money into over a 1 to 3 year period, you may be able to have it show a loss or at less income now, or int he years just after you FIRE (so you can convert TIRA to Roth).... but that would pay off with higher profits a few years down the road.  Basically... moving some of that money in taxable accounts into "the business" in the form of expenses, or better yet, business real estate will get you lower taxes now in the form of lower income (for expenses) or tax-deferment (for depreciation).

Gone Fishing

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Re: high tax burden
« Reply #7 on: October 23, 2014, 08:49:26 AM »
You could retire, that would lower your taxes!  I'm not kidding. What do your expenses look like?  You could keep the side hustle and draw $40k a year off of the portfolio for about $65k a year, sounds pretty good to me.

RichMoose

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Re: high tax burden
« Reply #8 on: October 23, 2014, 10:46:02 AM »
willie, it looks like you're doing great and walt is bang on, your taxes are cheap based on your income. I know it's different, but in Canada they would be well over $30,000 with no dependants. :)

My one real comment is that you're holding quite the buffet of funds. I would consider cutting that down to holding 5 or less funds. The changes would be relatively easy for your tax-deferred accounts, but you may be stuck with what you have on your taxable accounts. From a tax perspective, you should move towards holding international funds in your taxable account.

I would also consider planning for Roth conversions (MadFientist style) to keep your taxes low in the future. Do you both have a pension in addition to your 457? What's your timeline for retirement?

willie

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Re: high tax burden
« Reply #9 on: October 25, 2014, 08:08:09 AM »
Thank you, you have given me a different perspective on my taxes!  My wife is hoping to FIRE before me, hopefully in the next year or two. 

Neither of us have pensions, we are both 44 with no kids.  We both save a lot of our income, we are pretty frugal, and my biggest expense is my taxes.  I’ll talk to our CPA about our taxes and try to do more with my business, thanks for your input, time and suggestions!