Author Topic: Dropping a tax bracket  (Read 5676 times)

Mr. Peaches

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Dropping a tax bracket
« on: August 19, 2015, 07:53:27 PM »
Hi! I am a teacher in a state with no state income tax and I will make $51,484 this year. I had been planning to put $14,400 into my 403b and my HSA to bring me down into the 15% tax bracket. I have calculated that this would give me about $2300 per month to live on, which should be plenty. My concern is that I'm apparently going to be forced to tutor my students, which comes with extra (irregular) pay (of probably not more than $100/month, when and if it happens). This would indicate that I should put even more into pre-tax savings vehicles so I can stay in the 15% bracket; the problem is that I really don't want to take home much less than $2300/month (I have calculated that with that amount I should be able to save a few hundred dollars per month to build up my post-tax savings, so I would have a bit of a safety cushion, but a large part of me is worried about unexpected expenses. I do have a cash reserve of about $10,000 now and I guess I could always change my allocations... what can I say, I'm a bit of a worrier, but I also hate to leave money on the table). I guess my question has two parts: 1. Is this even something I can figure out myself, or do you really need a professional to advise you on this sort of thing? 2. If it is something I can figure out myself, would you recommend it?

SwordGuy

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Re: Dropping a tax bracket
« Reply #1 on: August 19, 2015, 08:03:55 PM »
Why are you so concerned with staying in the 15% bracket?

Are you under the mistaken belief that if your tax bracket is higher than 15% you will have to pay the higher % on your entire income? 

Because it simply does not work that way in the USA.


kpd905

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Re: Dropping a tax bracket
« Reply #2 on: August 19, 2015, 08:41:10 PM »
Once you figure out the amount you'll make tutoring, throw that amount into a traditional IRA.  You then deduct that amount from your income for the year.

mr_orange

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Re: Dropping a tax bracket
« Reply #3 on: August 19, 2015, 08:41:57 PM »
Agreed....the extra taxes are only paid on the incremental dollars past the first tax tranche.  Thus splitting hairs over your bracket doesn't really make a lot of sense.  It's not like your taxes suddenly jump on your whole income after you make marginally more money. 

MDM

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Re: Dropping a tax bracket
« Reply #4 on: August 19, 2015, 08:51:53 PM »
1. Is this even something I can figure out myself, or do you really need a professional to advise you on this sort of thing? 2. If it is something I can figure out myself, would you recommend it?

Do note previous posters' comments on tax brackets - it does appear you are misunderstanding the tax code.

In any case the answers to your questions are
1. Yes, as described your situation is simple enough that you can figure it about as well as a professional.
2. Yes

See http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/ for similar discussion.

Mr. Peaches

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Re: Dropping a tax bracket
« Reply #5 on: August 21, 2015, 05:37:27 AM »
That is really helpful, thanks! (And, yes, I did know that on some level but I could have sworn trying to drop a tax bracket was a thing…  It just goes to show that no matter how educated you are or how interested in personal finance, you can still not really understand basic things!)

Rural

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Re: Dropping a tax bracket
« Reply #6 on: August 21, 2015, 07:00:57 AM »
Staying below 15% will have a big impact on capital gains taxes.


http://www.irs.gov/taxtopics/tc409.html

beltim

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Re: Dropping a tax bracket
« Reply #7 on: August 21, 2015, 07:12:15 AM »
Staying below 15% will have a big impact on capital gains taxes.


http://www.irs.gov/taxtopics/tc409.html

Only on capital gains up to the top of the bracket - if capital gains raise your income above the 15% bracket then the excess is taxed at the higher rate.

So it's still a marginal effect, just like income.  Sure, you save on the marginal rate, but it doesn't effect the rest of your income.

Mississippi Mudstache

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Re: Dropping a tax bracket
« Reply #8 on: August 21, 2015, 09:15:02 AM »
Keep in mind that if you don't contribute enough to your 403B during 2015 to get yourself down to the desired taxable income, you can always contribute to your HSA (if you have additional space left at year's end) or a traditional IRA until April 15 of the following year. However, my advice would be to max out the HSA first, since that money reduces FICA if it's withdrawn from your paycheck, and it's potentially tax-free going in and coming out.

Bottom line: Get it close during the year, then make adjustments via your IRA when you file your taxes to dial it in exactly where you want it.

Rural

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Re: Dropping a tax bracket
« Reply #9 on: August 21, 2015, 01:54:45 PM »
Staying below 15% will have a big impact on capital gains taxes.


http://www.irs.gov/taxtopics/tc409.html

Only on capital gains up to the top of the bracket - if capital gains raise your income above the 15% bracket then the excess is taxed at the higher rate.

So it's still a marginal effect, just like income.  Sure, you save on the marginal rate, but it doesn't effect the rest of your income.


Ah, thanks. Didn't realize that.

beltim

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Re: Dropping a tax bracket
« Reply #10 on: August 21, 2015, 02:03:16 PM »
Staying below 15% will have a big impact on capital gains taxes.


http://www.irs.gov/taxtopics/tc409.html

Only on capital gains up to the top of the bracket - if capital gains raise your income above the 15% bracket then the excess is taxed at the higher rate.

So it's still a marginal effect, just like income.  Sure, you save on the marginal rate, but it doesn't effect the rest of your income.


Ah, thanks. Didn't realize that.

No problem.  That's a tricky one because some of the free online calculators get it wrong.

Gin1984

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Re: Dropping a tax bracket
« Reply #11 on: August 21, 2015, 02:31:59 PM »
Is there a reason why you could not increase the money going into you 403b once you do start tutoring?

catccc

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Re: Dropping a tax bracket
« Reply #12 on: September 02, 2015, 12:16:25 PM »
Staying below 15% will have a big impact on capital gains taxes.


http://www.irs.gov/taxtopics/tc409.html

Only on capital gains up to the top of the bracket - if capital gains raise your income above the 15% bracket then the excess is taxed at the higher rate.

So it's still a marginal effect, just like income.  Sure, you save on the marginal rate, but it doesn't effect the rest of your income.


Ah, thanks. Didn't realize that.

If you are well within the 15% bracket though, it is still a nice rule that can save a decent amount!  I harvested about $10K in capital gains last year and paid 0% tax on it.  (Hooray for being a one income family of 4!)

The top of the single filers 15% bracket is $37,450.  The $37,450 amount is based on taxable income.  That's line 43 on the 2014 IRS form 1040.  And that line is after personal exemptions and standard or itemized deductions.  So, OP, if your gross if $51,484, and your exclude the $14,400 going to your 403B, that gets you to $37,084.  Then you get a personal exemption of $4,000 and a standard deduction of $6,300, which gets you to a taxable income of $26,784.  Meaning you'll be in the 15% bracket by almost $10,700.  Odds are if you tutor for $100/month, you'll still be in the 15% bracket, and even have some room for some for notable capital gains at 0%.  I think.  Correct me if I'm wrong, people.  I know you will.

Trudie

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Re: Dropping a tax bracket
« Reply #13 on: September 03, 2015, 03:03:15 PM »
If you're really committed to staying in the 15% bracket, and if you itemize deductions you may consider prepaying some of your 2016 deductible expenses in December.

For instance, in the past we've gone about 4-5K over into the 25% bracket, which results in another $400-500 dished out for taxes.  The way I look at it, that $$$ could buy me a sweet laptop (which I need to replace this year).

In Iowa, where I live, property taxes are due in March and September.  I may prepay my March payment in December.  I will sit down the first week in December and figure out where we're at.

Another option is prepaying some charitable contributions - probably to my church.  But I prefer the property tax option because it is a legal obligation, not a voluntary one.

TheOldestYoungMan

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Re: Dropping a tax bracket
« Reply #14 on: September 04, 2015, 01:28:33 PM »
One thing you might try, particularly if you previously have not been saving as much as you are going for, is to tell HR to dial you up to the maximum.  Have them withhold the most they possibly can, and see where you're at.  It might erode that cash cushion the first paycheck, but you can back off the contribution a hundred at a time or so until you're saving money again. (51484 - 18000 = 33484, way over 2300/mo, even if you also max out HSA).

The way most of those things work is you can stop the contributions anytime, and change them at least quarterly.

But yea, I waited until I had around 30k in post-tax nonretirement investment accounts before really ratcheting up my savings, and for similar reasons (worried about emergencies and whatnot).  The peace of mind has a value, but I gave alot of money away in taxes I would never have had to pay.

"Forced to tutor my students"  I got an image of my old high school principle holding a ruler threateningly over my math teacher, "teach them!" :)

Have fun and great job saving so much!

 

Wow, a phone plan for fifteen bucks!