Learning, Sharing, and Teaching > Taxes

HELP! $285k income & $78k in taxes. Losing too much to taxes?!

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Fi365:
Background:
 - Early 30s couple and 2-year-old daughter living ~50 miles outside of Washington, DC (fairly high cost of living)
- We spent freely throughout our 20s and only started contributing to retirement plans in our late 20s. Yikes, I know. We didn't acquire an ounce of debt though--paid for undergrad and grad school out of pocket ourselves--phew!
- In 2014, we heard the word "budget." Yikes, I know.
- From 2015 - present, I've become really good at making money. I started a consulting business and our household income was ~$285,000 in 2017.
- The "increasing income" side of the FI equation is covered. We're getting better at the "reducing expenses" side every day. But the tax strategy side is brand new and I feel lost and frustrated...

The challenge:
- Yesterday I saw the Root of Good tax info on this forum's sticky post. $150,000 and paying $150 in taxes?!?! I have so much to learn. In 2017 we paid $78,000 of our ~$285,000 income to taxes.

Details:
- Here's our info: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit#gid=0 (scroll down to line 273)
- More background if you need it: https://fi365.wordpress.com/2017/12/31/2017-report/

Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.

THANK YOU!!!!
- Mrs. Fi365, aka Good-At-Making-Money-and-Bad-At-Keeping-It

Undecided:

--- Quote from: Fi365 on January 05, 2018, 08:14:13 AM ---Background:
 - Early 30s couple and 2-year-old daughter living ~50 miles outside of Washington, DC (fairly high cost of living)
- We spent freely throughout our 20s and only started contributing to retirement plans in our late 20s. Yikes, I know. We didn't acquire an ounce of debt though--paid for undergrad and grad school out of pocket ourselves--phew!
- In 2014, we heard the word "budget." Yikes, I know.
- From 2015 - present, I've become really good at making money. I started a consulting business and our household income was ~$285,000 in 2017.
- The "increasing income" side of the FI equation is covered. We're getting better at the "reducing expenses" side every day. But the tax strategy side is brand new and I feel lost and frustrated...

The challenge:
- Yesterday I saw the Root of Good tax info on this forum's sticky post. $150,000 and paying $150 in taxes?!?! I have so much to learn. In 2017 we paid $78,000 of our ~$285,000 income to taxes.

Details:
- Here's our info: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit#gid=0 (scroll down to line 234)
- More background if you need it: https://fi365.wordpress.com/2017/12/31/2017-report/

Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.

THANK YOU!!!!
- Mrs. Fi365, aka Good-At-Making-Money-and-Bad-At-Keeping-It

--- End quote ---

Somebody has to pay the taxes, and the system treats different situations very differently. You may not have the options Root of Good has.

Many deductions and credits phase out before your income level, although some of those limits change this year.

That said, it doesn’t look like you or your partner contributes to a 401(k). Are they available to you? Do you have other tax-advantaged plans (403(b), 457)? You likely can’t deduct IRA contributions, so it may not make sense to contribute to them and pass up other options that would be deductible but otherwise similar. Do you convert your IRA contributions to Roth IRAs?

Are you W-2 employees of someone else?

Proud Foot:
Does your spouse have a 401k available to them through work? Also since you are self-employed look into setting up a solo 401k for yourself so you can increase your contributions there.

Rocketman:
In your post you say consulting business. What structure is that business s-Corp love,sole prop.  Do you have employees?  There are many great ways to defer taxes and Save for retirement,but details really matter when starting the retirement plan.

There is a chance you could defer about $52,k per year -which greatly lowers your agi and taxes you pay -but details matter.

You need to look into all the different flavors of retirement plans.

Lucky Recardito:

--- Quote from: Fi365 on January 05, 2018, 08:14:13 AM ---
Specific questions:
- Child tax credit: It looks like we don't qualify? Need a lower AGI?
- Traditional IRA contributions of $11,000 -- do these get included somewhere?
- 529 college savings plan contributions -- do these get included somewhere? Or just in state taxes (Virginia)?
- What are we missing here? There must be something else we should be doing that we're not aware of yet.


--- End quote ---

Specific answers:
- You make too much to qualify for the CTC for 2017. However, the recent tax bill greatly expanded the CTC; at your current income level, I believe you will qualify for a $2K credit in 2018. https://www.hrblock.com/tax-center/irs/tax-reform/new-child-tax-credit/
- You make too much to deduct Traditional IRA contributions. You also make too much to contribute to a Roth IRA. https://www.fool.com/retirement/2016/11/05/ira-income-limits-for-2016-and-2017.aspx
- 529 savings are not deductible for federal taxes; helps on state taxes only.
- I'll let others be more helpful here, but I suspect your mileage will come from (a) making sure you're finding all the available retirement savings vehicles for your self-employed situation (which I don't know much about); (b) reducing your taxable  business profit via (legitimate) expense deductions; (3) adding an HSA if your health insurance plan qualifies, and (4) becoming a back-door (or mega-back-door) Roth-er (of which much has been written on these forums) -- this won't help your taxes now, but will help in the future!

ETA: It also looks like the doubled standard deduction will help you out in 2018, as your itemized deductions are below that $24K figure for MFJ (while the expanded CTC will help you more than the loss of personal exemptions will hurt you).

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