Author Topic: Optimize My Taxes!  (Read 4732 times)

FrugalRubles

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Optimize My Taxes!
« on: July 02, 2015, 12:07:52 PM »
Hello All,
Long time lurker who loves personal finance and optimization. I want to ensure I am keeping my taxable income as low as possible and know this community will help me achieve that.

Current Salary: $150k, plus $80-100k in bonuses (paid quarterly)

Company has 401k plan, but no match. I contribute the $18k maximum each year.
I have also maxed out Roth's each year in the past, haven't over the last 2-3 years (since I passed the income limit).
I have insurance through my company and no kids. I also rent.

After 401k, would a backdoor Roth be your next step?
What about a regular IRA?
My tax accountant mentioned 529's (I live in NYS), but have considered relocating to FL / TX / WA / CA.
My parents are 2-3 years from retiring (from NY to Florida), so I have kicked around the idea of purchasing their house from them for the deduction, but it's a bit more complicated based on most of my research.

Thoughts?

Thanks in advance for all of your contributions.

MDM

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Re: Optimize My Taxes!
« Reply #1 on: July 02, 2015, 02:01:09 PM »
After 401k, would a backdoor Roth be your next step?
What about a regular IRA?
Yes to the backdoor Roth IRA.  Other than as a gateway to the backdoor Roth, that means the answer to a regular IRA is "no".

Quote
My tax accountant mentioned 529's (I live in NYS), but have considered relocating to FL / TX / WA / CA.
With no kids, why would you do a 529?  Are you planning to return to school?

Quote
My parents are 2-3 years from retiring (from NY to Florida), so I have kicked around the idea of purchasing their house from them for the deduction, but it's a bit more complicated based on most of my research.
To get a mortgage deduction you have to pay more than the deduction in interest.  Why do that?

Does the company offer a HDHP for insurance so you can open an HSA?

See also http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/.  Although currently that is geared toward lower incomes, content will likely grow over time.

FrugalRubles

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Re: Optimize My Taxes!
« Reply #2 on: July 02, 2015, 02:18:20 PM »
With no kids, why would you do a 529?  Are you planning to return to school?

My accountant mentioned this as an option for sheltering $ from state income tax. I could use if I decided to go back to school / take classes, or just change the beneficiary to my children (I do plan on having). They seem to vary greatly by state and it still doesn't seem to be a slam dunk. You can use for all sorts of "educational" expenses, like golf lessons / cooking school, etc.

To get a mortgage deduction you have to pay more than the deduction in interest.  Why do that?

They would still live there in the near term and pay rent on it. Would allow them to cash out.


Does the company offer a HDHP for insurance so you can open an HSA?

No, they don't.

Thanks for the feedback.


Axecleaver

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Re: Optimize My Taxes!
« Reply #3 on: July 06, 2015, 11:45:56 AM »
Quote
With no kids, why would you do a 529?  Are you planning to return to school?

My accountant mentioned this as an option for sheltering $ from state income tax. I could use if I decided to go back to school / take classes, or just change the beneficiary to my children (I do plan on having). They seem to vary greatly by state and it still doesn't seem to be a slam dunk. You can use for all sorts of "educational" expenses, like golf lessons / cooking school, etc.

In NY, 529 contributions let you avoid the state income tax on up to $5000 a year. You are probably in the 6.65% bracket (see http://www.tax-brackets.org/newyorktaxtable). So, you could avoid  $332 a year in state tax by sending 5k to a 529 plan. Not sure I consider that worth it on its own merits.

As a bonus, NY's 529 gives you access to Vanguard funds at an expense ratio of 0.16%. If you do have kids later, you'd get ~20+ years of stock market growth on your investments, all of which would be available tax free to fund their education.

NY 529 site here: www.nysaves.org

ZiziPB

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Re: Optimize My Taxes!
« Reply #4 on: July 06, 2015, 02:51:40 PM »
Would mega backdoor Roth be an option for you?  If your plan allows after tax contributions and in-service rollovers/withdrawals, then it is something that would be very worthwhile.  It would allow you to put up to $35K into Roth accounts per year.

dandarc

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Re: Optimize My Taxes!
« Reply #5 on: July 06, 2015, 02:59:48 PM »
At $250K as a single person (your post reads like you're single), you're gonna pay some taxes.  On the plus side, you've got a relative shit-load of money, even after taxes.

To shelter much more than you already are, you'll either need to spend a fair amount of money (give it away, get a big mortgage and pay lots of interest, etc.), or change something about your employment arrangement.

Could you get a job that pays as well with a much more generous 401K?  Maybe even a 457 on top of the 401K?  Switch to being self-employed at your current place or a new one?  Just kind of the way it is when you're making a ton of money on your own.  The bulk of the tax-sheltering comes from your employment or certain favored expenses.

MDM

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Re: Optimize My Taxes!
« Reply #6 on: July 06, 2015, 04:01:05 PM »
Might as well repost this.  ;)

From http://www.bogleheads.org/forum/viewtopic.php?p=677232#677232:

Quote
... an expert will not help you much. The tax code is relatively simple: You pay less taxes when you earn less money. Some typical ways to reduce taxes:

1. Contribute max to 401(k) and self-employed retirement plans.
2. Contribute to Roth IRAs (only reduces future taxes, not today's taxes)
3. Invest tax efficiently (only reduces future taxes)
4. Give your money away to charity
5. Buy biggest house in world and pay huge property taxes
6. Have huge mortgage on that house and pay huge amount of interest
7. Get married and have lots of kids
8. Be sure to lose money in the stock market since $3000 of losses are deductible each year against ordinary income.
9. Move to a state with high income taxes because state income taxes are deductible.
10. Have severe health issues that you pay for out of your own pocket as you can deduct health care expenses above 7.5% of AGI
11. Grow old, you get more exemptions for being old
12. Go blind, you get more exemptions for being blind
13. Buy property and rent it out at a loss. The more losses the better.
14. Quit your jobs. With no earned income, it's not surprising that your taxes drop.
15. Avoid investments that create taxable income. You want losers to reduce your taxes.
16. Etc.

Or just pay the tax and enjoy life.

johnny847

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Re: Optimize My Taxes!
« Reply #7 on: July 06, 2015, 04:07:39 PM »
Might as well repost this.  ;)

From http://www.bogleheads.org/forum/viewtopic.php?p=677232#677232:

Quote
... an expert will not help you much. The tax code is relatively simple: You pay less taxes when you earn less money. Some typical ways to reduce taxes:

1. Contribute max to 401(k) and self-employed retirement plans.
2. Contribute to Roth IRAs (only reduces future taxes, not today's taxes)
3. Invest tax efficiently (only reduces future taxes)
4. Give your money away to charity
5. Buy biggest house in world and pay huge property taxes
6. Have huge mortgage on that house and pay huge amount of interest
7. Get married and have lots of kids
8. Be sure to lose money in the stock market since $3000 of losses are deductible each year against ordinary income.
9. Move to a state with high income taxes because state income taxes are deductible.
10. Have severe health issues that you pay for out of your own pocket as you can deduct health care expenses above 7.5% of AGI
11. Grow old, you get more exemptions for being old
12. Go blind, you get more exemptions for being blind
13. Buy property and rent it out at a loss. The more losses the better.
14. Quit your jobs. With no earned income, it's not surprising that your taxes drop.
15. Avoid investments that create taxable income. You want losers to reduce your taxes.
16. Etc.

Or just pay the tax and enjoy life.

Glad to see this is catching on ;)


Honestly OP there is no magic to reducing your taxes. If you really want to know every possibility to reducing your taxes, pull up a 1040 and look at all deductions to AGI, itemized deductions, and credits. We've named the common ones here, but perhaps there are a couple that are more specific to your situation that none of us are aware of.

elvizzle

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Re: Optimize My Taxes!
« Reply #8 on: July 07, 2015, 05:31:59 AM »
There are a few things you might consider.

Buy a house or condo to live in.  Plan to convert it into a rental in the future.

Buying your parents' house for the deduction isn't something I would do.  I wouldn't want to be a landlord to my parents.

If you could convert some of your income to self employment
Income then you can shelter up to $53,000 in your 401k.  You'll also be able to deduct business expenses such as home office, travel, food, etc.

clarkfan1979

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Re: Optimize My Taxes!
« Reply #9 on: July 11, 2015, 10:01:26 AM »
Isn't there an income ceiling for rental house deductions? If he is under the ceiling, he could reduce his income with buying rental properties. However, even with property management, he would be adding hours to his work day. It could be a good transition to retirement if he is willing to have 5 years of being really busy with working and doing the rental thing at the same time.

FrugalRubles

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Re: Optimize My Taxes!
« Reply #10 on: July 13, 2015, 07:35:51 AM »
Thanks for all the answers (and apologies for the delay, was traveling).

Quote
With no kids, why would you do a 529?  Are you planning to return to school?

My accountant mentioned this as an option for sheltering $ from state income tax. I could use if I decided to go back to school / take classes, or just change the beneficiary to my children (I do plan on having). They seem to vary greatly by state and it still doesn't seem to be a slam dunk. You can use for all sorts of "educational" expenses, like golf lessons / cooking school, etc.

In NY, 529 contributions let you avoid the state income tax on up to $5000 a year. You are probably in the 6.65% bracket (see http://www.tax-brackets.org/newyorktaxtable). So, you could avoid  $332 a year in state tax by sending 5k to a 529 plan. Not sure I consider that worth it on its own merits.

As a bonus, NY's 529 gives you access to Vanguard funds at an expense ratio of 0.16%. If you do have kids later, you'd get ~20+ years of stock market growth on your investments, all of which would be available tax free to fund their education.

NY 529 site here: www.nysaves.org


I agree with you, but it's still $300+ saved. I do plan on having kids in the next 2-4 years, so it may be a worthwhile investment. Have you looked into other states' plans as well?

Would mega backdoor Roth be an option for you?  If your plan allows after tax contributions and in-service rollovers/withdrawals, then it is something that would be very worthwhile.  It would allow you to put up to $35K into Roth accounts per year.

No, this isn't currently an option (this was my first hope). We have a 401k meeting with our plan administrator this week, so I will be inquiring as to whether they offer it at all. Our company's current 401k is fairly top heavy with the high earners maxing out their 401k and most others only saving a few thousand.

At $250K as a single person (your post reads like you're single), you're gonna pay some taxes.  On the plus side, you've got a relative shit-load of money, even after taxes.

To shelter much more than you already are, you'll either need to spend a fair amount of money (give it away, get a big mortgage and pay lots of interest, etc.), or change something about your employment arrangement.

Could you get a job that pays as well with a much more generous 401K?  Maybe even a 457 on top of the 401K?  Switch to being self-employed at your current place or a new one?  Just kind of the way it is when you're making a ton of money on your own.  The bulk of the tax-sheltering comes from your employment or certain favored expenses.

I am in a bit of a niche business, so my salary would likely be reduced if I left my current role. My boss is open to finding ways to help me take home more money, but I would likely need to start a side hustle for that. Any other reading materials you can recommend on learning more about switching to self-employed while staying in same role?

On the career side, I have looked into other opportunities as well even with the reduction in pay. Living in NYC, your $ can go very far as a high earner but big saver. Staying in current role for a few more years would likely bring about earliest FIRE, but heart wants to try something new.

I am single but engaged. Will get married in 2016. I've been following some of the wedding posts on here, it's crazy the costs and I have slowly been convincing my SO about not spending that $. The low end of weddings in my social circle has been $40k. It's unbelievable to me, especially when I am at near the top of the earners in my group. Most are paid in full by brides' family.

Might as well repost this.  ;)

From http://www.bogleheads.org/forum/viewtopic.php?p=677232#677232:


Thanks for this, exact type of list I was hoping for.


Glad to see this is catching on ;)

Honestly OP there is no magic to reducing your taxes. If you really want to know every possibility to reducing your taxes, pull up a 1040 and look at all deductions to AGI, itemized deductions, and credits. We've named the common ones here, but perhaps there are a couple that are more specific to your situation that none of us are aware of.

Understood, good suggestion.

There are a few things you might consider.

Buy a house or condo to live in.  Plan to convert it into a rental in the future.

Buying your parents' house for the deduction isn't something I would do.  I wouldn't want to be a landlord to my parents.

If you could convert some of your income to self employment
Income then you can shelter up to $53,000 in your 401k.  You'll also be able to deduct business expenses such as home office, travel, food, etc.

Buying something ties me down in a way that I don't want. NYC real estate is super expensive and not worth the investment (IMO) if you won't be here more than a few years. Maintenance, additional requirements by Condo / Co-op board, plus tying up such a significant portion of your assets. Even if you can find something affordable, you add a lot of time to your commute / daily work "commitment."

I currently deduct biz expenses, but not yet as a self-employed worker.

Isn't there an income ceiling for rental house deductions? If he is under the ceiling, he could reduce his income with buying rental properties. However, even with property management, he would be adding hours to his work day. It could be a good transition to retirement if he is willing to have 5 years of being really busy with working and doing the rental thing at the same time.

This is definitely something I would like to do, but am apprehensive about rental properties beyond my immediate travel vicinity. I have worked in RE in a few different capacities, so I am pretty familiar with cost benefit, but have a hang up about owning rental property while still paying rent on primary residence.

Axecleaver

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Re: Optimize My Taxes!
« Reply #11 on: July 13, 2015, 09:06:28 AM »
Quote
I agree with you, but it's still $300+ saved. I do plan on having kids in the next 2-4 years, so it may be a worthwhile investment. Have you looked into other states' plans as well?
To get the NY tax deduction you need to use the NY plan. You're free to invest in other state plans, but unless you are earning money there and thus owing taxes, there's nothing to save. No federal tax advantages.

On the $332 savings - I hear you. It's still better than putting it in a taxable account. Even in a worst case scenario with a 10% penalty 20 years from now, the delta is only 3.35%. Maybe you'll be in a new state with no tax, and in a lower bracket. That seems worth doing.

BlueHouse

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Re: Optimize My Taxes!
« Reply #12 on: July 13, 2015, 10:56:12 AM »

My parents are 2-3 years from retiring (from NY to Florida), so I have kicked around the idea of purchasing their house from them for the deduction, but it's a bit more complicated based on most of my research.

Thoughts?
Another NO vote on this idea.  Not sure about FL property taxes, but Senior Citizens in my area get reduced property taxes as long as they are the only people on the deed.  My sister had to come off the deed, despite being responsible for a chunk of the mortgage, in order for mom to pay ZERO property tax in a HCOL area.  That saves mom about  $4K per year on her tiny little condo.

johnny847

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Re: Optimize My Taxes!
« Reply #13 on: July 13, 2015, 11:46:00 AM »
Thanks for all the answers (and apologies for the delay, was traveling).

Quote
With no kids, why would you do a 529?  Are you planning to return to school?

My accountant mentioned this as an option for sheltering $ from state income tax. I could use if I decided to go back to school / take classes, or just change the beneficiary to my children (I do plan on having). They seem to vary greatly by state and it still doesn't seem to be a slam dunk. You can use for all sorts of "educational" expenses, like golf lessons / cooking school, etc.

In NY, 529 contributions let you avoid the state income tax on up to $5000 a year. You are probably in the 6.65% bracket (see http://www.tax-brackets.org/newyorktaxtable). So, you could avoid  $332 a year in state tax by sending 5k to a 529 plan. Not sure I consider that worth it on its own merits.

As a bonus, NY's 529 gives you access to Vanguard funds at an expense ratio of 0.16%. If you do have kids later, you'd get ~20+ years of stock market growth on your investments, all of which would be available tax free to fund their education.

NY 529 site here: www.nysaves.org


I agree with you, but it's still $300+ saved. I do plan on having kids in the next 2-4 years, so it may be a worthwhile investment. Have you looked into other states' plans as well?

Okay, but in the event that you do make unqualified withdrawals because you don't have kids, or they don't end up going to college, or whatever...
Quote
The principal portion of rollovers and nonqualified withdrawals from this plan are subject to New York tax to the extent of prior New York tax deductions, but only after removal of non-deducted contributions. A rollover for this purpose does not include a trustee-to-trustee transfer between two different accounts in New York's 529 plan.
^From http://www.savingforcollege.com/529_plan_details/index.php?page=plan_details&plan_id=37

I would double check NY's laws to be sure but keep that in mind. Even if you drop to a lower tax bracket, because the previous tax deduction gets recaptured in addition to the 10% penalty on gains, I don't think this will work out in your favor. Off the top of my head, it shouldn't, because NY's marginal tax rates don't reach 10%.

Furthermore, if you change the 529 beneficiary and the new beneficiary is of a different generation from the old one (which would be true assuming you have set up the 529 with yourself as the beneficiary) it is subject to the gift tax. The gift tax exclusion is $14k/yr or $28k/yr per married couple, per donor donee pair. There is a 5 year front load provision.
Basically what I am saying is if you save too much in the 529 before your kid is born you may end up paying gift taxes.

FrugalRubles

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Re: Optimize My Taxes!
« Reply #14 on: July 13, 2015, 12:01:39 PM »
Quote
I agree with you, but it's still $300+ saved. I do plan on having kids in the next 2-4 years, so it may be a worthwhile investment. Have you looked into other states' plans as well?
To get the NY tax deduction you need to use the NY plan. You're free to invest in other state plans, but unless you are earning money there and thus owing taxes, there's nothing to save. No federal tax advantages.

On the $332 savings - I hear you. It's still better than putting it in a taxable account. Even in a worst case scenario with a 10% penalty 20 years from now, the delta is only 3.35%. Maybe you'll be in a new state with no tax, and in a lower bracket. That seems worth doing.


Thanks, this makes sense. It seems like it could save me $ if everything breaks right but may not be the best use of the funds.


Another NO vote on this idea.  Not sure about FL property taxes, but Senior Citizens in my area get reduced property taxes as long as they are the only people on the deed.  My sister had to come off the deed, despite being responsible for a chunk of the mortgage, in order for mom to pay ZERO property tax in a HCOL area.  That saves mom about  $4K per year on her tiny little condo.
[/quote]

Understood and this is the general consensus I have come across. My parents would be able to use the 1031 exchange and using a RE agent friend willing to do the transaction at a discount, but it still doesn't benefit us enough.

Thanks for all the answers (and apologies for the delay, was traveling).

Quote
With no kids, why would you do a 529?  Are you planning to return to school?

My accountant mentioned this as an option for sheltering $ from state income tax. I could use if I decided to go back to school / take classes, or just change the beneficiary to my children (I do plan on having). They seem to vary greatly by state and it still doesn't seem to be a slam dunk. You can use for all sorts of "educational" expenses, like golf lessons / cooking school, etc.

In NY, 529 contributions let you avoid the state income tax on up to $5000 a year. You are probably in the 6.65% bracket (see http://www.tax-brackets.org/newyorktaxtable). So, you could avoid  $332 a year in state tax by sending 5k to a 529 plan. Not sure I consider that worth it on its own merits.

As a bonus, NY's 529 gives you access to Vanguard funds at an expense ratio of 0.16%. If you do have kids later, you'd get ~20+ years of stock market growth on your investments, all of which would be available tax free to fund their education.

NY 529 site here: www.nysaves.org


I agree with you, but it's still $300+ saved. I do plan on having kids in the next 2-4 years, so it may be a worthwhile investment. Have you looked into other states' plans as well?

Okay, but in the event that you do make unqualified withdrawals because you don't have kids, or they don't end up going to college, or whatever...
Quote
The principal portion of rollovers and nonqualified withdrawals from this plan are subject to New York tax to the extent of prior New York tax deductions, but only after removal of non-deducted contributions. A rollover for this purpose does not include a trustee-to-trustee transfer between two different accounts in New York's 529 plan.
^From http://www.savingforcollege.com/529_plan_details/index.php?page=plan_details&plan_id=37

I would double check NY's laws to be sure but keep that in mind. Even if you drop to a lower tax bracket, because the previous tax deduction gets recaptured in addition to the 10% penalty on gains, I don't think this will work out in your favor. Off the top of my head, it shouldn't, because NY's marginal tax rates don't reach 10%.

Furthermore, if you change the 529 beneficiary and the new beneficiary is of a different generation from the old one (which would be true assuming you have set up the 529 with yourself as the beneficiary) it is subject to the gift tax. The gift tax exclusion is $14k/yr or $28k/yr per married couple, per donor donee pair. There is a 5 year front load provision.
Basically what I am saying is if you save too much in the 529 before your kid is born you may end up paying gift taxes.

Seems like it's walking the plank with such an undecided future. I will have to look further into self-employment options.
I have tried to convince my boss to let me work remotely full-time. It's a bit of a long shot, but we tossed around the idea of Florida, which would eliminate state income taxes.