Author Topic: Optimize Your Taxable Income  (Read 40858 times)

simonsez

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Re: Optimize Your Taxable Income
« Reply #50 on: January 30, 2014, 11:46:18 AM »
Ha! Yeah sorry.  I'm a banker and we use M for k and MM for million.  M is the roman numeral for 1000. Gets me every time on message boards though.
Ahh, I see.  Sorry for the language, I couldn't believe what I was reading initially.

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #51 on: January 30, 2014, 11:56:14 AM »
It was the best use of bad language I've seen today. 

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #52 on: January 30, 2014, 12:01:41 PM »

I don't think you should back off the tax deferrals unless you have a short-term need for the cash. You are already paying 15% tax on every taxable dollar you earn over the $17,850 at 10%. Why pay more now? Note: Tax tables have increased slightly for 2014, the numbers quoted here are 2013 brackets MFJ.
I don't have a short term need per se, but I do want to start building up taxable investments for tax loss harvesting, to have assets a bank could lend against if I borrowed for investment property, liquidity, and capital gains income options in ER.

Those reasons may not be worth pre-paying the 15% tax, but then again they may be...

rocksinmyhead

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Re: Optimize Your Taxable Income
« Reply #53 on: January 30, 2014, 12:12:43 PM »
seattlecyclone:

Are there any books or other sources you could recommend for a beginner like myself who is interested in learning about personal income tax law? Thanks again!

If you're a "hands on" type learner, I'd suggest getting involved with the IRS' VITA program. You would volunteer at a VITA site to do low-income people's tax returns. The VITA program provides all the training you need, as well as site coordinators who answer questions, and in return you get experience in tax return preparation. You'll see a lot of tax situations beyond your own, and begin to think outside the lines of your own tax situation. Where I live, there's a VITA program administered by the United Way, so that might be a good place to start.

oh, I like this idea and would totally never have thought of it! thanks!!

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #54 on: January 30, 2014, 12:21:02 PM »

I don't think you should back off the tax deferrals unless you have a short-term need for the cash. You are already paying 15% tax on every taxable dollar you earn over the $17,850 at 10%. Why pay more now? Note: Tax tables have increased slightly for 2014, the numbers quoted here are 2013 brackets MFJ.
I don't have a short term need per se, but I do want to start building up taxable investments for tax loss harvesting, to have assets a bank could lend against if I borrowed for investment property, liquidity, and capital gains income options in ER.

Those reasons may not be worth pre-paying the 15% tax, but then again they may be...

Those all sound like good reasons so you have to weigh the benefits vs. the tax savings. Didn't you just say you were a banker? Can't you just approve your own loan??

Honestly though I've obtained a bank loan for an investment property with nothing more than a personal net worth statement and 60-70% of my NW was tied up in my 401K. Can't this all be included as collateral for lending purposes? Obviously cash or brokerage accounts are better than 401K's or privately held stock, but it should all count.

I plan to do more RE investing in the near future (hopefully summer 2015), so I'm keeping quite a bit in an after tax brokerage account for a down payment of 25%. You can also withdraw your substantial Roth funds for this purpose if you so choose, but I'm not sure that's a good strategy since the annual contributions are limited.

simonsez

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Re: Optimize Your Taxable Income
« Reply #55 on: January 30, 2014, 12:29:36 PM »
Honestly though I've obtained a bank loan for an investment property with nothing more than a personal net worth statement and 60-70% of my NW was tied up in my 401K. Can't this all be included as collateral for lending purposes? Obviously cash or brokerage accounts are better than 401K's or privately held stock, but it should all count.

I don't think so regarding your 401k.  Everything else should be fair game.

Only reason I say no to the 401k is because I tried getting a loan from my bank to attempt some lower interest rate arbitrage on my student loans and the teller repeatedly told me it didn't matter what my 401k balance was, only the accessible accounts that an institution could (more) easily seize were in contention to be collateral.  Maybe my bank sucks?  Not sure but my guess is 401k's are not collateral in lending situations.

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #56 on: January 30, 2014, 12:37:00 PM »
Honestly though I've obtained a bank loan for an investment property with nothing more than a personal net worth statement and 60-70% of my NW was tied up in my 401K. Can't this all be included as collateral for lending purposes? Obviously cash or brokerage accounts are better than 401K's or privately held stock, but it should all count.

I don't think so regarding your 401k.  Everything else should be fair game.

Only reason I say no to the 401k is because I tried getting a loan from my bank to attempt some lower interest rate arbitrage on my student loans and the teller repeatedly told me it didn't matter what my 401k balance was, only the accessible accounts that an institution could (more) easily seize were in contention to be collateral.  Maybe my bank sucks?  Not sure but my guess is 401k's are not collateral in lending situations.

All banks have the same regulations (i.e.-FDIC) they have to follow, but there are some who have a much different philosophy than the big guys like BOA, US Bank, etc.

Because of my job I know about 8 bankers really well, and I know another 20 or so bankers by name and could easily setup a lunch at a moment's notice. These are almost all commercial lenders who would do real estate loans, or other business type loans. I have certain bankers I will call in certain situations based on the circumstances of the client.

The bank that financed the deal I'm speaking of is very big on personal relationships and trust. I also had numerous partners in the deal with substantial NW's, but the collateral for my portion of the loan was based largely on my 401K balance. Maybe this was a sweetheart deal.

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #57 on: January 30, 2014, 12:44:40 PM »
Yes I'm a commercial lender I do commercial lending for money (still inexperienced mind you) and we do those types of loans based on personal cash flow and faith in the borrower's willingness to repay in the event that it's not secured by hard assets like RE.  401k nor Roth could be used as collateral, but that doesn't mean your banker wouldn't view them in a positive light.  Taxable investment accounts otoh are viewed in a VERY positive light.

My boss can do up to $300,000 unsecured with just a signature, so it all just depends.
« Last Edit: January 30, 2014, 12:52:39 PM by MooseOutFront »

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #58 on: January 30, 2014, 12:55:20 PM »
Good to know. Thanks.

Insanity

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Re: Optimize Your Taxable Income
« Reply #59 on: January 30, 2014, 07:34:03 PM »
Looks like I am going to get screwed this year, unless my financial institution is reporting things differently than the account is labeled.

I created a self-employment 401K at the end of the year last year with the goal of putting some of my second job income in as salary deferral.  I moved over what I thought was an allowed amount.  My father and I were starting to work on the taxes and through turbo tax were having trouble because the institution labeled the account as a Profit-Sharing Keogh account.  So I can't do salary deferrals and might have to even pull out some of the money I put in.

Need to make some calls and find out.  The difference is almost $5K in taxes owed :(

oldtoyota

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Re: Optimize Your Taxable Income
« Reply #60 on: January 30, 2014, 08:03:28 PM »
2014 will be my first full year of Mustachianism, so I am currently planning next year's finances and stumbled upon an interesting concept: optimizing my taxable income. I found an income tax calculator a

This is an awesome calc. Thank you for sharing it!

Why would we include IRA contributions in the qualified plan line since we do not put pretax money into those?

Does "qualified plan" on the calculator refer to 401ks, HSAs, dependent care, health and dental ins since all of that is taken out pretax?

2014 is the year I learn more about taxes. Many, many thanks for this thread.


foobar

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Re: Optimize Your Taxable Income
« Reply #61 on: January 30, 2014, 09:28:37 PM »
If this is fidelity it isn't an issue (other than maybe a turbo tax issue). I talked to someone last year about my self employed 401(k) and that is just how they label it. It is a still a 401(k) plan. IRS hasn't challenged it yet but they still have a couple of years.


Looks like I am going to get screwed this year, unless my financial institution is reporting things differently than the account is labeled.

I created a self-employment 401K at the end of the year last year with the goal of putting some of my second job income in as salary deferral.  I moved over what I thought was an allowed amount.  My father and I were starting to work on the taxes and through turbo tax were having trouble because the institution labeled the account as a Profit-Sharing Keogh account.  So I can't do salary deferrals and might have to even pull out some of the money I put in.

Need to make some calls and find out.  The difference is almost $5K in taxes owed :(

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #62 on: January 30, 2014, 10:10:16 PM »
2014 will be my first full year of Mustachianism, so I am currently planning next year's finances and stumbled upon an interesting concept: optimizing my taxable income. I found an income tax calculator a

This is an awesome calc. Thank you for sharing it!

Why would we include IRA contributions in the qualified plan line since we do not put pretax money into those?

Does "qualified plan" on the calculator refer to 401ks, HSAs, dependent care, health and dental ins since all of that is taken out pretax?

2014 is the year I learn more about taxes. Many, many thanks for this thread.

If your income is low enough, contributions to a traditional IRA are deducted on your income tax return. You don't put pre-tax money in them through a paycheck like you do in your 401K, but effectively they are pre-tax since they reduce your taxable income on your return. Roth IRA contributions are not "pre-tax" or "deductible" so don't count those.

I think in this calculator qualified plan would be any of the items you mentioned above, as long as they reduce your taxable income. If it reduces the amount reported in Box 1 of your W-2, it effectively reduces your gross income.

Be careful with the term "gross income" though if you plan to deduct all of those items against it. If you're using the amount in Box 1 of a W-2, all of those items have already been deducted. If you're using your true gross wages, as in the boss told you hey toyota, we're gonna pay you a gross of $75K this year, and that's the number you put at the top of the calculator, deduct all of those items from it.

Insanity

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Re: Optimize Your Taxable Income
« Reply #63 on: January 31, 2014, 08:33:43 PM »
If this is fidelity it isn't an issue (other than maybe a turbo tax issue). I talked to someone last year about my self employed 401(k) and that is just how they label it. It is a still a 401(k) plan. IRS hasn't challenged it yet but they still have a couple of years.


Looks like I am going to get screwed this year, unless my financial institution is reporting things differently than the account is labeled.

I created a self-employment 401K at the end of the year last year with the goal of putting some of my second job income in as salary deferral.  I moved over what I thought was an allowed amount.  My father and I were starting to work on the taxes and through turbo tax were having trouble because the institution labeled the account as a Profit-Sharing Keogh account.  So I can't do salary deferrals and might have to even pull out some of the money I put in.

Need to make some calls and find out.  The difference is almost $5K in taxes owed :(

Yep, that is who it is.  Thanks, i'm still going to call just so I have that on record, but it is good to know someone else is in the same boat.

twbird18

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Re: Optimize Your Taxable Income
« Reply #64 on: February 01, 2014, 07:27:39 AM »
2014 will be my first full year of Mustachianism, so I am currently planning next year's finances and stumbled upon an interesting concept: optimizing my taxable income. I found an income tax calculator a

This is an awesome calc. Thank you for sharing it!

Why would we include IRA contributions in the qualified plan line since we do not put pretax money into those?

Does "qualified plan" on the calculator refer to 401ks, HSAs, dependent care, health and dental ins since all of that is taken out pretax?

2014 is the year I learn more about taxes. Many, many thanks for this thread.


if you're looking for calculators this one is slightly better
http://interactive.taxfoundation.org/taxcalc/#calculator

ichangedmyname

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Re: Optimize Your Taxable Income
« Reply #65 on: February 02, 2014, 10:48:49 AM »
My husband is the one who did our taxes last year 2012. He does it for his mother too. But I'd really like to get into it and do our taxes for 2013. I have a few questions since I am filling out tax refund calculators LOL just hoping to get some money back.

Since I have 401k contributions shouldn't that be deducted from my wages and income or did my employer already do that with the w-2 I received? And are Social Security tax with held and medicare tax withheld separate from federal and state tax? And my husband is self-employed is there a different way to figure out his taxes?

Thanks. I really don't want to owe any money this year.

secondcor521

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Re: Optimize Your Taxable Income
« Reply #66 on: February 02, 2014, 01:18:32 PM »
@ichangedmyname,

Your employer should have already deducted your 401(k) contributions from your wages in box 1 of your W-2.  Your 401(k) contributions will also be listed on your W-2 somewhere in the box 12-14 range.

Yes, Social Security, Medicare, Federal and State taxes are all withheld separately.

Can't help you with the self-employed question...never had to do taxes that way.

Insanity

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Re: Optimize Your Taxable Income
« Reply #67 on: February 02, 2014, 02:25:24 PM »
My husband is the one who did our taxes last year 2012. He does it for his mother too. But I'd really like to get into it and do our taxes for 2013. I have a few questions since I am filling out tax refund calculators LOL just hoping to get some money back.

Since I have 401k contributions shouldn't that be deducted from my wages and income or did my employer already do that with the w-2 I received? And are Social Security tax with held and medicare tax withheld separate from federal and state tax? And my husband is self-employed is there a different way to figure out his taxes?

Thanks. I really don't want to owe any money this year.

It really depends on how your husbands company is structured and what he does.  I'm not a CPA, but I am self-employed for the first time ever.  I'm struggling through it now, but all of my work is 1099 so it isn't that hard.  The tricky part was dealing with the self-employed 401K which was mentioned above (and I'm still working through that).

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #68 on: February 03, 2014, 08:32:37 AM »
And my husband is self-employed is there a different way to figure out his taxes?

Thanks. I really don't want to owe any money this year.

I concur with the bold statement, and I think we all do. However, owing money means you made money, so it's not all bad.

To answer your question, self employed earnings are taxed net of all related expenses, and net of any self-employed 401K/SEP IRA, at the applicable state and federal rates, plus the self employed tax rate which is essentially 14.13% (15.3% * 92.35%). Confusing I know, so here's an example:

 100,000.00     Gross income    
 35,000.00     Business Expenses    
 65,000.00     Net Profit (taxable S/E Tax)    
13,000.00     SEP IRA/401K    20.00%
 52,000.00     Taxable (Income) Loss    
      
 9,184.21     Self Employment Tax Rate    14.13%
 13,000.00     Federal Tax Rate    25.00%
 3,120.00     State Tax Rate    6.00%
 25,304.21     Estimated Income Taxes    45.13%
 
Actually the retirement contributions only reduce your federal/state tax burden, not the self-employed taxes, so the tax is calculated based on the net profit, not the profit after retirement contributions. I have a spreadsheet I send to my clients to help calculate this during the year if you want me to send it to you in a PM.

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #69 on: February 03, 2014, 10:01:43 AM »
I would love that spreadsheet.  In the one I created for a self employed family member I have it as follows:

$25,260 Gross Income and AGI
$(11,700) 3 exemptions
$(8,950) St Deduction head of household
$4,610 taxable *10% = $461 income tax

FICA owed is $3,569.12 which is (Gross Income *.9235)*.153
Child Credit = $(2000)
Tax liability = $2,030.12
EIC = $(13,430)*0.4 = $5,372
EIC Phase-out = (AGI-$17,530)*0.2106 = $1,627.94
EIC = $(3,744.06)

Total Tax owed = $(1,713.94) where the negative number indicates a tax refund from the IRS.

I really need to set this up to be able show this person how beneficial the savers credit would be, among other things I may have missed.

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #70 on: February 03, 2014, 10:49:32 AM »
I would love that spreadsheet.  In the one I created for a self employed family member I have it as follows:

$25,260 Gross Income and AGI
$(11,700) 3 exemptions
$(8,950) St Deduction head of household
$4,610 taxable *10% = $461 income tax

FICA owed is $3,569.12 which is (Gross Income *.9235)*.153
Child Credit = $(2000)
Tax liability = $2,030.12
EIC = $(13,430)*0.4 = $5,372
EIC Phase-out = (AGI-$17,530)*0.2106 = $1,627.94
EIC = $(3,744.06)

Total Tax owed = $(1,713.94) where the negative number indicates a tax refund from the IRS.

I really need to set this up to be able show this person how beneficial the savers credit would be, among other things I may have missed.

Based on everything you just calculated I don't think my spreadsheet will do what you want it to do. Mine is more of an excel accounting software for a very small business. It allows a place to record all business activity, tracks your checking account balance, keeps a YTD net profit, and estimates the taxes related to the business activity so you can adjust quarterly tax estimates accordingly. If anyone is interested it's attached, and this is actual 2013 data from a very small civil engineering client of mine with all names removed for confidentiality reasons.

ichangedmyname

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Re: Optimize Your Taxable Income
« Reply #71 on: February 09, 2014, 01:23:23 AM »
I'm getting a $1700 refund :) That's nice but I;m thinking I'd rather have that money working for me in investments during the year.

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Re: Optimize Your Taxable Income
« Reply #72 on: February 21, 2014, 10:19:14 AM »

2014 will be my first full year of Mustachianism, so I am currently planning next year's finances and stumbled upon an interesting concept: optimizing my taxable income. I found an income tax calculator a

This is an awesome calc. Thank you for sharing it!

Why would we include IRA contributions in the qualified plan line since we do not put pretax money into those?

Does "qualified plan" on the calculator refer to 401ks, HSAs, dependent care, health and dental ins since all of that is taken out pretax?

2014 is the year I learn more about taxes. Many, many thanks for this thread.


If you contribute to a traditional IRA, then you are contributing pre-tax money. But if you don't set your withholding correctly, Uncle Same just hangs on to your overpayment until the following year.

if you're looking for calculators this one is slightly better
http://interactive.taxfoundation.org/taxcalc/#calculator

That one is better. Thanks for sharing!

jordanread

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Re: Optimize Your Taxable Income
« Reply #73 on: February 21, 2014, 10:52:06 AM »
Wow, totally feel in over my head. I've got to research this a bit more. Thanks for the resources, all.

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #74 on: March 04, 2014, 08:42:46 PM »
I'm looking for some advice/additional perspective on my 2014 tax plans. Thanks for reading, any thoughts would be appreciated.

Here's the situation:
I am the main wage earner, and I max my 401K at $17,500.
My wife takes care of our 2 kids, works when she can, and might clear $10-15K.
AGI is too high for TIRA (both covered by employer 401K's), so I want to reduce my wife's taxable wages via a larger 401K contribution.
Her current contribution is 5%, and I temporarily increased it to 75%.

Here's the problem (good problem to have I realize, but trying to optimize here):
The credit for child and dependent care expenses. When she works, kids go to pre-school/daycare ($6K+ cost), and IRS picks up 20% of the cost.
Each $ we put towards her 401K saves us about 40% (fed, state, plus recapture of some phase-outs).
However, if she dips below $6K taxable wages we lose 20% of it right back, netting only a 20% savings from that point downward.

So the obvious answer is to try to get her taxable wages down to $6K to save the 40%, which I plan to do. But would you continue reducing taxable income beyond that for only a 20% net tax savings knowing you are essentially giving back this credit? Also, am I missing something here - do any of you have any smart back door ideas to solve my "problem".

MustachianAccountant

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Re: Optimize Your Taxable Income
« Reply #75 on: March 06, 2014, 09:05:13 AM »
I'm looking for some advice/additional perspective on my 2014 tax plans. Thanks for reading, any thoughts would be appreciated.

Here's the situation:
I am the main wage earner, and I max my 401K at $17,500.
My wife takes care of our 2 kids, works when she can, and might clear $10-15K.
AGI is too high for TIRA (both covered by employer 401K's), so I want to reduce my wife's taxable wages via a larger 401K contribution.
Her current contribution is 5%, and I temporarily increased it to 75%.

Here's the problem (good problem to have I realize, but trying to optimize here):
The credit for child and dependent care expenses. When she works, kids go to pre-school/daycare ($6K+ cost), and IRS picks up 20% of the cost.
Each $ we put towards her 401K saves us about 40% (fed, state, plus recapture of some phase-outs).
However, if she dips below $6K taxable wages we lose 20% of it right back, netting only a 20% savings from that point downward.

So the obvious answer is to try to get her taxable wages down to $6K to save the 40%, which I plan to do. But would you continue reducing taxable income beyond that for only a 20% net tax savings knowing you are essentially giving back this credit? Also, am I missing something here - do any of you have any smart back door ideas to solve my "problem".

Do either of you have an FSA available through work? Many FSAs have a Dependent Care contribution you can make. Then all your daycare costs would be tax free, and you wouldn't have to worry about the credit. (If not, could you talk to your employer about setting one up?)

Other than that, just do whatever saves the most money, and don't worry about leaving a credit "on the table." That would be like someone itemizing rather than taking the standard deduction when itemized dollars are less, just because they want to take advantage of the deductible dollars they spent. Don't cut off your nose to spite your face. :-)
« Last Edit: March 06, 2014, 09:09:06 AM by MustachianAccountant »

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #76 on: March 06, 2014, 12:25:42 PM »
I see you point about doing whatever saves the most money. As I mentioned I'm just looking for some re-assurance that there isn't a better way.

No FSA's, but I should be able to get this setup at my office. Thanks for the thought - it was exactly what I was looking for.

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Re: Optimize Your Taxable Income
« Reply #77 on: March 07, 2014, 01:51:58 AM »
WOW! I must say my head is swollen and spins from so much information, just ran into MMM site last week, and plan to spend quite some time here now. Please excuse my current incompetence and possibly confusing questions in advance. This is first time I don't have any debt and a good salary AND plan for early retirement (or have any retirement plans for that matters).

My situation: I'm 35, single, no debt, no house, no 401k, no IRA, no nothing :)

AGI: ~125k, ~40k in VTSAX (put last week) and 15k on checking.

Employer has some 401k matching, but that vests in a few years, so for now I don't count on any matching. Is 401k still worth it? Can I control where 401k money is invested to? Should put as much as possible there? Is it too late for 2013 taxes?

IRA: tIRA vs Roth, what should I open? Can/should I open both? Can/should I open several?
I can invest from IRA/Roth and put money there before April 15 to reduce tax base, right?

MustachianAccountant

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Re: Optimize Your Taxable Income
« Reply #78 on: March 07, 2014, 06:07:37 AM »
AGI: ~125k, ~40k in VTSAX (put last week) and 15k on checking.

Employer has some 401k matching, but that vests in a few years, so for now I don't count on any matching. Is 401k still worth it? Can I control where 401k money is invested to? Should put as much as possible there? Is it too late for 2013 taxes?
-Why don't you count employer contributions just because they haven't vested yet? You should.
-So yes, the 401k is worth it... max it out.
-You will have some control over where it is invested to, but it's also dependent upon where your employer has opened the 401k. Make sure you check the fees for each fund, and choose the most broad based fund you can. The investment forum can help you when you have some specifics in hand.
-Yes, put as much as possible there
-Yes, it's too late for 2013

Quote
IRA: tIRA vs Roth, what should I open? Can/should I open both? Can/should I open several?
I can invest from IRA/Roth and put money there before April 15 to reduce tax base, right?
You won't open several, there's no advantage to that.
So, here's the thing - you're over income to contribute to a tIRA, and deduct it on your taxes. Which makes max contributions to your 401k even more important:
http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work
You can still contribute to one, you just won't be able to take a tax deduction.
On top of that, you're right on the cusp of not being able to contribute to a Roth IRA as well:
http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013
And you can make 2013 contributions to IRAs right up until April 15.

Also explore the HSA option if you have high deductible health insurance, as that's another way to save money tax free.

aj_yooper

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Re: Optimize Your Taxable Income
« Reply #79 on: March 07, 2014, 06:28:23 AM »
+1 to MustachianAccountant's excellent suggestions.  I would also look into becoming a landlord for its tax benefits and way of shielding income.  You are doing very well, but you need to be more aware of money thinking. 

Rick Ferri's All About Asset Allocation and William Bernstein's Four Pillars of Investing are good starting points.

Best wishes!

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #80 on: March 07, 2014, 08:35:57 AM »
+1 to MustachianAccountant's excellent suggestions.  I would also look into becoming a landlord for its tax benefits and way of shielding income.  You are doing very well, but you need to be more aware of money thinking. 

Rick Ferri's All About Asset Allocation and William Bernstein's Four Pillars of Investing are good starting points.

Best wishes!
Yes. Max 401k, max Roth IRA, max HSA if available and then keep investing in taxable.  The 2 above books are great suggestions, but I view them as level 2 investing.  For the most basic level 1 I would go with "Bogleheads Guide to Investing" and for my 1st level 2 book I would go with Larry Swedroe's horribly named but great book "The only guide to a winning investment strategy you'll ever need."  All in all these 2 and the 2 above are my favorite investing books that I've read so far.

On the tax topic, almost anything a future early retiree can do to save on taxes now while they have a high income is a good idea.  They'll be lower once that big income goes away.

LalsConstant

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Re: Optimize Your Taxable Income
« Reply #81 on: March 07, 2014, 10:33:46 AM »
I don't have any useful advice to add, but it tickles me pink that someone who earns a lot more than I do qualifies for the saver's credit and I don't.  The joys of an overly ridiculous tax code!  This is an inspirational thread of someone doing everything right, I needed that today.

andymarch

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Re: Optimize Your Taxable Income
« Reply #82 on: March 07, 2014, 10:00:42 PM »
Thanks for the advice, everyone. I'll definitely get recommended books.
tIRA - looks like I'm not qualified for deduction, so just opening Roth with max 5.5k, then another 5.5k in 2014
HSA - added contributions to max
401k - still looking at pros and cons, tax saving vs limited investment and withdrawal penalties. For now will set 4%, still have entire year to save and add more.

kpd905

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Re: Optimize Your Taxable Income
« Reply #83 on: March 08, 2014, 08:05:50 PM »
Thanks for the advice, everyone. I'll definitely get recommended books.
tIRA - looks like I'm not qualified for deduction, so just opening Roth with max 5.5k, then another 5.5k in 2014
HSA - added contributions to max
401k - still looking at pros and cons, tax saving vs limited investment and withdrawal penalties. For now will set 4%, still have entire year to save and add more.

Does that at least get you the full employer match?

Mazzinator

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Re: Optimize Your Taxable Income
« Reply #84 on: March 08, 2014, 08:21:07 PM »
+1 to MustachianAccountant's excellent suggestions.  I would also look into becoming a landlord for its tax benefits and way of shielding income.  You are doing very well, but you need to be more aware of money thinking. 

Can you tell me more about this? We are looking at buying income property and i've done some basic google searching, but the info out there is rather confusing. Read up a bit on schedule E, but it seems if i were to use a property manager than the tax benefits go away? Or at least on schedule E, the best you can get is that the income/expenses cancel each other out and no "extra" taxes are paid for income but no deductions either? Hope i'm asking this correctly...

Any books, links, other posts etc are appreciated!!!

Thanks!!!

Oh, and, i filed my taxes (see previous post) and i was only $2 off...awesome!!!! You guys rock!!!

Gin1984

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Re: Optimize Your Taxable Income
« Reply #85 on: March 08, 2014, 08:33:10 PM »
+1 to MustachianAccountant's excellent suggestions.  I would also look into becoming a landlord for its tax benefits and way of shielding income.  You are doing very well, but you need to be more aware of money thinking. 

Can you tell me more about this? We are looking at buying income property and i've done some basic google searching, but the info out there is rather confusing. Read up a bit on schedule E, but it seems if i were to use a property manager than the tax benefits go away? Or at least on schedule E, the best you can get is that the income/expenses cancel each other out and no "extra" taxes are paid for income but no deductions either? Hope i'm asking this correctly...

Any books, links, other posts etc are appreciated!!!

Thanks!!!

Oh, and, i filed my taxes (see previous post) and i was only $2 off...awesome!!!! You guys rock!!!
Why do you think the tax deductions go away if you use a manager?

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #86 on: March 08, 2014, 10:41:46 PM »
@Mazzinator - I'm not sure if hiring a property manager would disallow a tax deduction so I won't comment there, but the tax treatment can vary greatly between an active real estate investor and a passive real estate investor.

Going out on a limb here a bit, but I think what aj was implying is you can have an R/E investment with positive cash flow but no taxable income. Or even better, you can have an R/E investment with positive cash flow and a tax loss. Because you get to slowly depreciate the cost of the building you purchase, you get a nice big tax deduction without affecting current cash flow like most other expenses do.

When you have a relatively low income (under $150K I believe) you can deduct an R/E loss against your other ordinary income, thereby reducing your overall AGI/taxable income (kind of like a capital loss of up to $3k/year). When you have multiple properties the rules start to become tricky, and if you are a passive investor the rules can be tricky as well. No matter what, if you have deductions/losses related to a rental property you will get to deduct them eventually, you just might not get to deduct them immediately.

I'm not sure if that's what you were looking for, but I hope it helps.

Mazzinator

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Re: Optimize Your Taxable Income
« Reply #87 on: March 08, 2014, 11:03:34 PM »
Thank you both for your quick response...

It is the active vs passive which i don't understand. I was thinking, by using a PM, it automatically meant i was passive..??..

I guess i don't understand what makes me active vs passive?

Again, i did read a bit of the tax code (schedule e instructions) which is clear as mud... I am trying :)

Thanks again!!!

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #88 on: March 08, 2014, 11:35:44 PM »
I'm a CPA who 2 months ago sat through a 30 minute presentation on active/passive participation in real estate and other businesses and I'm still a bit hazy on the exact cutoff, so don't feel bad about not getting it. I have to re-read the rules whenever this situation comes up in practice. Some of the other accountants on the forum are more well versed in the tax code and might be able to answer this better than me, but I'll give it a shot.

If this will be your first rental property, and your income is under $100K (not the $150 off the top # from last post) you should be able to deduct losses, even with a property manager, as long as you still have some oversight and are involved in making some decisions.

This is an important excerpt from the Sch E instructions:

Exception for Certain Rental Real Estate Activities

If you meet all of the following conditions, your rental real estate losses are not limited by the passive activity loss rules, and you do not need to complete Form 8582. If you do not meet all of these conditions, see the Instructions for Form 8582 to find out if you must complete and attach Form 8582 to figure any losses allowed.

1.Rental real estate activities are your only passive activities. {First time right, so you should be good}

2.You do not have any prior year unallowed losses from any passive activities. {First time right, so you should be good}

3.All of the following apply if you have an overall net loss from these activities:

  a.You actively participated (defined later) in all of the rental real estate activities; {see below}

  b.If married filing separately, you lived apart from your spouse all year; {not applicable based on your other posts I've read}

  c.Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately); {so try not to lose $25K in the first place, right?}

  d.You have no current or prior year unallowed credits from passive activities; and {First time right, so you should be good}

  e.Your modified adjusted gross income (defined later) is $100,000 or less ($50,000 or less if married filing separately). {I think you fit the bill here}

Active participation.   You can meet the active participation requirement without regular, continuous, and substantial involvement in real estate activities. But you must have participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Such management decisions include:
•Approving new tenants,
•Deciding on rental terms,
•Approving capital or repair expenditures, and
•Other similar decisions.


So the way I interpret this, if you are involved enough in the final approval process over tenant selection, rent amounts, or paying for repairs, you are active enough to deduct a loss, as long as you meet the rest of the conditions above.

andymarch

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Re: Optimize Your Taxable Income
« Reply #89 on: March 08, 2014, 11:44:57 PM »
Thanks for the advice, everyone. I'll definitely get recommended books.
tIRA - looks like I'm not qualified for deduction, so just opening Roth with max 5.5k, then another 5.5k in 2014
HSA - added contributions to max
401k - still looking at pros and cons, tax saving vs limited investment and withdrawal penalties. For now will set 4%, still have entire year to save and add more.

Does that at least get you the full employer match?

It's complicated. Employer matches 50% up to 4% in stock that is vested in 3 years, so I don't even consider this since I don't know where I'll be in 3 years.
BTW since I've invested 5 previous years (and all my money) in a startup that went under, I have SIGNIFICANT amount of capital loss to defer tax-wise (3k+gains)/per year for many years to come :)
« Last Edit: March 09, 2014, 01:49:08 PM by andymarch »

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #90 on: March 09, 2014, 10:49:50 AM »
Cheddar stacker thanks for that post. I'll be lazy and just ask what the MAGI adds back compared to the regular AGI on pg 1 of the 1040?

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #91 on: March 09, 2014, 08:49:57 PM »
MAGI is tricky. It tends to "add back" different things for different calculations. Here's a link to the full instructions I posted:

http://www.irs.gov/instructions/i1040se/ch01.html#d0e231

And here's another excerpt:

Modified adjusted gross income.   This is your adjusted gross income from Form 1040, line 38, or Form 1040NR, line 37, without taking into account:

•Any allowable passive activity loss,
•Rental real estate losses allowed for real estate professionals (see Activities of real estate professionals, earlier),
•Taxable social security or tier 1 railroad retirement benefits,
•Deductible contributions to a traditional IRA or certain other qualified retirement plans under section 219,
•The student loan interest deduction,
•The tuition and fees deduction,
•The domestic production activities deduction,
•The deduction for one-half of self-employment tax,
•The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses, and
•Any excluded amounts under an employer's adoption assistance program.


Quite the list. It almost sounds like you take your total income (before the pre-AGI deductions) plus you have to add back the RE loss you are deducting. So the RE loss can't reduce your income below the $100K threshold, otherwise it won't be deductible.

As I said in the other post, there are likely better "tax guys" on the forum. I'm an auditor, but I do quite a bit of tax work as well so I do have some idea what the hell I'm talking about. However, I'm not the type that can quote all the rules off the cuff.

MooseOutFront

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Re: Optimize Your Taxable Income
« Reply #92 on: March 10, 2014, 11:49:02 AM »
Thank you again for being so helpful.  Yeah that list of add backs is pretty much everything other than HSAs and FSAs.  Doesn't look like I can get MAGI under $100k prior to retirement, but it shouldn't be an issue after that. :)

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #93 on: March 10, 2014, 12:32:01 PM »
Thank you again for being so helpful.  Yeah that list of add backs is pretty much everything other than HSAs and FSAs.  Doesn't look like I can get MAGI under $100k prior to retirement, but it shouldn't be an issue after that. :)

This shouldn't prevent you from buying a rental property. I don't think that's what you're saying, but I wouldn't let this affect your decision much. If you have a loss, it will carry forward and you will eventually get to deduct it. It won't increase your AGI or your tax if you have a loss, it just won't reduce it right away either.

Mazzinator

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Re: Optimize Your Taxable Income
« Reply #94 on: March 10, 2014, 07:07:50 PM »
Chedder stacker.. Thank you so much for the information! And seriously, thanks for looking into my situation. It is so nice knowing someone out there (or in st. Louis) gives a shit about my situation. I feel so loved (not in the romantic way ;))

I am trying to calculate if we will be in a higher tax bracket later and if we should be paying "some" now to help us out later due to a military pension and what exactly we could do to lower this (tax loss harvesting, real estate, etc) plus saving on interest now with our student loans on IBR. because we pay an extremely low amount of taxes per actual income it seems a bit crazy. I just want to make sure we aren't going to bite the bullet later and end up screwing ourselves if/when we pull from our tax advantage accounts. Plus i like how R/E adds an additional stream of income/safety back up plan of the market takes a huge plunge shortly after fire.

Currently working on our life plan/fire goals (not set in stone) is to buy about 4 or 5 houses along the next 4 or 5 years and then fire in 7. I want the last year or so to save up some cash (i think for fire people having a yr or two expenses in cash is key)

Again, thank you sooo much!! And sorry, i know i always highjack threads..no disrespect OP.


Gin1984

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Re: Optimize Your Taxable Income
« Reply #95 on: March 10, 2014, 07:37:07 PM »
Chedder stacker.. Thank you so much for the information! And seriously, thanks for looking into my situation. It is so nice knowing someone out there (or in st. Louis) gives a shit about my situation. I feel so loved (not in the romantic way ;))

I am trying to calculate if we will be in a higher tax bracket later and if we should be paying "some" now to help us out later due to a military pension and what exactly we could do to lower this (tax loss harvesting, real estate, etc) plus saving on interest now with our student loans on IBR. because we pay an extremely low amount of taxes per actual income it seems a bit crazy. I just want to make sure we aren't going to bite the bullet later and end up screwing ourselves if/when we pull from our tax advantage accounts. Plus i like how R/E adds an additional stream of income/safety back up plan of the market takes a huge plunge shortly after fire.

Currently working on our life plan/fire goals (not set in stone) is to buy about 4 or 5 houses along the next 4 or 5 years and then fire in 7. I want the last year or so to save up some cash (i think for fire people having a yr or two expenses in cash is key)

Again, thank you sooo much!! And sorry, i know i always highjack threads..no disrespect OP.
Actual cash?  Really, cash not bonds?  I plan to have 1-3 months in cash but after that ibonds for the extra years.  It is just as safe as cash (governmentally insured) but a higher interest rate.  And then for 2-5 years, state/county bonds.

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #96 on: March 10, 2014, 07:52:52 PM »
Chedder stacker.. Thank you so much for the information! And seriously, thanks for looking into my situation. It is so nice knowing someone out there (or in st. Louis) gives a shit about my situation. I feel so loved (not in the romantic way ;))
No problem, happy to add to the forum when I can. I've learned a ton here from everyone else.

.... plus saving on interest now with our student loans on IBR. I remember your IBR stuff from another post, and I know absolutely nothing about it, but make sure there isn't something about rental real estate that might disqualify you from IBR.

Again, thank you sooo much!! And sorry, i know i always highjack threads..no disrespect OP. I don't think you have to worry about a hijack - this thread started last fall and sort of died out. It was re-kindled early this year and has sort of turned into general place to discuss taxes from what I've seen.

Mazzinator

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Re: Optimize Your Taxable Income
« Reply #97 on: March 10, 2014, 11:28:42 PM »
Chedder stacker.. Thank you so much for the information! And seriously, thanks for looking into my situation. It is so nice knowing someone out there (or in st. Louis) gives a shit about my situation. I feel so loved (not in the romantic way ;))

I am trying to calculate if we will be in a higher tax bracket later and if we should be paying "some" now to help us out later due to a military pension and what exactly we could do to lower this (tax loss harvesting, real estate, etc) plus saving on interest now with our student loans on IBR. because we pay an extremely low amount of taxes per actual income it seems a bit crazy. I just want to make sure we aren't going to bite the bullet later and end up screwing ourselves if/when we pull from our tax advantage accounts. Plus i like how R/E adds an additional stream of income/safety back up plan of the market takes a huge plunge shortly after fire.

Currently working on our life plan/fire goals (not set in stone) is to buy about 4 or 5 houses along the next 4 or 5 years and then fire in 7. I want the last year or so to save up some cash (i think for fire people having a yr or two expenses in cash is key)

Again, thank you sooo much!! And sorry, i know i always highjack threads..no disrespect OP.
Actual cash?  Really, cash not bonds?  I plan to have 1-3 months in cash but after that ibonds for the extra years.  It is just as safe as cash (governmentally insured) but a higher interest rate.  And then for 2-5 years, state/county bonds.

Oh, uumm, not really sure actually. Because it's ~5+ years away, i haven't given it much thought. Also why i say my plans are "not set in stone" it seems every day, week, month i'm learning something new..plus i'm a go with the flow kinda gal so i'll take any and all advice i get. I'm old enough to know that i don't know anything and always willing to learn. I've read of others having "cash" reserves to use in case (market tanks, r/e issues, etc) and never asked those people if it was cash or bonds or...

Thanks for giving me something else to think about (sarcasm) (joke)

Cheddar Stacker

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Re: Optimize Your Taxable Income
« Reply #98 on: March 10, 2014, 11:43:57 PM »
@ Mazzinator - just looked back at page 1 and realized you are the one that gave this thread the bump back in January, so nice work. That's what put it on my radar.

Also, love the Jay-Z quote. In case you missed my "What's in a username" thread my name is sort of an MMM style nod to the rap genre and Hova is certainly one of my favorites.

ender

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Re: Optimize Your Taxable Income
« Reply #99 on: February 22, 2015, 03:10:47 PM »
One other thing I want to add here about optimizing taxable income - moving deductions together in alternating calendar years.

So for example, if you are married and plan on deducting $15k in both 2015 and 2016, but can "move" some of that from 2016 to 2015, you can save a ton more on taxes. If you did not batch deductions, you are going to get $15k + $15k = $30k worth of "deductions" total.

However, if you can move $10k of your 2016 deductions into 2015, you will now get the standard deduction in 2016, but 25k worth in 2015. So this gives you a total of $25k + $12.4k = $37.4 worth of deductions.

Not all deductions can be easily transferred years, but if you have meaningful charitable giving or property taxes you can pay early, it might be possible to do this and save significant money. I saved about $2k between 14/15 by doing this.