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Learning, Sharing, and Teaching => Taxes => Topic started by: Mississippi Mudstache on October 22, 2013, 07:42:19 AM

Title: Optimize Your Taxable Income
Post by: Mississippi Mudstache on October 22, 2013, 07:42:19 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 (http://www.calcxml.com/calculators/federal-income-tax-calculator) and plugged in some numbers based on maxing out my 401(k), my HSA, and t.IRAs for myself and my wife. The assumptions I used were:

$69,000  income
$1,000    health/dental insurance premiums
$17,500  401(k)
$6,150    HSA (my employer puts in the other $400, so I don't get to claim that)
$11,000  t.IRAs
Standard deduction ($12,200) - next year we won't have enough deductions to itemize
2 personal exemptions ($7,800)
2 dependent children ($2,000 tax credit)

What I found was surprising - my tax liability after all deductions came out to $1335, which meant that after the $2000 child tax credit, our federal income tax would be zero. HOWEVER, since the child tax credit doesn't pay more than your tax liability, that also meant that we would be leaving money on the table by filling all possible tax-deferred accounts.

I did a little more work and found that my optimal tax-deferred contribution for 2014, based on the above assumptions, would be $28,700. This would reduce my tax liability to $2002, which would then be almost completely wiped out by the child tax credit. In other words, the optimal scenario is for me to put almost $6,000 less into my tax-deferred retirement accounts than the law allows! No federal income tax, and no state tax as well (I ran the number on another website for my state income taxes). How's that for tax optimization?

So, tentatively (since I still don't know exactly what my 2014 income will be), my retirement account funding for 2014 will look like:

401(k):   $17,500
HSA:        $6,150
t.IRA:       $5,050
Roth IRA: $5,950 (which should go into the account TAX-FREE!)

Anyway, I just found the idea of optimizing your taxable income to be interesting and thought that others my benefit from it. Obviously, your results will vary widely, depending upon whether you file singly or jointly, which tax credits and deductions you qualify for, how much you earn, and how much you can save. Your state income tax laws will factor in as well. I found it fun to play around with the calculator to find my ideal solution.

Also, now that I've laid out my plan, feel free to shoot holes in it if I've missed something :)
Title: Re: Optimize Your Taxable Income
Post by: Sebastian on October 22, 2013, 08:18:25 AM
Not sure if I did it completely right, but I calculated what my taxes will be with my 401K and IRA deductions and one without as if I invested nothing.

I save a little over $700 bucks in taxes from making those investments. Not to mention the company match with my 401K will be a nice bonus.

In the words of Michael Scott "this is a win win win situation!"

Thanks for sharing this nifty tool :)
Title: Re: Optimize Your Taxable Income
Post by: simonsez on October 22, 2013, 10:55:40 AM
Nice tax hedge.  Why risk paying a non-zero tax rate in the future when you can get a guaranteed 0% right now!

Good work!
Title: Re: Optimize Your Taxable Income
Post by: KatieSSS on October 22, 2013, 11:15:47 AM
Hmmmm...when I do this it tells me my tax liability is around $3,300, but I know more is being taken out of my paycheck than that for the year. If I look at what is currently being withheld in taxes, it is around $9,700 for the current year. I used the standard deduction and filing status as single. Does this mean I'll get a huge tax refund for 2013 or am I missing something? The $6,000 difference seems crazy. I'm not good with taxes, so I'm starting from a pretty low point, education-wise, on this.
Title: Re: Optimize Your Taxable Income
Post by: seattlecyclone on October 22, 2013, 06:03:01 PM
HOWEVER, since the child tax credit doesn't pay more than your tax liability, that also meant that we would be leaving money on the table by filling all possible tax-deferred accounts.

Have you verified that you're not eligible for the "additional child tax credit"? This is a refundable credit designed to give many parents the full child tax credit even if it brings their net tax liability below zero. There are some additional restrictions on who is eligible and how much it's worth, beyond the requirements for the non-refundable child tax credit, but if you have earned income from a job you can probably claim it.

Even if you are eligible for the additional child tax credit, you may still find it advantageous to put more of your retirement savings in a Roth IRA instead of a traditional one since your tax bracket is so low. That will depend on your long-term income plans and whether you expect tax rates to stay as low as they are now indefinitely.
Title: Re: Optimize Your Taxable Income
Post by: seattlecyclone on October 22, 2013, 07:12:47 PM
A couple more things:
* You get to claim exemptions for your kids as well as yourself and your wife, for a total of four exemptions.
* People who make retirement account contributions and have a relatively low income are eligible for a "saver's credit" that is applied to your return before the child tax credit.
* Your W-2 income is just low enough that you would probably qualify for a small earned income tax credit as long as the HSA contributions are made in the form of pre-tax payroll deductions.

My math for your minimum taxable income scenario:
Gross W-2 income$44,350(after health insurance, 401(k) contributions, and HSA contributions that are all excluded from income pre-tax)
TIRA deduction$11,000
Adjusted gross income$33,350
Standard deduction$12,200
Exemptions$15,600
Taxable income$5,550
Tax (before credits)$558
Retirement savings contribution credit$558(Could have been as high as $2,000 if your tax liability had been higher)
Regular child tax credit$0(No more tax left to credit!)
Tax after non-refundable credits$0
Earned income credit$854
Additional child tax credit$2,000
Total tax liabilityNegative $2,854

The earned income credit and additional child tax credit both use earned income figures calculated before applying the TIRA deduction, so doing some Roth contributions instead of TIRA contributions won't change your tax refund. The saver's credit is calculated using adjusted gross income and has a cliff at $35,500 AGI.

Let's do a couple of alternative scenarios:
Scenario 1 - Switch $2,149 of TIRA contributions to Roth contributions. AGI is $35,499.
Gross W-2 income$44,350(after health insurance, 401(k) contributions, and HSA contributions that are all excluded from income pre-tax)
TIRA deduction$8,851
Adjusted gross income$35,499
Standard deduction$12,200
Exemptions$15,600
Taxable income$7,699
Tax (before credits)$768
Retirement savings contribution credit$768(Could have been as high as $2,000 if your tax liability had been higher)
Regular child tax credit$0(No more tax left to credit!)
Tax after non-refundable credits$0
Earned income credit$854
Additional child tax credit$2,000
Total tax liabilityNegative $2,854

Scenario 2 - Switch $2,151 of TIRA contributions to Roth contributions. AGI is $35,501.
Gross W-2 income$44,350(after health insurance, 401(k) contributions, and HSA contributions that are all excluded from income pre-tax)
TIRA deduction$8,849
Adjusted gross income$35,501
Standard deduction$12,200
Exemptions$15,600
Taxable income$7,701
Tax (before credits)$773
Retirement savings contribution credit$773(Could have been as high as $800 if your tax liability had been higher. Note that the excess credit is much less here.)
Regular child tax credit$0(No more tax left to credit!)
Tax after non-refundable credits$0
Earned income credit$854
Additional child tax credit$2,000
Total tax liabilityNegative $2,854

Scenario 3 - Switch $2,500 of TIRA contributions to Roth contributions. AGI is $35,850.
Gross W-2 income$44,350(after health insurance, 401(k) contributions, and HSA contributions that are all excluded from income pre-tax)
TIRA deduction$8,500
Adjusted gross income$35,850
Standard deduction$12,200
Exemptions$15,600
Taxable income$8,050
Tax (before credits)$808
Retirement savings contribution credit$800(No credit is "wasted" this time.)
Regular child tax credit$8
Tax after non-refundable credits$0
Earned income credit$854
Additional child tax credit$1,992
Total tax liabilityNegative $2,846

After this, additional contributions to the Roth IRA will further increase your AGI and increase your pre-credit tax burden (which increases your regular child tax credit and decreases the additional child tax credit). Once the AGI passes $38,500, your maximum retirement savings credit steps down to $400. The earned income credit should be yours regardless of your Roth/TIRA choices.

Also, all these calculations are made with 2013's tax rates. Annual inflation adjustments will change many of the numbers used in calculating taxes (standard deduction, exemption amounts, retirement contribution limits, and more) for 2014.
Title: Re: Optimize Your Taxable Income
Post by: i_am_the_slime on October 22, 2013, 07:19:05 PM
2 personal exemptions ($7,800)
2 dependent children ($2,000 tax credit)

If you are married filing jointly and have 2 children, that is 4 exemptions not 2.
Title: Re: Optimize Your Taxable Income
Post by: Mississippi Mudstache on October 23, 2013, 07:53:17 AM
seattlecyclone:

Many thanks for the additional information! You can surely tell that I am a complete newbie - things were so much simpler when I was single, but the deductions are obviously better as a married father :)

I did some research, and it does appear that I will probably be eligible for both the additional child tax credit and the retirement savings credit (which I didn't even know existed!) The last couple of years, I have outsourced my tax return, but lately I've become very interested in tax laws so I can file my own returns and optimize my finances. Are you an accountant/tax professional? 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!
Title: Re: Optimize Your Taxable Income
Post by: seattlecyclone on October 23, 2013, 09:31:54 AM
I'm not a tax professional, just a software developer who has done my own taxes since I was in college. If you want to really start to understand this stuff, I might suggest skimming through the entire instruction manual for form 1040 (http://www.irs.gov/pub/irs-pdf/i1040.pdf), line by line. It's really dry, but it basically explains everything that might affect your tax liability and how to report it to the IRS. You don't have to read everything in detail (the sections on farm income don't apply to most people anymore, for example), but it's good to be very familiar with everything you're eligible for right now, and at least aware of things that might apply to you in the future (such as college education credits or rental income reporting) so that you know to look into them more when they become relevant.

For things that are relevant to you right now, the instructions may refer you to other IRS numbered publications or form instructions that explain about the topic in more detail. Read those too.
Title: Re: Optimize Your Taxable Income
Post by: KatieSSS on October 23, 2013, 11:58:33 AM
Thanks, seattlecyclone. That is really helpful!
Title: Re: Optimize Your Taxable Income
Post by: simonsez on October 23, 2013, 12:09:19 PM
For things that are relevant to you right now, the instructions may refer you to other IRS numbered publications or form instructions that explain about the topic in more detail. Read those too.

Like Pub 970!  Reading the updated table once a year about the student loan interest phaseout (pg 25-29 last year) is a good reminder to me each year to keep going strong with the 401k.

http://www.irs.gov/pub/irs-pdf/p970.pdf
Title: Re: Optimize Your Taxable Income
Post by: KatieSSS on October 23, 2013, 12:24:20 PM
For things that are relevant to you right now, the instructions may refer you to other IRS numbered publications or form instructions that explain about the topic in more detail. Read those too.

Like Pub 970!  Reading the updated table once a year about the student loan interest phaseout (pg 25-29 last year) is a good reminder to me each year to keep going strong with the 401k.

http://www.irs.gov/pub/irs-pdf/p970.pdf

Wow - that is really good to know! I didn't realized the student loan deduction was being phased out. No matter for me, though, as my adjusted gross income won't be high enough for me not to qualify for that credit. Plus, this should be the last year I pay interest on student loans ever. YAY.
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator on October 23, 2013, 12:59:07 PM
Seattlecyclone- you are awesome!!! I'm still confused about the child tax credit (i'm easily confused) Can you double check mine??? (Sorry if this is a highjack? Should i start my own thread? I never know)




Gross W-2 income   $58,500   (after health insurance, 401(k) contributions, and HSA contributions that are all excluded from income pre-tax)
TIRA deduction   $10,600 (it's complicated)
Student loan interest $2,500
Adjusted gross income   $45,400
Standard deduction   $12,200
Exemptions   $15,600
Taxable income   $17,600
Tax (before credits)   $1,760
Retirement savings contribution credit   $400*
Regular child tax credit   $1,360
Tax after non-refundable credits   $0
Earned income credit   $0
Additional child tax credit   $640**
Total tax liability   Negative $640

*Is this the "savers credit?" Is it calculated at 10% of $2000 x2 (for AGI between 38,501-59,000)
**Is this correct?

Thank you again! And thanks for all your help in my other post!

ETA: i used this
http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx
And
http://www.irs.gov/pub/irs-pdf/f8880.pdf
Title: Re: Optimize Your Taxable Income
Post by: seattlecyclone on October 23, 2013, 02:54:14 PM
Your calculations look like they're probably in the right ballpark (assuming you have two dependent children), though it's always possible you'll report some additional income, deductions, or credits based on your work, family, and investment situation.

Yes, the retirement savings contribution credit is commonly called the "saver's credit" since it's easier to say. :-)

The way the child tax credit works, in a nutshell, is that it starts at $1000 per kid, and gradually phases out for married couples with AGI above $110k (in 2012, might be indexed for inflation, I'm not sure). The "regular" child tax credit can never be more than the amount of tax you otherwise owe. That's why it's called a "nonrefundable" tax credit, because it can't cause your total tax to be negative. If your "regular" child tax credit is capped for this reason, you might still be able to claim the rest of it as a refundable "additional child tax credit" if you meet some certain additional requirements. The main requirement is that you can't claim an "additional child tax credit" that's more than 15% of (your earned income - $3,000). But your work income seems plenty high for this to not be a concern for you.
Title: Re: Optimize Your Taxable Income
Post by: teen persuasion on October 25, 2013, 08:45:48 AM
+1

I've been doing this for years.  Unfortunately, I can't take advantage of the Saver's credit, since our taxable income  = 0.  It will probably become more important for us as the kids continue to head off to college.

I wanted to mention that you should also check your state income taxes.  In NY, the EITC is matched at 30%, and CTC is matched at 33% for kids over 4.
Title: Re: Optimize Your Taxable Income
Post by: ichangedmyname on October 25, 2013, 09:18:57 AM
I am going to read this later. Been thinking about this too. So thanks for sharing!
Title: Re: Optimize Your Taxable Income
Post by: aj_yooper on October 25, 2013, 09:54:07 AM
seattlecyclone, you are amazing!
Title: Re: Optimize Your Taxable Income
Post by: aj_yooper on October 25, 2013, 08:59:15 PM
I like your idea of optimizing taxes, but I now have a different thought.  Reducing taxes now probably increases your cash flow, but I don't think it helps your retirement income, if you stay within your current 15% marginal tax rate bracket.

You are in the 15% marginal taxable rate so your current long term capital gains rate is 0%.  Any money in a taxable account will receive that 0% rate for long term capital gains and this continues up to $72,500 of income, when it shifts to 15%; qualified dividends are also taxed at the same rate as long term capital gains.  So a Roth IRA or a traditional IRA at your marginal tax rate/income level will not have a significant improvement over a taxable account on your net money at retirement, if you manage your portfolio turnover wisely, i.e., harvest only long term capital gains and avoid frequent portfolio changes.  The taxable account has the advantage of allowing tax loss harvesting which can reduce your taxable income (with little effect on your asset allocation goals)  and provides extra liquidity financially-you can cash in taxable account equities sans tax advantaged rules.  A Roth IRA account adds a further firewall to your retirement funding, but it may not be necessary but probably doesn't hurt. 

By using a taxable account instead of a tax deferred vehicle, you pay your taxes now at the 15% marginal tax rate.  When you retire, you probably will be taxed on at least the 15% marginal tax rate on all tax deferred distributions (401k or traditional IRA), so the net money is the same.  You could be at a higher rate then which would mean you will pay a higher marginal tax rate on tax deferred retirement distributions than you will on a taxable account.  A Roth or two probably will not hurt you then, except Roth rules limit liquidity somewhat.

Further, when you retire, you will be at a given marginal tax rate.  If the marginal tax rate is 33% or lower, the current long term capital gains rate is 15% or 0%.  If you expect your retirement income to be above the 33% marginal tax rate, then a tax deferred account is not as helpful as a taxable account where you will pay a long term capital gain rate of 15% when your are at the 33% marginal tax rate.  Usually, retirement incomes are less than working income.  Tax rates can change though.

Funding your 401k to capture any employer match is very beneficial, but it could be done in a 401k or a Roth 401k when you are at your current marginal tax rate.  Funding a health savings account (which would be utilized as a retirement account strategy), especially if it is subsidized by your employer, is very beneficial, irregardless of marginal tax rate.  The key is to use tax deferral strategies to stay below the 25% marginal tax rate ($72,500).

I would use tax deferral strategies to keep your income in the 15% marginal tax rate, but then consider shifting to taxable accounts for the rest of your money.  A Roth IRA or two would be fine, but may not be necessary, if you feel you will be retiring in a bracket under 33%.  Of course, take any tax credits that are available.

I am not a tax professional, but these are my thoughts for general discussion.  They could be wrong, but this is what I think.  YMMV
Title: Re: Optimize Your Taxable Income
Post by: fiveoh on October 25, 2013, 09:36:22 PM
I like your idea of optimizing taxes, but I now have a different thought.  Reducing taxes now probably increases your cash flow, but I don't think it helps your retirement income, if you stay within your current 15% marginal tax rate bracket.

You are in the 15% marginal taxable rate so your current long term capital gains rate is 0%.  Any money in a taxable account will receive that 0% rate for long term capital gains and this continues up to $72,500 of income, when it shifts to 15%; qualified dividends are also taxed at the same rate as long term capital gains.  So a Roth IRA or a traditional IRA at your marginal tax rate/income level will not have a significant improvement over a taxable account on your net money at retirement, if you manage your portfolio turnover wisely, i.e., harvest only long term capital gains and avoid frequent portfolio changes.  The taxable account has the advantage of allowing tax loss harvesting which can reduce your taxable income (with little effect on your asset allocation goals)  and provides extra liquidity financially-you can cash in taxable account equities sans tax advantaged rules.  A Roth IRA account adds a further firewall to your retirement funding, but it may not be necessary but probably doesn't hurt. 

By using a taxable account instead of a tax deferred vehicle, you pay your taxes now at the 15% marginal tax rate.  When you retire, you probably will be taxed on at least the 15% marginal tax rate on all tax deferred distributions (401k or traditional IRA), so the net money is the same.  You could be at a higher rate then which would mean you will pay a higher marginal tax rate on tax deferred retirement distributions than you will on a taxable account.  A Roth or two probably will not hurt you then, except Roth rules limit liquidity somewhat.

Further, when you retire, you will be at a given marginal tax rate.  If the marginal tax rate is 33% or lower, the current long term capital gains rate is 15% or 0%.  If you expect your retirement income to be above the 33% marginal tax rate, then a tax deferred account is not as helpful as a taxable account where you will pay a long term capital gain rate of 15% when your are at the 33% marginal tax rate.  Usually, retirement incomes are less than working income.  Tax rates can change though.

Funding your 401k to capture any employer match is very beneficial, but it could be done in a 401k or a Roth 401k when you are at your current marginal tax rate.  Funding a health savings account (which would be utilized as a retirement account strategy), especially if it is subsidized by your employer, is very beneficial, irregardless of marginal tax rate.  The key is to use tax deferral strategies to stay below the 25% marginal tax rate ($72,500).

I would use tax deferral strategies to keep your income in the 15% marginal tax rate, but then consider shifting to taxable accounts for the rest of your money.  A Roth IRA or two would be fine, but may not be necessary, if you feel you will be retiring in a bracket under 33%.  Of course, take any tax credits that are available.

I am not a tax professional, but these are my thoughts for general discussion.  They could be wrong, but this is what I think.  YMMV

Correct me if i'm wrong, but doesn't capital gains/div in a taxable account still count towards income even though it's taxed at 0%, but Roth IRA distributions do not count as income?
Title: Re: Optimize Your Taxable Income
Post by: TheDude on October 25, 2013, 10:10:26 PM
Great thread, I though I was going to get to zero tax this year but then I earned an extra 3600 at part time job that bumped our tax up to about a 1K still only about 1% but damn I thought I was going to get there. I created a spreadsheet where I track my tax. Last year was my first and I was within about 100 bucks at the time I filed. Once I update the number to be the exact same my spreadsheet was with up about $5. The one thing I keep thinking about is should I be contributing more to a Roth? The think I am worried about is mandatory withdraw rates when I become 70. Oh taxes how I love/hate you. Its a game and I enjoy it.
Title: Re: Optimize Your Taxable Income
Post by: Insanity on October 25, 2013, 10:21:05 PM
Wow, I feel dumb reading this thread.   

I'll definitely have to look at that 1040 documentation. 



Title: Re: Optimize Your Taxable Income
Post by: dorkus619 on October 26, 2013, 11:23:24 AM
Thanks to everyone on this thread. This info will help me come tax time. Also my taxable income is much lower than I thought so that's awesome!

Also I hadn't ever heard of the saver's credit, so I'm excited to learn more about that.

Question to those who do their own taxes: Do you use tax software or just do the IRS paperwork to file? In the past I have always used turbotax.

Thanks again
Title: Re: Optimize Your Taxable Income
Post by: aj_yooper on October 26, 2013, 11:43:10 AM
Correct me if i'm wrong, but doesn't capital gains/div in a taxable account still count towards income even though it's taxed at 0%, but Roth IRA distributions do not count as income?

Capital gains and qualified dividends are taxed at the given long term capital gains rate for that marginal tax bracket.  So, it is treated as income by the capital gains tax only.  The Roth distributions are all tax free so the Roth does protect the short term capital gains and interest earned, which is an advantage.  In the strategy I suggested, putting REITs, bonds, CDs, small cap indexes in a Roth is a good plan.

*Edit:   I think you are right; the capital gain, although taxed as a capital gain, also shows as income, which might affect your marginal rate bracket.
Title: Re: Optimize Your Taxable Income
Post by: simonsez on October 28, 2013, 08:38:54 AM
Question to those who do their own taxes: Do you use tax software or just do the IRS paperwork to file? In the past I have always used turbotax.

I did use Turbotax when my income was low enough to be free.  I still use the Turbotax estimator throughout the year for a quick reference.

Now, I do my federal on paper and my state on the computer since e-filing is free (VA).  I like having it all laid out and slowly going line by line (even when most lines are 0 or I just drop the previous value down).  However, if my taxes were more complicated I'd pay someone else.  1040 with a 1099-MISC and 1098-E (SL interest), no kids, no credits, and we don't itemize.
Title: Re: Optimize Your Taxable Income
Post by: aj_yooper on October 28, 2013, 08:56:29 AM
I've used TaxActOnline (http://www.taxact.com/taxes-online/bundle-and-save.asp); it is about $18 with free federal and state e-filing.  Not bad, and it does more complicated returns too.
Title: Re: Optimize Your Taxable Income
Post by: teen persuasion on October 29, 2013, 08:36:07 AM
I prefer to do my taxes on paper first, and then run it thru TurboTax so I can e-file for free (another advantage of being eligible for EITC).  I've learned the hard way that I have to access TT thru my state's tax website for e-filing to be free for my state return, too.

I really prefer to do the calculations myself; I dislike the Q & A method of TT.  It is too easy to miss something obscure.  Of course, I'd also prefer if the IRS offered a simplified version (formulas) for those of us that are fluent in math, rather than the COBOLesque version for the math-illiterate (like my DH).
Title: Re: Optimize Your Taxable Income
Post by: rocketman48097 on November 01, 2013, 01:40:32 PM
I think there are some holes missing.  I think you might want to check on the earned income tax credit, which is refundable.  It is possible with your income that you could max out your IRA's and instead of owing zero, they government could end up PAYING you more than you put in.  This happens all the time in America and is why 49% of Americans pay no income tax. 

The best way to check this scenario is to put your numbers in tax software.  Of course, you can wait until April 15th to contribute to a tax deductible IRA, so you can even do this in February.  Plug in different scenarios before you file.  I use taxact.com, and it's not quite as good as turbo tax but is still excellent for only $10 per year.  In fact, the first year is free I think.  $8 for state returns but since I live in TN, I don't file a state return because TN has NO STATE INCOME TAX.  A huge benefit. 
Title: Re: Optimize Your Taxable Income
Post by: hoppy08520 on November 03, 2013, 02:03:57 PM
Mississippi Mustache, congratulations on achieving 3rd Level Jedi Tax Master status.

This is what the masters do, they dial in just the right amounts of everything to minimize taxes.  People will often do that at the margins of different tax brackets, to edge just under one bracket.

What's cool about your scenario is how if you never even dug into it, you would have never even known any better and you would have been all happy just to pay no taxes. But now you realized that you can fill more Roth space without even any tax hit, and STILL pay no taxes! Nice!

Granted, if you retire early, you probably could convert these Traditional IRA funds year by year anyway at 0%, but maybe you wouldn't have that chance, so at least you have it in Roth space and don't need to worry further.

As you've found, doing your own taxes and what you learn from doing your taxes and researching the tax code more can really help. For me, what helped in doing my own taxes was the self-delivered slap in the face when I saw just how much of an impact lowering your taxable income is, and just how high your marginal tax rate can be when you add it all up. Doing my own taxes helped convince me that I need to max my 401(k) -- which I wasn't << SLAP !! >> and I also learned that my wife could do a Traditional IRA instead of Roth IRA, which lowered our income further.  The result was that we lost much less of a valuable tax credit (child tax credit) with the higher 401(k) contributions, and the lower taxable income pushed us into the top of the 15% tax bracket. And I've now got more in my 401(k).

Oh, and it also showed me how important it is to lower your "above the line" adjusted gross income, and not just your "below the line" taxable income. For many tax credits, you qualify based on your AGI and not your taxable income. So, after years of not signing up for my company's flexible spending account (FSA), this year I did sign up. It lowers my AGI and not only do I pay less taxes but by lowering my AGI, I qualify for more of the child tax credit.

Another trick you can do is time certain taxable events by the tax year, to your advantage. For example, this year I'll be in the 25% tax bracket due to some extra one-time income, but I highly expect that next year I'll drop back to the 15% tax bracket. So, this year I'll be advancing some extra charitable donations that I would ordinarily have given next year, into this calendar year, in order to save 10% on those donations. It will be around $3,000. By making those donations this year intend of next year, I'll have $300 more in my pocket.

Last point: a lot of people do various what-if scenarios in tax software. I actually coded up my own 1040 spreadsheet that does all this. I found that by creating this spreadsheet, line by line, and working out the various formulas (none of which are complicated) really showed me how it works in a way that filling it out in a software program doesn't make as clear to you. For example, I have a "tab" in the sheet where I do the brackets (10%, 15%, 25%) where I see how much I have in each bracket, and how much "head room" I have until I bump up into the next higher bracket. Seeing that amount spotlighted it what made me say, "Hmm, I'm $3,000 into the 25% tax bracket...what would happen if I front-loaded my 2014 donations into 2013, cool, that will drop me into the 15% tax bracket..."
Title: Re: Optimize Your Taxable Income
Post by: teen persuasion on November 04, 2013, 07:43:21 AM
I think there are some holes missing. I think you might want to check on the earned income tax credit, which is refundable.  It is possible with your income that you could max out your IRA's and instead of owing zero, they government could end up PAYING you more than you put in.  This happens all the time in America and is why 49% of Americans pay no income tax. 

The best way to check this scenario is to put your numbers in tax software.  Of course, you can wait until April 15th to contribute to a tax deductible IRA, so you can even do this in February.  Plug in different scenarios before you file.  I use taxact.com, and it's not quite as good as turbo tax but is still excellent for only $10 per year.  In fact, the first year is free I think.  $8 for state returns but since I live in TN, I don't file a state return because TN has NO STATE INCOME TAX.  A huge benefit.

The OP could be eligible for some EITC, but putting money in a Roth IRA will have no effect on that credit (doesn't alter AGI), and putting money in a tIRA usually doesn't increase EITC since that credit is figured 2 ways (based on your wages on line 7, and again based on your AGI) and then you get the lower amount.  So using a tIRA would lower your AGI (higher EITC), but it doesn't touch your line 7 wages.  This assumes that most/all of your income is wages; if you have other income that raises your AGI, contributing to a tIRA would help get AGI closer to line 7 wages.

There is another gotcha with the EITC and saving in taxable accounts: investment income of more than $3200 disqualifies you from receiving EITC.  In light of that, saving in retirement accounts is better if you are income eligible for EITC.
Title: Re: Optimize Your Taxable Income
Post by: Iron Mike Sharpe on November 04, 2013, 08:58:08 AM
Props on this thread getting me started thinking about optimizing my own taxes.  I am in the 25% federal tax bracket.

My current situation is I get 26 paychecks a year + a bonus check of up to 10% of my salary.  I am currently sending 22% of my income to my 401K (we can do a max of 25%, I do not hit the $17,500 limit).  So, after the 22% to my 401K, I use two paychecks each month to make my monthly budget.  This leaves an extra two paychecks a year + my bonus check and I just send these three to the Roth IRA.

Anyway, I was looking over my benefits at work and realized I don't need the Silver health insurance package and I can go to Bronze.  Last week I ran my numbers of my monthly budget and I saw I could send $600 of my own money plus the $300 from the company for the health survey to an HSA account.  I thought, "cool, I was only saving $420 a year for future health care costs, now I'm at $900 a year."  I thought I was doing great.

Anyway, I had bad insomnia last night.  As I laid in bed, I wondered why do I need to budget X amount of money each month to say home repairs and car replacement funds?  I don't need to spend that money each month.  As long as I fully fund my year targets at some point during the year, I should be good.

So, I ran the numbers.  If I increased my 401K contribution rate to the max 25% and then increased my HSA contribution to $3000 from $600, I will be sending a little over $4000 combined to those two accounts.  The taxes I would have paid on that would have been a little over $1400.  So, my take home pay each year will be $2600 less.  I will take that amount out of those extra two checks and my bonus check to fund things like home reapirs and car replacement.  So, I do have $2600 less to fund my Roth IRA. However, I am anticipating on being in the 15% bracket when I retire, so getting the tax savings now is more important for me.  And I do have a hobby that produces income each year.  I can just take the first $2600 of that hobby income and send it to the Roth IRA.

Essentially, I just figured out a way to give myself a $1400/year or so raise last night, just by having insomnia.
Title: Re: Optimize Your Taxable Income
Post by: Mississippi Mudstache on November 04, 2013, 12:06:42 PM
I'm happy to hear that others have been inspired to dig a little deeper into their taxes - our tax laws may be incredibly complicated, but it seems that those complications create opportunities for those who are willing to study them a bit. Also, my thanks go out to the long-time tax jedis who have contributed and pointed out that my tax picture is even rosier than I originally thought. I would have never thought it was possible to get $2000-$3000 back from Uncle Sam with a near-$70,000 salary!

Granted, if you retire early, you probably could convert these Traditional IRA funds year by year anyway at 0%, but maybe you wouldn't have that chance, so at least you have it in Roth space and don't need to worry further.

I do indeed intend to retire early, and I expect that I will be able to convert all of my tax-deferred savings into Roths without paying a dime in taxes, but (as I'm sure you're well aware), the benefit of putting the money into Roths now is that I will avoid the 5-year waiting period before the contributions can be withdrawn, so I will be building up some capital that I can spend early on in my retirement, before the Roth conversion ladder kicks in. And, if my income in retirement is high enough that I do end up paying taxes on the conversion, then I'll have nothing to complain about, because my income will be higher than I anticipate :)
Title: Re: Optimize Your Taxable Income
Post by: hlca on November 05, 2013, 02:03:47 PM

t.IRA:       $5,050
Roth IRA: $5,950 (which should go into the account TAX-FREE!)

Are the IRA contributions both for you?  If so, that might be over the limit.  I think the contributions for both (combined) are capped at $5500.  http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
Title: Re: Optimize Your Taxable Income
Post by: Mississippi Mudstache on November 05, 2013, 07:31:35 PM
The IRS allows married couples to each contribute to an IRA, regardless of whether or not both spouses work.
Title: Re: Optimize Your Taxable Income
Post by: Iron Mike Sharpe on November 06, 2013, 07:48:36 AM
Ooooh, I played around with that calculator above.  It looks like by sending less to my Roth IRA and upping my 401K from 22% to 25% and then maxing out my HSA, I should be in the 15% tax bracket now.
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator on January 22, 2014, 01:06:33 PM
Just wanted to say thank you to all of you!! This post helped me sooo much. Also i wanted to give this a 'bump' because it's getting close to tax time and i want to reference this to others.
Title: Re: Optimize Your Taxable Income
Post by: eyePod on January 23, 2014, 11:55:33 AM
I like your idea of optimizing taxes, but I now have a different thought.  Reducing taxes now probably increases your cash flow, but I don't think it helps your retirement income, if you stay within your current 15% marginal tax rate bracket.

You are in the 15% marginal taxable rate so your current long term capital gains rate is 0%.  Any money in a taxable account will receive that 0% rate for long term capital gains and this continues up to $72,500 of income, when it shifts to 15%; qualified dividends are also taxed at the same rate as long term capital gains.  So a Roth IRA or a traditional IRA at your marginal tax rate/income level will not have a significant improvement over a taxable account on your net money at retirement, if you manage your portfolio turnover wisely, i.e., harvest only long term capital gains and avoid frequent portfolio changes.  The taxable account has the advantage of allowing tax loss harvesting which can reduce your taxable income (with little effect on your asset allocation goals)  and provides extra liquidity financially-you can cash in taxable account equities sans tax advantaged rules.  A Roth IRA account adds a further firewall to your retirement funding, but it may not be necessary but probably doesn't hurt. 

By using a taxable account instead of a tax deferred vehicle, you pay your taxes now at the 15% marginal tax rate.  When you retire, you probably will be taxed on at least the 15% marginal tax rate on all tax deferred distributions (401k or traditional IRA), so the net money is the same.  You could be at a higher rate then which would mean you will pay a higher marginal tax rate on tax deferred retirement distributions than you will on a taxable account.  A Roth or two probably will not hurt you then, except Roth rules limit liquidity somewhat.

Further, when you retire, you will be at a given marginal tax rate.  If the marginal tax rate is 33% or lower, the current long term capital gains rate is 15% or 0%.  If you expect your retirement income to be above the 33% marginal tax rate, then a tax deferred account is not as helpful as a taxable account where you will pay a long term capital gain rate of 15% when your are at the 33% marginal tax rate.  Usually, retirement incomes are less than working income.  Tax rates can change though.

Funding your 401k to capture any employer match is very beneficial, but it could be done in a 401k or a Roth 401k when you are at your current marginal tax rate.  Funding a health savings account (which would be utilized as a retirement account strategy), especially if it is subsidized by your employer, is very beneficial, irregardless of marginal tax rate.  The key is to use tax deferral strategies to stay below the 25% marginal tax rate ($72,500).

I would use tax deferral strategies to keep your income in the 15% marginal tax rate, but then consider shifting to taxable accounts for the rest of your money.  A Roth IRA or two would be fine, but may not be necessary, if you feel you will be retiring in a bracket under 33%.  Of course, take any tax credits that are available.

I am not a tax professional, but these are my thoughts for general discussion.  They could be wrong, but this is what I think.  YMMV

This is why I like to have a nice split with my 401k and Roth IRA. It lets me keep money in a tax advantaged and a non-tax advantaged account, hedging my bets on whether or not I'm in a lower tax bracket in the future.
Title: Re: Optimize Your Taxable Income
Post by: ChiStache on January 29, 2014, 03:51:55 PM
Thank you to everyone who contributed to this thread. It is helping me think really productively about my #1 expense - taxes!
Title: Re: Optimize Your Taxable Income
Post by: the fixer on January 29, 2014, 04:10:01 PM
One tiny tip to share that I learned a couple years ago:

Your total tax is not an exact mathematical formula based on your income. To simplify things, the IRS has you look up your tax on the tax table in the instructions. This is a table that presents the total tax as a fixed number for a given $50 range of income.

Let's suppose you made $48,999 in taxable income, and the IRS says your total tax is $6,000 (made up, the actual number isn't important and I don't want to look it up!) and you're in the 25% bracket. If you had made an extra two dollars in taxable income, it would bump you up to the next $50 range with a tax of $6012, costing you $12 in taxes! So you ended up losing more to taxes than the marginal gain in income.

It's a small effect, but checking and adjusting where on the table you fall can save you a bit of money each year. I've also found that in practice it's really hard to get right because a little bit of extra interest income or something can screw it all up. So far I just hope that it all averages out over the years, but someone more enterprising than I might find good ways to game this.
Title: Re: Optimize Your Taxable Income
Post by: rubybeth on January 29, 2014, 05:54:49 PM
For things that are relevant to you right now, the instructions may refer you to other IRS numbered publications or form instructions that explain about the topic in more detail. Read those too.

Like Pub 970!  Reading the updated table once a year about the student loan interest phaseout (pg 25-29 last year) is a good reminder to me each year to keep going strong with the 401k.

http://www.irs.gov/pub/irs-pdf/p970.pdf

Wow - that is really good to know! I didn't realized the student loan deduction was being phased out. No matter for me, though, as my adjusted gross income won't be high enough for me not to qualify for that credit. Plus, this should be the last year I pay interest on student loans ever. YAY.

I feel the need to clarify this point. I don't believe the deduction "is being phased out" meaning that it's going away, I believe "phase out" in this case means that if you make over a certain amount of income, your ability to take the deduction goes away. Feel free to correct me if I'm wrong! :)
Title: Re: Optimize Your Taxable Income
Post by: Jack on January 29, 2014, 07:29:39 PM
I feel the need to clarify this point. I don't believe the deduction "is being phased out" meaning that it's going away, I believe "phase out" in this case means that if you make over a certain amount of income, your ability to take the deduction goes away. Feel free to correct me if I'm wrong! :)

It's good that you clarified that; I almost panicked when I read it above!

One thing that I noticed when I was working on my spreadsheet a few days ago is that the Saver's Credit has a huge discontinuity in it: if your AGI is <= $35500 you get 50% of your contribution, but if it's over that you only get 20%. For me, that has two implications: contributing enough to my traditional IRA to have an AGI of $35499 instead of ending up at $35501 saves me over $900 in taxes, and anything beyond that -- which isn't even halfway to maxing the IRA contribution -- can be contributed as Roth and not get taxed later or now!

Alas, if only these credits applied to the self-employment tax...
Title: Re: Optimize Your Taxable Income
Post by: beltim on January 29, 2014, 07:34:15 PM
I feel the need to clarify this point. I don't believe the deduction "is being phased out" meaning that it's going away, I believe "phase out" in this case means that if you make over a certain amount of income, your ability to take the deduction goes away. Feel free to correct me if I'm wrong! :)

It's good that you clarified that; I almost panicked when I read it above!

One thing that I noticed when I was working on my spreadsheet a few days ago is that the Saver's Credit has a huge discontinuity in it: if your AGI is <= $35500 you get 50% of your contribution, but if it's over that you only get 20%. For me, that has two implications: contributing enough to my traditional IRA to have an AGI of $35499 instead of ending up at $35501 saves me over $900 in taxes, and anything beyond that -- which isn't even halfway to maxing the IRA contribution -- can be contributed as Roth and not get taxed later or now!

Alas, if only these credits applied to the self-employment tax...

There are two other discontinuities as well: at 38,500 the credit goes from 20% to 10%, and at 59,000 the credit goes from 10% to 0%.

Although I usually prefer Roth IRAs at these income levels, contributing to a traditional IRA in order to get a higher credit is well worth it.
Title: Re: Optimize Your Taxable Income
Post by: TomTX on January 29, 2014, 08:04:29 PM
One tiny tip to share that I learned a couple years ago:

Your total tax is not an exact mathematical formula based on your income. To simplify things, the IRS has you look up your tax on the tax table in the instructions. This is a table that presents the total tax as a fixed number for a given $50 range of income.

Let's suppose you made $48,999 in taxable income, and the IRS says your total tax is $6,000 (made up, the actual number isn't important and I don't want to look it up!) and you're in the 25% bracket. If you had made an extra two dollars in taxable income, it would bump you up to the next $50 range with a tax of $6012, costing you $12 in taxes! So you ended up losing more to taxes than the marginal gain in income.

It's a small effect, but checking and adjusting where on the table you fall can save you a bit of money each year. I've also found that in practice it's really hard to get right because a little bit of extra interest income or something can screw it all up. So far I just hope that it all averages out over the years, but someone more enterprising than I might find good ways to game this.

So, don't max out your Traditional IRA. When you run your taxes (before April 15) and you find yourself $2 over the breakpoint - contribute $2 to your IRA for the prior year.
Title: Re: Optimize Your Taxable Income
Post by: nottoolatetostart on January 30, 2014, 07:30:02 AM
Got referred here from another thread....just wanted to say that you all are awesome.

Two action items that I am going to do after reading this: I'm going to take seattlecyclone's idea of reading the IRS publication and then take hoppy's advice of coding my own spreadsheets to put it all into action.

I have to say the best thing we ever did was get away from using our CPA....nothing against CPA's as I know some awesome ones. But the one my DH's family used (and we just used for the first 2 years of marriage) was a "punch in the numbers" kind of guy and it probably cost us more since I was too ignorant to understand all of this. I shudder to think how much extra we paid in taxes.

Also going to consider moving to Taxact instead of TT this year.

Thank you....you all rock!
Title: Re: Optimize Your Taxable Income
Post by: MustachianAccountant on January 30, 2014, 09:00:46 AM
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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker on January 30, 2014, 10:47:19 AM

I feel the need to clarify this point. I don't believe the deduction "is being phased out" meaning that it's going away, I believe "phase out" in this case means that if you make over a certain amount of income, your ability to take the deduction goes away. Feel free to correct me if I'm wrong! :)

You are correct. Here's the excel formula I use within my tax spreadsheet for those who might be interested. This formula will only work if you reach the minimum phaseout level, otherwise just use 100% of SL interest. If you're an excel nut and want to "fix it" to also include AGI < the limits go for it.

=IF(C27>155000,0,(1-(C27-125000)/30000)*B30)

So C27 is effectively AGI (slightly modified) and B30 is total student loan interest paid. The phase-out begins at $125K and ends at $155K, married filing joint. There's no cliff really, it's just a percentage of how far you go in that range. $140K AGI would get you a 50% deduction for SL interest.
Title: Re: Optimize Your Taxable Income
Post by: rubybeth on January 30, 2014, 11:15:52 AM

I feel the need to clarify this point. I don't believe the deduction "is being phased out" meaning that it's going away, I believe "phase out" in this case means that if you make over a certain amount of income, your ability to take the deduction goes away. Feel free to correct me if I'm wrong! :)

You are correct. Here's the excel formula I use within my tax spreadsheet for those who might be interested. This formula will only work if you reach the minimum phaseout level, otherwise just use 100% of SL interest. If you're an excel nut and want to "fix it" to also include AGI < the limits go for it.

=IF(C27>155000,0,(1-(C27-125000)/30000)*B30)

So C27 is effectively AGI (slightly modified) and B30 is total student loan interest paid. The phase-out begins at $125K and ends at $155K, married filing joint. There's no cliff really, it's just a percentage of how far you go in that range. $140K AGI would get you a 50% deduction for SL interest.

Thanks, that's very helpful. I just didn't want anyone to freak out if they read "phased out" and misinterpreted it. :)
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront on January 30, 2014, 11:20:07 AM
Question.

For 2014 I'm looking at this scenario:
AGI: $89,266
From AGI: $(29,617)
Taxable: $59,649

So this puts me inside the 15% bracket by $72,500-$59,649 = $12,851

I currently max all possible tax advantaged space.

Should I be considering backing off the 401k contributions and investing in taxable instead to get my taxable income up to $72,500?  I generally see 15% as an acceptable tax and it'ss the rate I plan to pay in retirement, but otoh I also like the idea of delaying any taxes possible and just trying my luck with structuring future income to avoid high taxes, possibly even paying 0% in the future. 

On a related note, I have no taxable currently, but will have $110M in Roth principal to live off of in ER while I wait for roth conversions to ripen.
Title: Re: Optimize Your Taxable Income
Post by: simonsez on January 30, 2014, 11:32:54 AM
On a related note, I have no taxable currently, but will have $110M in Roth principal to live off of in ER while I wait for roth conversions to ripen.
Jesus titty-fucking Christ!  $110,000,000?
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker on January 30, 2014, 11:34:15 AM
Question.

For 2014 I'm looking at this scenario:
AGI: $89,266
From AGI: $(29,617)
Taxable: $59,649

So this puts me inside the 15% bracket by $72,500-$59,649 = $12,851

I currently max all possible tax advantaged space.

Should I be considering backing off the 401k contributions and investing in taxable instead to get my taxable income up to $72,500?  I generally see 15% as an acceptable tax and it'ss the rate I plan to pay in retirement, but otoh I also like the idea of delaying any taxes possible and just trying my luck with structuring future income to avoid high taxes, possibly even paying 0% in the future. 

On a related note, I have no taxable currently, but will have $110M in Roth principal to live off of in ER while I wait for roth conversions to ripen.

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.

BTW, do you mean $110K Roth, because if you have $110 Million in a Roth you must be a magician and I think you're in the wrong forum. ; ) 
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront on January 30, 2014, 11:40:00 AM
Jesus titty-fucking Christ!  $110,000,000?
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.
Title: Re: Optimize Your Taxable Income
Post by: simonsez 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.
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront on January 30, 2014, 11:56:14 AM
It was the best use of bad language I've seen today. 
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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...
Title: Re: Optimize Your Taxable Income
Post by: rocksinmyhead 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!!
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: simonsez 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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker on January 30, 2014, 12:55:20 PM
Good to know. Thanks.
Title: Re: Optimize Your Taxable Income
Post by: Insanity 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 :(
Title: Re: Optimize Your Taxable Income
Post by: oldtoyota 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 (http://www.calcxml.com/calculators/federal-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.

Title: Re: Optimize Your Taxable Income
Post by: foobar 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 :(
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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 (http://www.calcxml.com/calculators/federal-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.
Title: Re: Optimize Your Taxable Income
Post by: Insanity 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.
Title: Re: Optimize Your Taxable Income
Post by: twbird18 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 (http://www.calcxml.com/calculators/federal-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
Title: Re: Optimize Your Taxable Income
Post by: ichangedmyname 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.
Title: Re: Optimize Your Taxable Income
Post by: secondcor521 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.
Title: Re: Optimize Your Taxable Income
Post by: Insanity 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).
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: ichangedmyname 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.
Title: Re: Optimize Your Taxable Income
Post by: Mississippi Mudstache 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 (http://www.calcxml.com/calculators/federal-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!
Title: Re: Optimize Your Taxable Income
Post by: jordanread 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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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".
Title: Re: Optimize Your Taxable Income
Post by: MustachianAccountant 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. :-)
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: andymarch 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?
Title: Re: Optimize Your Taxable Income
Post by: MustachianAccountant 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.
Title: Re: Optimize Your Taxable Income
Post by: aj_yooper 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!
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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.
Title: Re: Optimize Your Taxable Income
Post by: LalsConstant 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.
Title: Re: Optimize Your Taxable Income
Post by: andymarch 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.
Title: Re: Optimize Your Taxable Income
Post by: kpd905 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?
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator 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!!!
Title: Re: Optimize Your Taxable Income
Post by: Gin1984 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?
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator 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!!!
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: andymarch 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 :)
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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?
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: MooseOutFront 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. :)
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator 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.

Title: Re: Optimize Your Taxable Income
Post by: Gin1984 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.
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: Mazzinator 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)
Title: Re: Optimize Your Taxable Income
Post by: Cheddar Stacker 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.
Title: Re: Optimize Your Taxable Income
Post by: ender 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.