One question I have for the experienced folks here is about tax strategy. So much of what I read about on blogs re: tax minimization strategy assumes you (whether single or a married couple) have pretty much zero income. But for those with a spouse that is still working, are there qualitatively different approaches and does anyone spend a lot of time working on them (and want to share)? Or just basically the same idea of staying within the lowest possible brackets?
I basically need to play around with our tax liabilities as a married couple with one large income and one small (I have a pension paying out now, so I won't be at zero even alone) and wondering if there are any tips I should keep in mind.
I know you mentioned seeking from those that have had one person fire. We've not but Ive done lots of modelling.
Our situation may be: enough for lean fire but one spouse that likes to work as an independent contractor for project based work. Currently full time but can scale up/down and sometimes it happens no matter what. Income from that is equivalent to about an $80k w2 job.
Firstly, it's incredibly situational so I'm just describing my findings. Yours may be very different.
While earning that much, health care optimization for our family of 3 is a big deal. Meanwhile, executing some 401k to Roth conversions is also important. I found that the ideal path was alternating high/low income years where low is around $40k magi for aca and high is around $77k taxable income which corresponds to the top of the fed 12% bracket where 0% ltcg stops
The reason is that is if we go low, we get big aca subsidization but we are likely actually spending down some of our post tax assets. If we go high, we can replenish the Roth ladder. Meanwhile, if we go steady state, the aca subsidy is disproportionately low due to the phase out being non linear.
Note that we choose to keep our mortgage due to mid 3's interest rate and as such our cash demands are somewhat higher than the average fire model with paid off home.
As to the how... Here's our bag of tricks:
* We have an i401k. We can deposit about $33k to $37k per year pre tax. That plus STD dedn pushes our income quite low.
* we have a solid Roth balance but need more and want to keep the pretax accts in check so Roth conversions are the likely strategy to bring income up.
* Wildcard that I'm still processing... Section 199 business income deduction applies to us, reducing taxable income from the business by 20%. Not sure how that will alter the interconnected Dynamics like aca qualification but I do know that in our low years, we will lose all benefit since you need some earned income. For us to get a full dedn value, I need to convert around $36k from a 401k to Roth while we'll see half of that as an addt dedn. That may not play well if it moves our low year from $40k magi to $58k magi.
* We also have some capital gains potential to do tax loss or gain harvesting. And it appears likely we'll have a large carry forward capital loss we can selectively use.
* I've not modelled yet how paying off our mortgage would affect things. Lowering our cash demands may allow us to stay in low magi point a lot more and the loss of leverage on the home may be offset by greater tax efficiency. I worry that tax efficiency, especially via aca, is pretty subject to change while I'll never get a mid 3's 29 year mortgage again.
Anyway, to truly optimize this requires a very specific analysis of your situation including:
* Cash flow needs.
* Break down of post tax, no tax, pre tax assets including run down rates on them.
* Consideration of future changes including income/spend events (e.g. college, SS, inheritience, etc).
* Identification of tools available (e.g. Roth ladder, HSA, i401k or sep, cap gains, donor advised fund, etc).
* Tons of math, time, and tolerance for tax speculation.
If that sounds fun, good for you (and me). If not, accept a simpler model without obsessing over perfect tax optimization. Perfect, in my scenario, only yields a pretty modest effective tax rate reduction. Maybe not worth the time especially considering I get it slightly wrong on occasion (sometimes my fault, sometimes last minute business income that I can't anticipated).
Fwiw, a few months ago, I made a spreadsheet that incorporates all of my tools and performs full 1040, sch a, c, aca, and several worksheets based on 2018 rates and how I read tax code changes. That was incorporated into a broader 10 year projection of cash flows, market returns, and projected balances. Probably my best spreadsheet ever technically. I played with lots of scenarios and found it useful in understanding Dynamics of different levers. It did reinforce how they worked but long term effective rates of our optimal strategy, as I said, didn't reduce all that much.
I hope this helps some but I'm sorry it's pretty non specific in terms of clear conclusion.