Would you do anything different in our tax situation?

[Roland of Gilead]

Reading some of the other threads about people paying low or no taxes just makes me want to double check that we are not missing anything. 

Married, one earner, no children, no mortgage

Gross $245,000 (variable a bit because of bonus)
401K $17,500
HSA $4,450 (employer puts in $2000)
Standard deduction $12,200
Personal exemptions $7,800
Dividends $5000

Taxable income: $213,050

Federal tax: $47,000

We do the backdoor Roth thing but no deduction for that.  Fairly mustachian I guess since we live on about $25,000 per year.   I don't see a lot we can do differently...do you?  I pay our medical bills with 2% cash back credit card and pay it off every month...I have the HSA invested in VTI and don't touch it.  The taxable account has started throwing off pretty serious dividends but at least there are no realized capital gains because I don't trade it.

[SwordGuy]

If you have a business on the side, and it makes money every X years (ask your accountant, I forget), you can deduct business expenses.

The key to making this work for you (assuming you don't actually make money on it! :) ), is to have a side business where you would have bought the items anyway.

[Catbert]

Well, you could adopt me for deduction.  Or would that be weird?

What do you do with the rest of your money other than pay taxes?  You might be one of the few people for whom whole life insurance might be a decent deal.  Only those with high income, a need for life insurance and already maxing out everything else should even think about whole life.

Given your tax bracket you might want to do traditional IRAs rather than Roths.  Seems likely your income tax bracket will be lower when your retire.

Is there a reason you haven't bought a house?  Property taxes and mortgage interest is deductible.  Not worth buying just for the deduction, of course. 

[SwordGuy]

I'm assuming you are under 50.  At 50, you can put in an extra $5000.

Can you start a business and pay your wife a salary from the business?  Put her whole salary into a 401k and generously match it.   :) 

[Gray Matter]

Well, you could adopt me for deduction.  Or would that be weird?

Mary--love your sense of humor!

I don't have any advice that will help you lower taxes--sorry.  If I were in your situation, I'd probably thank my lucky stars that I have to pay so much in taxes, because it means I make a heck of a lot of money. 

(I mean that in the nicest possible way, and don't blame you for wanting to lower your tax burden.)

[Roland of Gilead]

Thanks for the responses.  I know we are fortunate to have a great income but nobody really wants to pay more taxes than they can.  Even Buffett doesn't seem to write a check to the IRS for extra, though he complains he pays too little.

A few details:

My wife makes the money, not me.  Sexist, Swordguy :-)

Traditional IRA would not help as you don't get a deduction at our income level.

We do own a house, but paid it off early.

We are age 43 and 44 so can't do the extra catch up contributions.

[aj_yooper]

The good news is when you retire, you will be paying way lower capital gains taxes! 

Is it possible for the bonus money to be paid in stock options or for the employer to pay into the 401k?

[2527]

Get the smallest, easiest job possible which allows you to fund another 401K?

[Siamond]

Yeah, not much opportunity for a tax break with such high income.

With such a salary though, there might be a remote chance that your employer offers a Deferred Compensation Plan (DCP, 409a), where you can put aside some of your salary and/or bonuses pre-tax, let it grow, and the day you early-retire (with your crazy high savings, this can't be that far?), you get such money back over a few years, and it will then be taxed much lower because of your new tax bracket. This could strongly lower your current taxes... This also provides cash for the first few years of retirement, hence allowing your portfolio to keep growing untouched. Very good deal.

Now this is quite a bet that you have to think twice about (as Enron or Nortel execs painfully discovered), as if the company goes bankrupt, you can say 'bye bye' to such deferred revenue.

If your company doesn't provide any such plan, the 401k provider (Fidelity or else) probably does, so you may want to lobby your company to introduce such benefit...

[kkbmustang]

Yeah, not much opportunity for a tax break with such high income.

With such a salary though, there might be a remote chance that your employer offers a Deferred Compensation Plan (DCP, 409a), where you can put aside some of your salary and/or bonuses pre-tax, let it grow, and the day you early-retire (with your crazy high savings, this can't be that far?), you get such money back over a few years, and it will then be taxed much lower because of your new tax bracket. This could strongly lower your current taxes... This also provides cash for the first few years of retirement, hence allowing your portfolio to keep growing untouched. Very good deal.

Now this is quite a bet that you have to think twice about (as Enron or Nortel execs painfully discovered), as if the company goes bankrupt, you can say 'bye bye' to such deferred revenue.

If your company doesn't provide any such plan, the 401k provider (Fidelity or else) probably does, so you may want to lobby your company to introduce such benefit...

One of those deferred comp plans work ONLY if it is subject to a substantial risk of forfeiture as defined in 409A. Translation: you could lose it. If I'm given the option of taxable cash now and deferred taxable cash subject to a SROF, which one do you think you'd prefer? NQDC plans are used to handcuff people to their jobs because you can't just up and quit and still get the compensation.

I'd go for cash now but subject to tax EVERY SINGLE TIME.

[Siamond]

One of those deferred comp plans work ONLY if it is subject to a substantial risk of forfeiture as defined in 409A. Translation: you could lose it. If I'm given the option of taxable cash now and deferred taxable cash subject to a SROF, which one do you think you'd prefer? NQDC plans are used to handcuff people to their jobs because you can't just up and quit and still get the compensation.

I'd go for cash now but subject to tax EVERY SINGLE TIME.

Yes, as I mentioned, this is indeed quite a bet. Now if you're one or 2 years from retirement, the company is pretty stable and successful, and you took care of limiting the time period for distribution to 2 or 3 years max, then the risk vs reward equation may be worth it. But you have to weigh it very carefully, that is for sure...

[RootofGood]

Looks pretty good overall. 

I went through my tax checklist.  You could make babies with your wife for a couple extra deductions. 

No, seriously, the only thing I can suggest is running any dental or vision expenses through a FSA (if available).  You can do that on top of maxing a HSA.  But only dental and vision, not medical expenses.

Also, look into tax loss harvesting.  For example: http://www.madfientist.com/tax-loss-harvesting/

You can write off up to $3000 each year from capital losses and carry over any losses year to year.  I do this every year and have about $16,000 carried over for 2014.  Mostly from TLH'ing during 2008-2009, but some from more recently.  It sounds like your taxable portfolio is around a quarter million, so it might not be too hard to find $3k in losses.  And next time the market takes a big dip, lock in some losses. 

[Roland of Gilead]

I had harvested about $30,000 in losses in 2009/2010 but this year I did a bit of market timing in one of the accounts and ended up with $25,000 in short term gains (a 62% return though).  So I will have the ability to deduct $3000 against ordinary income at least this year.  I am probably not going to do any more trading in that account next year as I have converted it to VTI recently.

[RootofGood]

I had harvested about $30,000 in losses in 2009/2010 but this year I did a bit of market timing in one of the accounts and ended up with $25,000 in short term gains (a 62% return though).  So I will have the ability to deduct $3000 against ordinary income at least this year.  I am probably not going to do any more trading in that account next year as I have converted it to VTI recently.

I'd lock in some losses if we have a dip.  Easy easy money! 

[Roland of Gilead]

I don't need many years of losses because we are going to try the early retirement thing in a couple of years.  I have projected we will have around $1,300,000 and need around $35,000 a year for living expenses.   Considering a good $400,000 of our taxable account is already taxed money with little gains (as of now), we will not be paying much if any taxes when we ER (figure $25,000 of dividends and capital gains along with $10,000 of stashed cash per year).  Losses would actually hurt us as I want to generate enough capital gains in our early retirement to get above 133% of FPL for ACA subsidy.  I would prefer not to be on Medicaid.

Some might consider us crazy to leave a $240,000 a year income but we want to adventure a bit and really don't need that much money to be happy.

[Trirod]

Don't think there's that much you can do in that situation.  Probably the most important thing is to ensure that your taxable investment accounts are tax efficient, but I assume they are since you reference VTI a couple of times.

One other thought.  I assume you are in a state with no income taxes if you are taking the standard deduction at that income level.  If you are philanthropically minded at all, you might want to make a large charitable contribution to a donor advised fund while you are still raking in the big bucks (and get a good deduction for it).  Then once you are retired and don't need the deductions, you can gradually make distributions to your favorite charities from the fund.

That's all I've got.

[kkbmustang]

One of those deferred comp plans work ONLY if it is subject to a substantial risk of forfeiture as defined in 409A. Translation: you could lose it. If I'm given the option of taxable cash now and deferred taxable cash subject to a SROF, which one do you think you'd prefer? NQDC plans are used to handcuff people to their jobs because you can't just up and quit and still get the compensation.

I'd go for cash now but subject to tax EVERY SINGLE TIME.

Yes, as I mentioned, this is indeed quite a bet. Now if you're one or 2 years from retirement, the company is pretty stable and successful, and you took care of limiting the time period for distribution to 2 or 3 years max, then the risk vs reward equation may be worth it. But you have to weigh it very carefully, that is for sure...

Those agreements have very specific triggers for payout and if you fail to follow the rules in 409A the individual, not the company, is subject to an enormous excise tax. For example, you can't "retire" if the agreement doesn't specify that a payment trigger will be retirement as defined by the employee. It's usually retirement in the traditional sense of the word. Either 55 and 10 years of service or SS retirement age or retirement age as defined under a 401(k) plan. Also, separation from service is just as specifically defined. It's doesn't mean the same thing as a termination of employment. This is complicated stuff and it's not just oh, I'll retire early and get my deferred cash. It doesn't work that way.

[rocketman48097]

Not sure your situation, if you are self employed you should be doing a defined benefit pension plan.  I assume you are a dr. so if you are part of a practice your practice should adopt one of these. 

If you are employed then I think you are doing a good job, not much you can do other than perhaps saving as much as you  can.  Also, if your spouse has no income, she still might be eligible for a tax deductible IRA.  I would do that if the law allows it.

Source:  I am a CPA but not a tax accountant. 

[Roland of Gilead]

Again, wife is the one bringing home the bacon.  She is a senior software engineer at megacorp.

She does fund a IRA for me, but it is not deductible.  We roll them over into Roths.

I didn't think there was much we could do but be happy with our income and just hand Uncle Sam a new Lexus every year, but just wanted to double check.  RootofGood is my tax hero.

[RootofGood]

Again, wife is the one bringing home the bacon.  She is a senior software engineer at megacorp.

She does fund a IRA for me, but it is not deductible.  We roll them over into Roths.

I didn't think there was much we could do but be happy with our income and just hand Uncle Sam a new Lexus every year, but just wanted to double check.  RootofGood is my tax hero.

Yay!  I'm someone's hero! 

You're getting the royal screwing right now, but you'll turn the tables and join me in early retirement and not pay taxes (or not much anyway).

[aj_yooper]

I don't need many years of losses because we are going to try the early retirement thing in a couple of years.  I have projected we will have around $1,300,000 and need around $35,000 a year for living expenses.   Considering a good $400,000 of our taxable account is already taxed money with little gains (as of now), we will not be paying much if any taxes when we ER (figure $25,000 of dividends and capital gains along with $10,000 of stashed cash per year).  Losses would actually hurt us as I want to generate enough capital gains in our early retirement to get above 133% of FPL for ACA subsidy.  I would prefer not to be on Medicaid.

Some might consider us crazy to leave a $240,000 a year income but we want to adventure a bit and really don't need that much money to be happy.

As I understand things, you can take the losses when you want, no obligation to take them when you don't want them.  Tax gains when you are at 15% bracket can place you exactly where you want to be on income level.  Also, see madfientist on tax harvesting and tax loss strategies:  http://www.madfientist.com

[rocketman48097]

Another thing you can do is itemize every other year.  Since taxes are on the cash basis, you can double up on property tax payments one year, and double up on state income tax payments as well as prepay one month's mortgage interest.  This assumes your income isn't high enough for itemized deductions to be "phased out," which hopefully your not too high. 

This strategy only makes sense when your mortgage interest paid is not enough to itemize every other year, because in the "off" years you simply take the standard deduction.

(For the record, I am doing this strategy this year and will prepay January's mortgage sometime in late December, the IRS allows this, one extra month of interest if you prepay).  next year, and perhaps every year after that, I will simply take the standard deduction as the interest I pay each year goes down on my mortgage and the standard deduction goes up each year. 

[geekette]

She does fund a IRA for me, but it is not deductible.  We roll them over into Roths.

I'm apparently getting confused about the benefits of Traditional vs. Roth IRAs.  If your IRA is not deductible, why start with Traditional and roll it over - why not just start with a Roth?

[okashira]

Another thing you can do is itemize every other year.  Since taxes are on the cash basis, you can double up on property tax payments one year, and double up on state income tax payments as well as prepay one month's mortgage interest.  This assumes your income isn't high enough for itemized deductions to be "phased out," which hopefully your not too high. 

This strategy only makes sense when your mortgage interest paid is not enough to itemize every other year, because in the "off" years you simply take the standard deduction.

(For the record, I am doing this strategy this year and will prepay January's mortgage sometime in late December, the IRS allows this, one extra month of interest if you prepay).  next year, and perhaps every year after that, I will simply take the standard deduction as the interest I pay each year goes down on my mortgage and the standard deduction goes up each year.

Holy crap, I have never heard of this before.

My mortgage interest and property tax are not high enough on their own to overcome standard deduction... but if I can pay 2 years of property tax in 1 year, then this could save me a lot of money.

So basically, for next year, all I should do is pay my property tax as late as possible for this year (February) then for next year, pay as early as possible (November) then I can count both events in one year???


Edit: and to OP... can't you contribute $35000 to your 401(k) ?

[RootofGood]

For skip year itemizers, double check that you won't be screwing yourself on state taxes.  I live in a high state income tax state, and I have done the skip year itemizing to save a small amount on fed taxes, but then paid back most of it on state taxes.  It still worked in my favor (about $100 net in tax savings), but don't save $400 on fed taxes only pay an extra $500 on state taxes. 

My situation was such that I barely had enough to itemize even doing skip years, so only had a tiny incremental fed tax savings vs. taking the std deduction.

[okashira]

For skip year itemizers, double check that you won't be screwing yourself on state taxes.  I live in a high state income tax state, and I have done the skip year itemizing to save a small amount on fed taxes, but then paid back most of it on state taxes.  It still worked in my favor (about $100 net in tax savings), but don't save $400 on fed taxes only pay an extra $500 on state taxes. 

My situation was such that I barely had enough to itemize even doing skip years, so only had a tiny incremental fed tax savings vs. taking the std deduction.

No state income tax here.

[Undecided]

She does fund a IRA for me, but it is not deductible.  We roll them over into Roths.

I'm apparently getting confused about the benefits of Traditional vs. Roth IRAs.  If your IRA is not deductible, why start with Traditional and roll it over - why not just start with a Roth?

Because there's an income limit for being permitted to make contributions to (but, for the past few years, not conversions to) a Roth IRA.

[Ellen]

[quote author=RootofGood link=topic=10060.msg159086#msg159086 date=1382984877

You're getting the royal screwing right now, but you'll turn the tables and join me in early retirement and not pay taxes (or not much anyway).

[/quote]

I hope I don't sound snarky, but is a person making $250K gross and paying about 20% of that in taxes really receiving a "royal screwing?"

[Undecided]

I hope I don't sound snarky, but is a person making $250K gross and paying about 20% of that in taxes really receiving a "royal screwing?"

I'm for progressive taxes on the basis of lifetime, rather than annual, income, so "it depends."

[RootofGood]

I hope I don't sound snarky, but is a person making $250K gross and paying about 20% of that in taxes really receiving a "royal screwing?"

His tax bill is double his living expenses.  I'll leave the reader to draw their own conclusions.

Our household made $100k less and paid nearly zero tax.

OP also doesn't work (his wife does) and I imagine a part of the reason is the marginal benefit of working is less than the marginal cost of working, commuting, taxes, etc.  I would prefer a tax system that incentivizes productivity.   

[Ellen]

What's the connection between low living expenses and income taxes? I'm seriously confused. Because he and his wife live on 1/10 her gross (which is awesome for a whole host of reasons), they should pay less in taxes? Her earnings put her in the top ... what, 1% of earners in the U.S. (individual not household income) ... and she pays 20% in income tax.

[HokieInPa]

Roland,
We are in almost the exact same situation, except dual earners to get to where you are with one salary :o(
I haven't found anything yet to reduce our taxes by any noticeable amount (many of which other posters have already ).

Good luck, but I'm not sure there is much out there to help your situation

[Undecided]

What's the connection between low living expenses and income taxes? I'm seriously confused. Because he and his wife live on 1/10 her gross (which is awesome for a whole host of reasons), they should pay less in taxes? Her earnings put her in the top ... what, 1% of earners in the U.S. (individual not household income) ... and she pays 20% in income tax.

You assume that income, rather than consumption, or wealth, or something else, should be the basis for taxation. That's how it is, but not necessarily how it has to be.

[Ellen]

Yes, well we are talking about "income" taxes. Do other countries do it differently? Are there other "developed" countries that have lower taxes and high income potential?

[RootofGood]

Yes, well we are talking about "income" taxes. Do other countries do it differently? Are there other "developed" countries that have lower taxes and high income potential?

Singapore and Hong Kong come to mind.  20% and 15% max income tax rates (respectively), and per capita GDP at or above the US levels.

[Roland of Gilead]

Yes, well we are talking about "income" taxes. Do other countries do it differently? Are there other "developed" countries that have lower taxes and high income potential?

Some countries use a VAT...but they also have income taxes so probably don't want to go down that path.

I am not *totally* upset to be paying taxes, I just want to pay the smallest amount legally required.  Even Warren Buffett said he pays a lower rate than his secretary.

[NinetyFour]

But Warren Buffet has said that he *should* be required to pay more taxes. 

[Roland of Gilead]

Heh, well, Warren can Google the address where he can send extra taxes.  I am sure they would take them.

It will all balance out in the end because we will benefit from taxpayers in the future (due to things like saver's credit, ACA subsidy, and maybe even a little earned income credit).  So we pay now, get money from the government later.  I can't complain too much about that.