Plan for reducing tax load -- am I missing anything obvious?

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Cely
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Plan for reducing tax load -- am I missing anything obvious?

Postby Cely » Tue Feb 12, 2013 11:47 am

My husband and I have a heftier tax bill than expected for 2012, so we are getting more serious about maximizing our deductions for this year. Loose plan below. Mostly wondering if I'm missing something big. We don't use a tax adviser but it might be time.

Backstory: we both work full time. Married two years, no kids. In 2012, I contributed the max to my 401k (no matching) and took zero deductions on my W-4. My husband also took zero deductions but did not contribute to a 401k (I know, I know) because he had no emergency fund and wanted to save 30K (my EF level) so we'd have an equal amount set aside. He hit that goal a month ago. His company was acquired last year so he had a small payout with no taxes withheld, which also upped our tax load. We invested 100K into a private real estate venture (too long to explain here); we earn dividends (6%) but reinvest them. We contributed about $3500 total to charity. I did a FSA through work for $800. We don't have IRAs, but we do have a down payment fund in an ING account, currently at 30K. We feed that every month and want to buy this year. (I own a condo, where we currently live, so we do get a tax break for that mortgage interest.)

This year, the plan is as follows:
Both of us are contributing the max to our 401ks.
I've already upped my FSA to $1200.
We changed our withholding to be "single" even though we're married, so more taxes are withheld up front.
Up the charity contributions to $5000.
Open a 529 for our yet-to-be-conceived child, using a relative's child as beneficiary until we have a child and can transfer (you're allowed to transfer once per year).

The last item is possibly controversial, but we are actively trying to have a child and would adopt should it not happen naturally. We can contribute up to 26K per year (if my research is right) and that would be second only to our 401ks in terms of tax benefit (not saying we contribute that much right away; we'd probably start with 5-10K).

Anything to add? Pick apart? Thanks!

indebtedlawyer
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby indebtedlawyer » Tue Feb 12, 2013 2:54 pm

Switching to single on the withholding is great, especially if you both make good money. We have to withhold at single and each of us has an additional $600 withheld each month because of the marriage penalty and AMT.

The only point I would make is that upping the charitable contributions does lower your tax bill, but it's a net loss of income for you because your deduction is on cash that is out the door. So upping to $5000 will result in you taking home less money than if it was at $3500.

Other point is that you should look at the 529s -- aren't they usually state specific? Worth thinking about if you ever could conceive of moving.

Bichon Frise
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Bichon Frise » Tue Feb 12, 2013 3:05 pm

indebtedlawyer wrote:Switching to single on the withholding is great, especially if you both make good money. We have to withhold at single and each of us has an additional $600 withheld each month because of the marriage penalty and AMT.

The only point I would make is that upping the charitable contributions does lower your tax bill, but it's a net loss of income for you because your deduction is on cash that is out the door. So upping to $5000 will result in you taking home less money than if it was at $3500.

Other point is that you should look at the 529s -- aren't they usually state specific? Worth thinking about if you ever could conceive of moving.


529 doesn't help your federal tax bill. A lot of 529's have crappy plans (read:high fees). It may or may not be worth the deduction. They are state specific, but you can use for any education expense. Moving is not an issue. You can continue to contribute to the plan once you move, but may or may not get a STATE tax benefit. In fact, anyone can contribute to any state's plan. Utah is usually the plan most people go to. You can also open up a 529 in your own name. Personally, I'd hold it as cash or max out your IRA contributions until a child actually comes. Adopting can be a difficult process as well.

take advantage of the deductions you have, but don't go out trying to create them.

Do you and your husband each have an emergency fund with $30k each? If so, why?
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

Cely
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Cely » Tue Feb 12, 2013 3:37 pm

Bichon Frise, I had a 30K EF from before we were married. He didn't have one, so wanted to save the same amount and form a joint EF. (He didn't want to "hitch a ride" on my EF, so to speak. :) )

Bichon Frise
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Bichon Frise » Tue Feb 12, 2013 4:36 pm

perhaps you needed a $60k e-fund?

sometimes, our egos are our worst enemies. seems a little childish, especially after "loosing" the opportunity to put money away into a 401k. hopefully, a match wasn't left on the table.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

Cely
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Cely » Tue Feb 12, 2013 5:29 pm

Bichon Frise, we do actually need a large EF because we both work for the same company, in the same office. I actually appreciated the fact that he wanted to join the EF club, it's a nice gesture of solidarity.

And never fear, no match was missed.

stannius
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby stannius » Tue Feb 12, 2013 6:00 pm

indebtedlawyer wrote:Switching to single on the withholding is great, especially if you both make good money. We have to withhold at single and each of us has an additional $600 withheld each month because of the marriage penalty and AMT.


Wasn't the marriage penalty mostly eliminated years ago?

VinTek
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby VinTek » Tue Feb 12, 2013 6:22 pm

stannius wrote:Wasn't the marriage penalty mostly eliminated years ago?

Nope. A quick check of the tax tables will confirm that for you. See here.

Bichon Frise
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Bichon Frise » Wed Feb 13, 2013 7:54 am

VinTek wrote:
stannius wrote:Wasn't the marriage penalty mostly eliminated years ago?

Nope. A quick check of the tax tables will confirm that for you. See here.


Not only the income tax tables, but how the higher tier(s) of LTCG/Div taxes are treated. It certainly isn't "times 2" in those cases.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

indebtedlawyer
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby indebtedlawyer » Wed Feb 13, 2013 8:29 am

stannius wrote:
indebtedlawyer wrote:Switching to single on the withholding is great, especially if you both make good money. We have to withhold at single and each of us has an additional $600 withheld each month because of the marriage penalty and AMT.


Wasn't the marriage penalty mostly eliminated years ago?


Hardly. Wife and I both make good amount of money, so are also hit by the AMT. If we weren't married and had filed as single filers, we would have paid ~$15,500 less in income taxes in 2012 than we did as married. It's really ridiculous to me in this day and age, especially since we have co-workers who cohabitate and make the same amount as us, but get to bring home $1k more a month. Anyway, that can be saved for a separate thread I suppose.

Latro
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Latro » Wed Feb 13, 2013 11:16 am

I'm a partner at a small business and our distributions this year were a lot higher than expected (Yipee!). Unfortunately we hadn't prepared for this earlier with taxes so we'll be writing a larger check in April. (Boo!).

I've gone through some online calculators and I don't seem to be getting any tax benefit for a full IRA contribution. Maybe income is too high for that deduction?

Do you suggest maxing out anyways? Or putting the money into a Roth IRA instead?

Bichon Frise
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby Bichon Frise » Wed Feb 13, 2013 12:16 pm

Latro wrote:I'm a partner at a small business and our distributions this year were a lot higher than expected (Yipee!). Unfortunately we hadn't prepared for this earlier with taxes so we'll be writing a larger check in April. (Boo!).

I've gone through some online calculators and I don't seem to be getting any tax benefit for a full IRA contribution. Maybe income is too high for that deduction?

Do you suggest maxing out anyways? Or putting the money into a Roth IRA instead?


Say you're a farmer and you buying seeds from me. Everything else being equal, which would you choose? Seed A you "buy" it from me today, but never have to give me any of your crop. Seed B, you "buy" at the same price as seed A, but you then 10% of your crop. Which one would you choose? Don't spend too much time thinking about it.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

stannius
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Re: Plan for reducing tax load -- am I missing anything obvi

Postby stannius » Wed Feb 13, 2013 2:27 pm

Latro wrote:I'm a partner at a small business and our distributions this year were a lot higher than expected (Yipee!). Unfortunately we hadn't prepared for this earlier with taxes so we'll be writing a larger check in April. (Boo!).

I've gone through some online calculators and I don't seem to be getting any tax benefit for a full IRA contribution. Maybe income is too high for that deduction?

Do you suggest maxing out anyways? Or putting the money into a Roth IRA instead?


What I suggest is starting your own thread for this, which is mostly a separate topic.

What do you mean by "don't seem to be" and "maybe"? Figure it out for sure!

Do you get any deduction? Is it phased out? Is your income too high to contribute to a Roth directly?


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