Your tax situation is rather interesting.
$55,000 gross income
- $2,000 401k contribution
- $2,000 pre-tax health, dental, and disability insurance premiums withheld from your pay (or maybe zero if you're still covered by your parents' insurance)
$51,000 AGI --> under the phaseout for the student loan interest deduction, which starts at $55,000 ... so it may be at risk in future years as your pay increases
- $1,500 student loan interest deduction (I estimated this based on your loan sizes and rates)
- $6,100 standard deduction
- $3,900 personal exemption
$39,500 taxable income --> just into the 25% federal bracket, which starts at $36,250
Consider these interesting points:
- Depending on your precise gross income, you might be just into the 25% federal bracket or just inside the 15% bracket. Note that this determines how your marginal income is taxed, not your total income, e.g., on the top $1,000 of income you pay $250 of tax in the 25% bracket.
- Your state tax bracket is 7%. If you're in the 15% federal bracket, your state tax is a third of your marginal tax burden.
- In the 25% federal bracket, and assuming your state tax accommodates (doesn't add back in) the student loan interest deduction, your student loans effectively cost you only 68% of the nominal rate, so a 3.4% interest rate is effectively 2.3%, not bad. However, in the 15% federal bracket, 3.4% is effectively 2.65%.
- If your gross income exceeds $57,000, you start to be at risk of your AGI exceeding $55,000, which puts you in the student loan interest deduction phaseout. The phaseout effectively increases your marginal rate by 3.2%, because you're losing a $1,500 deduction over a $15,000 phaseout, which means you lose 10% of the deduction for each increment of income above $55,000 AGI, and the deduction is worth 32% because you're avoiding 25% federal and 7% state tax, so 10% x 32% = 3.2%. So in the phaseout your total marginal rate is 25% federal nominal + 7% state nominal + 3.2% effective tax due to the phaseout = 35%. 35% is a high marginal rate.
- Finally, NC allows you to make a state-tax-deductible Roth IRA contribution up to $2,000. If you are in the 15% federal bracket and can dodge the 7% state tax, a Roth contribution is pretty attractive. Read more about this here: viewtopic.php?f=10&t=86262 You are eligible for a deductible TIRA contribution provided your MAGI is under $59,000.
Your head may be spinning by now, but if you study these various factors and think hard about your true income and your true pre-tax insurance costs, you can do some clever tax mitigation. And tax mitigation can make you way more money than even choosing the right low cost investments. You can reduce your AGI and your taxable income by increasing your 401k contributions, so you have the power. Also, bear in mind that if you decide to do the state-deductible Roth IRA trick, you will shift $2,000 of income from 2013 to 2014 --> that has implications for how all these thresholds will affect you in both years, so be sure to optimize for multiple years, not just 2013.