Owe $4k in taxes / Got $4k room left in IRA contribution limit

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stimulacra
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Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by stimulacra » Thu Mar 09, 2017 1:37 pm

Hi everyone.

That time of the year again. I didn't withhold enough from my taxes for 2016 so owe roughly $4k in taxes.

Trying to maximize all my deductions and it looks like if I maximize my contributions to my traditional IRA (I've contributed $1,500 in 2016) it'll roughly cut my tax bill by a third.

It'll be a bit of a stretch financially to make this happen (March will be a lean month) but wanted to see what the Boglehead community think is the best approach.

Note: for 2017 I plan on maxing out my IRA, HSA, and 401k and adjusting my withholding.

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tdhg566
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by tdhg566 » Thu Mar 09, 2017 1:42 pm

I'm always thankful that during our primary working years, my wife insisted that we max out 401K and IRA contributions, her spousal IRA included. It's not like we kept a ledger or monitored what would have happened if we had not, but I'm sure we ended up better off.
As an Enrolled Agent I advise clients about taxes and investments. My work is retiree friendly, geographically portable, mentally stimulating, personally profitable and emotionally rewarding.

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CAsage
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by CAsage » Thu Mar 09, 2017 1:45 pm

More IRA is a long term win! Can you just transfer the money from your (of course you have one...) emergency fund and then build that back up over the year, kind of repurposing it? Cuts your taxes due and the (less important) penalty for underwithholding.
Otherwise, scrub your deductions well, and do better next year! I find it useful to estimate my taxes for each year, twice a year ahead is good.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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stimulacra
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by stimulacra » Thu Mar 09, 2017 2:39 pm

CAsage wrote:Can you just transfer the money from your (of course you have one...) emergency fund and then build that back up over the year, kind of repurposing it?
I think that's my plan. I've already dipped into it twice already this year (auto repair / overseas remittance) and was replenishing it slowly.

In the big scheme of things this isn't a huge deal, just an interesting dilemma to ponder. I'm making the necessary calibrations for 2017 :sharebeer

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stimulacra
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by stimulacra » Thu Apr 13, 2017 3:48 pm

Just filed my taxes today. Was able to take more deductions than I initially thought.

Ended up maxing out my IRA for 2016 and owing the IRS $700 in taxes.

Definitely intend to max out all available tax-advantaged accounts for the remainder of 2017.

I appreciate everyone's feedback.

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celia
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by celia » Thu Apr 13, 2017 4:01 pm

stimulacra wrote:Owe $4k in taxes / Got $4k room left in IRA contribution limit
Just to be clear to other readers, if you deduct $4K from your taxable income (by contributing to a traditional IRA), that lowers your taxable income by that amount. It DOES NOT LOWER YOUR TAXES by that amount. Your taxes will be lowered differently depending on what your tax bracket is.

For example, if you are in the 25% tax bracket, deducting $4K from your income will save you 25% of $4K (or $1,000) from your federal taxes. If you have a state tax, it too will be lowered similarly.

In OP's case, (s}he not only lowered his/her income by contributing to a traditional IRA, but he ALSO took other deductions that lowered his income.

KATNYC
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Re: Owe $4k in taxes / Got $4k room left in IRA contribution limit

Post by KATNYC » Fri Apr 14, 2017 3:36 pm

We were in the same position due to a withholding error in 2016 that was later corrected.
We maxed out 2 IRAs for 2016 this week & adjusted 2017 withholdings.
We still owe IRS about 50% of the initial amount but the state refund will cover it with a net gain.

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