High Income earners, whats your Tax Strategy?

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tin369
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High Income earners, whats your Tax Strategy?

Post by tin369 » Wed Apr 05, 2017 9:25 am

Hi all,

My wife and I are maxing out 401k, but as our combined income is increasing, what other ways are there to save on taxes? I am interested to hear what some other high income earners are doing to save on taxes?

Cuzz35
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Re: High Income earners, whats your Tax Strategy?

Post by Cuzz35 » Wed Apr 05, 2017 9:31 am

I have alot of clients that invest in syndicated conservation easements.

They basically invest into a partnership that owns a piece of land that it later places an easement on. The valuations are based on highest and best use of the property and not it's raw fair market value. So most clients get a deduction between 4x and 4.5x of what they invest. The tax savings is usually double their investment meaning they MAKE a 100% return on their money. It sounds to good to be true but it's perfectly legal right now.

There is alot of risk that the IRS audits the partnership and adjusts the valuation used to determine the charitable deduction passed through to the investors. In addition the IRS has flagged these as listed transactions.

In addition your state may have various transferable tax credits which you can buy at a discount.

NotWhoYouThink
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Re: High Income earners, whats your Tax Strategy?

Post by NotWhoYouThink » Wed Apr 05, 2017 9:37 am

Charitable donations that provide 50% state tax credits, which I take in addition to the federal and state tax deductions.

High deductible health insurance with HSA.

ysette9
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Re: High Income earners, whats your Tax Strategy?

Post by ysette9 » Wed Apr 05, 2017 9:48 am

My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)

Probably not what you were looking for.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

TigerNest
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Re: High Income earners, whats your Tax Strategy?

Post by TigerNest » Wed Apr 05, 2017 9:50 am

I wish we had a better one. :-/

Our 2016 effective tax bracket was 38.2%, and our marginal tax rate is 51.8%. Such is life in the Bay Area.

I max out my 401(k), but my wife doesn't have access to one at work. We can't afford a house yet, California 529 plan contributions aren't tax deductible, and an HSA doesn't make sense for us. We do contribute to Health and Dependent Care FSAs, which help. That's about it though.

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lthenderson
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Re: High Income earners, whats your Tax Strategy?

Post by lthenderson » Wed Apr 05, 2017 9:55 am

Besides 401(k) we max out our kids 529 plans for our state tax deduction.

Phil DeMuth
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Re: High Income earners, whats your Tax Strategy?

Post by Phil DeMuth » Wed Apr 05, 2017 10:00 am

I recommend a diversified portfolio of zero-dividend stocks for taxable accounts. Research shows that zero-dividend stocks underperform the indexes pre-tax but outperform post-tax. This is un-Bogleheadish in that it is a tilt towards stockpicking, but very Bogleheadish in that it is research-based and emphasizes minimizing frictional expenses.

Steve723
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Re: High Income earners, whats your Tax Strategy?

Post by Steve723 » Wed Apr 05, 2017 10:02 am

One simple thing we do (where possible) is make charitable contributions with stock that has increased in value. That way we get the write-off on our income taxes AND we don't pay capital gains on the stock appreciation (and neither does the recipient if it's a non-profit).

WildBill
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Re: High Income earners, whats your Tax Strategy?

Post by WildBill » Wed Apr 05, 2017 10:08 am

ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)

Probably not what you were looking for.
This pretty much sums it up when you are in the accumulation phase. Alternative is to make less, but I never opted for that choice.

Details:

Maximize 401-K and IRAs

HSA if you can

Tax efficient index funds in taxable

ROTH if you can work it out

529 if it makes sense
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

ridebikeseveryday
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Re: High Income earners, whats your Tax Strategy?

Post by ridebikeseveryday » Wed Apr 05, 2017 10:10 am

ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)
I don't think this is really true, but it is a common misconception: https://en.wikipedia.org/wiki/List_of_c ... _tax_rates

If you sort by maximum, I think you'll find we're right in line with all other rich countries (in fact, if you live in California you'd pay more tax than e.g. Denmark in the highest brackets).

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bligh
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Re: High Income earners, whats your Tax Strategy?

Post by bligh » Wed Apr 05, 2017 10:13 am

- Always max out 401K and SEP IRA.
- Taxable investments are tax optimized based on advice on this board.
- Use IBonds and EE Bonds. The expectation is that I will be in a lower tax bracket by the time I begin cashing those in.
- 529 plans for my kids. Invested aggressively while they are still young. Will stop all contributions when they turn 10. Hope that gives them a good amount of time to accumulate gains that I can use tax free for their education.

One I have considered but not followed through on.... yet...
- Move from a super high tax state (CA) to a low or no income tax state (FL) or (TX).


Beyond that I just suck it up and pay the tax man what he is due and thank the universe for my good fortune.
Last edited by bligh on Wed Apr 05, 2017 10:17 am, edited 1 time in total.

monsterid
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Re: High Income earners, whats your Tax Strategy?

Post by monsterid » Wed Apr 05, 2017 10:17 am

Generating some self employment income and writing off appropriate expenses through Schedule C. Also opens up potential individual 401k options which could allow you to take advantage of difference between contribution + match at your day job and the $54k cap.

tin369
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Re: High Income earners, whats your Tax Strategy?

Post by tin369 » Wed Apr 05, 2017 10:54 am

How does HSA work, I do get my health insurance from work, so I don't think I can have a HSA, can I ?

badger42
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Re: High Income earners, whats your Tax Strategy?

Post by badger42 » Wed Apr 05, 2017 11:00 am

We keep it simple:

- Max out pre-tax 401(k)
- Max out mega backdoor Roth 401(k)
- Backdoor Roth IRA
- Donate appreciated stock, if there's a good opportunity
- Keep taxable in ETFs instead of traditional mutual funds, where you can more effectively defer capital gains
- Tax loss harvesting if/when there's anything to harvest
- Lots of lube (living in CA, paying Scandinavian tax rates for third world infrastructure)

NotWhoYouThink
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Re: High Income earners, whats your Tax Strategy?

Post by NotWhoYouThink » Wed Apr 05, 2017 11:03 am

Some company health insurance plans offer an HSA option. Ours lowers our co-pay and contributes to the HSA if we select that option.

ysette9
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Re: High Income earners, whats your Tax Strategy?

Post by ysette9 » Wed Apr 05, 2017 11:16 am

I though I posted a reply, but it seems to have gotten lost in the ether.
**
I don't think this is really true, but it is a common misconception: https://en.wikipedia.org/wiki/List_of_c ... _tax_rates

If you sort by maximum, I think you'll find we're right in line with all other rich countries (in fact, if you live in California you'd pay more tax than e.g. Denmark in the highest brackets).
Are we looking at the same data in the wiki article? When I sort by highest max tax rate, the US is #34 in the list, nowhere near the top. I realize that effective tax rates are not the same as max tax rates, but in fact they should be lower for most people. My own federal rate for my 2016 return was 22.7% for an AGI of $335k. Even though I live in CA my overall effective tax rate isn't up to the max for the US and isn't comparable to the countries higher up on the list.

Then again, we can't forget that comparing pure tax rates isn't an apples-to-apples comparison because they don't buy the same thing. I had hidden costs not carried by countries higher up in the tax list such as greatly increased healthcare, higher college tuition for my kid, fully shouldering the cost of childcare, little paid family leave (thank gods I am in CA or I would get nothing), and so forth.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

Gill
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Re: High Income earners, whats your Tax Strategy?

Post by Gill » Wed Apr 05, 2017 11:22 am

Cuzz35 wrote:I have alot of clients that invest in syndicated conservation easements.

They basically invest into a partnership that owns a piece of land that it later places an easement on. The valuations are based on highest and best use of the property and not it's raw fair market value. So most clients get a deduction between 4x and 4.5x of what they invest. The tax savings is usually double their investment meaning they MAKE a 100% return on their money. It sounds to (sic) good to be true but it's perfectly legal right now.

There is alot of risk that the IRS audits the partnership and adjusts the valuation used to determine the charitable deduction passed through to the investors. In addition the IRS has flagged these as listed transactions.

In addition your state may have various transferable tax credits which you can buy at a discount.
So I buy a piece of land for $1 million and then permanently dedicate it for charitable purposes using a value of $4 - $4.5 million? Sounds like an easy way to make money or else end up in prison once the IRS audits the scheme. :oops:
Gill

random_walker_77
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Re: High Income earners, whats your Tax Strategy?

Post by random_walker_77 » Wed Apr 05, 2017 11:32 am

Pretty much pay what we owe and not try to contort ourselves too much based on taxes. Don't let the tail wag the dog: I've held company stock options a little longer to try to get the relevant tax breaks, but lost more to market declines than I gained in tax savings.

However, we do bunch property tax payments and charitable deductions into alternating years. We contribute to HSA and LP-FSA's, and max out our 401k(s).

In our taxable investment accounts, we substituted the intermediate tax-exempt bond fund for total bond, and use the tax-exempt money market.

The most extreme was that, many years ago, we left the bay area for texas. Taxes were a minor but not insignificant part of that decision. It's saved us a lot of money though. We were surprised to see that our income didn't take a hit from that move, and continued to rise substantially as our careers progressed.

Flashes1
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Re: High Income earners, whats your Tax Strategy?

Post by Flashes1 » Wed Apr 05, 2017 11:41 am

The AMT costs us an additional $4k/per annum in taxes every 4/15----and I really don't like writing that check.

The inability to write-off my relatively high property taxes hurts me.

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House Blend
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Re: High Income earners, whats your Tax Strategy?

Post by House Blend » Wed Apr 05, 2017 12:53 pm

1. Learn enough to do your own taxes without software. (It's ok to use software to check your work.)

2. Spend some time reading Our Fine tax Publications, especially for issues that might not apply now, but could apply later.

finite_difference
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Re: High Income earners, whats your Tax Strategy?

Post by finite_difference » Wed Apr 05, 2017 1:16 pm

tycho wrote:
ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)
I don't think this is really true, but it is a common misconception: https://en.wikipedia.org/wiki/List_of_c ... _tax_rates

If you sort by maximum, I think you'll find we're right in line with all other rich countries (in fact, if you live in California you'd pay more tax than e.g. Denmark in the highest brackets).
Are you sure about that? Note that Denmark taxes start at 30%, so your effective tax rate could easily be higher. I am seeing its kind of a wash on the highest tax bracket for income taxes but note that Denmark has a lot of other taxes like 25% VAT, a tax of $3/gallon for gasonline, etc. Also I would be surprised if the Denmark tax code allows as many deductions as the US does.

You also picked one of the top 5 most expensive states in terms of taxes in the US (NY, NJ, CT, CA, WY.) Some states are significantly lower.

So I don't see how it is a misconception that the US has low taxes compared to other developed nations.

To the OP: To avoid taxes, dont move from California to Denmark, but do add kids :)
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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snackdog
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Re: High Income earners, whats your Tax Strategy?

Post by snackdog » Wed Apr 05, 2017 1:27 pm

The IRS has significantly cracked down on syndicated conservation easements. You may regret having been involved in any.

https://www.irs.gov/pub/irs-drop/n-17-10.pdf

Boglegrappler
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Re: High Income earners, whats your Tax Strategy?

Post by Boglegrappler » Wed Apr 05, 2017 1:41 pm

There isn't any good way to minimize your taxes beyond the pedestrian methods already mentioned.

The idea that truly wealthy people have the ability to do so Is misleading political rhetoric.

DVMResident
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Re: High Income earners, whats your Tax Strategy?

Post by DVMResident » Wed Apr 05, 2017 2:00 pm

We keep it simple:

- Max out pre-tax 401(k)
- Max out mega backdoor Roth 401(k)
- Backdoor Roth IRA
- Donate appreciated stock, if there's a good opportunity
- Keep taxable in ETFs instead of traditional mutual funds, where you can more effectively defer capital gains
- Tax loss harvesting if/when there's anything to harvest
- Lots of lube (living in CA, paying Scandinavian tax rates for third world infrastructure)
These are biggies. Adding less and less tax advantage:
-HSA
-529
-Using municipal and iBonds for taxable accounts
-Leveraged real estate investments (tax advantage overstated due to recapture taxes on sale, but if a sale can be squeezed in a low income year, can be valuable)

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dmcmahon
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Re: High Income earners, whats your Tax Strategy?

Post by dmcmahon » Wed Apr 05, 2017 2:06 pm

badger42 wrote:We keep it simple:

- Max out pre-tax 401(k)
- Max out mega backdoor Roth 401(k)
- Backdoor Roth IRA
- Donate appreciated stock, if there's a good opportunity
- Keep taxable in ETFs instead of traditional mutual funds, where you can more effectively defer capital gains
- Tax loss harvesting if/when there's anything to harvest
- Lots of lube (living in CA, paying Scandinavian tax rates for third world infrastructure)
Ditto to all of that. You missed out muni bonds, which I personally avoid but that are often used by high earners for the taxable side.

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randomizer
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Re: High Income earners, whats your Tax Strategy?

Post by randomizer » Wed Apr 05, 2017 2:59 pm

Muni and tax exempt bond funds in taxable.
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MikeG62
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Re: High Income earners, whats your Tax Strategy?

Post by MikeG62 » Wed Apr 05, 2017 3:20 pm

It is a high class problem, so first be happy you have it.

What I did:

1. Max out 401K,
2. Backdoor Roth "every year" (for you and your spouse),
3. Build large taxable brokerage accounts and fill with: (a) low cost, index ETF's or mutual funds (should be highly tax efficient) and (b) muni bonds (for fixed income exposure).

You'll be happy you have #3 if you retire early as it provides a very low tax cost source of funds to help fund living expenses. If you find yourself in this luxurious position, you should be able to do systematic partial Roth conversions (up to the top of the 15% tax bracket - current rules) from the time you early retire until you are required to take RMD's from your 401k/IRA. This is an excellent way to manage your taxes in retirement.
Real Knowledge Comes Only From Experience

RandomFly
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Re: High Income earners, whats your Tax Strategy?

Post by RandomFly » Wed Apr 05, 2017 3:36 pm

In addition to the traditional methods, a deferred comp plan ( NQDC) ... if your employer allows it.

badger42
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Re: High Income earners, whats your Tax Strategy?

Post by badger42 » Wed Apr 05, 2017 3:48 pm

dmcmahon wrote:
Ditto to all of that. You missed out muni bonds, which I personally avoid but that are often used by high earners for the taxable side.
We avoid those as well. We keep the short end of FI in treasuries in taxable (you get the state tax savings, which is substantial in CA), and the long end in iShares iBonds in pre-tax.

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steve roy
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Re: High Income earners, whats your Tax Strategy?

Post by steve roy » Thu Apr 06, 2017 12:39 am

tycho wrote:
ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)
I don't think this is really true, but it is a common misconception: https://en.wikipedia.org/wiki/List_of_c ... _tax_rates

If you sort by maximum, I think you'll find we're right in line with all other rich countries (in fact, if you live in California you'd pay more tax than e.g. Denmark in the highest brackets).
Depends on the prism through which you squint. Among OECD countries, U.S. taxes are low as a percentage of GDP. There are only three countries that are lower.

http://www.taxpolicycenter.org/briefing ... nationally

Individual rates, of course, vary with income, the number or write-offs, etc. We live in California and our state/federal income taxes are between 16-19%.

mass_biker
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Re: High Income earners, whats your Tax Strategy?

Post by mass_biker » Thu Apr 06, 2017 5:51 am

Ditto the NQDC strategy - I use this to offset when RSUs vest/pay out (as those are non-deferrable).

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Re: High Income earners, whats your Tax Strategy?

Post by Grt2bOutdoors » Thu Apr 06, 2017 6:27 am

RandomFly wrote:In addition to the traditional methods, a deferred comp plan ( NQDC) ... if your employer allows it.
Works really well if you leave your employer for any reason, including switching jobs, then it all gets paid out in one lump sum, potentially putting you in an even higher tax bracket! :oops:
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harvestbook
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Re: High Income earners, whats your Tax Strategy?

Post by harvestbook » Thu Apr 06, 2017 6:40 am

tycho wrote:
ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)
I don't think this is really true, but it is a common misconception: https://en.wikipedia.org/wiki/List_of_c ... _tax_rates

If you sort by maximum, I think you'll find we're right in line with all other rich countries (in fact, if you live in California you'd pay more tax than e.g. Denmark in the highest brackets).
But services received vary greatly by country. Getting free health care and paying more in taxes can generally be a better deal than paying high taxes and spending a ton of money on health insurance that you can't even really rely on because of all the loopholes. Sort of like saying a state with zero income tax is automatically better than a state with higher tax rate but low or zero sales tax. As with most things, "it depends."
I'm not smart enough to know, and I can't afford to guess.

mass_biker
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Re: High Income earners, whats your Tax Strategy?

Post by mass_biker » Thu Apr 06, 2017 6:56 am

Re: Works really well if you leave your employer for any reason, including switching jobs, then it all gets paid out in one lump sum, potentially putting you in an even higher tax bracket! :oops:

***

Some NQDC plans - like ours - have a feature that allow for a deferral of the distribution upon a separation of service - it is something prior employees have taken advantage of as a way to bridge working full time and the RMDs....

Spedward
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Re: High Income earners, whats your Tax Strategy?

Post by Spedward » Thu Apr 06, 2017 6:59 am

Cuzz35 wrote:I have alot of clients that invest in syndicated conservation easements.

They basically invest into a partnership that owns a piece of land that it later places an easement on. The valuations are based on highest and best use of the property and not it's raw fair market value. So most clients get a deduction between 4x and 4.5x of what they invest. The tax savings is usually double their investment meaning they MAKE a 100% return on their money. It sounds to good to be true but it's perfectly legal right now.

There is alot of risk that the IRS audits the partnership and adjusts the valuation used to determine the charitable deduction passed through to the investors. In addition the IRS has flagged these as listed transactions.

In addition your state may have various transferable tax credits which you can buy at a discount.
These are now listed transactions, rightfully so. Hopefully if you did have "clients" that invested in these in 2016, they appropriately disclosed as a tax shelter. Stay far away from this kind of crap.

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TomatoTomahto
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Re: High Income earners, whats your Tax Strategy?

Post by TomatoTomahto » Thu Apr 06, 2017 7:09 am

ysette9 wrote:My tax strategy basically boils down to "suck it up buttercup, and be grateful that you have a high salary and a relatively low tax burden as compared to almost all other rich countries". :)

Probably not what you were looking for.
Yup! Effective tax rate of 35% federal, 3% state, 7% sales tax, crazy property tax, FICA, FICA for household help. The craziest part is that I still feel grateful. Whether or not I think the money is being well used is outside the forum rules.

We have not participated in NQDC, and are glad. We would have deferred at relatively lower tax rates for what will be maximum rates. Except maybe for one employer whose financial situation is rocky, but I'm not sure what happens to NQDC, and am glad that our interest is purely academic.

We do a back door Roth for my wife every year; I'm unfortunately stuck with a tIRA that I can't roll into 401k.

oktax
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Re: High Income earners, whats your Tax Strategy?

Post by oktax » Thu Apr 06, 2017 7:21 am

Cuzz35 wrote:I have alot of clients that invest in syndicated conservation easements.

They basically invest into a partnership that owns a piece of land that it later places an easement on. The valuations are based on highest and best use of the property and not it's raw fair market value. So most clients get a deduction between 4x and 4.5x of what they invest. The tax savings is usually double their investment meaning they MAKE a 100% return on their money. It sounds to good to be true but it's perfectly legal right now.

There is alot of risk that the IRS audits the partnership and adjusts the valuation used to determine the charitable deduction passed through to the investors. In addition the IRS has flagged these as listed transactions.

In addition your state may have various transferable tax credits which you can buy at a discount.
You note these are now listed transactions. What you don't mention is the implications of this. You're required to disclose to the IRS your involvement in a listed transaction. If you don't file the required disclosures, you pay draconian penalties. In other words, you basically hand the IRS the information needed to tip them off to start an audit.

General rule of thumb: don't participate in listed transactions.

carolinaman
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Re: High Income earners, whats your Tax Strategy?

Post by carolinaman » Thu Apr 06, 2017 7:21 am

When I retired at age 66, 90% of my savings was in TIRAs and 401k. I am now 72 and seeing the impact of RMDs which will eventually push me into a higher tax bracket and increase Medicare Part B premiums substantially. As others have stated, I should consider myself lucky to have this problem.

I did back door Roth conversions for a couple of years before RMDs but I should have done more before my RMDs kicked in. If I do them now, it will substantially increase our Medicare Part B premiums. Also, I recently did an analysis of retirement/tax scenarios for both my wife and I as single taxpayers after the first of us dies. Taxes are a much bigger impact there as the tax rates are much higher. My regret is not doing this analysis 10 years ago and doing some backdoor Roths then. I followed the conventional Roth wisdom at the time which has proven wrong in my case.

My suggestion is that you not only consider tax strategies now, but also think about your taxes in retirement, and plan your retirement assets and income in a tax optimal manner.

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DaftInvestor
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Re: High Income earners, whats your Tax Strategy?

Post by DaftInvestor » Thu Apr 06, 2017 7:26 am

In addition to 401 (k) you can door a backdoor Roth (if you don't have a tIRA). HSA is great if you are eligible.
529 plans saved me a lot in taxes on gains (provided you have kids and are planning on paying for their college) - even though I didn't benefit from a state tax deduction the tax free gains have been great.
IBonds have been widely debated here - I started buying them as I believe my tax rate in retirement will let be less than it is now (and I like the inflation protection in addition to the tax deferral).
Others than that - not a lot of secrets.

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Peculiar_Investor
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Re: High Income earners, whats your Tax Strategy?

Post by Peculiar_Investor » Thu Apr 06, 2017 7:35 am

random_walker_77 wrote:Pretty much pay what we owe and not try to contort ourselves too much based on taxes. Don't let the tail wag the dog: I've held company stock options a little longer to try to get the relevant tax breaks, but lost more to market declines than I gained in tax savings.
I would totally agree here. I left Nortel in the summer of 2000 and had a great tax plan to exercise my remaining options in early 2001 to spread out the tax hit. It was an expensive but educational experience about the importance of don't let the tax tail wag the investment strategy dog.
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jambadoc
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Re: High Income earners, whats your Tax Strategy?

Post by jambadoc » Thu Apr 06, 2017 7:45 am

We just crossed into the top tax bracket this year. Here's been my plan (in no particular order):

1. Live in a state with no state income tax
2. Max 401(k) - recently switched to Roth 401(k) when it became available this year
3. Max Deferred compensation
4. Max family HSA and pay medical expenses cash
5. His/Her Backdoor Roth IRAs
6. Modest 529s for the kids (I'm a little concerned about over funding these - besides, not as significant an advantage in a state with no income tax)
7. Low turnover index funds in taxable (we're not there yet - paying off the house, personal preference)

All told, this is about 70k using our traditional 401k from last year in tax sheltered space or 52k for this year. It will drop a bit, but we're in our 30s and I think the Roth 401(k) will be better in the end (assuming it doesn't end up means-tested or something like that). Other than that, I don't think there's much to be done unless you're a small business owner or 1099 employee. This opens up a whole bunch of other stuff, but becomes more complicated.

Our effective tax rate last year (including real estate, est sales tax, payroll, income, etc) was a touch over 29%.

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TomatoTomahto
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Re: High Income earners, whats your Tax Strategy?

Post by TomatoTomahto » Thu Apr 06, 2017 7:53 am

jambadoc wrote:We just crossed into the top tax bracket this year. Here's been my plan (in no particular order):

1. Live in a state with no state income tax
2. Max 401(k) - recently switched to Roth 401(k) when it became available this year
3. Max Deferred compensation
[snip...]
I've always been tempted by the no-RMDs aspect of Roth (I know 401k Roth have RMD, but that's easy to fix). But, I still can't get around the thought of paying MAX tax bracket now, even if it's possible that tax bracket in the future might be even higher. So, for us, it's still traditional 401k.

random_walker_77
Posts: 600
Joined: Tue May 21, 2013 8:49 pm

Re: High Income earners, whats your Tax Strategy?

Post by random_walker_77 » Thu Apr 06, 2017 8:17 am

TomatoTomahto wrote:
jambadoc wrote:We just crossed into the top tax bracket this year. Here's been my plan (in no particular order):

1. Live in a state with no state income tax
2. Max 401(k) - recently switched to Roth 401(k) when it became available this year
3. Max Deferred compensation
[snip...]
I've always been tempted by the no-RMDs aspect of Roth (I know 401k Roth have RMD, but that's easy to fix). But, I still can't get around the thought of paying MAX tax bracket now, even if it's possible that tax bracket in the future might be even higher. So, for us, it's still traditional 401k.
yeah... if you're in the top tax bracket now, it usually doesn't make much sense to give up a deduction now in exchange for no taxes later. Usually, your income during retirement is lower and you'll be in a lower bracket by then, hopefully at lower rates.

If it's already taxed funds, say a traditional IRA that's nondeductible b/c you make too much, then a roth is clearly better.

jambadoc
Posts: 55
Joined: Thu Dec 15, 2011 4:03 am

Re: High Income earners, whats your Tax Strategy?

Post by jambadoc » Thu Apr 06, 2017 8:28 am

random_walker_77 wrote:yeah... if you're in the top tax bracket now, it usually doesn't make much sense to give up a deduction now in exchange for no taxes later. Usually, your income during retirement is lower and you'll be in a lower bracket by then, hopefully at lower rates.

If it's already taxed funds, say a traditional IRA that's nondeductible b/c you make too much, then a roth is clearly better.
As always, I appreciate the advice. I went back and fort a bit, and I understand there's some risk to it. However, its as much for the income diversification 30 years from now as it is from the future tax advantages. At this point, I can afford the 6k or so in taxes without too much difficulty. I've already got 35k in the deferred comp pre-tax so I thought there would be some value "spreading it around". I'm concerned about increasing tax rates in the future, and this is sort of hedge against that. I had thought of sort of "front loading" it for a few years and then re-evaluating.

malabargold
Posts: 489
Joined: Fri Aug 08, 2014 8:16 am

Re: High Income earners, whats your Tax Strategy?

Post by malabargold » Thu Apr 06, 2017 8:48 am

For taxable use brk or etfs tilted toward growth and small
cap to lower dividends

establish trusts for kids

Tax loss harvest in all taxable, including kids

Munis if that's your cup of tea

livesoft
Posts: 62241
Joined: Thu Mar 01, 2007 8:00 pm

Re: High Income earners, whats your Tax Strategy?

Post by livesoft » Thu Apr 06, 2017 8:49 am

My strategy was to stop earning high income because we had enough.
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TigerNest
Posts: 304
Joined: Mon May 10, 2010 12:58 pm

Re: High Income earners, whats your Tax Strategy?

Post by TigerNest » Thu Apr 06, 2017 9:07 am

jambadoc wrote:I think the Roth 401(k) will be better in the end (assuming it doesn't end up means-tested or something like that).
Another poor scenario for a Roth would be if in 30 years the US chooses to rely less heavily on income taxes and instead shifts to consumption taxes like a VAT or sales taxes.

travellight
Posts: 2780
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: High Income earners, whats your Tax Strategy?

Post by travellight » Thu Apr 06, 2017 10:48 am

Which etfs in taxable? I am in vbr and ijs.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: High Income earners, whats your Tax Strategy?

Post by avalpert » Thu Apr 06, 2017 10:55 am

TigerNest wrote:
jambadoc wrote:I think the Roth 401(k) will be better in the end (assuming it doesn't end up means-tested or something like that).
Another poor scenario for a Roth would be if in 30 years the US chooses to rely less heavily on income taxes and instead shifts to consumption taxes like a VAT or sales taxes.
What's more, doing traditional 401k allows you to retain the option of switching to Roth in the future when potential changes in tax structure become clearer - going with the Roth now is betting on a single outcome. Particularly if you are already at the max rate, using a Roth 401k makes no sense at all - even if you think it is likely that rates will be higher at some point in the distant future.

letsgobobby
Posts: 11474
Joined: Fri Sep 18, 2009 1:10 am

Re: High Income earners, whats your Tax Strategy?

Post by letsgobobby » Thu Apr 06, 2017 10:59 am

Max 403bs
backdoor Roth IRAs
529s
HSA
I bonds (tax deferred up to 30 years)
EE bonds (same)
municipal bonds
most importantly, don't live in a high tax state

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