How to reduce my income tax

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IADFlyer
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How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 10:24 am

Hello Everyone –

I’d like to get your insights on how we can possibly reduce our federal and state income tax burden or more efficiently plan for upcoming increases to our taxable income. Between daycare expense going away and rental property income, 2017 taxable income will rise by $22K (rent) and rise again by another $12K (daycare) in 2018. Here are some details below that I could think of:

Two Federal Employees: Husband - 37/ Wife - 42
Dependents: Two (9/4)

2016 Annual Salary: $252K
2016 Adjusted Gross: $199.5K
2016 Taxable: $150.5K
2016 Federal Tax: 29K
2016 Virginia Tax: 9K

TSP (401K) Aggregate Values $675K – Both income earners max contributions
Flexible Spending Account: Child $5K/Medical $1.5K
Child Care: $12K (one year left)
Donations: $4K of goods
Real Estate & Personal Prop Tax: $7.5K

2016 Mortgage and HELOC Interest: $10.5K
1. Primary Home Value $560,000
Loan Info $373,500 @ 2.75% - 15 years (current balance $291,800/ 11 years left)
2. HELOC: $70K @ 4% Interest Only

2017 Future Income – Just purchased rental property. Will produce $22,000 beginning in 2017
Rental Home Value $330,000
Loan Info $260,500 @ 3.875% - 30 years (current balance $259,750/ 30 years left)

Thank you for any help you can provide.

The Wizard
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Re: How to reduce my income tax

Post by The Wizard » Thu Apr 20, 2017 10:49 am

I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%.

We do have a progressive Federal income tax, so no getting away from that.
Perhaps focus more on what you have for net income after tax and try to keep your basic monthly expenses controlled well enough that you have excess income each month...
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IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 11:00 am

The Wizard wrote:I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%...

I definitely didn't do this for the income. It was to assist an aging parent. Nonetheless, we have additional income now because of it. I do like rentals though, and have had them in the past so I hope that future value will be beneficial in retirement.

informal guide
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Re: How to reduce my income tax

Post by informal guide » Thu Apr 20, 2017 11:14 am

Have you considered a high deductible health plan, coupled with a health savings account?

I found the health savings account (HSA) to be great - - if contributions are deducted from your pay, it is truly triple tax free -- unlike 401k accounts, one doesn't even pay FICA and Medicare taxes on the dollars going into the HSA. I pay health care up to the deductible from other sources, so I invest the HSA in Vanguard funds. It was another way to save, while reducing my taxable income by $7750 per year (I am over 55, with family coverage). I have been doing it for many years, investing in Vanguard Wellington and Balanced Index; my account balance just crossed into 6 figures, so lots of my retirement health care will have good funding.

Read the WIKI for more details.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 12:43 pm

informal guide wrote:Have you considered a high deductible health plan, coupled with a health savings account?

I found the health savings account (HSA) to be great - - if contributions are deducted from your pay, it is truly triple tax free -- unlike 401k accounts, one doesn't even pay FICA and Medicare taxes on the dollars going into the HSA. I pay health care up to the deductible from other sources, so I invest the HSA in Vanguard funds. It was another way to save, while reducing my taxable income by $7750 per year (I am over 55, with family coverage). I have been doing it for many years, investing in Vanguard Wellington and Balanced Index; my account balance just crossed into 6 figures, so lots of my retirement health care will have good funding.

Read the WIKI for more details.

I'll need to look into the HSA and HDHP more. Thanks a lot.

retiredjg
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Re: How to reduce my income tax

Post by retiredjg » Thu Apr 20, 2017 3:27 pm

I don't see many ways to reduce your income tax myself. The HSA could help, but only if that type of health plan is available to you and appropriate for your family's needs. It is not for everybody.

You could look at I Bonds which can be tax-deferred for up to 30 years.

Mostly, I think you need to see it as a good problem to have and not worry about it too much.

I would not suggest looking at things like tax-deferred annuities - fees are too high.

delamer
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Re: How to reduce my income tax

Post by delamer » Thu Apr 20, 2017 3:37 pm

Contribute to 529 plan for VA state tax deduction.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 3:40 pm

retiredjg wrote: Mostly, I think you need to see it as a good problem to have and not worry about it too much.


You are absolutely correct.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 3:43 pm

delamer wrote:Contribute to 529 plan for VA state tax deduction.


Sorry, failed to mention that we do contribute to 529s for each child.

mmarreco
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Re: How to reduce my income tax

Post by mmarreco » Thu Apr 20, 2017 3:51 pm

IADFlyer wrote:
The Wizard wrote:I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%...

I definitely didn't do this for the income. It was to assist an aging parent. Nonetheless, we have additional income now because of it. I do like rentals though, and have had them in the past so I hope that future value will be beneficial in retirement.


The rental property will not necessarily affect your tax bill. You are allowed to deduct depreciation on top of all the expenses. That will be roughly $12,000/year. You will be paying another $10,000 in interest at the beginning of the loan. Add property taxes, insurance, maintenance, commissions, etc - I wager you will have a taxable loss for quite some time.

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celia
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Re: How to reduce my income tax

Post by celia » Thu Apr 20, 2017 3:59 pm

IADFlyer wrote:Between daycare expense going away and rental property income, 2017 taxable income will rise by $22K (rent) and rise again by another $12K (daycare) in 2018.

What do you mean daycare expense are going away and they will rise by $12K. Sounds contradictory.

IADFlyer wrote:
The Wizard wrote:I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%...

I definitely didn't do this for the income. It was to assist an aging parent.

Another possible contradiction: how does making an aging parent pay almost $2,000 for their housing assist them?

bigred77
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Re: How to reduce my income tax

Post by bigred77 » Thu Apr 20, 2017 4:00 pm

If you can get your federal income tax burden down around an effective rate of 12.5% on a gross income of over 250k than I think your doing really well.

mmarreco
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Re: How to reduce my income tax

Post by mmarreco » Thu Apr 20, 2017 4:40 pm

Child Care - I assume the $12K is for one child only. You are not getting a deduction for the whole $12K, I believe there is a $3K limitation per year, therefore you will are losing only a $3K deduction not the full $12K.

If you are eligible for an HSA account you can shield another $6,750/year.

You don't have a lot of deductions, so consider itemizing every other year. You can time your property taxes payments and donations so they only occur every 2 calendar years and on the year in between you take the standard deduction.

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unclescrooge
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Re: How to reduce my income tax

Post by unclescrooge » Thu Apr 20, 2017 4:49 pm

mmarreco wrote:Child Care - I assume the $12K is for one child only. You are not getting a deduction for the whole $12K, I believe there is a $3K limitation per year, therefore you will are losing only a $3K deduction not the full $12K.

If you are eligible for an HSA account you can shield another $6,750/year.

You don't have a lot of deductions, so consider itemizing every other year. You can time your property taxes payments and donations so they only occur every 2 calendar years and on the year in between you take the standard deduction.


+1

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unclescrooge
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Re: How to reduce my income tax

Post by unclescrooge » Thu Apr 20, 2017 4:52 pm

mmarreco wrote:
IADFlyer wrote:
The Wizard wrote:I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%...

I definitely didn't do this for the income. It was to assist an aging parent. Nonetheless, we have additional income now because of it. I do like rentals though, and have had them in the past so I hope that future value will be beneficial in retirement.


The rental property will not necessarily affect your tax bill. You are allowed to deduct depreciation on top of all the expenses. That will be roughly $12,000/year. You will be paying another $10,000 in interest at the beginning of the loan. Add property taxes, insurance, maintenance, commissions, etc - I wager you will have a taxable loss for quite some time.


+1

More specifically, let's assume the value of the land is $55k and your improvements are worth $275k. Deducting these over 27.5 years gives a $10k/yr depreciation "loss".

I don't see you making $22k in taxable income for a long time. In fact, with a high enough mortgage, you'll have passive activity losses that you'll be able to deduct against your regular income for a while. :beer

integrity
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Re: How to reduce my income tax

Post by integrity » Thu Apr 20, 2017 7:39 pm

IADFlyer: I'm impressed with the way you've reduced your taxes already. Would you mind sharing any additional thoughts on how you reduced a gross income of 252K to an AGI of 200K and a taxable amount of 151K? My Married-Filing-Jointly family had a similar gross income, but we paid a lot more tax. The key difference I see between our situation is that you have mortgage income to deduct, whereas I take the standard deduction.
Thank you kindly.
--integrity

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 8:17 pm

mmarreco wrote:The rental property will not necessarily affect your tax bill. You are allowed to deduct depreciation on top of all the expenses. That will be roughly $12,000/year. You will be paying another $10,000 in interest at the beginning of the loan. Add property taxes, insurance, maintenance, commissions, etc - I wager you will have a taxable loss for quite some time.

I thought we would not get to make use of the taxable loss from the rental because our AGI is greater than $150K? Or at least not use it to offset our earned income.

flanders81
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Re: How to reduce my income tax

Post by flanders81 » Thu Apr 20, 2017 8:21 pm

IADFlyer wrote:
mmarreco wrote:The rental property will not necessarily affect your tax bill. You are allowed to deduct depreciation on top of all the expenses. That will be roughly $12,000/year. You will be paying another $10,000 in interest at the beginning of the loan. Add property taxes, insurance, maintenance, commissions, etc - I wager you will have a taxable loss for quite some time.

I thought we would not get to make use of the taxable loss from the rental because our AGI is greater than $150K? Or at least not use it to offset our earned income.


Correct. You'll have to carry forward your losses do to income.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 8:32 pm

celia wrote:What do you mean daycare expense are going away and they will rise by $12K. Sounds contradictory.

Our 4 year old will go to public school. No need to pay for child care any longer, thus the expense goes away. I mistakenly said my income would go up 12K instead of what I meant, which was that I would lose 12K of deductions. That misunderstanding was since corrected by a member saying that only ~ 3K is actually deductible.

celia wrote:Another possible contradiction: how does making an aging parent pay almost $2,000 for their housing assist them?

Because money wasn't the issue.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Thu Apr 20, 2017 8:35 pm

mmarreco wrote:You don't have a lot of deductions, so consider itemizing every other year. You can time your property taxes payments and donations so they only occur every 2 calendar years and on the year in between you take the standard deduction.

I don't understand this. Care to elaborate?

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High Income Parent
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Re: How to reduce my income tax

Post by High Income Parent » Thu Apr 20, 2017 8:56 pm

IADFlyer wrote:
celia wrote:What do you mean daycare expense are going away and they will rise by $12K. Sounds contradictory.

Our 4 year old will go to public school. No need to pay for child care any longer, thus the expense goes away. I mistakenly said my income would go up 12K instead of what I meant, which was that I would lose 12K of deductions. That misunderstanding was since corrected by a member saying that only ~ 3K is actually deductible.

celia wrote:Another possible contradiction: how does making an aging parent pay almost $2,000 for their housing assist them?

Because money wasn't the issue.


My understanding of the child care credit is it is 20% of $3000 so you get $600 less.
Along with the rental propert really only returning around $11,000 a year since most, taxes, insurance and general repair costs eat up 50% of your rent. Then deduct the mortgage interest and the depreciation and you are probably pretty close to zero taxable income on the rental property.
If I understand your post correctly your taxes should only increase a few hundred dollars next year.
You could start a donor advised fund if you do any charitable giving and take care of that last bit of higher taxes. Hope that helps.
Children are not a distraction from more important work. They are the most important work. | | C. S. Lewis

JGoneRiding
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Re: How to reduce my income tax

Post by JGoneRiding » Thu Apr 20, 2017 10:42 pm

unclescrooge wrote:
mmarreco wrote:
IADFlyer wrote:
The Wizard wrote:I'm not sure that purchasing that rental property to get even more taxable income was the best idea, but I'm just not sure. Putting that $$ into a tax efficient index fund might have been better, producing untaxed growth in coming years along with dividends taxed at 15%...

I definitely didn't do this for the income. It was to assist an aging parent. Nonetheless, we have additional income now because of it. I do like rentals though, and have had them in the past so I hope that future value will be beneficial in retirement.


The rental property will not necessarily affect your tax bill. You are allowed to deduct depreciation on top of all the expenses. That will be roughly $12,000/year. You will be paying another $10,000 in interest at the beginning of the loan. Add property taxes, insurance, maintenance, commissions, etc - I wager you will have a taxable loss for quite some time.


+1

More specifically, let's assume the value of the land is $55k and your improvements are worth $275k. Deducting these over 27.5 years gives a $10k/yr depreciation "loss".

I don't see you making $22k in taxable income for a long time. In fact, with a high enough mortgage, you'll have passive activity losses that you'll be able to deduct against your regular income for a while. :beer


He isn't eligible, any passive activity losses will have to carry forward until his income is less than 150k. BUT the depreciation is worth more to him because it is deducted out at his top tax bracket and then paid back at a max of 25%

Fishing50
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Re: How to reduce my income tax

Post by Fishing50 » Fri Apr 21, 2017 12:42 am

He isn't eligible, any passive activity losses will have to carry forward until his income is less than 150k. BUT the depreciation is worth more to him because it is deducted out at his top tax bracket and then paid back at a max of 25%


How is passive activity loss carry forward treated during sale of the property?
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

The Wizard
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Re: How to reduce my income tax

Post by The Wizard » Fri Apr 21, 2017 2:42 am

Fishing50 wrote:
He isn't eligible, any passive activity losses will have to carry forward until his income is less than 150k. BUT the depreciation is worth more to him because it is deducted out at his top tax bracket and then paid back at a max of 25%


How is passive activity loss carry forward treated during sale of the property?

The depreciation part reduces the basis in the property, thus increasing the eventual capital gain on it when sold.
Also, selling a rental property some years ago was the one and only time I got pushed into AMT...
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SGM
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Re: How to reduce my income tax

Post by SGM » Fri Apr 21, 2017 2:57 am

The first $2100 of a child's investment income is taxed at the child's rate. The first $1050 is not taxed and the next $1050 likely at 10%.

Traveler
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Re: How to reduce my income tax

Post by Traveler » Fri Apr 21, 2017 5:42 am

My first thought was, why is he complaining? I grossed $142K, taxable was $125K and I paid $28K in federal and $7K in state. You're getting off easy. Us single people with relatively high income are the ones paying more than our "fair" share of taxes. Not necessarily a bad problem to have.

keystone
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Re: How to reduce my income tax

Post by keystone » Fri Apr 21, 2017 6:02 am

Look into getting a dependent care FSA if it's available through your employer. The tax benefit will be superior to deducting 3K for the dependent care credit.

Edit - I see that you list 5k for child's FSA. Assuming that is for dependent care, then you would be ineligible for the 3k child care credit.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Fri Apr 21, 2017 8:18 am

integrity wrote:IADFlyer: I'm impressed with the way you've reduced your taxes already. Would you mind sharing any additional thoughts on how you reduced a gross income of 252K to an AGI of 200K and a taxable amount of 151K? My Married-Filing-Jointly family had a similar gross income, but we paid a lot more tax. The key difference I see between our situation is that you have mortgage income to deduct, whereas I take the standard deduction.
Thank you kindly.
--integrity

Getting the gross down was a matter of taking advantage of as much pre-tax items as possible, namely health insurance, maxing out retirement, and flexible spending accounts.

Getting our taxable down was based on itemized deductions for all taxes paid, mortgage interest paid (not on rental) and charity...plus our exemptions.

If we had a 30yr mortgage, we would have paid more interest...resulting in an even larger deduction likely bringing our taxable below $150K and being able to take some benefit from the rental losses. I don't think the juice is worth the squeeze on that exercise though.

IADFlyer
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Re: How to reduce my income tax

Post by IADFlyer » Fri Apr 21, 2017 8:22 am

Traveler wrote:My first thought was, why is he complaining? I grossed $142K, taxable was $125K and I paid $28K in federal and $7K in state. You're getting off easy. Us single people with relatively high income are the ones paying more than our "fair" share of taxes. Not necessarily a bad problem to have.

I'm definitely not complaining. I am just trying to take advantage of the tax laws as they are currently written. We each should.

Da5id
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Re: How to reduce my income tax

Post by Da5id » Fri Apr 21, 2017 8:33 am

SGM wrote:The first $2100 of a child's investment income is taxed at the child's rate. The first $1050 is not taxed and the next $1050 likely at 10%.


Is this a suggestion to gift the kids money to avoid paying taxes on the investment earnings and make use of the lower tax rates on first ~2K? You can of course do that but:

1) this is a gift, you can't legally just take it back later. However as custodian of a UMTA you could spend it for things that are for the child's benefit.
2) lots of money in kids name is awful for financial aid under current rules, but OP may end up with too many assets for that anyway.

If you want to give your kids money, do that. Not sure it is worthwhile as a tax management plan though, as you are giving money away to achieve tax reductions.

BackOfTheNet
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Re: How to reduce my income tax

Post by BackOfTheNet » Fri Apr 21, 2017 8:44 am

Your situation is very similar to ours (you are about 4 years ahead) so thanks for the thread. Our stats below for comparison but its seems like you are doing pretty good for the extra income.

One Federal Employee Husband - 33/ Wife - 33
Dependents: Two (5/3)

2016 Annual Salary: $205k
2016 Adjusted Gross: $165k
2016 Taxable: $133K
2016 Federal Tax: 25K
2016 State Tax: 5K

SGM
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Re: How to reduce my income tax

Post by SGM » Fri Apr 21, 2017 2:34 pm

Da5id wrote:
SGM wrote:The first $2100 of a child's investment income is taxed at the child's rate. The first $1050 is not taxed and the next $1050 likely at 10%.


Is this a suggestion to gift the kids money to avoid paying taxes on the investment earnings and make use of the lower tax rates on first ~2K? You can of course do that but:

1) this is a gift, you can't legally just take it back later. However as custodian of a UMTA you could spend it for things that are for the child's benefit.
2) lots of money in kids name is awful for financial aid under current rules, but OP may end up with too many assets for that anyway.

If you want to give your kids money, do that. Not sure it is worthwhile as a tax management plan though, as you are giving money away to achieve tax reductions.


Absolutely you are giving the money away. Many parents want to gift their children. A down side to having an UTMA as it will decrease the ability to get scholarship money based on need. However, it does reduce your income tax in the interim. Our kids would not have been able to get financial aid based on need anyway.

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