Tax tips for dual, high income household

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Gemini
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Tax tips for dual, high income household

Post by Gemini » Thu Dec 03, 2015 10:53 am

I am reading Sandy Botkin's lower your taxes big time book. He presents some interesting ideas and creative ideas on how to save on taxes. As a dual income household, I am always trying to further my knowledge on how to best save on taxes.

The book advocates one should keep a "tax diary". Do any of you keep a tax diary? If so, where did you purchase the diary and how detailed is it?

Sandy also advocates a home-based business as it leads to multiple tax benefits. I already went ahead and go this started.

Any other ideas? Is it really more than "max out your pre-tax accounts" or "earn less"? :wink:

When, if ever, is paying a tax advisor worth it? Speaking of tax advisors - I don't really know of too many. Only two people come to mind - Sandy Botkin and Jim Lange - none of them local.

livesoft
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Re: Tax tips for dual, high income household

Post by livesoft » Thu Dec 03, 2015 11:01 am

The same old, old same advice always applies:
livesoft wrote:From an old locked thread:
livesoft wrote:Y'all aren't trying hard to reduce your taxes. I"ve posted this list of things you can do to reduce your taxes several times before:

1. Earn less money or quit your job. Lower income means lower taxes.
2. Lose big time in the stock market. We all now know that we can deduct some losses against ordinary income.
3. Get married and have lots of kids. You get more exemptions and maybe even the child tax credit.
4. Get the biggest house and biggest mortgage you possibly can. You can deduct the interest payments on Schedule A.
5. That big house should come with huge property taxes which can be deducted on Schedule A.
6. Give away your money to charity (you got this one right).
7. Pay an accountant to do your tax return for you, but you have to pay them alot because only the amount above 2% of AGI is deductible. Same goes for an investment advisor.
8. Don't have any interest-bearing accounts in your taxable side of things. You don't want to get any taxable interest that would drive your taxes up!
9. Get really sick and pay for your treatment yourself. You can deduct any medical expenses above 7.5% of your AGI.
10. Poke your eyes out. If you are blind, you get an extra exemption. You will probably need medical attention (see #9).
11. Grow old. If you are over 65, you get an extra exemption.
12. Move to a high tax state like NY or CA. You can deduct state income taxes (I'm not sure about sales taxes in 2008 anymore).
13. Contribute pre-tax the max allowed to your retirement plans. You can't even hold some money back for expenses if you really want to reduce your taxes.
A couple more:

14. Rental real estate that loses lots of money.
15. Participate in a Deferred compensation plan.

#8 above is another way of saying don't have any income on the top half of Schedule B. If you look at your tax return, get rid of accounts that give you income on the top half of Schedule B and try to have only qualified dividends which go on the bottom half of Schedule B or no dividends and no interest at all.

My bottom line is that most tax-saving schemes cost you more money than the taxes that you would save.
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AWH_CPA
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Re: Tax tips for dual, high income household

Post by AWH_CPA » Thu Dec 03, 2015 11:03 am

Pay early and often. :)

Don't forget that spending a dollar to get a deduction is a losing strategy. Don't forget your "home office" needs to be used exclusively for business to qualify as a deduction. IE: if it's a spare bedroom that guests stay in it doesn't qualify. Maybe the 2' by 5' desk would qualify but not the whole room.

I've been a CPA for 8 years now. I can assure you that for two people who earn their income from wages there is very little you can do besides maxing tax advantaged space and giving money to charity. If you own a business, there might be some additional things you can do like purchasing equipment that qualifies for special depreciation rules etc. But at the end of the day, most tax saving strats still cost you a dollar to save 50 cents in tax. A losing proposition.

MikeZ
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Re: Tax tips for dual, high income household

Post by MikeZ » Thu Dec 03, 2015 11:10 am

From all I've read, if both your incomes are W-2, you don't have a ton of options outside retirement/HSA accounts. The only one that jumps to mind is if your employer can reimburst you for some personal expenses (overtime meals, car allowance, cell phone, home office expenses, etc.).

As far as a home based business, my wife does do some independent contracting from home and as a result, it does result in us being able to write off some expenses, but those really didn't help out tax savings because those were real business expenses that she used to work. She went W-2 with that company and makes more now that we don't have to deal with the self employment tax. Having a business to generate tax losses is a terrible idea, think about something you want to do first and worry about the taxes latter.

I would say the main thing to consider is rental property. One nice benefit is you can write off travel expenses to inspect the property and there are specific rules about permissible side trips that you can include in the travels.

SouthernCPA
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Re: Tax tips for dual, high income household

Post by SouthernCPA » Thu Dec 03, 2015 11:13 am

AWH_CPA wrote:Pay early and often. :)

Don't forget that spending a dollar to get a deduction is a losing strategy. Don't forget your "home office" needs to be used exclusively for business to qualify as a deduction. IE: if it's a spare bedroom that guests stay in it doesn't qualify. Maybe the 2' by 5' desk would qualify but not the whole room.

I've been a CPA for 8 years now. I can assure you that for two people who earn their income from wages there is very little you can do besides maxing tax advantaged space and giving money to charity. If you own a business, there might be some additional things you can do like purchasing equipment that qualifies for special depreciation rules etc. But at the end of the day, most tax saving strats still cost you a dollar to save 50 cents in tax. A losing proposition.
Agree. High earners from W2 income have the least options. In general, doing something you otherwise wouldn't do (such as taking out a large mortgage or starting a business) JUST for tax savings is a losing proposition. Down here in the south there must be some "guru" that teaches the medical professionals to all start farms because it seems I always have a doctor couple that went out and bought land and started a "farm" to try and get Schedule F losses. Then the hobby loss rules begin to apply and they are mad at me. I also have a lot of docs that get tax advice from other docs in their hospital. Usually it's bad advice because it's almost always a spend $1 to save $.50 type proposition.

Grt2bOutdoors
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Re: Tax tips for dual, high income household

Post by Grt2bOutdoors » Thu Dec 03, 2015 11:14 am

Avoid, I repeat, AVOID anyone who claims to have tax reduction strategies involving your retirement plans or has found some loophole in the 2015 Budget Reconciliation Act that was recently passed into law. There are no loopholes that have not been discussed ad infinitum on this site and you don't have to pay for it to utilize them.

Avoid actively managed mutual funds, master limited partnerships, REITS, taxable bonds in your taxable accounts.

Maximize your tax-deferred retirement options including using a backdoor Roth account, HSA. Use index funds for taxable accounts. Use tax-exempt bond funds in taxable.

Do not fall for the "taking out a large mortgage will save you money" routine. It will not, instead it will leave you in "hock" for a long, long time. You will get back a quarter for every dollar you spend. Sound good? Great! You give me $10,000, I'll give you back $2,500. You've just paid for my European vacation next year! :twisted:
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JDCarpenter
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Re: Tax tips for dual, high income household

Post by JDCarpenter » Thu Dec 03, 2015 11:42 am

DW and I have been in your shoes since 1980s. We never found a reasonable way to reduce taxes in your situation except for: 1) aggressively funding retirement accounts; 2) one person quits working for 15 years to raise kids; and, anticipatory, 3) retirement.

Home based business and/or rental properties weren't workable for us--if your professions have reasonable time/travel/call demands, maybe different for you.

As Livesoft [and others] indicates, many of the touted options to reduce taxes may not be cost effective.

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vitaflo
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Re: Tax tips for dual, high income household

Post by vitaflo » Thu Dec 03, 2015 12:08 pm

AWH_CPA wrote: Don't forget that spending a dollar to get a deduction is a losing strategy. Don't forget your "home office" needs to be used exclusively for business to qualify as a deduction. IE: if it's a spare bedroom that guests stay in it doesn't qualify. Maybe the 2' by 5' desk would qualify but not the whole room.

I've been a CPA for 8 years now. I can assure you that for two people who earn their income from wages there is very little you can do besides maxing tax advantaged space and giving money to charity. If you own a business, there might be some additional things you can do like purchasing equipment that qualifies for special depreciation rules etc. But at the end of the day, most tax saving strats still cost you a dollar to save 50 cents in tax. A losing proposition.
This. Beyond maxing retirement/HSA accounts, the rest are mainly paying money to save on taxes (IE, pay $1 to save 50c). Even home office deductions can mean paying taxes on depreciation deductions when you sell the house. It's not "free".

The goal shouldn't be trying to reduce taxes in and of itself. It should be reducing expenses. This will in turn reduce taxes, but it leaves you with more money in your pocket than simply trying to "save the most on taxes". Buy the things you actually need, and take the deductions for them if you can. But don't overspend on things in order to save on taxes, you're just throwing your money away.

surfstar
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Re: Tax tips for dual, high income household

Post by surfstar » Thu Dec 03, 2015 12:27 pm

I complete my tax diary once a year. A copy for the Feds and for CA. ;)


Tips:
congratulate yourselves for having such a wondrous problem
have kids if you want

Rupert
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Re: Tax tips for dual, high income household

Post by Rupert » Thu Dec 03, 2015 12:32 pm

As a criminal defense lawyer, I have lots of clients with ingenious ideas about how to qualify for the Earned Income Tax Credit. PM me and I'll hook you up. :wink:

Dulocracy
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Re: Tax tips for dual, high income household

Post by Dulocracy » Thu Dec 03, 2015 1:27 pm

Rupert wrote:As a criminal defense lawyer, I have lots of clients with ingenious ideas about how to qualify for the Earned Income Tax Credit. PM me and I'll hook you up. :wink:
I like the way you made that point.

OP: Asset location is the biggest thing that you can look at. As was mentioned, keeping REITs out of taxable, etc. is important.

IF you were looking at real estate investing, there are some tax advantages in owning rental properties. There are strategies in doing this that will legally allow you more control over taxes. I would NOT go into real estate investing for tax purposes, though. I would ONLY go into real estate investing if you were going to do it anyway. Real estate investing is NOT passive investing.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

edge
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Re: Tax tips for dual, high income household

Post by edge » Thu Dec 03, 2015 3:19 pm

There isn't that much to do assuming 2 high income earnings e.g. 2 doctors, 2 directors/executives, 2 high powered lawyers

1) Correct asset placement, tax efficient investments in taxable accounts
2) Max out retirement plans with tax advantages
3) Back door Roth if possible
4) Tax loss harvest
5) Itemize, charitable gifts & mortgage (first and/or second home). Most everything else is phased out with AMT.
6) Rental property depreciation, if that is the way you want to handle the taxes of it and if you want to own rental property (not my cup of tea)
7) Corporate tax deferred plans (can be risky in bankruptcy proceedings, deferment can 'spring' given certain M&A activity)
8) Depending on your particular healthcare options a HSA may make sense
9) Depending on your family situation a dependent care FSA may make sense
10) Same as 8 but for healthcare FSA
11) If you have kids, then 529. Especially if your state has a good plan and they allow you to deduct state income tax

Some of what livesoft proposed doesn't really apply if you actually are high income and subject to AMT every year (IMO, if you have dual income earners and you aren't subject to AMT, then your income isn't actually high). Things like having more kids clearly isn't driven by tax savings but with AMT there is no direct tax benefit either.

Other ideas involving insurance (can have some advantages as wealth transfer in niche scenarios but very little utility during accumulation) or other 'tax adviser' schemes involving asset purchases for the purpose of recognizing losses typically are very painful and the marginal benefit is questionable (some posters gave examples like the ridiculous farm one). For those types of decisions to make sense you have to be getting value for the deductible spend.

Things/tactics would be different if you got a huge stock grant vs. having high sustainable income.

Gemini
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Re: Tax tips for dual, high income household

Post by Gemini » Fri Dec 04, 2015 9:25 am

Glad to see I am not missing much.The book makes it seem like there are some "insider" ideas that only certain tax advisors are aware of.

I am still in the "pay off student loans - max out retirement accounts" phase.

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Artsdoctor
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Re: Tax tips for dual, high income household

Post by Artsdoctor » Fri Dec 04, 2015 10:58 am

Gemini,

Actually, there's quite a bit you can do to reduce your taxes.

First, you need to really understand tax rules. You may not be able to change your income much, but you can definitely understand the ramifications of that income. Learn the rules and buy tax software. You need to understand exactly what your marginal rate might be in order to make investment decisions that are tax-efficient.

Second, don't lose sight of what your investment goals are. It's easy to fall into a trap of making decisions based solely on taxes, but that's not the priority.

You can definitely become a tax-loss harvest wizard. This will not only reduce your AGI by $3,000 each year, but your carryover losses will go on for years and years, and you'll avoid capital gain taxes during your high-income years.

Definitely understand the dividends paid out in your taxable account. They may be qualified, but they still influence your AGI.

Definitely understand munis. Make sure you understand what you're investing in, but munis will become your friend.

clutchied
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Re: Tax tips for dual, high income household

Post by clutchied » Fri Dec 04, 2015 11:12 am

Gemini wrote:I am reading Sandy Botkin's lower your taxes big time book. He presents some interesting ideas and creative ideas on how to save on taxes. As a dual income household, I am always trying to further my knowledge on how to best save on taxes.

The book advocates one should keep a "tax diary". Do any of you keep a tax diary? If so, where did you purchase the diary and how detailed is it?

Sandy also advocates a home-based business as it leads to multiple tax benefits. I already went ahead and go this started.

Any other ideas? Is it really more than "max out your pre-tax accounts" or "earn less"? :wink:

When, if ever, is paying a tax advisor worth it? Speaking of tax advisors - I don't really know of too many. Only two people come to mind - Sandy Botkin and Jim Lange - none of them local.
While I think it is important to consider taxes in an overall strategy; I do not think a strategy that focuses exclusively on taxes is appropriate.

With that being said; you can run dependent care FSA's if you have kids, all your healthcare comes out pre-tax. Both of you and your spouse should be maxing pre-tax 401k's.

Giving to charities in your community.

Funding an HSA fully if available.

Other than that you can have rentals that can help with taxes but the deduction phases out @ $150,000 and suspends all losses till sale if you phaseout.

Starting a home business solely for tax purposes is not a good idea and is likely to get you audited.


I do most of the things on this list except the home business and my tax rate is so abysmally low it's almost not even of value anymore.

On a gross income of like $150k we paid maybe $5k in Fed taxes.

Cuzz35
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Re: Tax tips for dual, high income household

Post by Cuzz35 » Fri Dec 04, 2015 11:45 am

Depending on how high your income is, you could invest in a conservation easement. Basically, you put $1 in and get a $4 charitable deduction. The $4 deduction saves you $1.5 to $2 depending on your state tax rate if you're in the highest federal tax bracket. I'll let others chime in on this who will be able to explain this in greater detail.

Some states have transferable credit programs that let you buy state tax credits for less than 100%. In my state of GA the most common credits I see individuals purchase is film and low income housing. Low income housing prices are anywhere from $0.75 to $0.85 and film credits are around $0.90.

Roothy
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Re: Tax tips for dual, high income household

Post by Roothy » Fri Dec 04, 2015 11:55 am

If you haven't gotten married, don't. If you have, you're out of luck--the IRS doesn't look kindly on sham divorces.

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LiveSimple
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Re: Tax tips for dual, high income household

Post by LiveSimple » Fri Dec 04, 2015 12:06 pm

livesoft wrote:Y'all aren't trying hard to reduce your taxes. I"ve posted this list of things you can do to reduce your taxes several times before:
10. Poke your eyes out. If you are blind, you get an extra exemption. You will probably need medical attention (see #9).
ROFL, on Livesoft's "Poke your eyes out. If you are blind, you get an extra exemption. You will probably need medical attention (see #9). "

I assume livesoft missed something like this " Carry cash $50+k, and get mugged and robbed. Claim tax deduction through "Report casualty and theft losses Form 4684" Repeat multiple times for more tax gains.
Last edited by LiveSimple on Mon Dec 07, 2015 12:23 pm, edited 1 time in total.

Gemini
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Re: Tax tips for dual, high income household

Post by Gemini » Sun Dec 06, 2015 9:18 am

Artsdoctor wrote:Gemini,

Actually, there's quite a bit you can do to reduce your taxes.

First, you need to really understand tax rules. You may not be able to change your income much, but you can definitely understand the ramifications of that income. Learn the rules and buy tax software. You need to understand exactly what your marginal rate might be in order to make investment decisions that are tax-efficient.

Second, don't lose sight of what your investment goals are. It's easy to fall into a trap of making decisions based solely on taxes, but that's not the priority.

You can definitely become a tax-loss harvest wizard. This will not only reduce your AGI by $3,000 each year, but your carryover losses will go on for years and years, and you'll avoid capital gain taxes during your high-income years.

Definitely understand the dividends paid out in your taxable account. They may be qualified, but they still influence your AGI.

Definitely understand munis. Make sure you understand what you're investing in, but munis will become your friend.
Short of going to the IRS website - what is a good place to learn the tax rules and munis?

Not making any decisions based on taxes, but would sure like to pay as little as possible.

No tax loss harvesting to be done as of yet. No money invested in taxable as of today.

livesoft
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Re: Tax tips for dual, high income household

Post by livesoft » Sun Dec 06, 2015 9:23 am

LiveSimple wrote:ROFL, on Livesoft's "Poke your eyes out. If you are blind, you get an extra exemption. You will probably need medical attention (see #9). "

I assume livesoft missed something like this " Carry cash $50+k, and get mugged and robbed. Claim tax deduction through "Report casualty and theft losses Form 4684" Repeat multiple times for more tax gains.
Thanks! I will add that next time after reading up about it.

(But losing eyesight is no laughing matter. Some folks have been offended.)

@Gemini, do not fear the IRS web site. We are lucky to have it. I used to order the IRS publications by mail in the 1980s. And I read them.
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Artsdoctor
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Re: Tax tips for dual, high income household

Post by Artsdoctor » Mon Dec 07, 2015 6:15 pm

^ Agree with livesoft. The IRS website is underrated. Of course it can dry but there are plenty of examples to help you understand what they're trying to accomplish.

I've said this many times but I can't stress enough how helpful tax software can be. The tax law is so complicated that you think you can predict what an extra $100 will cost you in taxes but I'm constantly amazed what a moving target marginal tax rates can be.

Learning about California tax law is harder. There is no comparable site (there's a site, but I find it too clunky to be useful). This is also where tax software helps you out. It tooks me years to finally appreciate that it's not enough to understand federal taxes--I had to understand CA taxes as well because it's such a large chunk of what I pay.

At the very least, buy a program, put in your income, and then add $1,000 of qualified dividends. See what happens. Add in your mortgage interest, and see how that influences your tax bill. Add your real estate tax (and you'll see that it doesn't do anything since you're subject to the AMT). Add in charitable contributions.

Play around a bit and look at all of the lines on the 1040--figure out all that might possibly apply to you.

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