2018 Tax Planning Help - New to US - Couple in Their 30s

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LurkingOne
Posts: 2
Joined: Sat Apr 14, 2018 12:40 pm

2018 Tax Planning Help - New to US - Couple in Their 30s

Post by LurkingOne » Sat Apr 14, 2018 1:45 pm

Hello folks, long time lurker here coming out of the woodwork. Would appreciate any tips or advice. We are new to the US and still on a bit of a learning curve with how to legally minimize tax liability. Open minded!

Our Situation
  • her - 36, him - 35, WA state
  • kids go to college in 14 and 17 years, no specific funds set aside yet (eg. 529s)
  • single income, MFJ in 2017 with a 483K AGI, 25.7% effective tax rate
  • live a typical Boglehead lifestyle
Our Income
3 sources of income for 2018, 550K expected income
  • mega corp - 485K split across salary and stock
  • side-job single-member LLC - 45K, web-based business, almost no expenses
  • dividends - 18K, generated by ETFs in taxable account
Our Investments
1.8M total portfolio split these ways
  • 0.8M in a taxable account across Vanguard and iShares ETFs, 70/30 AA (BND 30%, VTI 23%, EWC 23%, EFA 23%)
  • 0.5M in a taxable account containing employer stock
  • 0.3M in a tax-sheltered account in what would be equivalent to a Roth IRA here in the US, can no longer contribute to this account
  • 0.2M in a tax-sheltered account in what would be equivalent to an IRA here in the US, can no longer contribute to this account
Questions
  • Big Capital Gain in 2018. We want to sell the 500K in employer stock and pay off our house. This will realize a capital gain of about 200K and nudge our AGI to about 750K for 2018. Am I right to assume that for our income bracket we are looking at a 20% long-term capital gains raise plus a 3.8% investment tax on top? Any strategies to minimize any of this? Anything else to watch for with an AGI this high?
  • 401k/IRAs Absent. We have no tax sheltered accounts in the US. We do not plan on working past our late-40s and I'm afraid of having my money locked up in an IRA or 401k until 59-1/2 so I've avoided them. Something in my gut tells me that we might not save a whole lot and the money will be locked up the whole time. How dumb am I being? Is my head in the sand? Should we setup and max the 401k and IRAs?
  • Taking Advantage of the LLC. We have a single-member LLC that kicks out about 4K of monthly income. Any way to take advantage of this entity for tax purposes? For example, should I be looking at a self-employed 401k (too complicated?).
  • Superfunding the 529s. Our plan was to setup and fund both 529s (in Nevada) for the 5-year lump sum of 75K each, either later in 2018 or early 2019. Any obvious gotchas with this plan?
  • Professional Help. Anything obvious that we should be doing but are not? Worthwhile to have a CPA look and recommend?
Thanks folks, sincerely appreciate any and all help!

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FiveK
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by FiveK » Sat Apr 14, 2018 11:58 pm

LurkingOne, welcome to the forum.

Capital Gain: Yes, 23.8% for all $200K. You could use the "what if?" worksheets of TurboTax, TaxAct, etc., the personal finance toolbox spreadsheet, or whatever other favorite tax estimation program for 2018 planning.

401k/IRA: Yes, unless there is something contradictory due to a planned repatriation, that ticking sensation in your nose is due to the sand surrounding your head. ;)
See Investment Order and links therein for more on this.

LLC: Yes, a Solo 401(k) plan is likely a good idea. At your income, tax-advantaged plans are very valuable.

529s: Other than "fund your own retirement before funding a 529" (that's an opinion, not a rule), no obvious gotchas here.

Professional help: Maybe. Does the employer offer deferred compensation plans? If so, a fee-only advisor outside the company but experienced with its plans might be worth a visit. Otherwise, CPAs are usually more valuable for business situations than W-2 income.

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BL
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by BL » Sun Apr 15, 2018 12:21 am

You might look at the funds generating high dividends to see about selling them. You could buy municipal bonds which have no federal taxes instead of holding taxable bonds. High taxes from dividends or capital gains when you didn't sell anything is not ideal.

TedSwippet
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by TedSwippet » Sun Apr 15, 2018 9:43 am

Welcome.
LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm
0.3M in a tax-sheltered account in what would be equivalent to a Roth IRA here in the US, can no longer contribute to this account
The US rarely if ever recognises non-US (and non-pension) tax-sheltered accounts -- if it does, I cannot bring to mind a single example -- meaning these are usually fully taxable annually for US residents and US citizens. Examples include UK ISAs and Canadian TFSAs.

What assets do you hold in here? If in non-US domiciled mutual funds, it is very likely that you will have to tangle with extremely punitive US tax rules. See this wiki article and then Google "PFIC" for more. You might also -- or perhaps instead -- have to tangle with the form 3520 and 3520A foreign trust forms and tax rules. Both are the stuff of nightmares.
LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm
0.2M in a tax-sheltered account in what would be equivalent to an IRA here in the US, can no longer contribute to this account
The US sometimes recognises non-US pensions, but only where there is an income tax treaty in place that specifically covers them. Check the details for the country in which you hold these. The UK and Canada are known 'good' treaties in this respect.

If not protected by treaty, the US will tax these as if they are plain unsheltered investment accounts, so gains would be taxable annually and with all of the same problems as for non-US tax shelters mentioned above.

You might also need to consider state taxes here. For pensions the situation can be even worse than for 'ordinary' non-US tax shelters, since many states do not follow the treaties. So a non-US pension protected from federal tax by treaty may still be taxable annually to the state. My guess is that you are probably okay on this in Washington state, but very much something to bear in mind if you were to move to California, say.

All very, very painful I'm afraid. It will be hard to find any CPA or other US-based tax professional who understands all the nuances of cross-border investing.

And one final thought... do you intend to retire in the US, or outside? If you think you may move again in future, this wiki page on navigating US tax traps might be worth a look.
Last edited by TedSwippet on Sun Apr 15, 2018 10:35 am, edited 1 time in total.

cas
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by cas » Sun Apr 15, 2018 10:00 am

LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm

[*] Big Capital Gain in 2018. We want to sell the 500K in employer stock and pay off our house. This will realize a capital gain of about 200K and nudge our AGI to about 750K for 2018. Am I right to assume that for our income bracket we are looking at a 20% long-term capital gains raise plus a 3.8% investment tax on top? Any strategies to minimize any of this? Anything else to watch for with an AGI this high?
In 2017 and before, a big capital gain like that might have triggered Alternative Minimum Tax (if the rest of the income hadn't triggered AMT already.) AMT, and the points at which it is triggered is, unfortunately, really non-intuitive (to me, and apparently a lot of other people.) However ... if it is triggered ... and if income is in the AMT exclusion phase-out range, it means another 6.5% or 7% marginal "stealth" tax (due to phase-out effects) on the capital gains, in addition to the 20% + 3.8% ... plus whatever effect on the rest of your income that AMT would have.

Having said that ... with the changes to AMT starting 2018, and given your income levels, I think the large cap gains are probably unlikely to trigger AMT in 2018. But, as I said, AMT is non-intuitive to me, so I could easily be wrong. You'll probably want to do some or all of the following before before selling the stock:

-become familiar with IRS Form 6251 (unfortunately no 2018 version out yet) (sorry ... Form 6251 is really diving in the deep end as far as US tax code.)
-read the individual (not corporation) AMT related changes for 2018 in this article: https://www.kitces.com/blog/final-gop-t ... trategies/
-run your estimated tax numbers including various levels of capital gains through a good 2018 tax estimator (that you have fair confidence is doing 2018 AMT calculations correctly)
-there is a good Fairmark article out there on how capital gains interact with AMT ("AMT and Long-Term Capital Gain" at fairmark.com), but I keep getting malware pop-ups when I go to the Fairmark site recently, so I hesitate to even put the URL here. (Fairmark is a good (and staid) tax information site, so I'm befuddled what is up with the malware that seems to have snuck in and why it hasn't been exterminated.)

HEDGEFUNDIE
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by HEDGEFUNDIE » Sun Apr 15, 2018 10:22 am

With your level of income and assets you should really get professional advice. A competent CPA can help you leverage the new tax law, and a wealth manager can help you diversify your portfolio beyond stocks/bonds.

schrute
Posts: 246
Joined: Wed Nov 05, 2014 2:27 pm

Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by schrute » Sun Apr 15, 2018 10:42 am

LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm
Hello folks, long time lurker here coming out of the woodwork. Would appreciate any tips or advice. We are new to the US and still on a bit of a learning curve with how to legally minimize tax liability. Open minded!

Our Situation
  • live a typical Boglehead lifestyle
What does this entail? What are your annual expenses?

LurkingOne
Posts: 2
Joined: Sat Apr 14, 2018 12:40 pm

Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by LurkingOne » Sun Apr 15, 2018 12:45 pm

Wow! Thank you everyone for the words of advice here. Lots to follow-up on, tons of homework to do.
Capital Gain: Yes, 23.8% for all $200K. You could use the "what if?" worksheets of TurboTax, TaxAct, etc., the personal finance toolbox spreadsheet, or whatever other favorite tax estimation program for 2018 planning.
These are awesome tools. I was trying this with paper and it was nearly impossible. Thank you!
401k/IRA: Yes, unless there is something contradictory due to a planned repatriation, that ticking sensation in your nose is due to the sand surrounding your head. ;) See Investment Order and links therein for more on this.
No planned repatriation, maybe, maybe not - we have no idea. I did the math and it works out to about 10K per year of tax savings and employer contributions for a fully funded 401k. That a lot of money to set aside because we're indecisive. Ok so we should totally do the 401k.

Looking at the IRAs, we lose out on the tax deduction due to our income level and access to a 401k from the employer. Any reason to still contribute to an IRA? I suppose that growth would be tax-sheltered, so slight edge there above a basic brokerage account...
LLC: Yes, a Solo 401(k) plan is likely a good idea. At your income, tax-advantaged plans are very valuable.
Ok I'll dig into this more, thanks.
529s: Other than "fund your own retirement before funding a 529" (that's an opinion, not a rule), no obvious gotchas here.
Ok sounds like we're on the right track here too, thank you.
Professional help: Maybe. Does the employer offer deferred compensation plans? If so, a fee-only advisor outside the company but experienced with its plans might be worth a visit. Otherwise, CPAs are usually more valuable for business situations than W-2 income.
No deferred compensation plans available, nope. From the sounds of other posters below, I really need to find someone familiar with cross-border tax planning. Sounds pricey!
You might look at the funds generating high dividends to see about selling them. You could buy municipal bonds which have no federal taxes instead of holding taxable bonds. High taxes from dividends or capital gains when you didn't sell anything is not ideal.
Good call out. Anyone using VTEB (Vanguard's municipal bond ETF) instead of BND? Is there a better tax-free ETF out there? Running the math, if I swap out BND for VTEB I end up with a 2K / year tax savings. Not huge, but I'll take it.
The US rarely if ever recognises non-US (and non-pension) tax-sheltered accounts -- if it does, I cannot bring to mind a single example -- meaning these are usually fully taxable annually for US residents and US citizens. Examples include UK ISAs and Canadian TFSAs. What assets do you hold in here?
Yes, unfortunately these are Canadian TFSAs holding Canadian stocks listed on the TSE. Reading now, I'm realizing there appears to be a very complicated reporting requirement for these (3520 and 3520A forms). Shoot! This also looks complicated.
And one final thought... do you intend to retire in the US, or outside? If you think you may move again in future, this wiki page on navigating US tax traps might be worth a look.
We are undecided. Looking at that wiki though, seems like there are some things we can do to avoid a tax bill later if we do decide to leave. Thank you for the heads up here, more to consider going forward.
Having said that ... with the changes to AMT starting 2018, and given your income levels, I think the large cap gains are probably unlikely to trigger AMT in 2018. But, as I said, AMT is non-intuitive to me, so I could easily be wrong. You'll probably want to do some or all of the following before before selling the stock: -read the individual (not corporation) AMT related changes for 2018 in this article: https://www.kitces.com/blog/final-gop-t ... trategies/
That was a great article. Went through every detail of the 2018 tax changes, I read the whole thing. Based on my initial pass, I agree with your assessment - the AMT buffer is so wide in 2018 that we might not be caught in it. I'll play around with a simulator to confirm.
With your level of income and assets you should really get professional advice. A competent CPA can help you leverage the new tax law, and a wealth manager can help you diversify your portfolio beyond stocks/bonds.
What should we have beyond stocks and bonds?
What does this entail? What are your annual expenses?
Our annual expenses for a family of 4 in a HCOL area is 65K per year. That includes mortgage, property tax, insurance, food, Peppa Pig concert tickets - the whole bit. We invest the remainder (~80% of after-tax income).

TIAX
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by TIAX » Sun Apr 15, 2018 1:04 pm

LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm
[*] Taking Advantage of the LLC. We have a single-member LLC that kicks out about 4K of monthly income. Any way to take advantage of this entity for tax purposes? For example, should I be looking at a self-employed 401k (too complicated?).
Setting up a solo 401(k) is very simple. Take a look at this and this blog post. It's one long-ish form to set it up and then you'll need to calculate the max employer contributions when doing your taxes. I would use Vanguard unless you need incoming rollovers or are contributing very high amounts such that you care about not having access to admiral shares.

2cents2
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by 2cents2 » Sun Apr 15, 2018 5:07 pm

We do not plan on working past our late-40s and I'm afraid of having my money locked up in an IRA or 401k until 59-1/2 so I've avoided them.


Can you do a mega backdoor Roth from your 401K? This works if your 401k plan allows after tax contributions and in service rollovers of your after tax contributions. You roll over your after tax contributions to a Roth and the gains to a tIRA. You can access the Roth contributions (but not the gains) tax free and penalty free prior to 59.5. If your 401K accepts roll ins, the gains (tIRA) could be rolled back into the 401k.
More Info:
https://www.bogleheads.org/wiki/After-tax_401(k)

Limits on the 401K (2018) under age 50. Employee deferral: 18,500. Defined contribution maximum limit, all sources: 55,000. (Includes employee deferral, company match and after tax contributions)

Both you and your spouse could contribute to a tIRA and convert to a Roth. Note, there are some complexities to this strategy. (If you go ahead with it, you can't have other funds in a tIRA.)
More Info:
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

schrute
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Joined: Wed Nov 05, 2014 2:27 pm

Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by schrute » Sun Apr 15, 2018 9:59 pm

TIAX wrote:
Sun Apr 15, 2018 1:04 pm
LurkingOne wrote:
Sat Apr 14, 2018 1:45 pm
[*] Taking Advantage of the LLC. We have a single-member LLC that kicks out about 4K of monthly income. Any way to take advantage of this entity for tax purposes? For example, should I be looking at a self-employed 401k (too complicated?).
Setting up a solo 401(k) is very simple. Take a look at this and this blog post. It's one long-ish form to set it up and then you'll need to calculate the max employer contributions when doing your taxes. I would use Vanguard unless you need incoming rollovers or are contributing very high amounts such that you care about not having access to admiral shares.
If you're planning to retire in the US or at least will be here until 59.5 and don't need the cash right away; I think a tax-shelter account is worthwhile. It will defer your tax obligation.

I think for your side gig, you can move a decent chunk of it as part of a self-directed 401K up to $55K. So most of your earnings could be sheltered from tax for now. Just my opinion and may want to discuss with an advisor.

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TheGreyingDuke
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Re: 2018 Tax Planning Help - New to US - Couple in Their 30s

Post by TheGreyingDuke » Mon Apr 16, 2018 10:20 am

There are exceptions that allow for penalty-free withdrawals from IRAs before 59 1/2, the most useful approach is the substantially equal periodic payments.

https://www.investopedia.com/articles/r ... 111202.asp
"Every time I see an adult on a bicycle, I no longer despair for the future of the human race." H.G. Wells

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