Minimizing taxes for 2018

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Kathys
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Joined: Mon Mar 26, 2018 10:27 am

Minimizing taxes for 2018

Post by Kathys » Mon Apr 16, 2018 12:59 pm

I'm trying to figure out how to minimize taxes for 2018. Can someone tell me if this is correct:

Married filing jointly

Total income $85,000
Standard deduction $24,000
Business expenses $10,000
403b contribution $18,500
2x tIRA $11000
Saver's credit ($11000 + $18,500) * 50% = $14750

Total taxable income $6750
Taxes owed $6750 * 10% = $675

Does this make sense?

furwut
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Re: Minimizing taxes for 2018

Post by furwut » Mon Apr 16, 2018 1:07 pm

Many use the free Taxcaster software to gauge their taxes. Though I don’t know if it has been updated yet to reflect the most recent tax law changes.

ofckrupke
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Re: Minimizing taxes for 2018

Post by ofckrupke » Mon Apr 16, 2018 1:24 pm

The savers credit is a credit, not a deduction.

So calculate the tax on 21.5k of taxable income, then calculate the saver's credit using an AGI of 45.5k (IFF the business expense is netted in income line(s), typically via schedule C), and then subtract that from the tax.

Chip
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Re: Minimizing taxes for 2018

Post by Chip » Mon Apr 16, 2018 1:30 pm

What sort of business expenses are you talking about? If they're on Schedule C aren't they already accounted for in your total income number? If they're itemized employee business expenses that doesn't fit with taking the standard deduction.

???

Fresh Air
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Re: Minimizing taxes for 2018

Post by Fresh Air » Mon Apr 16, 2018 1:38 pm

If you are referring to "Unreimbursed Employee Business Expenses" for a W2 employee - alot of that is going away for 2018 - I'd look into that. (If you are 1099, I believe it stays the same).

ofckrupke
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Re: Minimizing taxes for 2018

Post by ofckrupke » Mon Apr 16, 2018 1:45 pm

Right, the question here is whether the IRS sees 85k (-18.5k 403b contribution) of income on form 1040 between the 403b participant's W-2 and the business's net income, or just 75k (-18.5k) because the business expenses are subtracted from the business income on schedule C. In other words, was the business gross combined with W-2 (w/403b added back) to get this hypothetical 85k, or was it the net (in case the AGI and taxable income both go by 10k from answer given upthread, since you don't get to subtract business expenses twice).

MrBeaver
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Re: Minimizing taxes for 2018

Post by MrBeaver » Mon Apr 16, 2018 2:18 pm

Kathys wrote:
Mon Apr 16, 2018 12:59 pm
Saver's credit ($11000 + $18,500) * 50% = $14750
The saver's credit is only a credit (10%, 20%, or 50%) on the first $2000 of contributions per person ($4000 for two individuals filing MFJ). Therefore, the maximum credit for MFJ is $2000 in the 50% credit tier, and taxable income is not reduced.

Since the standard deduction does not reduce AGI which the saver's credit eligibility is based on, AGI would be 45,000 and the saver's credit would be the lowest tier (10% credit, so the credit is worth only $400. Final tally:

Taxable income: 21500
Fills 10% bracket: 19050 * 10% = 1905
12% bracket: 2450 * 12% = 294
Total = 1905 + 294 - 400 (savers credit) = 1799.

This hypothetical condition may be better served to use Roth to the top of the top saver's credit tier, or all Roth within the 12% bracket, depending on the situation. The former plan (Roth to the top of the top saver's credit range) would have 13000 go into traditional tax-deferred (403b and IRA), with the remaining 16500 into Roth, resulting in 62000 AGI.

See here for more details:
https://www.bogleheads.org/wiki/Saver%27s_credit

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BruceM
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Re: Minimizing taxes for 2018

Post by BruceM » Mon Apr 16, 2018 2:39 pm

Hi Kathys
Assuming
1. you are using Form 1040
2. your only Above-The-Line deductions are the IRA contributions
3. the total income you are showing is represents all of your ordinary income (wages, net self employment, interest, non-qualified dividends)
4. your itemized deductions are less than $24,000 (MFJ)
5. you and/or spouse are not yet age 65 or older
6. you have no other employer benefit deductible withholding than retirement plan salary deferrals
7. you operate a business that is organized as a pass-through entity (Proprietorship, LLC or partnership),
8. the $10,000 you show as 'Business Expense' is either for non-reimbursed employee business expenses...OR.... has already been taken into account in arriving at net business profit that is included in the $85,000 total income
9 you have no qualified dividends or long term capital gains,
10 you have no other dependents than you and spouse, then...


Gross Income = $85,000 - $18,500 = $66,500
AGI = $66,500 - $11,000 = $55,500
Taxable Income = $55,500 - $24,000 = $31,000

Tax: first $19,050 taxed at 10% = $1,905
Next $31,500 - $19,050 = $12,450, taxed at 12% = $1,494
Tax: $1,905 + $1,494 = $3,399
Saver's Credit: Total qualifying retirement savings = $18,500 + $11,000 = $29,500. Credit for AGI of $55,500 = 10%, so Saver's Credit = $29,500 X .10 = $2,950
Final Tax = $449

The question yet unanswered is if the $10,000 business expense has already been accounted for in business income from schedule C (or C-EZ) included in the gross income. If so, there will also be a FICA tax of about 15.3% with half of this deducted ATL. If the $10,000 is an unreimbursed employee expense, then it cannot be deducted as miscellaneous itemized deductions subject to the 2% of AGI threshold are no longer allowed.

BruceM

Tanelorn
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Re: Minimizing taxes for 2018

Post by Tanelorn » Mon Apr 16, 2018 6:40 pm

Bruce - you forgot the $2k cap per person on retirement savings eligible for the credit ($400 here at 10% credit rate). Otherwise looks good.

https://www.irs.gov/pub/irs-pdf/f8880.pdf

Kathys
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Joined: Mon Mar 26, 2018 10:27 am

Re: Minimizing taxes for 2018

Post by Kathys » Tue Apr 17, 2018 4:30 pm

Thanks everyone. I knew this was too simple, what I did.
Anyway, going by Bruce's calculations and correcting it per Tanelorn's post the last 3 lines should be:

Tax: $1,905 + $1,494 = $3,399
Saver's Credit: Total qualifying retirement savings = $18,500 + $11,000 = $29,500. Credit for AGI of $55,500 = 10%, so Saver's Credit = $400
Final Tax = $2999

Is that right?

So if I contributed $5500 to Roth instead I would still qualify for 10% saver's credit but my taxes would be $4068 instead. Yes?

Braje
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Re: Minimizing taxes for 2018

Post by Braje » Tue Apr 17, 2018 5:08 pm

For The Retirement saver's credit, if your AGI is low enough it doesn't matter if you do traditional or Roth

Kathys
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Re: Minimizing taxes for 2018

Post by Kathys » Tue Apr 17, 2018 5:19 pm

Braje wrote:
Tue Apr 17, 2018 5:08 pm
For The Retirement saver's credit, if your AGI is low enough it doesn't matter if you do traditional or Roth
Yes, but in my case with taxes being low and AGI of $55,500 I would still get the saver's credit if I contributed to Roth. I would still save on taxes in case my taxes are higher when I withdraw.

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FiveK
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Re: Minimizing taxes for 2018

Post by FiveK » Tue Apr 17, 2018 5:46 pm

Kathys wrote:
Tue Apr 17, 2018 4:30 pm
So if I contributed $5500 to Roth instead I would still qualify for 10% saver's credit but my taxes would be $4068 instead. Yes?
You would still get a $400 saver's credit. The tax before the credit would be ~$4059 so the tax due would be ~$3659.

The personal finance toolbox spreadsheet can help with other "what if...?" calculations if you don't mind spreadsheets.

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