[Looking for ways to reduce taxes and keep more of my income]

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jwaxjwax
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[Looking for ways to reduce taxes and keep more of my income]

Post by jwaxjwax » Tue Jun 12, 2018 12:42 pm

Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!

niceguy7376
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Re: Getting killed on taxes - any ideas?

Post by niceguy7376 » Tue Jun 12, 2018 12:51 pm

Let me calculate:
100K a year federal tax on 450K/yr comes out to 22%.

magicrat
Posts: 520
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Re: Getting killed on taxes - any ideas?

Post by magicrat » Tue Jun 12, 2018 1:00 pm

The easiest way to pay less in taxes would be to lower your income.

Jack FFR1846
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Re: Getting killed on taxes - any ideas?

Post by Jack FFR1846 » Tue Jun 12, 2018 1:09 pm

Well, the bright side is that you hit the max FICA numbers pretty quickly. Then you pay no more for the year.

Sorry.....but "first world problems".
Bogle: Smart Beta is stupid

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bottlecap
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Re: Getting killed on taxes - any ideas?

Post by bottlecap » Tue Jun 12, 2018 1:16 pm

I’m not fan of high taxes, but ...

Your problem isn’t that you are getting killed on taxes.

Your problem is that one or both of you don’t want to work very long, and you’d prefer to bank those taxes to get you closer to your goals.

That’s not how things work.

401ks and perhaps an HSA are the big ways for you to save on taxes immediately.

JT

an_asker
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Re: Getting killed on taxes - any ideas?

Post by an_asker » Tue Jun 12, 2018 1:22 pm

bottlecap wrote:
Tue Jun 12, 2018 1:16 pm
I’m not fan of high taxes, but ...

Your problem isn’t that you are getting killed on taxes.

Your problem is that one or both of you don’t want to work very long, and you’d prefer to bank those taxes to get you closer to your goals.

That’s not how things work.

401ks and perhaps an HSA are the big ways for you to save on taxes immediately.

JT
The problem is not even that they don't want to work very long. With $450k for five years, they should be able to comfortably save $1 million in five years. Then it is just a matter of matching expectation and finances. If you want more, work more; else try to make do with less.

OP comes across as a humble brag. Even on this forum, I doubt if more than 25% make that kind of money (though I could be wrong!).

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ray.james
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Re: Getting killed on taxes - any ideas?

Post by ray.james » Tue Jun 12, 2018 1:24 pm

This is the stack I see from other posts:
-----
HSA
DFSA -dependent fsa-childcare
2- 401ks
457
2- roth IRA
2 - Mega back door roth
I-Bonds
529(on your name if kids are in future)
-------
Ofcourse not everything is possible for everyone due to plan limits/job types/kids present, etc., The above entails ~50K tax deductible and 100K post tax but tax free growth limits.

Tax deductions/credits:
mortgage interest, home office interest, charity etc.;
Education + child credits/deductions are probably beyond cutoff.
If CA and own a home, look into solar.

The deductible amount for ALL 401k's is still 18.5K which is per person and not per plan as many think. Of course 25% of business profits can be routed there. I do not think 10K is enough yet. Rental losses due to depreciation cannot be deducted against income at that income level unless you become a real estate professional or treated as such.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

ExitStageLeft
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Re: Getting killed on taxes - any ideas?

Post by ExitStageLeft » Tue Jun 12, 2018 1:33 pm

If you've maxed things out with your current 401ks then one option is to get a better 401k, ie change jobs. If either of you were already self-employed then a solo 401k would be an obvious first choice for substantialy increasing that contribution space. But since you are both already working full time it seems like there would be little value in trying to stuff a few thousand a year in a SEP IRA or a solo 401k. Making enough self employment income to make it worthwhile would probably require a lot of effort, resulting in accelerated burnout.

Were I in your shoes I hope I would come to terms with the fact that my marginal taxes are close to 50% and figure out ways to reduce future taxes. (EDIT to add: with muni bonds, managing long term capital gains, Roth conversions, etc.)

livesoft
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Re: Getting killed on taxes - any ideas?

Post by livesoft » Tue Jun 12, 2018 1:37 pm

The OP asked about a solo 401(k), but also seemed to suggest that they were not working. So if one had to work in order to make self-employed earned income for a solo 401(k), then that would actually increase one's taxes. Does everybody see how that happens?

However, it is a great idea. Even their spouse should try to get some side earned income, so that they can open a solo 401(k) for their self-employment income in order to help make up for the the HCE limitation with their W-2 income.

Mostly though, I would say: Invest very tax efficiently with no income on top half of Form 1040 Schedule B and only qualified dividend income on the bottom half of Form 1040 Schedule B. Plus no capital gains on Form 1040 Schedule D, but only losses.

And time for a repeat:
livesoft wrote:
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. 2018: Limited.
5. That big house should come with huge property taxes which can be deducted on Schedule A. 2018 Limited
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.
Last edited by livesoft on Tue Jun 12, 2018 1:38 pm, edited 1 time in total.
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Spirit Rider
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Re: Getting killed on taxes - any ideas?

Post by Spirit Rider » Tue Jun 12, 2018 1:38 pm

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax?
Not if you are the one making the $10K and you are already maximizing your $18,500 employee elective deferrals. You would be limited to deducting only employer contributions of 20% of your net self-employment earnings to a one-participant 401k

On the other hand, if it is your wife making the additional $10K. Since her w-2 employee elective deferral is limited, she could make and deduct employee elective deferrals up to 100% of $18,500 - her W-2 deferrals not to exceed her net self-employment earnings.

tesuzuki2002
Posts: 538
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Re: Getting killed on taxes - any ideas?

Post by tesuzuki2002 » Tue Jun 12, 2018 2:01 pm

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!

If you want a way to have some losses... buy a rental... it will lower your taxes. Buy 2 or 3 eventually... and then when you wife wants to stop working... Aggressively get those paid off and you will have a stream of income from the rentals....

NextMil
Posts: 523
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Re: Getting killed on taxes - any ideas?

Post by NextMil » Tue Jun 12, 2018 2:02 pm

You are getting absolutely destroyed by people here, but I will say, I understand your point of view. With a high income, seeing the raw numbers come out somehow hurts worse than if you figure the actual tax rate which actually isn't that terrible, but to folks not making this sort of cash, its really hard to understand the complaint.

That said, beyond what others have suggested, the only thing I could think of would be to somehow transition your current gigs to contractor gigs and build out solo 401ks where you can increase the amount you can put away tax free. Not sure if that is even feasible with the jobs you have, but thought I would mention. Otherwise, as others have said, max all the vehicles available to you to reduce your tax burden, other than that, learn to live with it and keep investing.

SelfEmployed123
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Re: Getting killed on taxes - any ideas?

Post by SelfEmployed123 » Tue Jun 12, 2018 2:08 pm

OP: I am sure you and your wife both worked very hard to get to this point. At your current income you are in the top 1% of households and also doing very well by the standards of this thread. Honestly, your questions are going to best be addressed by consulting with an accountant. In my experience good CPAs in a HCOL area are around $300 per hour. Keep your savings rate high and invest as much as possible. You will soon be able to shift income over to your investments, which inherently comes with a lower tax rate. If you think you are getting killed in taxes, just look at the tax rate and not the dollar amount.

Most on this forum would be proponents of a 3 fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio

You are in excellent to achieve financial independence: https://www.reddit.com/r/financialindependence/wiki/faq

Best of luck to you.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

Rupert
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Re: Getting killed on taxes - any ideas?

Post by Rupert » Tue Jun 12, 2018 2:22 pm

NextMil wrote:
Tue Jun 12, 2018 2:02 pm
You are getting absolutely destroyed by people here, but I will say, I understand your point of view. With a high income, seeing the raw numbers come out somehow hurts worse than if you figure the actual tax rate which actually isn't that terrible, but to folks not making this sort of cash, its really hard to understand the complaint.
+1. The majority of people in this country make less per year than you are paying in federal income taxes. So, some perspective. That said, do consult an accountant as there may be ways to structure your income differently which might benefit you tax-wise. Also, give some to charity. It's good for you.

bert09
Posts: 43
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Re: Getting killed on taxes - any ideas?

Post by bert09 » Tue Jun 12, 2018 2:27 pm

Move to Washington state. No state income tax, very likely still good enough job opportunities (although not sure what field you are both in).
Being frugal is pretty easy - the only real high-cost-of-living is housing, but you can be frugal about renting/using public transit/etc.

pshonore
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Re: Getting killed on taxes - any ideas?

Post by pshonore » Tue Jun 12, 2018 2:48 pm

tesuzuki2002 wrote:
Tue Jun 12, 2018 2:01 pm
jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!
If you want a way to have some losses... buy a rental... it will lower your taxes. Buy 2 or 3 eventually... and then when you wife wants to stop working... Aggressively get those paid off and you will have a stream of income from the rentals....
150K of AGI will cause any rental losses to be deferred and carried over until you sell the property. Actually starts phasing out at 100K and is fully gone at 150K.

rhornback
Posts: 108
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Re: Getting killed on taxes - any ideas?

Post by rhornback » Tue Jun 12, 2018 3:05 pm

ray.james wrote:
Tue Jun 12, 2018 1:24 pm
This is the stack I see from other posts:
-----
HSA
DFSA -dependent fsa-childcare
2- 401ks
457
2- roth IRA
2 - Mega back door roth
I-Bonds
529(on your name if kids are in future)
-------
Ofcourse not everything is possible for everyone due to plan limits/job types/kids present, etc., The above entails ~50K tax deductible and 100K post tax but tax free growth limits.

Tax deductions/credits:
mortgage interest, home office interest, charity etc.;
Education + child credits/deductions are probably beyond cutoff.
If CA and own a home, look into solar.

The deductible amount for ALL 401k's is still 18.5K which is per person and not per plan as many think. Of course 25% of business profits can be routed there. I do not think 10K is enough yet. Rental losses due to depreciation cannot be deducted against income at that income level unless you become a real estate professional or treated as such.
OP, I do not have your problems. Wish I did! And I have to agree that you are getting creamed on this message stream which I consider a bit unfair.

The big, big money it seems to me in this country is investing. That capital gains and dividends are 20% regardless of income seems insane to me. Even Warren Buffet criticize this (though they still take the money to the bank).

I wonder about the high earners on this board who want fancy houses and cars. Personally I would rather achieve FIRE first and then buy the toys. The compounding of 1 million dollars over 4 years is pretty awesome. If you could save 1 million right you could theoretically put it away in a the three fund portfolio and just ignore it until you were 55 and then retire somewhere.

1. I would start by maxing out your 401K/IRA/SEP IRA for both you and your wife.

2. Next I would contribute up to the state into the 529 plan, if you life in a high cost state. Where I live I can contribute 20K. The tax rate is 4.5%. So the return is $900 when I deposit it. And I am not that smart. I am only contributing 20K this year and next because my son is going to college so it will immediately be used. But I do gain $900 which is awesome.

3. Next I would contribute the max into the healthcare savings account. I do not contribute the max but I think it is $7,500.

4. Agreed on the flexible spending account / dependent care account. Another way to save, though I believe there are phase outs for those based on your income you may not be able gain the full benefit.

Beyond this I would save, pay the taxes, live modestly and put as much away as you could. You could save money by additional IRA / ROTH IRA contributions but I believe you would be using after tax money. And if you max out your 401K now through the rest of your life, you will have plenty in your retirement accounts.

When it comes to things such as I-bonds, my experience is the tax savings are already put into the price.

As others have said, it could be worse. The U.S. actually has relatively low taxes when compared to many other countries. And repeating myself, the real gold IMO is the low capital gains and dividend taxes. But you have to pay taxes up front in order to get there.

H-Town
Posts: 1309
Joined: Sun Feb 26, 2017 2:08 pm

Re: Getting killed on taxes - any ideas?

Post by H-Town » Tue Jun 12, 2018 3:20 pm

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!
You can create a legit business and invest capex to take Sch C deduction. This might not worth your trouble though. 100k tax is still low relatively to your AGI.

Just pay yourself more than you pay the taxman. Make sure you save more than 100k.

livesoft
Posts: 62927
Joined: Thu Mar 01, 2007 8:00 pm

Re: Getting killed on taxes - any ideas?

Post by livesoft » Tue Jun 12, 2018 3:20 pm

PVW wrote:
Tue Jun 12, 2018 3:06 pm
According to this data, the OP is probably paying more than most in his income bracket.
https://taxfoundation.org/how-much-do-people-pay-taxes/
For a legit comparison of taxes paid, check out the Effective Average Adjusted Livesoft Tax Rate:
viewtopic.php?t=163748

It should give you some ideas on how to have untaxed income. Many taxpayers have quite a bit of untaxed benefits which they ignore when mentioning tax rates which I do not think is legit.
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tesuzuki2002
Posts: 538
Joined: Fri Dec 11, 2015 12:40 pm

Re: Getting killed on taxes - any ideas?

Post by tesuzuki2002 » Tue Jun 12, 2018 3:25 pm

pshonore wrote:
Tue Jun 12, 2018 2:48 pm
tesuzuki2002 wrote:
Tue Jun 12, 2018 2:01 pm
jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!
If you want a way to have some losses... buy a rental... it will lower your taxes. Buy 2 or 3 eventually... and then when you wife wants to stop working... Aggressively get those paid off and you will have a stream of income from the rentals....
150K of AGI will cause any rental losses to be deferred and carried over until you sell the property. Actually starts phasing out at 100K and is fully gone at 150K.


Good call. I remember reading about that... but for me I'm not even close to that... In this case that is an issue..

wolf359
Posts: 1458
Joined: Sun Mar 15, 2015 8:47 am

Re: Getting killed on taxes - any ideas?

Post by wolf359 » Tue Jun 12, 2018 3:36 pm

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!
1) W-2 employees have the fewest income tax breaks available to them. Retirement accounts are one of them. Your wife is limited in hers due to being an HCE. If she were to have earned income from a side hustle, then she could contribute the additional amount to a Solo 401-k, bypassing the HCE problem. (Her 401-k contributions combined are capped, but she is only contributing $10,000.) She might be able to make additional contributions to her Solo 401-k using an employer match.
2) Take advantage of your high income to have high savings. Try to live on the lower of the two incomes. If possible, project what your savings would be if you maximized savings for 5 years. That may allow your wife to be motivated and enable her to quit or dial back in that time-frame.
3) High income generally comes with high taxes. (There are exceptions, but you have to create those situations.) High income does not need to result in high expenses. If you keep your expenses low, then you will eventually be able to minimize your income requirements, reducing your taxes in the future. Make sure you are using a traditional 401-k to minimize taxes.
4) Try to qualify for an HSA by having high-deductible health insurance. Then maximize the HSA, using it as another tax-deferred vehicle.
5) Direct real estate investment can be another good tax shelter, but between your work and a side hustle, may not be worth it. It's more of another part-time business with investment characteristics. It's worth exploring, but whether or not it's for you depends upon your personality and goals.
6) Don't let the tax tail wag the dog. Don't take actions simply to avoid taxes. The fact that you have to pay high taxes is an indication that you have high income, and that's not a bad thing. Do what you can to minimize the taxes, but having high income is better than having low or no income.

letsgobobby
Posts: 11672
Joined: Fri Sep 18, 2009 1:10 am

Re: Getting killed on taxes - any ideas?

Post by letsgobobby » Tue Jun 12, 2018 3:43 pm

Max out everything including HSA and state tax benefit for 529.

Move to a state with no income tax.

Make sure your taxable investments are tax efficient.

Ignore the haters.

Thanks for posting.

User avatar
oldzey
Posts: 1105
Joined: Sun Apr 13, 2014 8:38 pm
Location: Land of Lincoln

Re: Getting killed on taxes - any ideas?

Post by oldzey » Tue Jun 12, 2018 3:59 pm

livesoft wrote:
Tue Jun 12, 2018 1:37 pm
And time for a repeat:
livesoft wrote:
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. 2018: Limited.
5. That big house should come with huge property taxes which can be deducted on Schedule A. 2018 Limited
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.
I'm saving this - too funny! Thanks for sharing, Livesoft!
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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Re: Getting killed on taxes - any ideas?

Post by LadyGeek » Tue Jun 12, 2018 6:53 pm

I removed a few off-topic posts. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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Re: Getting killed on taxes - any ideas?

Post by LarryAllen » Tue Jun 12, 2018 7:15 pm

I would look at it the other way around and instead of worrying about lowering taxes I would find a way to make more money. That's what I have done. My theory is why get upset about the taxes when instead it's better to just bring home more dough. In your case, based on the OP, I would find ways to make work less demanding. I used to think I made a lot of money and had a demanding job. Now I make twice as much and work less... it might happen to you too. So keep working hard and don't look at 5 years but at 25 or 35 years! Good luck.

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Re: Getting killed on taxes - any ideas?

Post by JBTX » Tue Jun 12, 2018 7:27 pm

Not sure why some are so hostile to the OP. Jealousy?

OP, I don't think there is a lot you can do if you are already maxing your tax deferred accounts. I would advise to consult a good tax advisor - i doubt there will be any magic bullets but at your income it is worth a look.

As somebody else mentioned, if you have already put in your 18500 401k, the only thing you would be able to contribute to a self employed 401k would be the employer match, which would be fairly modest unless you had a lot of self employment income.

I wouldn't advise going into real estate just to save taxes. That's something you need to have the appetite for.

Don't let the tax tail wag the dog here.

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Re: Getting killed on taxes - any ideas?

Post by jayk238 » Tue Jun 12, 2018 8:01 pm

I think the hostility is not acceptable and the mods should intervene here.

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Re: Getting killed on taxes - any ideas?

Post by MossySF » Tue Jun 12, 2018 8:07 pm

There is little available for W2 wage earners -- no accountant will be able to find deductions that don't cost more than they're worth. I make less than the OP and pay a higher rate -- 24% Federal. 8% California. Forget about real estate -- you are over the limit to deduct rental losses.

IF you had enough pull at your employer, quit and sign back up as a contractor (+ gross up for benefits) and you could contribute 55K to a solo 401K instead of a mere 18.5K.

And yes, less hyperbole. You're not getting killed. Just say something like "how can I reduce my taxes"?
Last edited by MossySF on Tue Jun 12, 2018 8:09 pm, edited 1 time in total.

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Re: Getting killed on taxes - any ideas?

Post by NotWhoYouThink » Tue Jun 12, 2018 8:09 pm

Not so much hostility as tough love. The truth is, if you make a lot of money you pay a lot of taxes, and that's ok. If you aren't used to making or having a lot of money the tax bill can be jarring, but when you look at how much you get to keep it's pretty cool.

So learn enough about the tax code to figure out how to avoid paying more than you need to, but enjoy the high income and the benefits it can bring. And don't get to thinking that everyone else knows magic secrets to avoid paying those tax bills. If you think everyone else knows secret tricks you might think you're a chump for paying. If you talk (or post) with others and find out we're all lucky to be in the same boat, and paying big tax bills, you realize it's just part of life. There is no magic shelter for W-2 income, and even investment income gets hit with NIIT. If you want to annoy people at holiday parties, complain about that.

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Re: Getting killed on taxes - any ideas?

Post by celia » Tue Jun 12, 2018 8:19 pm

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
My question is - any advice on how to minimize our current tax burden?
When I read the OP's original post here, a particular response popped into my head immediately. I'm surprised no one has pointed the OP to our wiki:

Our wiki has a useful page called Tax-efficient Fund Placement. It is possible that the OP could move around some of their holdings so things are more efficient tax-wise. Of course, they need to be aware of capital gains if they sell something in taxable.

This works best if you have some Roth space. If you don't, you might consider taking a one-time tax hit to convert some tax-deferred funds to Roth. Since the holdings in the Roths will not be taxed again (once the account has been open 5 years and the account owner is over 59.5), this is the perfect space for those assets you expect to grow the most.

Yes, some will say that the OP is likely already in the highest tax bracket and it would be better to convert when your tax bracket is lower, but I suspect the OP's tax bracket won't be truly low until they are retired. And the current tax rates are historically on the low side. The brackets that just took effect this year are temporary, but would revert to the old brackets around 2025, unless Congress makes them permanent.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Getting killed on taxes - any ideas?

Post by jwaxjwax » Tue Jun 12, 2018 9:24 pm

Thanks for the input everyone. To the posters who thought I was attempting to "humblebrag," I can promise that I wasn't. We only achieved dead broke (i.e., loans equaled assets) when I was about 35. We're now on the plus side by only a little bit. I recognize that our income is high. But as I had said originally, there is no way that can continue as my wife is going to have to scale back next 5 years or so and our income will reduce significantly. So I was simply looking to the community to make sure I wasn't missing something during this high income time, along the lines of a HSA, backdoor roth, etc.

Thanks again to those who responded.

moneywise3
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Re: Getting killed on taxes - any ideas?

Post by moneywise3 » Tue Jun 12, 2018 9:44 pm

It's a great problem to have!
Better than getting "killed" with low income

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Re: Getting killed on taxes - any ideas?

Post by Afty » Tue Jun 12, 2018 9:47 pm

One possibility that no one else has mentioned is a Nonqualified Deferred Compensation plan. Some companies offer this option where you defer some of your salary/bonus to a future year. If you will have a lower tax rate in a future year (e.g. if you are retiring soon), then this could save you money.

See https://www.fidelity.com/viewpoints/retirement/nqdc

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Re: Getting killed on taxes - any ideas?

Post by JBTX » Tue Jun 12, 2018 10:45 pm

Dottie57 wrote:
Tue Jun 12, 2018 7:45 pm
JBTX wrote:
Tue Jun 12, 2018 7:27 pm
Not sure why some are so hostile to the OP. Jealousy?

OP, I don't think there is a lot you can do if you are already maxing your tax deferred accounts. I would advise to consult a good tax advisor - i doubt there will be any magic bullets but at your income it is worth a look.

As somebody else mentioned, if you have already put in your 18500 401k, the only thing you would be able to contribute to a self employed 401k would be the employer match, which would be fairly modest unless you had a lot of self employment income.

I wouldn't advise going into real estate just to save taxes. That's something you need to have the appetite for.

Don't let the tax tail wag the dog here.
Your last line is best.

I do think Op’s Post could be easily termed a humble brag.
Totally disagree. OP is paying a lot of taxes and wants help. There is no way he could have worded it without offending someone.

We have threads with hundreds of posts of their 7 digit wealth yet this post is humble brag.

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Re: Getting killed on taxes - any ideas?

Post by TropikThunder » Tue Jun 12, 2018 11:44 pm

Spirit Rider wrote:
Tue Jun 12, 2018 1:38 pm
On the other hand, if it is your wife making the additional $10K. Since her w-2 employee elective deferral is limited, she could make and deduct employee elective deferrals up to 100% of $18,500 - her W-2 deferrals not to exceed her net self-employment earnings.
That would definitely increase their tax-advantaged savings, but it won't reduce the taxes they owe (making an extra $8,500 on the side in order to put another $8,500 into a 401k won't change AGI or tax). It will reduce their effective tax rate, but as others have pointed out, it seems to be the $$$ and not the %%% that is causing OP's angst.

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Re: Getting killed on taxes - any ideas?

Post by MrPotatoHead » Wed Jun 13, 2018 12:01 am

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!
First of all, I envy your income. Second of all, unlike a lot of folks I too think you pay too much in taxes.

You do not indicate what you do, but I would suggest you look to see if you can move into contracting. If not, you really might want to reevaluate your life and determine if you want to work for the man. Because when you work for the man you also are slave to government largess. Owning your own business and a wise tax accountant can do much to alter the equation. There is an old saying, "you are never going to rich, you pay too much in taxes".

I will tell you a personal philosophy, I fear the retaliatory power of the IRS(and government in general) so I do not get aggressive in my tax strategies. That being said, even without pressing boundaries there are simply a lot of advantages to business ownership even if it is just a side business. Legitimate hobbies that are run as a legitimate/true side business are often the most valuable if you are a W2 slave.

There are books that detail the tax advantages of running a business.

I will also offer this. There are many way to employ your talents in a way that does not generate payroll taxes or taxes in general, until you chose to realize a gain. Of course the whole trick to that is, you need to have a source of funds that pay your day to day living expenses. But it is pretty easy to arrive in that type of situation if you plan for it a decade or two ahead of time.

Final thought, at least you are not getting gouged by social security on the full 450K. Sometimes it helps to look on the bright side.

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Re: Getting killed on taxes - any ideas?

Post by ausmatt » Wed Jun 13, 2018 1:55 am

I don’t understand the jealousy/hostility either.

The bad news is that there are no real loop holes anymore and you’re doing most everything you can.

The only other thing that is not mentioned above is if you think you will exceed the maximum estate tax limits (roughly $11m per person, so $22m combined) in the future. If so, then there are trust vehicles that are important as they will let you reset the taxable basis upon transfer of the trust (when you die).

Regarding the deferred Comp plan at a large company - note that there is risk here as it’s not insured and it’s subject to company insolvency issues etc. I’m not sure it’s worth the strict capital tie-up rules.

Unless you can switch from W-2 to your own C/S-corp somehow, you’re pretty much doing everything you can.

Remember that 23.7% long term capital gains tax is a lot less than 33%/35%/37% tax brackets. So building that tax efficient portfolio that others have mentioned above is one of the best (only) long term plays you have.

IMHO all tax reduction strategies will be on reducing the future tax on your investments.

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Re: Getting killed on taxes - any ideas?

Post by bottlecap » Wed Jun 13, 2018 6:46 am

jwaxjwax wrote:
Tue Jun 12, 2018 9:24 pm
Thanks for the input everyone. To the posters who thought I was attempting to "humblebrag," I can promise that I wasn't. We only achieved dead broke (i.e., loans equaled assets) when I was about 35. We're now on the plus side by only a little bit. I recognize that our income is high. But as I had said originally, there is no way that can continue as my wife is going to have to scale back next 5 years or so and our income will reduce significantly. So I was simply looking to the community to make sure I wasn't missing something during this high income time, along the lines of a HSA, backdoor roth, etc.

Thanks again to those who responded.
Haha.

There is no shame in wanting to keep more of your money. Unfortunately, if you are W2 employees, it sounds (and looks from your numbers) like you are doing just about everything you can. Max out your tax deferred accounts, keep investments outside of these accounts tax-efficient, and save as much as you can for the next five years.

Good luck!

JT

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Re: Getting killed on taxes - any ideas?

Post by Longdog » Wed Jun 13, 2018 7:02 am

jwaxjwax wrote:
Tue Jun 12, 2018 9:24 pm
Thanks for the input everyone. To the posters who thought I was attempting to "humblebrag," I can promise that I wasn't. We only achieved dead broke (i.e., loans equaled assets) when I was about 35. We're now on the plus side by only a little bit. I recognize that our income is high. But as I had said originally, there is no way that can continue as my wife is going to have to scale back next 5 years or so and our income will reduce significantly. So I was simply looking to the community to make sure I wasn't missing something during this high income time, along the lines of a HSA, backdoor roth, etc.

Thanks again to those who responded.
I think it was your use of the phrase “killed on taxes” that triggered many of the responses. While it may feel like you are paying a lot of taxes - probably more than you ever have in your life - you’re only paying your fair share of your very high income. Congratulations on you and your wife’s success! Appreciate that you’re doing much better, financially, than most people.
Steve

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Re: Getting killed on taxes - any ideas?

Post by surveyor » Wed Jun 13, 2018 7:06 am

As my accountant told me when I had to start writing quarterly checks to the government - congratulations on being successful.

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Re: Getting killed on taxes - any ideas?

Post by crit » Wed Jun 13, 2018 8:11 am

NextMil wrote:
Tue Jun 12, 2018 2:02 pm
You are getting absolutely destroyed by people here, but I will say, I understand your point of view. With a high income, seeing the raw numbers come out somehow hurts worse than if you figure the actual tax rate which actually isn't that terrible, but to folks not making this sort of cash, its really hard to understand the complaint.
We paid 6 figures in taxes last year. We are well aware of our relative fortune. And I find it very, very hard to understand this complaint.

Taxes are what we pay to live in a civilized society. Full stop.

We pay our fair share, happily, and even think that tax rates on our income level should be higher. We don't have children to justify taxes for paying teachers. We'd just prefer our civilisation to be educated (and our bridges maintained, etc., etc.). That's enough reason to pay our taxes.

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Re: Getting killed on taxes - any ideas?

Post by SRenaeP » Wed Jun 13, 2018 8:40 am

crit wrote:
Wed Jun 13, 2018 8:11 am
NextMil wrote:
Tue Jun 12, 2018 2:02 pm
You are getting absolutely destroyed by people here, but I will say, I understand your point of view. With a high income, seeing the raw numbers come out somehow hurts worse than if you figure the actual tax rate which actually isn't that terrible, but to folks not making this sort of cash, its really hard to understand the complaint.
We paid 6 figures in taxes last year. We are well aware of our relative fortune. And I find it very, very hard to understand this complaint.

Taxes are what we pay to live in a civilized society. Full stop.

We pay our fair share, happily, and even think that tax rates on our income level should be higher. We don't have children to justify taxes for paying teachers. We'd just prefer our civilisation to be educated (and our bridges maintained, etc., etc.). That's enough reason to pay our taxes.
You do realize that you can just give money to the Treasury if you so desire... Also, if you itemize, you can opt to take the standard deduction and pay more taxes.

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Re: Getting killed on taxes - any ideas?

Post by livesoft » Wed Jun 13, 2018 9:40 am

Afty wrote:
Tue Jun 12, 2018 9:47 pm
One possibility that no one else has mentioned is a Nonqualified Deferred Compensation plan.
It was mentioned. #15.
Wiki This signature message sponsored by sscritic: Learn to fish.

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Re: Getting killed on taxes - any ideas?

Post by NextMil » Wed Jun 13, 2018 10:39 am

crit wrote:
Wed Jun 13, 2018 8:11 am
NextMil wrote:
Tue Jun 12, 2018 2:02 pm
You are getting absolutely destroyed by people here, but I will say, I understand your point of view. With a high income, seeing the raw numbers come out somehow hurts worse than if you figure the actual tax rate which actually isn't that terrible, but to folks not making this sort of cash, its really hard to understand the complaint.
We paid 6 figures in taxes last year. We are well aware of our relative fortune. And I find it very, very hard to understand this complaint.

Taxes are what we pay to live in a civilized society. Full stop.

We pay our fair share, happily, and even think that tax rates on our income level should be higher. We don't have children to justify taxes for paying teachers. We'd just prefer our civilisation to be educated (and our bridges maintained, etc., etc.). That's enough reason to pay our taxes.
This sort of thing is what turns these conversations political very quickly, and is counter to the way this board is setup. Just to add, I don't think you would be shocked to find out that some of your peers, me included, may not share your exact view on this issue and that questioning your tax bill and how those taxes are used is not a crazy idea rather than viewing taxes in such absolute terms.

dbr
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Re: Getting killed on taxes - any ideas?

Post by dbr » Wed Jun 13, 2018 10:44 am

Given the level of income and the variability of income, taking the whole case to a CPA for suggestions might be worthwhile.

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Re: Getting killed on taxes - any ideas?

Post by an_asker » Wed Jun 13, 2018 11:13 am

Longdog wrote:
Wed Jun 13, 2018 7:02 am
jwaxjwax wrote:
Tue Jun 12, 2018 9:24 pm
Thanks for the input everyone. To the posters who thought I was attempting to "humblebrag," I can promise that I wasn't. We only achieved dead broke (i.e., loans equaled assets) when I was about 35. We're now on the plus side by only a little bit. I recognize that our income is high. But as I had said originally, there is no way that can continue as my wife is going to have to scale back next 5 years or so and our income will reduce significantly. So I was simply looking to the community to make sure I wasn't missing something during this high income time, along the lines of a HSA, backdoor roth, etc.

Thanks again to those who responded.
I think it was your use of the phrase “killed on taxes” that triggered many of the responses. While it may feel like you are paying a lot of taxes - probably more than you ever have in your life - you’re only paying your fair share of your very high income. Congratulations on you and your wife’s success! Appreciate that you’re doing much better, financially, than most people.
+1! I would retract my previous comment if OP were to rephrase the subject to "Making a lot of money - need help reducing taxes! :oops:" or something like that :sharebeer

That said, I believe livesoft has provided a succinct list of action items for OP to reduce taxes.

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Re: Getting killed on taxes - any ideas?

Post by momopi » Wed Jun 13, 2018 11:56 am

jwaxjwax wrote:
Tue Jun 12, 2018 12:42 pm
Hello everyone,

So here's my situation. My wife and I are in our 30s. We got a late start earning because we both went to graduate school. We still have student loan debt but are aggressively paying that off and it should be done in the next year. We are maxing our 401ks (she is limited to 10K due to being a HCE) and recently opened backdoor Roth IRAs. The good news for us is that our income is good - about $450K/yr. But my wife's career is demanding and she doesn't think that she will be able to keep that up (at the high income level she's doing it at) for more than another 5 years or so. Our goal is to retire early.

So we want to maximize our strong income now by putting as much away as possible. Not to be too dramatic, but we are getting killed on taxes, paying over 100K federally a year + we live in a high-tax state + we will likely be claiming the standard deduction now that it's $24K.

My question is - any advice on how to minimize our current tax burden? If we are able to earn some side income, at what point does it make sense to open a solo 401k or something similar? If I made $10K a year doing that, am I able to put all of that away pre-tax? Also, would it help to invest in real estate, such as buying and renting a duplex? We invested a small amount in real estate syndication but understand that the tax benefits of that can be limited.

Any ideas or thoughts would be helpful. Thank you!

First, if your wife thinks her job is so stressful that she won't last longer than 5 years, I would suggest finding a less stressful job/career for her health.

No amount of money will buy your health back once you have ruined it. Quoting one of my mentors, when he was young he found a great paying job at a battery factory. But the acid and fumes was making him ill so he quit.

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Re: Getting killed on taxes - any ideas?

Post by stocknoob4111 » Wed Jun 13, 2018 12:21 pm

an_asker wrote:
Tue Jun 12, 2018 1:22 pm
OP comes across as a humble brag. Even on this forum, I doubt if more than 25% make that kind of money (though I could be wrong!).
OP statistically is actually part of the 1%... I believe an income of $380k/yr or higher puts you in the top 1% in the entire country. And paying 22% tax on that kind of income and then referring to it as "getting killed on taxes" is quite ridiculous. I am single and make less than quarter that income and pay more than the OP in taxes. If the OP is getting killed then I must be getting worse than killed :annoyed

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Re: Getting killed on taxes - any ideas?

Post by inbox788 » Wed Jun 13, 2018 12:25 pm

an_asker wrote:
Wed Jun 13, 2018 11:13 am
That said, I believe livesoft has provided a succinct list of action items for OP to reduce taxes.
Yup. Great list. I've abbreviated the list below to items that I think are most relevant to this discussion. I think item 12 is also impacted by 2018 changes and needs re-evaluation.
livesoft wrote:
Tue Jun 12, 2018 1:37 pm
10. Poke your eyes out. If you are blind, you get an extra exemption. You will probably need medical attention (see #9).

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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Re: Getting killed on taxes - any ideas?

Post by letsgobobby » Wed Jun 13, 2018 12:25 pm

stocknoob4111 wrote:
Wed Jun 13, 2018 12:21 pm
an_asker wrote:
Tue Jun 12, 2018 1:22 pm
OP comes across as a humble brag. Even on this forum, I doubt if more than 25% make that kind of money (though I could be wrong!).
OP statistically is actually part of the 1%... I believe an income of $380k/yr or higher puts you in the top 1% in the entire country. And paying 22% tax on that kind of income and then referring to it as "getting killed on taxes" is quite ridiculous. I am single and make less than quarter that income and pay more than the OP in taxes. If the OP is getting killed then I must be getting worse than killed :annoyed
What you have said is almost mathematically impossible. If you earn less than 1/4 of his $450k, you earn about $100k per year. He pays more than $100k in taxes. Can you explain how you pay more than the OP In taxes?

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