unexpected income and taxes!

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Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

unexpected income and taxes!

Post by dlm2827 »

Hey, Bogleheads, I need some taxation advice. Retired from public school administration in 2020 and have state pension (with COLA!) that, with my wife's similar state pension, covers all our expenses plus some for savings. We have approximately 1 year of expenses in savings, sizable Roth IRA balances, and only a small auto loan and our mortgage as debt. That debt is being paid off ahead of schedule, and neither of us has begun social security yet.

I may take an interim superintendent position for the 2022-2023 school year, and am wondering what to do with that income so that I can minimize the tax bite that may happen. I have approximately $30K between taxable income and top of the tax bracket. I am looking for suggestions for what to do with approximately $120K to reduce my taxes in 2022 and 2023. I know I'll have to pay some, just looking to minimize the amount. Suggestions appreciated!


Update: I didn't get the position. It went to the other candidate, and I am ok with that. Thanks to all who shared responses with me. I think I learned a thing or two. Again, thanks!
Last edited by dlm2827 on Thu Jun 23, 2022 10:35 pm, edited 1 time in total.
exodusNH
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Re: unexpected income and taxes!

Post by exodusNH »

dlm2827 wrote: Mon Jun 20, 2022 9:48 pm Hey, Bogleheads, I need some taxation advice. Retired from public school administration in 2020 and have state pension (with COLA!) that, with my wife's similar state pension, covers all our expenses plus some for savings. We have approximately 1 year of expenses in savings, sizable Roth IRA balances, and only a small auto loan and our mortgage as debt. That debt is being paid off ahead of schedule, and neither of us has begun social security yet.

I may take an interim superintendent position for the 2022-2023 school year, and am wondering what to do with that income so that I can minimize the tax bite that may happen. I have approximately $30K between taxable income and top of the tax bracket. I am looking for suggestions for what to do with approximately $120K to reduce my taxes in 2022 and 2023. I know I'll have to pay some, just looking to minimize the amount. Suggestions appreciated!
Will you have access to a tax-deferred retirement plan? If not, will you be within the range of income to make a deductible IRA contribution? I assume you are both over 50, which would mean deferring $14,000.

Will you have access to a high-deductible health plan? You could bury another few thousand in a HSA.

Will you be a contractor or regular employee? If a contractor, you could look at setting up a Solo 401k or SEP IRA.
Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

Thanks for your comments! I would be a regular employee and we are both over 50. I would have access to a 403(b) and could also start an IRA. What is the maximum I can put into those two? As for an HSA, no, not that I know of.
123
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Re: unexpected income and taxes!

Post by 123 »

In addition to regular retirement and salary deferral options that are tied to eventual RMDs the school system might have other salary deferral options where your salary could be held in some kind of annuity product and paid out over some period of years. Often times there is an "insurance guy" who gets the business from a school system for these kinds of situations involving executives. If the process proceeds to salary negotiations you may want to ask the HR people if there are deferred salary payout options.
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Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

Thanks!
exodusNH
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Re: unexpected income and taxes!

Post by exodusNH »

dlm2827 wrote: Mon Jun 20, 2022 10:12 pm Thanks for your comments! I would be a regular employee and we are both over 50. I would have access to a 403(b) and could also start an IRA. What is the maximum I can put into those two? As for an HSA, no, not that I know of.
IRS limit is $27,000 if you're over 50. The plan can be more restrictive.

While you can definitely contribute to an IRA as well, whether you can deduct all or part depends on your MAGI: https://www.irs.gov/retirement-plans/pl ... an-at-work
Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

Thanks, I'll look into that.
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oldcomputerguy
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Re: unexpected income and taxes!

Post by oldcomputerguy »

dlm2827, since your question regards taxes rather than "what to invest in", I have moved your topic from Personal Investments into the Personal Finance forum.
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arcticpineapplecorp.
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Re: unexpected income and taxes!

Post by arcticpineapplecorp. »

1. if you don't have a HSA, do you have a FSA? If so you could contribute to that but make sure you use the funds on medical expenses or you will lose what's unused (unless the plan allows some amount to be rolled over into the following year).

2. you can contribute to a donor advised fund which is tax deductible if eligible. Read more:
Maximize potential tax benefits

As soon as you make a charitable contribution, you are eligible for an immediate tax deduction, just as you would by donating to another public charity, like your local homeless shelter or food pantry. But some donations could make you eligible for additional benefits.

Cash donations
If you donate cash, via check or wire transfer, you're generally eligible for an income tax deduction of up to 60 percent of your adjusted gross income.

Donations of long-term appreciated assets
Donating long-term appreciated securities directly to charity—instead of liquidating the asset and donating the proceeds—can help maximize both your tax benefit and the overall amount you have to grant to charity. These donations provide two tax benefits:

Become eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income.
Eliminate capital gains tax on long-term appreciated assets, as long as they’ve been held for more than a year.

https://www.fidelitycharitable.org/guid ... -fund.html
3. i don't know if the following is applicable or not but i'll mention it so you're aware of it and can look into it. Don't know if your current job is in the same "organization" (school district?) that you've completed at least 15 years of service with. If it is, you might be eligible for special catch up 403b (but this is only if you didn't max your 403b contributions for the years you worked at the "same organization" (if current is same as one you retired from).
Special 403(b) Catch-Up
Amount

Under the special 403(b) catch-up, employees of a qualified organization may contribute an increased dollar amount under IRC Section 402(g)(1) if they've completed at least 15 years of service with the organization. This special 403(b) catch-up is the least of:

$3,000;
$15,000, reduced by the sum of:
amounts not included in gross income for prior taxable years by reason of this special 403(b) catch-up and
the aggregate amount of designated Roth contributions (per IRC Section 402A(c)) permitted for prior taxable years by reason of this special 403(b) catch-up; or
$5,000 multiplied by the employee's years of service with the qualified employer, less all elective deferrals the employee made in prior years to the organization's plans. Elective deferrals include those made to a 401(k) plan, SARSEP, SIMPLE, or 403(b) plan maintained by the organization.

As indicated above, the special 403(b) catch-up formula imposes a lifetime limit of $15,000 of elective deferrals.

See IRC Sections 402(g)(3) and 402(g)(7) and Treas. Reg. 1.403(b)-4(c)(3).
Qualified Organization

Only a 403(b) plan that's maintained by a qualified organization may allow increased elective deferrals under the special 403(b) catch-up. A qualified organization is any of the following:

An educational organization as described in IRC Section 170(b)(1)(A)(ii)
A hospital
A health and welfare service agency (including a home health service agency)
A church
A church-related organization, as defined under IRC Section 414(e)(3)(A)
An organization described in IRC Section 414(e)(3)(B)(ii) (an exempt organization that is controlled by or associated with a church or convention or association of churches).

All entities within a church-related organization or one controlled by a church-related organization under IRC Section 414(e)(3)(B)(ii) are treated as a single qualified organization. This means that you must consider all of a participant's years of service and prior special 403(b) catch-up deferrals for all related organizations to determine if a participant is eligible for, and if so, his annual limit on special 403(b) catch-up deferrals.

A 'health and welfare service agency' means an organization whose primary activity is to provide medical care as defined in IRC Section 213(d)(1), a 501(c)(3) organization whose primary activity is the prevention of cruelty to individuals or animals, an adoption agency, or an agency that provides personal services to the needy.
Years of Service

Under the special 403(b) catch-up, an employee must have completed at least 15 years of service with the qualified organization sponsoring the plan. Years of service are based on an employee's work period, which may be different from the taxable year. For example, a teacher's work period is the academic year, which may run from August to June. Credit an employee who works full-time during the entire work period with a full year of service. Credit an employee who only works part of the work period, either full-time or part-time, with a fraction of a year. Add an employee's work periods together to determine if the employee has completed 15 years of service. See Treas. Reg. 1.403(b)-4(e).

When determining if an employee has 15 years of service, only consider the years worked with the same organization. For example, you wouldn't consider an employee's work for different schools within the same school district as work for the same organization; therefore, you wouldn't combine years of service with the different schools to determine if the employee has 15 years of service. However, there's an exception to this rule for church-related organizations or organizations controlled by a church-related organization. See Treas. Reg. 1.403(b)-4(e)(3)(ii)(B).

A 403(b) plan that permits the special 403(b) catch-up must keep detailed records. The plan must keep participant information for the increased limit formula, including a participant's:

elective deferrals made to any of the organization's plans,
prior elective deferrals under the special 403(b) catch-up, and
designated Roth contributions.

The plan must also keep employment records to calculate an employee's years of service.
Coordination Rule

If the plan permits both the age 50 catch-up and the special 403(b) catch-ups, you must consider the special 403(b) catch-up first to apply the annual limit. Then, apply the age 50 catch-up to any remaining amount, up to the IRC Section 414(v) limit. For example, a participant eligible for both the age 50 catch-up and $3,000 of the special 403(b) catch-up makes an additional $7,000 in catch-up contributions during 2020. $3,000 of the $7,000 is applied to the special 403(b) catch-up and the remaining $4,000 is applied to the age 50 catch-up. See Treas. Reg. 1.403(b)-4(c)(3)(iv).
Audit Tips

Review the Forms W-2 to determine if any employee has exceeded the basic IRC Section 402(g) limit. This indicates that the employee made catch-up contributions.
Determine if the plan document permits the age 50 catch-up or the special 403(b) catch-up contributions. For plans that permit both types, make sure the contributions are applied to the limits in the proper order.
Verify that the qualified organization keeps the records necessary to calculate the special 403(b) catch-up and that the calculations are accurate.

source: https://www.irs.gov/retirement-plans/40 ... tributions
Last edited by arcticpineapplecorp. on Tue Jun 21, 2022 9:14 am, edited 4 times in total.
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KlangFool
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Re: unexpected income and taxes!

Post by KlangFool »

OP,

You may have access to 401K and 457B too. One of them has a shared 27K limit with other plan. The other has a separate limit. I cannot remember which one. Could someone else please share that information?

KlangFool
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magnusw
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Re: unexpected income and taxes!

Post by magnusw »

Hi. Just because you move into a higher bracket doesn't mean all your income is taxed at that level. It's progessive... so while for instance you are in the 34% bracket your effective tax rate is like 25% because most income is taxed at lower levels (just an example!)
mw1739
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Re: unexpected income and taxes!

Post by mw1739 »

Since your income will span 2 tax years, can you negotiate the contract so the income is heavily weighted towards one year or another? Alternatively that should allow you to make max retirement contributions in 2 years.
Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

Re: unexpected income and taxes!

Post by dlm2827 »

magnusw wrote: Tue Jun 21, 2022 9:11 am Hi. Just because you move into a higher bracket doesn't mean all your income is taxed at that level. It's progessive... so while for instance you are in the 34% bracket your effective tax rate is like 25% because most income is taxed at lower levels (just an example!)
Understood.
Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

Re: unexpected income and taxes!

Post by dlm2827 »

mw1739 wrote: Tue Jun 21, 2022 9:27 am Since your income will span 2 tax years, can you negotiate the contract so the income is heavily weighted towards one year or another? Alternatively that should allow you to make max retirement contributions in 2 years.
Nope. Payments in 2022 will be July through December and payments in 2023 will be January through June. Having administered payroll for a couple school districts, the likeliness of weighting contracted payments is at about 0%. Thanks for suggesting that, though.
Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

KlangFool wrote: Tue Jun 21, 2022 9:11 am OP,

You may have access to 401K and 457B too. One of them has a shared 27K limit with other plan. The other has a separate limit. I cannot remember which one. Could someone else please share that information?

KlangFool
I believe I can do a 403(b) at $27K, unless the plan limits the amount deferred. Thanks for your response.
KlangFool
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Re: unexpected income and taxes!

Post by KlangFool »

dlm2827 wrote: Tue Jun 21, 2022 9:48 pm
KlangFool wrote: Tue Jun 21, 2022 9:11 am OP,

You may have access to 401K and 457B too. One of them has a shared 27K limit with other plan. The other has a separate limit. I cannot remember which one. Could someone else please share that information?

KlangFool
I believe I can do a 403(b) at $27K, unless the plan limits the amount deferred. Thanks for your response.
OP,

You missed my point. If you have access to 401K and 457B, you may be able to contribute another 27K to either 401K or 457B.

KlangFool
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Small Savanna
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Re: unexpected income and taxes!

Post by Small Savanna »

dlm2827 wrote: Tue Jun 21, 2022 9:47 pm
mw1739 wrote: Tue Jun 21, 2022 9:27 am Since your income will span 2 tax years, can you negotiate the contract so the income is heavily weighted towards one year or another? Alternatively that should allow you to make max retirement contributions in 2 years.
Nope. Payments in 2022 will be July through December and payments in 2023 will be January through June. Having administered payroll for a couple school districts, the likeliness of weighting contracted payments is at about 0%. Thanks for suggesting that, though.
The fact that this job cuts across two calendar years is actually an advantage. Maximize 403b plus IRA plus spousal IRA contributions on earned income in both years and you should be able to defer (27K + 7K + 7K ) * 2 = $84K from taxes.
Katietsu
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Re: unexpected income and taxes!

Post by Katietsu »

It seems that many school districts have added a 457b in addition to the 403b. These have separate limits. Therefore as a 50+ year old, you could contribute $27,000 to each for a total of $54,000. The contribution limits are by calendar year. You could therefore potentially contribute $54,000 more in 2023. There may be a limit to the % of your salary you can contribute.

You would need to decide if it was better to pay taxes now or later on this money. Maybe the 403b or 457b has a Roth option and you want to split the contribution. Or maybe you have several years until social security and you want to use pre tax now and do Roth conversions over several years.

Not much point to contemplating best options until you find out what options are available from the school district as a start.
Last edited by Katietsu on Wed Jun 22, 2022 12:01 pm, edited 1 time in total.
Caliscotsman
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Re: unexpected income and taxes!

Post by Caliscotsman »

KlangFool wrote: Tue Jun 21, 2022 9:11 am OP,

You may have access to 401K and 457B too. One of them has a shared 27K limit with other plan. The other has a separate limit. I cannot remember which one. Could someone else please share that information?

KlangFool
Here in CA my wife had a full contribution entitlement to both a 403b and a 457 every year,
I can't recall the exact numbers but it was similar to a 401K contribution except she could contribute the full amount to both plans, not shared.
From, imperfect memory for example, in her latter years she was employed she was contributing @ 50K total. Eventual income taxes were trivial.

And she also contributed to her Roth IRA annually.
Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

Re: unexpected income and taxes!

Post by dlm2827 »

KlangFool wrote: Tue Jun 21, 2022 9:53 pm
dlm2827 wrote: Tue Jun 21, 2022 9:48 pm
KlangFool wrote: Tue Jun 21, 2022 9:11 am OP,

You may have access to 401K and 457B too. One of them has a shared 27K limit with other plan. The other has a separate limit. I cannot remember which one. Could someone else please share that information?

KlangFool
I believe I can do a 403(b) at $27K, unless the plan limits the amount deferred. Thanks for your response.
OP,

You missed my point. If you have access to 401K and 457B, you may be able to contribute another 27K to either 401K or 457B.

KlangFool
You're right, I missed your input on the 457(b). I will check to see whether that is available. Thanks!
Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

Re: unexpected income and taxes!

Post by dlm2827 »

Katietsu wrote: Tue Jun 21, 2022 10:11 pm It seems that many school districts have added a 457b in addition to the 403b. These have separate limits. Therefore as a 50+ year old, you could contribute $27,000 to each for a total of $64,000. The contribution limits are by calendar year. You could therefore potentially contribute $64,000 more in 2023. There may be a limit to the % of your salary you can contribute.

You would need to decide if it was better to pay taxes now or later on this money. Maybe the 403b or 457b has a Roth option and you want to split the contribution. Or maybe you have several years until social security and you want to use pre tax now and do Roth conversions over several years.

Not much point to contemplating best options until you find out what options are available from the school district as a start.
Thanks for your input. I will definitely check to see whether a 457(b) is possible. Regarding "contemplating best options", I expect a short turnaround time between offer/acceptance of the position and getting the compensation/tax stuff decided. Just wanted to be a bit proactive.
Topic Author
dlm2827
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Joined: Wed Feb 23, 2022 12:39 pm

Re: unexpected income and taxes!

Post by dlm2827 »

Thanks, will definitely check on the 457(b).
deltaneutral83
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Re: unexpected income and taxes!

Post by deltaneutral83 »

OP, with $60k this year and $60k next year, I assume you can defer most of this to retirement accounts and potentially an HSA, and over 50 take advantage of the catch up. You're probably below the MFJ MAGI for direct Roth contributions (it was $214k for 2021) as well but that is after tax but still an advantage. I think this situation is very advantageous. You can then get back to Roth conversions in 2024 and I would do that up to the current 22% with your pensions being present every year (assume you have health care already).
Katietsu
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Re: unexpected income and taxes!

Post by Katietsu »

dlm2827 wrote: Wed Jun 22, 2022 9:12 am
Katietsu wrote: Tue Jun 21, 2022 10:11 pm It seems that many school districts have added a 457b in addition to the 403b. These have separate limits. Therefore as a 50+ year old, you could contribute $27,000 to each for a total of $64,000. The contribution limits are by calendar year. You could therefore potentially contribute $64,000 more in 2023. There may be a limit to the % of your salary you can contribute.

You would need to decide if it was better to pay taxes now or later on this money. Maybe the 403b or 457b has a Roth option and you want to split the contribution. Or maybe you have several years until social security and you want to use pre tax now and do Roth conversions over several years.

Not much point to contemplating best options until you find out what options are available from the school district as a start.
Thanks for your input. I will definitely check to see whether a 457(b) is possible. Regarding "contemplating best options", I expect a short turnaround time between offer/acceptance of the position and getting the compensation/tax stuff decided. Just wanted to be a bit proactive.
In case you have not figured it out yet, I should have written $54,000 as the annual total.
DoubleComma
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Re: unexpected income and taxes!

Post by DoubleComma »

The easiest solution is don't take the position.

Its pretty clear you don't need the money, your doing great financially. If you just feel the calling to help out this district, accept you will have some additional tax liability and bracket increase.

I guess you can always make a charitable donation in the amount you want in order to bring your AGI to a level your comfortable with...of course after using all you differed space.
Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

Yes, that is a possibility. Don't even know if the position will be offered to me.
n00b
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Re: unexpected income and taxes!

Post by n00b »

Katietsu wrote: Tue Jun 21, 2022 10:11 pm It seems that many school districts have added a 457b in addition to the 403b. These have separate limits. Therefore as a 50+ year old, you could contribute $27,000 to each for a total of $54,000. The contribution limits are by calendar year. You could therefore potentially contribute $54,000 more in 2023. There may be a limit to the % of your salary you can contribute.

You would need to decide if it was better to pay taxes now or later on this money. Maybe the 403b or 457b has a Roth option and you want to split the contribution. Or maybe you have several years until social security and you want to use pre tax now and do Roth conversions over several years.
Nice summary, Katiesu!

If offered the Superintendent's position, dlm2827, I think you owe it to the district to make sure they have good 403b AND 457b options!

Arizona passed a law giving all Arizona State Retirement participants access to good plans via ASRS This is VERY helpful since school districts often seem to have access to lower quality plans. (https://www.azasrs.gov/blog/new-informa ... ings-plans)
Topic Author
dlm2827
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Re: unexpected income and taxes!

Post by dlm2827 »

deltaneutral83 wrote: Wed Jun 22, 2022 9:40 am OP, with $60k this year and $60k next year, I assume you can defer most of this to retirement accounts and potentially an HSA, and over 50 take advantage of the catch up. You're probably below the MFJ MAGI for direct Roth contributions (it was $214k for 2021) as well but that is after tax but still an advantage. I think this situation is very advantageous. You can then get back to Roth conversions in 2024 and I would do that up to the current 22% with your pensions being present every year (assume you have health care already).
Thanks! Great suggestions, I will pursue these ideas.
ivk5
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Re: unexpected income and taxes!

Post by ivk5 »

DoubleComma wrote: Wed Jun 22, 2022 12:14 pm I guess you can always make a charitable donation in the amount you want in order to bring your AGI to a level your comfortable with...
For the record, itemized deductions don’t reduce AGI. (They may reduce taxable income, which may be what was intended.)
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