Dual W-2 earners - how to stop getting hosed on taxes?

[NoMoreJob]

Could you invest more tax efficiently to reduce cap gains, dividends and interest? Tax efficient mutual funds perhaps? Are your investments positioned in the right locations - i.e. taxable vs. tax deferred? Are you tax-loss harvesting where possible?

These are some things I failed to do altogether right while working and they continued to haunt me into early retirement.

 

[pb4uski]

If all your income is W-2 income then there are not many alternatives available to you other than maxing out tax deferred savings (401k, HSA, etc.). Grin, bear it, save like mad and then ER.

 

[soupcxan]

Not so annoyed by the tax rate as the gross $ amount of federal taxes paid. To me $77k/year is a lot of money and it's only going up as long as we keep working. Yes it's a first world problem, and a top 2% problem so I don't feel too sorry for myself.

However, at the other end of the spectrum is a person who started this thread where he claims to have $250k income and only pays $7k/year in federal tax (3% versus my 22%), all of which is social security tax. I question whether this guy's returns would withstand an audit but regardless that is a huge difference and does not strike me as very equitable (yeah, who said the tax code would be fair):

Tax Planning Strategies, 2014

On the other hand, the top 1% (or perhaps top 0.1%) have all sorts of vehicles to shelter income from taxes but for those of us who are working professionals there is really nothing, is the conclusion I am coming to.

 

[Walt34]

DW and I were in a similar position years ago although not that high getting hammered with taxes and W-2 incomes. We went to a fee-only FA and about all we could do was buy a boat with a galley and head, or an RV, or dump all we could into Thrift Savings and the 457 account. Since we didn't want a boat or RV we did the last on the list.

 

[aja8888]

I do not know if they still do it, but back in the day if you took a home office deduction it was an automatic audit...

Sure, you can take it, but the rules are VERY tight... and the court cases have gone toward the IRS...

I have been self employed since 2010 (present day 1099 contractor) and had a Sub S corporation with four employees between 1998 - 2010. I have never had a year where we were a net loss after deductions. I recall the bad press about home office deductions years ago, but I believe it is pretty commonplace to have one these days, especially with so many folks working on their own anymore.

I have never been audited for my business activities or deductions, and take what the law allows. Currently, the home office deduction is very small part, dollar-wise, of the total deductions I take for my consulting business. Just one airline fare is generally more in total cost, than I can claim for the home office deduction in total. (I use the standard formula in TT to calculate it)

Now I could understand that if you have a business and are losing money year after year on it and take a huge office deduction, that would raise a flag to the IRS.

Based on what I pay in taxes out of the business, the IRS must like me.

 

[Texas Proud]

I have been self employed since 2010 (present day 1099 contractor) and had a Sub S corporation with four employees between 1998 - 2010. I have never had a year where we were a net loss after deductions. I recall the bad press about home office deductions years ago, but I believe it is pretty commonplace to have one these days, especially with so many folks working on their own anymore.

I have never been audited for my business activities or deductions, and take what the law allows. Currently, the home office deduction is very small part, dollar-wise, of the total deductions I take for my consulting business. Just one airline fare is generally more in total cost, than I can claim for the home office deduction in total. (I use the standard formula in TT to calculate it)

Now I could understand that if you have a business and are losing money year after year on it and take a huge office deduction, that would raise a flag to the IRS.

Based on what I pay in taxes out of the business, the IRS must like me.

It is always difficult with home office... I remember a case where a doctor had taken it and lost in court... he did not have an office, but he lost because he saw his patients at the hospital...

I am not saying NOT to take it if you meet the requirements.... but as you say the benefits are not as great as people make out...

Some people always throws out 'start your own business to get deductions' and just do not realize that you cannot take a deduction if it is not in the course of a business...

From the IRS site:

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
  
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
  
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

Now, if you have a home office and you use it 50% business and 50% personal... you might not want to take the deduction... also, remember that you might have a tax issue when you sell your house... there is recapture of depreciation to think about... or cap gains... your cap gain exclusion does not apply to the business part of your home...

 

[Gatordoc50]

It is painful writing those checks but being self employed isn't the tax haven people think it is. For one, you would be paying an extra 7500 to 15000 in SS taxes. Additionally, it is difficult to put funds away in a retirement vehicle without also shelling out tens of
thousands to employees. The good news is if you retire with most of your money in post tax accounts, your tax bill will be negligible. My wife is still working part time and last year made 50000.00. But unlike other years when I was working and we paid 90 grand in taxes, this year we paid 0. Stay healthy and the tide will turn in your favor eventually.

 

[FANOFJESUS]

I legally pay $0 in taxes. If you trade me incomes I would trade tax bills.

 

[Rustward]

I have been trying to hold back, but can't. You make more in a year than most people will ever be worth. I don't blame you for looking for ways to reduce your taxes, but . . .

I looked back at our highest earning years. We made a little over half what you did and paid between 20 and 25% of it in federal income taxes. I was self employed some of those years so paid both employer's and employee's shares of SS in addition to medicare.

Right now our federal taxes are about 5% of income. I liked paying 20%+ in taxes. But now I am in total control of my life, so it's all good.

 

[cardinal93]

Try living in California

Hi OP,

If you think you got it bad, we are also W2 only income and we make in your income neighborhood (but have 2 kids) but we live in California.

My combined marginal income tax rate is 48%...I couldn't believe it until I added 1000 dollars in interest to my online tax prep software and it increased my combined tax amount by 480 dollars . We are also subject to AMT, so I'm double whammied.

Be thankful you're not paying another 9.3% in state income tax.

My large mortgage (and subsequent large annual interest deduction) are my most valuable tax savings. I regret paying down my mortgage, so I took out an equity loan at 2.74% fixed to increase my mortgage interest deduction. Of course I'm using that loan for good purposes!

But I agree with some of the other posters on here....at a certain point, it becomes less incentive for 2 high income earners if you have to pay for childcare, etc....the extra income just adds extra taxes and other burdens that it may make more sense just to have 1 high income and a part time job.

 

[Culture]

While the OP explicitly indicated that self-employment was not an option, I want to throw this in for other readers:

I am self employed and was disappointed when I found out that all of the alleged amazing self employment tax deductions you hear about are myths. Like other posters, I found the home office deduction was so small as to be almost meaningless (I use 600 SF of a 3200 SF house exclusively as my only office and it is so small as to be almost not worth the trouble of calculating).

However, I finally found the holy grail, which you never hear discussed. I started a pension plan. This cut my taxes in half (literally in half, not figuratively in half). Of course, the taxes are only postponed, not eliminated, but still. The other problem is you have to be willing to save half your income. Should be easy when you are making north of 200K. I found it was.

This does not help the W-2 crowd, but merely makes them madder, as it should. Why should I be able to put 50% of my income into a tax sheltered plan and you can't? The tax code is stupid.

When my wife and I were both high income W-2 slaves, I tried to convince her we should divorce (on paper). It would have saved us a significant sum of money. She wanted no part of it. I still think it is a great idea for situations where husband and wife are both high income earners. As far as I am concerned, the government should not have any input into marriage anyway. I got married by a preacher, not a government bureaucrat.

 

[Culture]

However, I finally found the holy grail, which you never hear discussed. I started a pension plan.

I just read the link posted by the OP regarding the individual who pays no income taxes on 250k/year income and note that this person also uses the pension plan as the primary tax reducer.

 

[youbet]

I don't think anyone here who has suggested a small business has suggested a sham business or deductions. I am sure many here have expertise that could earn consulting income or have the skills to develop a knowledge worker side business using brains and a lap top, and then many expenses do become legitimately deductible, like health insurance or attending a business related conference in London or Paris.

I have a feeling that OP and spouse are busy enough earning their handsome W2 incomes that seriously getting involved in a consulting or other side business isn't something they're looking to do...........

 

[daylatedollarshort]

I have a feeling that OP and spouse are busy enough earning their handsome W2 incomes that seriously getting involved in a consulting or other side business isn't something they're looking to do...........

To each his own. From other forums, I know many people with day jobs and side businesses. A couple of side businesses are what helped DH eventually leave the megacorp world behind.

Perhaps the OP could make more money for less work doing consulting or owning a small business.

 

[aja8888]

I just read the link posted by the OP regarding the individual who pays no income taxes on 250k/year income and note that this person also uses the pension plan as the primary tax reducer.

Look up Solo 401K for starters......I opened one and it allows me to shelter $17,500 + $5,500 + 20% of the net earnings of my business.

 

[Fermion]

Those of you saying be happy you are paying high taxes because you have a high income should remember that a lot of these high incomes (not all of course) come with high hours and stress which could actually mean a shorter working life. It can't be healthy to work 60 or 70 hours a week, but if you do, it certainly seems unfair to be taxed so heavily.

 

[pb4uski]

I have been trying to hold back, but can't. You make more in a year than most people will ever be worth. ....

Rustward, all of what you write is true, but.... it is nonetheless frustrating to pay in taxes more than most people gross.

Most people have no appreciation for the hours and stresses associated with high income jobs. Many high income jobs are long hours and you are "on call" 24/7/365. And in most cases, there is NO job security - you can be cut loose at any time for no reason - if the new boss arrives and doesn't like the way you part your hair - you're gone.

 

[Bestwifeever]

Rustward, all of what you write is true, but.... it is nonetheless frustrating to pay in taxes more than most people gross.

Most people have no appreciation for the hours and stresses associated with high income jobs. Many high income jobs are long hours and you are "on call" 24/7/365. And in most cases, there is NO job security - you can be cut loose at any time for no reason - if the new boss arrives and doesn't like the way you part your hair - you're gone.

These things are also true for jobs that don't pay nearly as much as the OP's household earns. Only certain people in education and unions have any job security regardless of their income, and being on call is also a given for many people who make much less (the first things they get on the job are a company phone and lap top, so they are always communicating with the office, clients, bosses, etc.).

 

[Rustward]

Rustward, all of what you write is true, but.... it is nonetheless frustrating to pay in taxes more than most people gross.

Most people have no appreciation for the hours and stresses associated with high income jobs. Many high income jobs are long hours and you are "on call" 24/7/365. And in most cases, there is NO job security - you can be cut loose at any time for no reason - if the new boss arrives and doesn't like the way you part your hair - you're gone.

Been there. Long hours, on call 24x7, no job security, cut with no reason. All of that. I understand. Been there. WTF

Perhaps if the OP would tell us his situation things would be more clear.

Is somebody holding a gun to the OP's head to make him do this?

 

[ERD50]

Been there. Long hours, on call 24x7, no job security, cut with no reason. All of that. I understand. Been there. WTF

Perhaps if the OP would tell us his situation things would be more clear.

Is somebody holding a gun to the OP's head to make him do this?

Up to the OP of course, but I see no reason for him to feel a need to 'justify' his income.

He might have been able to find a cushy high paying job - if so, good for him! There are cushy high and low paying jobs, and grueling high and low paying jobs, all with varying degrees of job security. Any of those workers are equally entitled to seek out legal ways to reduce their taxes.

I don't see any reason to drift into 'judgmental' territory.

-ERD50

 

[fidler4]

Up to the OP of course, but I see no reason for him to feel a need to 'justify' his income.



He might have been able to find a cushy high paying job - if so, good for him! There are cushy high and low paying jobs, and grueling high and low paying jobs, all with varying degrees of job security. Any of those workers are equally entitled to seek out legal ways to reduce their taxes.



I don't see any reason to drift into 'judgmental' territory.



-ERD50

Good answer ERD50. I agree with you 100%.

 

[soupcxan]

Not bitching about my job (in this thread, anyway), just the lack of tax deductions for W-2 earners as compared to self-employed or the uber-wealthy.

But I will say that becoming high-earners didn't just magically happen, we both invested in professional masters degrees which had years of zero income plus student loans. We're early 30s.

 

[Hamlet]

Yeah, some of the most stressful jobs are also pretty low-paying.

My brother is a GM at a fast food restaurant. He makes less than half what I make and probably works twice as hard.

These things are also true for jobs that don't pay nearly as much as the OP's household earns. Only certain people in education and unions have any job security regardless of their income, and being on call is also a given for many people who make much less (the first things they get on the job are a company phone and lap top, so they are always communicating with the office, clients, bosses, etc.).

 

[Hamlet]

This varies widely. My father has a wealthy friend who is gaming the system amazingly well. He is a snowbird, running a seasonal business in a northern state, and living in Florida in the winter.

So he lists his state of residence as Florida, and then treats all of his expenses during the rest of the year as business travel expenses.

I'm not sure if that is entirely legal. My feeling is it shouldn't be.

I am self employed and was disappointed when I found out that all of the alleged amazing self employment tax deductions you hear about are myths. Like other posters, I found the home office deduction was so small as to be almost meaningless (I use 600 SF of a 3200 SF house exclusively as my only office and it is so small as to be almost not worth the trouble of calculating).

 

[Rustward]

Up to the OP of course, but I see no reason for him to feel a need to 'justify' his income.

He might have been able to find a cushy high paying job - if so, good for him! There are cushy high and low paying jobs, and grueling high and low paying jobs, all with varying degrees of job security. Any of those workers are equally entitled to seek out legal ways to reduce their taxes.

I don't see any reason to drift into 'judgmental' territory.

-ERD50

No judgement. I was responding to pb4uski, whose post seemed to be gratuitous. Especially this:

Most people have no appreciation for the hours and stresses associated with high income jobs.

What does this have to do with income taxes? Hours and stresses?
Who are "most people"?