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Old 02-06-2014, 12:54 PM   #41
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Originally Posted by Texas Proud View Post
As others have mentioned..... there is no good or easy way to reduce taxes.... you kinda just have to live with it...


You still get to take most of your income home, so do not sweat the taxes...


I remember talking to a guy who used to have to make $1 mill quarterly estimated taxes.... this was about 30 years ago, so I will probably butcher it, but he said he would rather be paying $4 million in taxes than zero... zero meant very little income.... $4 mill meant a LOT of income...
+1

I don't understand what the OP is complaining about...is it the absolute dollar amount in taxes? If so, instead focus on that very large gross income number.
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Old 02-06-2014, 02:45 PM   #42
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A donor advised fund (like the "Giving Fund" at Fidelity) might be good if you can lop off enough to keep you below a tax threshold. Certainly an advantage now compared to after retirement if your income goes down. However, limited usefulness if your W-2 income just keeps rising for many years.
True, but if that is the case, and there isn't an expectation of ER with a period of lower tax rate, then this is the wrong forum.
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Old 02-06-2014, 03:02 PM   #43
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.........77 Federal tax bill!...............
Someone has to pay for millionaire early retirees getting subsidized heath care.
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Old 02-06-2014, 03:16 PM   #44
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True, but you can take a "home office" deduction. You can either figure it out on an actual square footage basis and take cuts of utilities, etc on that basis or you can take a "standard" one like I do. Not a big deal and only a small deduction based on the universe of other potential business deductions.

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...
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Old 02-06-2014, 04:36 PM   #45
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Did the OP say what his age was and his spouse?

If they are 50 or older, then use the add'l catch up 401k limit to be $23,000 per person or $46K MFJ.

And, make sure you time your 401k contributions if your employer matches - if you top out too soon then you miss the matching amount.
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Old 02-06-2014, 06:33 PM   #46
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Transitioning to Part-Time status is a beautiful thing for this if your MegaCorp has such a program.

I went from 40 hours down to 24 hours and it only cost me about $25k/year after taxes. So instead of saving $100k /year we were only saving $75k/year. Quite the trade-off if you can get it.

Also made the jump to ER much easier when the time presented itself. I already had one foot in the proverbial water and could see that it was "nice and warm".

-gauss
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Old 02-06-2014, 06:56 PM   #47
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On the other hand, you are talking about 77k/358k = 21.5% tax rate with no state tax for texas. I think this is a great rate and maybe just see it as a glass that is half full?
We pay about 21% on income that is a bit lower than the OP. I think that is pretty reasonable. Someone's gotta pay for the schools and roads, and it isn't going to happen on the backs of the folks raising 4 kids on 35k/year. Whenever I'm aghast at our tax bill (and it happens) I take a breath and remind myself how incredibly fortunate we are.

I'm probably going to be able to retire by age 45. So I remind myself: You're a lucky chick. You've got it great. Pay it forward and stop yer bellyachin'



BTW, Not implying the OP is whining, just that they are similarly fortunate.
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Old 02-06-2014, 09:26 PM   #48
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We pay about 22% to 23% federal tax on 250k, so I don't think you are doing too bad.

That being said, I don't like sending in 56k in federal tax when I only spend $40k a year.

Best move you can make is to retire early, live frugal, and pay zero or even negative tax (when you calculate ACA subsidy). Knowing we will pay zero or negative tax in a few years makes it a lot easier to pay 56k now.
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Old 02-06-2014, 09:53 PM   #49
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We pay about 21% on income that is a bit lower than the OP. I think that is pretty reasonable. Someone's gotta pay for the schools and roads, and it isn't going to happen on the backs of the folks raising 4 kids on 35k/year. Whenever I'm aghast at our tax bill (and it happens) I take a breath and remind myself how incredibly fortunate we are.

I'm probably going to be able to retire by age 45. So I remind myself: You're a lucky chick. You've got it great. Pay it forward and stop yer bellyachin'
But if you retire by age 45, who is going to pay for the schools and roads you mention? Won't your early retirement place a greater burden on those folks raising 4 kids on $35K/yr? Since it is not a zero sum game, even if someone takes over your current job and its salary, it still means one more highly paid person out of the workforce. Tax revenues decline.

The reason I bring this up is because a person in the comments section from the linked article in the "ER's we know" thread writes:

"Too early retired = too rich = selfish => lack of money circulation = poorness for others and destruction of the economical system. Period."

Apparently, this person believes that early retirees do not pay their fair share of human capital. They are selfish bums. And he has a point, at least at some level. Perhaps ER should be banned in the name of societal good. So I am intrigued at attitudes towards taxes in ER forums. There is no right or wrong answer, but personally, I am leaning towards being a selfish bum.

Back to the OP's question. My situation is similar except that I am single. And I agree. People like us are very fortunate. We take many things for granted. Still, I consider every possible way to legally reduce my tax burden ... 401k max with age 50 catchup, HSA, DAF, tax loss harvesting, mortgage refinance considerations, municipal bonds, backdoor Roth (IRA and 401k), etc.

There often is not a lot one can do - except reduce income (or ER). I agree with others who suggest cutting the work load from full-time to part-time or having one parent stay at home after children are born. It is useful to consider the tradeoffs between salary, taxes, work, and the benefits of having additional time not spent in the workforce. Reducing the work hours can be particularly advantageous when considering marginal tax rates. There can be a significant bang for the buck.
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Old 02-06-2014, 09:55 PM   #50
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Best move you can make is to retire early, live frugal, and pay zero or even negative tax (when you calculate ACA subsidy). Knowing we will pay zero or negative tax in a few years makes it a lot easier to pay 56k now.
We broke even financially having DH quit a W2 job after accounting for reduced SS, state and federal taxes; ACA subsidies; now qualifying financial aid for college; college tax credits; middle class tuition breaks; no more job and commute costs; reduced expenses from having DH home to help cook, shop, clean, review the budget and cut expenses; and taking our pensions early.
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Old 02-06-2014, 10:48 PM   #51
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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.
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Old 02-07-2014, 12:41 AM   #52
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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.
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Old 02-07-2014, 08:40 AM   #53
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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.
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Old 02-07-2014, 08:50 AM   #54
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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.
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Old 02-07-2014, 09:44 AM   #55
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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.
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Old 02-07-2014, 12:18 PM   #56
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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...
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Old 02-07-2014, 01:06 PM   #57
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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.
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Old 02-07-2014, 01:21 PM   #58
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I legally pay $0 in taxes. If you trade me incomes I would trade tax bills.
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Old 02-07-2014, 01:31 PM   #59
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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.
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Old 02-07-2014, 03:59 PM   #60
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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.
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