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

[AllDone]

The conversation is breaking down along the usual tribal lines, here. I don't believe that anyone is condemning or in favor of punishing the OP for having a high income. My DH worked half a year last year and substantially out-earned the couple. Like the OP and his wife, we spent a lot of years under the wing of the University of California (in our case) and like them we view our taxes as paying back what we owe. We're lucky that we've avoided the judicial system, disability programs, and many of the other governmental programs that we also pay for, but they are there for us if we need them.

The very, very wealthy and the very, very poor pay a smaller portion of their income in taxes. Those of us in between pay roughly the same total percentage. I don't begrudge the very, very poor. My late in-laws suffered from psychiatric disease and DH was hospitalized on the state's dime a ciuple of times and probably received food stamps. While it would have saved the state some short term tax expense to let the little taker see if he could make it on his own, in the long run the investment paid off handsomely.

People who are interested in pondering the tribal divide might enjoy "Albion's Seed". Red was red and blue was blue long before there were states. My ancestors, having survived the first winter, promptly passed tax laws for the purpose of supporting mandatory public education.

The answer to the OP is "become a hedge fund manager".

 

[Ready]

It has only been a short period of time where it was legal for me to marry my partner in California. I had always thought that the benefits of marriage were worth fighting for, and I'm pleased that we have the right to do so now.

However, since both of us still earn a high income, it has become clear that the marriage penalty associated with both individuals earning a lot is quite significant. As a single person, I can earn $183K and stay within the 28% tax bracket. If we get married, our combined income can only be $223K before we bump up above the 28% bracket. The penalty is quite high for two high income earners.

I'm not suggesting the OP, or anyone in this situation, should consider getting divorced to fix this. There are many benefits that we do not get for not being married. But the penalty seems a bit random to me. Why should two single people be able to earn so much more money than two married people before jumping up to the next tax bracket?

In any case, if my total tax bill in prior years was only $77K, I would have been thrilled. California adds so much extra tax burden compared to income free states like Texas. I would consider the OP to be quite fortunate to have so much income and only $77K in taxes.

 

[youbet]

It has only been a short period of time where it was legal for me to marry my partner in California. I had always thought that the benefits of marriage were worth fighting for, and I'm pleased that we have the right to do so now.

However, since both of us still earn a high income, it has become clear that the marriage penalty associated with both individuals earning a lot is quite significant. As a single person, I can earn $183K and stay within the 28% tax bracket. If we get married, our combined income can only be $223K before we bump up above the 28% bracket. The penalty is quite high for two high income earners.

Congratulations! And welcome to the marriage penalty.........

The penalty impacts us even in retirement. And it will be worse when RMD's start.

 

[RobLJ]

We're in the mid 200s and I think paid about 22%. My DW often is troubled by the same concern, and I try to tell her, she could take a job for the same hours and less vacation for half the salary and we could cut our taxes precipitously.
But I don't think she would like the result, other than the lower taxes.
I never had a clue we would wind up in this lucky position, so while I don't like paying taxes, it seems a reasonable rate, compared to those in the 50's-70's in particular. It helps that we usually get money back at taxtime; while idiotic, that seems to soften the blow a little. Paying another 500 in April, however, would rub salt in the wounds (I know, I know, the 1k we got back last year could have earning money in the market).

 

[Independent]

The thread title and a number of posters have suggested that marriage, with both spouses working, is a real tax problem.

I tried a few simple examples in TurboTax's "Tax Caster". https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

If I assume equal earnings, the married couple does pay more tax than two singles. OTOH, for sufficiently unequal earnings, the couple pays less - there is a "marriage reward" for these people.

The additional tax in the first case seems to be around 2% of gross income. Certainly, that's a lot of dollars for high income people. But, would I really consider a divorce just to avoid 2%?

(A note on TaxCaster: It picked up the new medicare tax for the my couple situation - 0.9% on gross income over $250,000. But, it didn't give me the new tax I was expecting for my single person making over $200,000. Anybody know what's going on?)

 

[MichaelB]

There are lots of higher income taxpayers with lower rates, I don't see their advantage as my bad fortune, and don't see marriage as a penalty.

 

[MRG]

We didn't have as high of quality problem as you do but it seemed painful. DW finally opened her own FT business(legit), got lots of write offs. She did take a cut, and was responsible for all her SS, it was a good move for her.

Given your income level, not too bad of rate, like that's any concelation. Hey I got to pay an extra 1% every year in city earnings tax. Not to mention the sales tax, had that built into it.

There's been some good suggestions, think thats as good as it gets.
MRG

 

[523HRR]

Depending on your employer offerings, consider deferring a portion of your annual compensation. For many years, the DW and I deferred 30% - 50% of gross income (salary and bonuses) while working at a mega corp. Though funds are unsecured in the event of corporate bankruptcy, assets are invested in an S&P 500 index and grow tax-deferred. We FIREd in 2012, and now these balances are paying out over the next 10 - 20 years.

 

[Surewhitey]

Depending on your employer offerings, consider deferring a portion of your annual compensation. For many years, the DW and I deferred 30% - 50% of gross income (salary and bonuses) while working at a mega corp. Though funds are unsecured in the event of corporate bankruptcy, assets are invested in an S&P 500 index and grow tax-deferred. We FIREd in 2012, and now these balances are paying out over the next 10 - 20 years.

We also took the deferred comp way. We had a lump, 5 yr or 10 yr payout option when DW "retired". Working out well for us. We opted for the 5 yr payout. Should have taken the 10 yr in hindsight.

 

[pixelville]

In 1971, I was a Captain in the USAF, my DW had a clerical job. Our federal tax rate was considerably higher than 20%. I don't think you are getting "hosed" on taxes. I offer the following link so that you can see what taxes you could have paid over the last 100 years:
U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets) | Tax Foundation

Wow, marginal rates in the 90%+ range in the 40s, 50s and 60s and the 70% range in the 70s !
I should think about converting more to Roth at the current rates.

OP, Tax-loss harvesting, tax-efficient placement of your investments (see bogleheads wiki), HSA are the main ones. You should be glad you are not earning in CA or some other high income tax states. Could be 30K addtl tax.
Also note, you are not paying FICA of 6.2% above about 110K salary each, so your marginal tax rate could actually be lower than a couple making ~110K each.

Business income (schedule C) is unlikely to be of much help. You will need revenue to write-off some expenses to not get flagged by IRS. The tracking, time and energy you put into saving a bit in taxes setting up a business is better put in increasing your salary at your jobs. The goal of more $ in your pocket, not less $ in govt pockets is better for you personally.