Seeking tax planning tips for 2010 - DINKs w/ $250k income

[soupcxan]

2010 will be the first year that DW and I have a joint return with full year incomes for both of us. I am grateful that we both have good jobs, but not looking forward to the tax bill. Worried we're going to hit the AMT. Any suggestions for things we can do now to lessen the impact? Situation is as follows:

• Married, ~30 years old, no kids
• Expect W-2 2010 total income of about $250k, we are both employees with no side businesses or partnerships
• Plus $2k in 1099 income from savings accounts, capital gains on mutual fund distributions, etc. Will take $3k tax loss carryforward.
• Maxing out both 401ks at $16.5k/year each
• Income too high for Roth contributions
• House: value $230k, mortgage balance $70k at 5.75%, working on paying down mortgage
• Student loans: $50k at 2% (income too high to deduct interest)
• Taxable investments: $50k savings account (1% yield), $50k taxable stock index fund (3% dividend yield)
• Reasonable balances in 401k's and Roth IRAs from previous years
• No credit card debt

[plex]

Sounds like you have most of what you need to be on top of doing. Seems like you guys will also just barely be within the extra 3.8% Medicare gains/dividends tax that is now law, but I think that will only be $76 of extra tax, as long as you don't declare any gains.

[FIREd]

It's pretty easy not to get hit by the AMT even if you make a lot of money. If you have no kids, only a small mortgage and live in a state with no income tax (like TX), then you probably won't pay the AMT because you already pay more taxes under the regular tax code than what you would under the AMT (you have to pay the highest of the 2). Since your income is mostly W-2 income, there is not much you can do to shield your income from taxation beyond the usual suspects (401K, HSA, etc...).

Since I am pretty much in the same situation as you are (high income, low deductions) and that I am looking at a big tax increase in 2011 (Bush tax cuts expire for high earners), I am taking advantage of the lower tax brackets in 2010 to maximize income typically taxed at ordinary income tax rates. So I am exercising aggressively my non-qualified stock options for example. I will be also selling a lot of dividend-paying stocks held in my taxable account before the end of 2010 because, starting in 2011, qualified dividends will be taxed again at ordinary income rates for high earners instead of 15% currently. In order to make my portfolio more tax efficient, I will probably have to move dividend-paying stocks into my IRA, which will force me to replace some taxable bonds in my IRA by munis in my taxable account, and I will try to keep only low-yielding index funds in my taxable account.

[walkinwood]

From my personal experience: Being employees, there isn't much you can do to avoid taxes besides sheltering income in 401K, HSA plans or Flexible Spending accounts. Make sure you understand all your applicable deductions, but there probably isn't much besides the mortgage, property & local taxes. Chances are you'll get hit with AMT if your deductions are high.

I suggest reading about asset location - ie. what kinds of assets to put in a 401K and what type to put in a taxable account.

At the end of the day, be grateful for your good fortune. It is a good problem to have

[ChrisC]

Real estate is a tax great shelter and at a bargain these days. Munis might not be bad for you either. I'd think seriously about a HDHP-HSA, if you're reasonably healthy. There aren't any income level caps on Roth conversions -- this might spike up taxes in the short term but might be a great long term benefit.

[youbet]

Folks above have listed the usual items like contribute to 401k, etc. After that I'm really hoping folks in your situation can't find ways to sidestep taxes. Dont' take that the wrong way. I'm not shooting at you. It's just that the higher tax rates already existing and being revised upwards now for folks making significant money need to be paid, not worked around. It often annoys me that our tax code allows those willing to embrace behaviors, hire cpa's and dance to the right tune are able to avoid paying taxes that our politicians just told us were fair and needed.

So, no bad wishes for you. But I do hope you (and everyone else in that fortunate bracket) find the tax code means earning more = paying more and not earning more = using more loop holes.

[LOL!]

In 2009, We eschewed any taxable savings accounts and also tax-exempt bond funds. We had under $10 in interest on our checking account. All fixed income funds went into tax-advantaged accounts.

Our taxable accounts were mostly international ETFs such as VEU, EEM, SCZ, VSS, etc. We benefitted from the foreign tax credit on the dividends. Of course, the FTC is only recovering taxes paid, but does prevent double-taxation of the dividends that would occur if our international funds had been in tax-deferred accounts.

Other dividends were mostly qualified dividends taxed at a lower rate, but that doesn't really help you.

So ditch the $50,000 in a savings account. If you think you need it as an emergency fund, think again. Here is a ploy I use: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

You already have your $3000 capital loss. Other above-the-line reductions in AGI would stem from starting a business that had a loss. And you already mentioned FSA, right? FSA money is exempt from FICA as well as income taxes.

Other than that, there is not much you can do. A small percentage of Americans make the kind of income you do.

Below the line deductions are another matter. I used TT to decide on those.

[jimnjana]

Take a look at your current federal tax with holding and make sure you are with holding at the appropriate level for your new tax bracket, at least that way you are not in for a shocking tax bill in April 2011.

[mh]

Quote:

Originally Posted by youbet Folks above have listed the usual items like contribute to 401k, etc. After that I'm really hoping folks in your situation can't find ways to sidestep taxes. Dont' take that the wrong way. I'm not shooting at you. It's just that the higher tax rates already existing and being revised upwards now for folks making significant money need to be paid, not worked around. It often annoys me that our tax code allows those willing to embrace behaviors, hire cpa's and dance to the right tune are able to avoid paying taxes that our politicians just told us were fair and needed. So, no bad wishes for you. But I do hope you (and everyone else in that fortunate bracket) find the tax code means earning more = paying more and not earning more = using more loop holes.

There are things out there such as investments in domestic gas and oil
exploration that provide tax breaks. There's also things like tax breaks for
low income housing investments. They are there to encourage investments
in those areas. I see no reason not to avail yourself of those options if you think they make sense for you.

[Gillette]

Energy efficient modifications to your primary residence are eligible for a tax credit that is not subject to income phaseouts.

[Ronstar]

I had similar income in 2006 with $23k in itemized deductions and payed AMT of $1,690. I know every case is different, so YMMV. Get some sound advice from a tax accountant and start taking AMT reducing measures asap.

[LOL!]

Ronstar, can I ask how a tax accountant helped you?

[Ronstar]

Our tax accountant prepares returns and provides advice for business ventures and partners that I'm involved in/with. No specific advice for me personally the last few years. I'm just saying that if the OP has an accountant do his taxes, he should ask the accountant how to to avoid anticipated AMT. Its always great to get more opinions.

[smjsl]

Quote:

Originally Posted by mh There are things out there such as investments in domestic gas and oil exploration that provide tax breaks. There's also things like tax breaks for low income housing investments. They are there to encourage investments in those areas. I see no reason not to avail yourself of those options if you think they make sense for you.

I'll second this. Buying MLPs may give you some headaches at tax preparation time (or you get to pay more to preparers), but in essence you get to defer (normally large) distributions until you sell the shares (or until your distributions and some other MLP-related factors make your basis go down to 0).

Also, as mentioned above, you DO qualify for Roth IRA starting this year by rolling over a non-deductable traditional IRA contribution.

[audreyh1]

We've been realizing capital gains like crazy this year, in anticipation of the expiring 15% cap gains tax rate (going to 20%) and qualified dividends tax rate. Already retired, so our situation is different from yours. We are also taking steps to limit our AGI to $250K in future years so that we aren't subject to some of the higher taxes.

For 2010 - mostly you need to avoid AMT taxes. You can do this by avoiding a large capital gain. But since a good chunk of your income is taxed at higher than AMT rates, anyway, I doubt you'd be subject this year unless you took a huge profit on something (relative to your salaries).

For 2011, 2012:

You'll be subject to higher marginal rates on your income, and all dividends will be treated as short-term income, and cap gains are taxed at a higher rate. So keep maxing out the tax-deferred accounts and try to limit dividends/cap gains on the taxable investments. Muni bonds are still an option for non-taxable income.

For 2013 when medicare on investment income might impact you:

Keep maxing out the contributions to your tax-deferred accounts, and avoid capital gains and dividends in your taxable investments. Muni bond income is apparently exempt from this increased tax, so that may be an appropriate investment for you in your non-tax-deferred accounts.

Audrey

[audreyh1]

Quote:

Originally Posted by plex Sounds like you have most of what you need to be on top of doing. Seems like you guys will also just barely be within the extra 3.8% Medicare gains/dividends tax that is now law, but I think that will only be $76 of extra tax, as long as you don't declare any gains.

This does not go into effect until 2013.

Audrey

[smjsl]

Quote:

Originally Posted by audreyh1 We've been realizing capital gains like crazy this year

Why the rush? There is still 9 months to go... ?