Taxes... those damn taxes!!

[DawgMan]

Ok, so we all spend allot of time during the accumulation & draw down phase focused on minimizing our tax liability. Legally speaking, limitations exist based on your income, employee status (i.e. W2, 1099), options available to you (i.e. Plans offered by employer), assets/liquidity, and your personal risk tolerance for certain investment types. I thought it might be helpful to share tax strategies we all use during these phases.

I am still in the accumulation phase 3 yrs from FIRE. I am a 1099 guy so my income fluctuates, but has allowed me to put significant $$ away since I live well below my means. Strategies used by traditional employees and 1099 folks like myself include the following...
- Maximizing traditional 401K plans including matching and any catch-up provisions
- if no 401K, max out SEP/IRA, other, including Roth
- For some who make significant 1099 income and are fairly liquid, I recommend a Defined Benefit Plan. Short version is it works like a combo IRA/401K, but it allows you to put away potentially a few hundred K in a year depending upon a number of factors, all of which is tax deductble/tax differed (more compicated than this, but very lucrative)
- RE investments
- Maximize business, charitable deductions
- Conservation easements
- Tax efficient investments

What creative (legal) ways have you found to minimize taxes?

 

[SecondCor521]

Two come to mind:

1. I know about the perpetual pay-off-the-mortgage debate. For me, I paid mine off a few years before I retired. Now, because I have very low expenses without a mortgage, I can avail myself of the various low-income tax goodies that are out there, like ACA subsidies, ACA cost sharing reductions, ACA subsidy repayment caps, 0% capital gains taxes, and the Child Tax Credit. Also, possible low EFC when that time comes for my kids to go to college.

2. This one is not widely replicable, but I ended up buying stock in my employer about 6 years ago, and they got bought out earlier this year. The capital gains appear to qualify for a capital gains exclusion under section 1202, making 75% of my gain tax-free.

 

[calmloki]

As an unmarried couple, we have two primary residences in different states. We visit each other for about 1/2 the year and plan to take two capital gains exclusions if/when we sell. OTOH, we sold a small rental house on owner-carry contract we've owned 25+ years and just paid tax for the whole sale price profit + our regular state & federal 1/4ly tax. Whuff! Have lived a year on less than the aggregate of those checks.

 

[COcheesehead]

Open a deferred annuity. Over fund whole life. Donate appreciated shares to a charity trust.

 

[Senator]

Instead of getting a 1099, get incorporated or form an LLC. Then take a large dividend and avoid much of the self employment taxes. That's a 15.3% savings.

 

[Sunset]

Nothing creative, as most of the really creative ones require moving a lot.

 

[scrabbler1]

A few years ago, I was able to "bunch" my itemized deductions because I was near the standard deduction amount. Bunching them allowed me to claim the SD in alternating years , effectively bumping up my itemized deductions in the off-years while juicing up the itemized ones in the on-years.


Eight years ago, when I ERed, I used NUA for the company stock I cashed out, paying only 15% LTCG on most (97%) of its value. I still got hit with state income taxes and the federal AMT on the rest of my small income, and paid a small tax penalty on the non-NUA portion of the company stock. But I still saved a lot on taxes by cashing that out while doing a direct rollover of my pretax 401k into a TIRA, a non-taxable event.

 

[Badger]

Two come to mind:

2. This one is not widely replicable, but I ended up buying stock in my employer about 6 years ago, and they got bought out earlier this year. The capital gains appear to qualify for a capital gains exclusion under section 1202, making 75% of my gain tax-free.

On rare occasions I hear a good positive story on taxes. Nice to start my day reading this one.

Cheers!

 

[Fermion]

We reduced our taxes from $60,000 a year (federal) to zero by quitting work.

 

[LiveBelowMeans]

I fully fund an HSA account every year and NEVER take money out. Via Optum Bank I invest account in Vanguard stock funds. This can then grow tax free (state and local) forever. Pay for health expenses out of pocket. My HSA account is now 6 figures and growing. JMHO

 

[Senator]

Start a business. Have business write offs. That is by far the best. Be your only customer if you have to. You sometimes have to start small.

 

[Amethyst]

Yes, it's quite a shocker to have to pay taxes when selling a rental property at a loss, and still the IRS accounting shows a "gain" on which Federal and state taxes must be paid. Odd how little info was out there on the tax perils of landlording back when we got embroiled in rental property. Tax guy never warned us, and there wasn't even much on the Net way back then. Everything I found in my research, emphasized all the tax advantages.

As an unmarried couple, we have two primary residences in different states. We visit each other for about 1/2 the year and plan to take two capital gains exclusions if/when we sell. OTOH, we sold a small rental house on owner-carry contract we've owned 25+ years and just paid tax for the whole sale price profit + our regular state & federal 1/4ly tax. Whuff! Have lived a year on less than the aggregate of those checks.

 

[Beardog]

We reduced our taxes from $60,000 a year (federal) to zero by quitting work.

This is a good reminder that we have income tax, not wealth tax in this country!

 

[Amethyst]

Also a good reason not to envy people with pensions too much. We pay full IRS and State income taxes on our pensions, except the actual amount we contributed to them.

This is a good reminder that we have income tax, not wealth tax in this country!

 

[Texas Proud]

Start a business. Have business write offs. That is by far the best. Be your only customer if you have to. You sometimes have to start small.

Technically you cannot have yourself as your only customer... heck, I do not think you can have yourself as a customer anyway you slice it if you are 100% owner.... maybe even less % owned...