Hi All...Any good tax strategies out there

[Barnstormer]

Been a big fan of this community for about 4 years. ER'd for a year back in 2003 at 38 (retired military). It was short lived as I decided to head back into the world of the employed. No regrets, altho I do miss the independence. Strapped myself to a 235K mortgage so can't get out now.

My question for the community is are there any good, simple tax strategies, (or books/websites I should try) beside maxing out a 401K that could have a significant impact on my overall tax bill. I'm in the 28% bracket and would rather more of that money be used to get me back to FIRE'd.

Any help would be appreciated and thanks to all who make this board an awesome source of information.

JLS

 

[uncledrz]

JLS
I'm going to assume that you do not have your own business nor real estate for investment. Given that, consider Roth IRA as an excellent way to save on taxes on your investments, but not as a deferral on ordinary income.

The fairmark site, fairmark.com, has quite a bit of tax information.

Uncledrz

 

[Nords]

Welcome to the board, Barnstormer!

My question for the community is are there any good, simple tax strategies, (or books/websites I should try) beside maxing out a 401K that could have a significant impact on my overall tax bill.  I'm in the 28% bracket and would rather more of that money be used to get me back to FIRE'd.

Well, if you're not already in a low-tax state you could consider moving to one that doesn't tax a military pension.  Same for counties/cities and other locality taxes.

Max out your 401(k) and your IRAs for tax-deferred compounding and end up in a lower tax bracket when you retire.  Ed Slott's IRA books offer more detailed advice.

Does your employer offer a Roth 401(k)? 

Rental real estate would give you plenty of opportunities for deferring taxes through 1031 exchanges.  However profits on monthly rents are taxed at your income bracket.

Been a big fan of this community for about 4 years.  ER'd for a year back in 2003 at 38 (retired military).  It was short lived as I decided to head back into the world of the employed.  No regrets, altho I do miss the independence.  Strapped myself to a 235K mortgage so can't get out now.

As a military retiree who's been ER'd for four years now, I'm curious-- what made you decide to go back to work?  Did the mortgage send you back to work first or was it other factors followed by the mortgage?

 

[Barnstormer]

Thanks for the input guys.

Going back to work was more a timing decision. I'm in aviation and my skills would not be marketable after a long layoff. So after a year I decided I would see if working at a second career would be for me.

I do live in a state that doesn't tax the pension, however my AGI in now too high to contribute to an IRA and altho I max out the 401K with a 5% match, I still would like to to save some the the 23K in Fed tax. I get tax sticker shock when I add up the FICA, SSA, STATE and MEDICARE.

I know I'm more fortunate than most and maybe should just be happy I have such a high tax bill.

 

[Nords]

I do live in a state that doesn't tax the pension, however my AGI in now too high to contribute to an IRA

Keep in mind that although your current income may be too high to deduct contributions to a conventional IRA, or even too high to contribute to a Roth IRA, you can always make a non-deductible contribution to a conventional IRA.

The advantage comes when your income drops back down to the 10-15% bracket (usually at retirement but before mandatory IRA withdrawals) and you can convert the conventional IRA to a Roth. You've enjoyed years of tax-deferred compounding on taxed contributions, you've already paid taxes on the basis so it's not taxed at conversion (only the gains are taxes), and after the conversion you can enjoy tax-free compounding and no mandatory withdrawals for the rest of your life.

I know I'm more fortunate than most and maybe should just be happy I have such a high tax bill.

Considering the alternatives, paying taxes is good.

 

[Barnstormer]

Oh, and the mortgage was a result of moving to a higher cost of living area. While I was ER'd I owned home free and clear. Now I will work at least till new mortgage is paid off. About 4 more years. Unless of course we decide to up and move again!

 

[Barnstormer]

Nords, I may be wrong here, but isn't there a max income where you can't even add money to an IRA? I thought it was something like 165K for a married couple.

 

[Nords]

Nords, I may be wrong here, but isn't there a max income where you can't even add money to an IRA?  I thought it was something like 165K for a married couple.

Not that I'm aware of, but I'm not a tax expert like Martha or some of the other posters.

Conventional IRAs don't have an income limit, although Roth IRAs do have an income limit. There's also an income limit on a Roth conversion although that limit is about to be waived starting, I believe, in 2008.

Take a look at pp 10-11 & 54-55 of IRS Pub 590.

 

[Barnstormer]

Well this is very informational. Maybe I'm not taking advantage of the IRA as I should. Couple of questions for you nords.

1) Can I and my DW have both a traditional and a Roth IRA? $4000/year in each for a annual total of 16K?

2) Is my military pension figured in the AGI figure that limits contributions to the Roth IRA?

 

[Martha]

You have to add together your Roth and traditional IRA contributions and the total for both together can't exceed the yearly maximum ($4000 for each spouse if less than 50).

I don't know if a miliary pension is considered being covered by a retirement plan at work.  You might look close at publication 590 to see if it defines "retirement plan."

 

[Martha]

Oh, remember that if only one spouse if covered by a retirement plan at work, the other spouse may be able to deduct IRA contributions as the income phase out is higher for a spousal IRA (150,000 to 160,000 AGI vs. 75,000 to 85,000 AGI if both are covered by retirement plans.)

 

[FinanceDude]

You have to add together your Roth and traditional IRA contributions and the total for both together can't exceed the yearly maximum ($4000 for each  spouse if less than 50).

I don't know if a miliary pension is considered being covered by a retirement plan at work.  You might look close at publication 590 to see if it defines "retirement plan."

i don't think it falls under covered, if in fact he is receiving payments, not deferring money to it.  A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

 

[Nords]

Well this is very informational.  Maybe I'm not taking advantage of the IRA as I should.  Couple of questions for you nords.

I know a lot about my own taxes but I'm not a tax expert and I have huge jagged gaping knowledge holes in the area of other people's taxes.

Keep in mind that my advice is what you paid for it.  In fact, considering penalties & interest, it might be worth a lot less.

1)  Can I and my DW have both a traditional and a Roth IRA?  $4000/year in each for a annual total of 16K?

You can each have both a traditional and a Roth IRA (so my spouse and I have a total of four separate IRA accounts) but the combined total annual contributions to them can't exceed the max.  

So, if your contribution limit for your age/income is $4000, then your total contributions to your conventional & Roth IRAs can't exceed $4000.  Your spouse has to play by the same rulebook, and if it's $4000 for her too then your combined total contributions to all four accounts wouldn't be allowed to exceed $8000.  One exception (of many) is that your AGI might limit the amount of the contribution you can make to the Roth IRAs, although it won't affect the amount of the contribution you can make to the conventional IRAs.

I used the $4000 limit as an example.  It's actually the lower of $4000 or your annual earned income, and if you're 50 or older that year then it's raised to the lower of $5000 or your annual earned income.  The detailed answer is a lot longer & more complicated and you should really read the verbiage in Pub 590 and/or consult a tax expert.

2)  Is my military pension figured in the AGI figure that limits contributions to the Roth IRA?

Looking at my 1040 return I'd have to say "Yes."  Income runs from line 7 to line 12, cap gains(losses) and IRA distributions/conversions take up a few more lines, and my military pension 1099-R is recorded on line 16b.  All those lines add up to "total income" and there's no way to subtract any of the pension from the section that results in AGI.

 

[Martha]

See page 12 of publication 590 for how to figure out if you are covered by a retirement plan at work.

This issue has more to due with whether the contribution can be deducted, not whether it can be made.

At re-reading this thread, I see I mis-interpreted the question about the pension. The question was whether it is counted as part of the AGI when figuring ROTH income limits. Yes it is. So are capital gains, interest, and dividends. It is not just income from work.

 

[Martha]

i don't think it falls under covered, if in fact he is receiving payments, not deferring money to it.  A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

If that is the case, you are correct.  You need to look at your W2 to see if you are covered under a retirement plan at work.

Oh, I rarely believe what the IRS tells me on the phone. Their error rate is quite high and they can't be bound by what they say unless they issue a letter ruling.

 

[Martha]

I used the $4000 limit as an example.  It's actually the lower of $4000 or your annual earned income, and if you're 50 or older that year then it's raised to the lower of $5000 or your annual earned income.  The detailed answer is a lot longer & more complicated and you should really read the verbiage in Pub 590 and/or consult a tax expert.

Yes, for example, only one spouse needs to be working. The non-working spouse can contribute to an IRA.

 

[retire@40]

...A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

It's one thing to be helpful.  It's another thing to be correct.  Unless the question is very simple, I wouldn't trust an IRS phone answer any more than I would trust an answer on this forum.

 

[Barnstormer]

I appreciate all the discussion and I believe I have my answer. Based on the fact that the pension is included in AGI, DW and I are limited to a Traditional IRA. Time to fill out some paperwork. Used to have a Traditional IRA before I converted them to a Roth back in 98. Hated tracking the basis with the 8606 a tax time. Seemed like it was going to be a hassle when I finally started drawing from it. Guess it's worth the tax-free growth.

Thanks again.

 

[Nords]

Used to have a Traditional IRA before I converted them to a Roth back in 98.  Hated tracking the basis with the 8606 a tax time.  Seemed like it was going to be a hassle when I finally started drawing  from it.  Guess it's worth the tax-free growth.

That was a smart move in 1998.

If you think that Form 8606 was a hassle for tracking non-deductible IRA contributions then you're gonna love filling out the other parts for the incremental annual conversions. The good news is that TurboTax handles the paperwork better than the IRS does.

 

[Barnstormer]

If you think that Form 8606 was a hassle for tracking non-deductible IRA contributions then you're gonna love filling out the other parts for the incremental annual conversions. The good news is that TurboTax handles the paperwork better than the IRS does.

I remember back when I had the full deduction on my IRA and then over the years it slowly slipped away. The 8606 was a nusciance(sp) until I converted to the Roth and just paid the tax over four years...that hurt but they told me it was better in the long run. I cashed out of the Roth to pay off the house back in 03. Debated a very long time but it was the right decision. There was no penalty since it was all contributions after the 01/02 crash. The piece of mind I gained was worth the potential lost opportunity for growth. Of course the house is now sold and got a very nice gain which was tax free. So it all worked out. Now I'm starting the IRAs over from scatch at 42.

With the advent of TaxCut/Turbo Tax it did become a no-brainer which was very nice. I just switched to Turbo Tax last year after 6 years with TC and must say I liked TC better. Probably just what I was used to. Switched to a Mac and TaxCut was not available for the Mac.

 

[jazz4cash]

Not sure it was mentioned (maybe too obvious for the sophisticated types around here), but use home equity loan/line for any consumer debt you have makes the interest deductible (w/in limits)

You may benefit from tax-advantaged savings accounts (depending on your bracket and local tax situation).  Treasury instruments escape state taxation...

Here's one I love which is not utilized very well (IMHO).  I am a big fan of HSA (Healthcare Savings Accounts).  If your employer offers one, check it out.  Like anything  there may be pitfalls (if you designate too much).   The constraints for our plan have been greatly relaxed lately (e.g. we have 15 months to use the funds rather than 12).  Do some homework and see if you could AT LEAST put in something to cover monthly healthcare coverage premiums and deductibles.  If you have kids or anyone in the family wears glasses, its easier to estimate how much to defer.  I worked it out one day and we get $1 of healthcare for 65 cents! The savings comes from the HSA account deferral being pre-tax.

 

[jazz4cash]

Sorry, I mis-spoke, my plan is an FSA (Flexible Spending Account), not an HSA. There are some similarities, but from what I've seen, FSA is better for me.

 

[samclem]

Unfortunately, if Barnstormer is using Tricare (available to retired military personnel) as his medical insurance, he can't also have an FSA. On the other hand, if you are using your employer's medical plan, they might have an FSA option.

 

[Barnstormer]

Thanks sam...didn't know I couldn't make use of the HSA/FSA if using Tricare. I was just about to sign up for it. Now I won't.

JLS

 

[LOL!]

This thread has concentrated mostly on contributing to retirement plans to help reduce taxes, but there are a few other methods to consider as well.

Foremost, don't forget to use tax software. The questions will help prompt you for deductions.

There's not a whole lot outside of contributing to a 401(k) plan to reduce W2 wages, but there's a lot one can do with investment income.

1. Try to get all your investment income in a tax-free (Roth IRA) or tax-deferred (401(k) or traditional IRA) account. All income in a taxable account should at least be qualified dividend income and get you a more favorable tax rate. You don't want to hold a REIT fund in your taxable account, but such a fund would be great in your 401(k) or IRA instead.

2. Try not to realize capital gains. There are no taxes owed on unrealized capital gains. If you must realize gains, try to make sure they are long-term and taxed at a more favorable rate or sell your losers to offset the gains.

3. Sell your losers while they are still short-term (held less than a year), especially in Nov-Dec of each year. You can use up to $3000 in excess losses to offset ordinary income and carry forward to next year losses larger than that.
If need be, you can do some swaps, like sell LOW and buy HD, if you wish to remain fully invested (as you should).

4. Use all the itemized deductions you are allowed. This means give money to charity, pay your property taxes, pay your state income taxes or sales taxes, pay your mortgage interest. Deduct them all. If you don't have enough to itemize, consider bunching deductions into one year. That is, donate to charity in Jan 2007 and in Dec 2007. Pay your property taxes in Jan 2007 and Dec 2007. Then itemize every other year and take the standard deduction in the other years.

5. Got young kids and both parents work? Take the dependent care credit. Summer day camps qualify. Sports camps qualify. I am told your maid service qualifies as well.

6. There are few more esoteric tax savings. If you are blind you get an extra allowance, so you can poke your eyes out. You can deduct medical expenses that exceed 7.5% of your AGI, so to save taxes you can get really, really sick.

7. Pay a lot of money for investment advice. If you pay more than 2% of your AGI, then it's deductible. Of course, why anyone would want to pay so much for advice is beyond, but you wanted ideas for saving on taxes and not on having more money in your pocket.