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

[aja8888]

LOL.... yep, nothing like getting the IRS to come audit like taking the home deduction...

Also, you cannot take 'household' deductions... (at least not legally).... sure, many people do, but they run a risk....

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.

 

[NanoSour]

Don't overcomplicate your life for a few extra bucks. Trust me it won't be worth it. Living with the thought of an IRS audit for suspect deductions is no way to live a healthy and fulfilling life. Be thankful for your relative success and enjoy the journey.

 

[daylatedollarshort]

I don't think anyone here who has suggested a small business has suggested a sham business or deductions. I am sure many here have expertise that could earn consulting income or have the skills to develop a knowledge worker side business using brains and a lap top, and then many expenses do become legitimately deductible, like health insurance or attending a business related conference in London or Paris.

 

[sengsational]

We may add a dependent in the future but that's only a small benefit.

Maybe bigger than you think, if one of you throws in the towel to stay at home with the 'added dependent'. At least do the math (run the numbers with less income, but a big reduction in taxes, reduction in expenses for both child care and employment related expenses. Add in the intangibles, like better adjusted kid(s), someone to make calls on behalf of the working spouse, someone to be at home for the cable guy, etc, etc. What's all that worth?...a hard number to pin-down, but zero is as arbitrary as any other number. Making the decision to have only one in the rat race with an agreement on budget that does not accomplish keeping up with the Jones' might be a path to getting the second out of the rat race too.

 

[eytonxav]

I don't know how old you are, but with income like that it shouldn't take too long for you to build a nice nest egg and RE. Then your taxes should go down.

 

[ducky911]

I do not think that is high at all. Fed taxes are a deal plus you have no state tax...in Calif. you would pay another 30k. But I am sure Texas gets it share from you in other ways.

Keep saving and taxes are low in retirement.

Thank you for your payments.

 

[ChiliPepr]

Virtually all of the (arguably) viable vehicles for sheltering personal income taxation were shut down with the 86 tax reform act.

But, but, but.... Everyone says there are tax loopholes for the wealthy!?!? There are very few loopholes for W2 income.

I am in a similar situation as you are, I am single and only have state taxes, charity and a realitively low mortgage interest deduction. I have actually gotten hit with AMT the last few years.

I have been lbym and socking as much as I can into tax managed accounts and hopefully those accounts will eventually "pay" my salary. Right now I pay about 26% on my w2 income and about 10% on investment gains (quite a bit of my gains are still unrealized). I average about 22% tax on all my w2+realized gains. This year I will get hit with the new 3.8% medicare surtax for the ACA and that will probably bump me to about 24% just for my FIT.

 

[jebmke]

And donate lots more to charity including appreciated stock shares held long-term. Why not $20K in donations?

That is what we did. We started building a pretty healthy balance in a DAF which is now funding donations during our ER low-tax-rate-period before tax rate spikes again at 70.5.

Donations went in at 35%+ marginal rate and coming out at 15% rate (that is, if we had donated now, they would have been against a 15% rate).

 

[MasterBlaster]

Sorry no wisdom, but least you don't live in CA!

Rental real estate might help if you are so inclined, side-business might offer a little relief.

FYI...Rental real estate losses get phased out above $100k of income. At $150k income there is no allowable deduction.

Property owners with modified adjusted gross incomes of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they "actively participate" in the rental activity. You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and eliminated entirely when it exceeds $150,000. Thus, it is useless for high-income landlords.

 

[rodi]

This is definitely a first world problem.

My tax rate is similar to yours, on a much smaller combined income (less than half). Is it bad that I envy your problems?

 

[dvalley]

I pay the same % fed taxes on a much lower income (single now) and then on top of that another 7-9% state tax

 

[trirod]

Not much you can do about that other than be happy that you just about make it into the top 1% and that you are there during a time when we have (almost) historically low tax rates. Oh, and be happy you have no state or local income taxes, unlike those of us in Ohio.

Your tax rates will definitely have gone up in 2013 compared with 2012 with the new additional medicare and net investment income taxes, but really since the Bush tax cuts in 2001 and 2003, tax receipts as a percentage of GDP have been much lower than the long term average, so there may be worse to come.

The only useful piece of advice I could give is that in the year before you retire, make a big charitable contribution to a donor advised fund, and use that to make charitable contributions for the rest of your life, so you can take advantage of your higher marginal tax rates while working.

An HSA would help a little too.

And I hope you are making back-door Roth contributions - not that that reduces your taxes currently, but will help in the future.

 

[Animorph]

That is what we did. We started building a pretty healthy balance in a DAF which is now funding donations during our ER low-tax-rate-period before tax rate spikes again at 70.5.

Donations went in at 35%+ marginal rate and coming out at 15% rate (that is, if we had donated now, they would have been against a 15% rate).

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.

 

[zedd]

Bogleheads • View topic - Taxes on a family with $200,000 gross income
Maybe some ideas can be gleened from here

 

[jon-nyc]

A tax rate of 21% is great. I'd sign up for that in a heartbeat.

 

[mrfeh]

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.

 

[jebmke]

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.

 

[travelover]

.........77 Federal tax bill!...............

Someone has to pay for millionaire early retirees getting subsidized heath care.

 

[Texas Proud]

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...

 

[BBQ-Nut]

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.

 

[gauss]

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

 

[ShortInSeattle]

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.

 

[Fermion]

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.

 

[Shawn]

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.

 

[daylatedollarshort]

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.