High W-2 earnings are killing our taxes

[soupcxan]

Boo hoo for us, right?

Wages 347k + interest/dividends/CG 25k = AGI 372k
- itemized deductions: 24k - exemptions: 4k = 344k taxable income
Tax: 86k + AMT 1k + additional medicare tax 1k + net investment tax 1k
Total federal tax: 89k

We already max our 401ks, and our deductions are being phased out so more donations doesn't help. Having a kid this year also isn't likely to help much as that exemption is phased out for us too.

 

[GrayHare]

even Uncle Sam is encouraging you to ER

 

[ERD50]

Well, that's an effective rate of ~ 24% on your AGI.

People will have different takes on whether that's high/low/indifferent (and the thread will probably get shut down if we go there), but it's not a number that sound extraordinary to me, for that income level.

If it makes you feel any better, you could add in your property tax, SS and Medicare, sales tax, gas tax..... feel better now? No?

-ERD50

 

[timo2]

I never minded having been phased out of the various tax credits for making too much. It means my financial life is going well.

 

[bingybear]

not sure there is a lot you can do. Quite far out of my league. would you're employer work with you to do deferred comp? Some risks there.

Being in AMT land... many of the typical things don't work. maybe more muni bond investments that are GO (no private activity).

It is a nice problem to have... compared to many others that you could have.

 

[audreyh1]

Charitable Donor-advised Fund! You can contribute some of those higher tax dollars now (or appreciated securities), and let most of it build for donating when you are retired.

The tax limit on charitable donations is limited for regular tax, but you get the limitation back when computing AMT.

HSAs if you are eligible, but if you have an insurance plan with copays you won't be.

 

[2017ish]

Boo hoo for us, right?

Wages 347k + interest/dividends/CG 25k = AGI 372k
- itemized deductions: 24k - exemptions: 4k = 344k taxable income
Tax: 86k + AMT 1k + additional medicare tax 1k + net investment tax 1k
Total federal tax: 89k


We already max our 401ks, and our deductions are being phased out so more donations doesn't help. Having a kid this year also isn't likely to help much as that exemption is phased out for us too.

As others note, it all depends upon how you look at it. DW used to pay about that amount, then I went back to work..... Looking forward to the days when our "all other spending" exceeds taxes again. Not fun, but each of my siblings makes far less money than we pay in taxes; puts it in perspective if I ever were to get upset about it.

 

[bingybear]

As others note, it all depends upon how you look at it. DW used to pay about that amount, then I went back to work..... Looking forward to the days when our "all other spending" exceeds taxes again. Not fun, but each of my siblings makes far less money than we pay in taxes; puts it in perspective if I ever were to get upset about it.

+1

 

[LOL!]

Charitable Donor-advised Fund! You can contribute some of those higher tax dollars now (or appreciated securities), and let most of it build for donating when you are retired.

Since you do not get a tax deduction for letting it build in the DAF, I think money put in a DAF should be granted to charities right away. Otherwise, let it build in your own accounts and get a bigger tax deduction when you finally do donate.

 

[ziggy29]

Since you do not get a tax deduction for letting it build in the DAF, I think money put in a DAF should be granted to charities right away. Otherwise, let it build in your own accounts and get a bigger tax deduction when you finally do donate.

Depends on your situation. What you say makes sense if you regularly itemize, or if you make a single massive "dump" of donations one year and nothing in other years.

In our situation, we regularly give, but in a typical year since we live in a state with no income tax, we don't currently own property and have no mortgage, we usually take the standard deduction so our charitable contributions (averaging maybe $4-5K a year) do exactly bupkis for our taxes.

So we're looking at one of these, perhaps dumping $20-25K in at a time, so we can get a nice writeoff one year, and take the standard deduction for 3-4 years while we replenish our accounts to deposit another $20-25K chunk. The current alternative is donating $4-5K a year and getting no tax relief whatsoever. I'm looking at the nuances of tax law to see what we can do and how much we can deduct in a single tax year. We may do it this year -- we've talked about it in the past but we're in a position now where it seems like a better idea. This may be even more important for us because if all goes as planned, DW will be ordained this July and will change from a W-2 employee to being self-employed and having to pay self-employment tax.

 

[Fred123]

Here's a another way of looking at it that might make you feel better: if you look at total Fed taxes (including SSI + Medicare), your overall Fed tax rate would be about 29%. If you were self-employed, which is really common post-recession among my friends, and made $75K your tax rate would be about 24%. Not a huge difference.

 

[audreyh1]

Since you do not get a tax deduction for letting it build in the DAF, I think money put in a DAF should be granted to charities right away. Otherwise, let it build in your own accounts and get a bigger tax deduction when you finally do donate.

This is a way to lower your AGI if you are in a high ordinary tax bracket plus if you pay AMT, so it will probably help them most now than when retired.

[Assuming they can itemize it] They can donate 5% of their DA fund value every year while working (or a little less if their administrator allows it), and let the rest build. Then when they do retire, they can donate from the fund instead of spending their annual draw on charitable donations or itemizing.

 

[Lakewood90712]

Prob. doesn't make it any less bitter, but be glad you have no state and/or city income tax too.

 

[audreyh1]

Depends on your situation. What you say makes sense if you regularly itemize, or if you make a single massive "dump" of donations one year and nothing in other years.

In our situation, we regularly give, but in a typical year since we live in a state with no income tax, we don't currently own property and have no mortgage, we usually take the standard deduction so our charitable contributions (averaging maybe $4-5K a year) do exactly bupkis for our taxes.

So we're looking at one of these, perhaps dumping $20-25K in at a time, so we can get a nice writeoff one year, and take the standard deduction for 3-4 years while we replenish our accounts to deposit another $20-25K chunk. The current alternative is donating $4-5K a year and getting no tax relief whatsoever. I'm looking at the nuances of tax law to see what we can do and how much we can deduct in a single tax year. We may do it this year -- we've talked about it in the past but we're in a position now where it seems like a better idea. This may be even more important for us because if all goes as planned, DW will be ordained this July and will change from a W-2 employee to being self-employed and having to pay self-employment tax.

We donate to the DAF every other year at the moment, because we itemize every other year.

And currently we donate 30% of our fund value every summer. But that's because we expect to add funds every other year. If we didn't donate funds often we would donate a much smaller amount of the DAF each year.

 

[FIREd]

They can donate 5% of their fund value every year while working (or a little less if their administrator allows it), and let the rest build. Then when they do retire, they can donate from the fund instead is spending their annual draw on charitable donations or itemizing.

Right or wrong, that's the way we are doing it, to a tee.

Back to the OP, all I can only say is that I share your pain. We paid a bundle in FIT last year (I can't even bring myself to say how much). When DW retires, doing our tax return is going to be a lot less painful.

 

[dallas27]

Covert the income from w-2 to self employed or llc and the world is your oyster.


Sent from my iPhone using Early Retirement Forum

 

[pb4uski]

I felt your pain for a number of years. If your earnings are mostly W-2 earnings there is little that you can do other than maximize tax-deferred savings. Can you do a HSA?

While it sucks to pay more in tax than most people make, count your blessings.

 

[FUEGO]

Poor you!

You're taking home almost a quarter million after FIT and payroll taxes. That's almost double our gross income from our highest earning year. Sounds like you're doing pretty well, huge income tax burden notwithstanding.

 

[frayne]

I never minded having been phased out of the various tax credits for making too much. It means my financial life is going well.

Ditto !

 

[kaneohe]

OP's "woes" reminds me of rental owners who tell similar woes when the properties stop losing money. Would they really want to keep losing 20K/yr rather than make 10K when they get to keep perhaps 75% of that 30K swing? You can focus on the taxes or perhaps what you keep after taxes. Same situation, different viewpts.

 

[pb4uski]

One thing to consider is making after-tax contributions to your 401k if your plan allows it. While it doesn't help you with taxes currently, under current rules you can roll after-tax 401k balances into a Roth IRA (either in-service if your plan allows in-service rollovers or after you sever service).

However, be aware that the recent Obama budget is proposing to close down this loophole.

 

[Closet_Gamer]

A friend's father once told me "you only pay taxes when good things happen."

+1 on charitable funds and asking about deferred comp (if your employer is super-solvent). Also ensure that your investing habits are tax aware -- high tax stuff in tax deferred accts, low tax stuff in brokerages, and minimize transactions.

Final thought: I think It was the "Millionaire Next Door" that talked about being income affluent vs. being balance sheet affluent. It pointed out that the balance sheet affluent actually pay very low taxes as a % of their investable/growing net worth. As a result of that insight, I always calculate two things when I update my balance sheet:

1). Effective asset tax rate (all taxes paid/total assets)
2). % of assets in tax deferred structures

I find that even though I pay enormous income taxes like the OP, these calls help me focus on the long run levers of wealth creation.

 

[Andre1969]

I'll agree with the others that it sounds like an nice problem to have...but then, I don't make enough to have that problem! I might feel differently, if I did, though.

Still, 24% overall for federal taxes doesn't sound too bad. Does that include SS, as well? I guess if you lived in a state that had high state/local taxes, and/or lived in a really high cost of living area, the pain would be worse.

 

[BellBarbara]

Yes! We loved it when we made so much money. Great news! We never paid more than 25% taxes, even with 300K + income. YAY American. We would pay so much more in other westernized countries.

 

[Neill]

Boo hoo for us, right?

Wages 347k + interest/dividends/CG 25k = AGI 372k
- itemized deductions: 24k - exemptions: 4k = 344k taxable income
Tax: 86k + AMT 1k + additional medicare tax 1k + net investment tax 1k
Total federal tax: 89k

We already max our 401ks, and our deductions are being phased out so more donations doesn't help. Having a kid this year also isn't likely to help much as that exemption is phased out for us too.

Lets look at that interest. First your subject to AMT. That's taxing you at 28% and it's dominating your tax return (you have an AMT balance). Your AMT exemption I guess is at about 30k (see 6251 line 29). So your actively phasing out that 0% bracket at $1 per $4 of income. That means your marginal tax rate is 28% + 28% / 4 = 35%. But wait there's more. Obama is stuffing you with 3.8% on top of that with NIIT. So we are looking at 38.8%.
Your next thing to google is "municipal bonds".
Now in the future if you happen to earn about $100k more (and your investment income will grow faster than your income if you save) then 6251 line 29 will drop to zero or close to it. This AMT slide at that point means you can accelerate income (say with Roth conversions) to lower your effective tax rate (until AMT balance drops to zero).
For capital gains. Don't sell anything. Re-balance with buying.
If your making charitable donations then do it with appreciated stock. At least you get something even if your deductions get phase out. Or quit giving people stuff. They only voted to take your money anyway.
Other people telling you that your tax burden isn't so great by bringing in SS for lower earners are neglecting that the lower earners get their money back and more via SS. You get bub-kiss for your federal payments (like a 30 seconds of golf for the CEO of America).
It sucks. You earned it you should be able to keep more of it.