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Minimizing taxes on high wage income
Old 06-25-2022, 06:43 AM   #1
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Minimizing taxes on high wage income

I'm trying to get my newly graduated Dentist daughter educated on how to minimize taxes and maximize savings. I expect between her and he husband they will gross $250k a year and it will increase. I was never in that ballpark and all I know are using IRAs and maximizing her HSA. They have 12 year old so could do some type of tax deductible educational account, but I only see a maximum of $2,000 a year can be invested.

So my question is, Are there any methods a couple with high wage income can minimize taxes?
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Old 06-25-2022, 06:55 AM   #2
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Best method: get a good accountant.
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Old 06-25-2022, 07:16 AM   #3
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Best method: get a good accountant.

That may be a good idea, but I think they should have a good understanding of things, so they can a least have a bit of understanding about whether the accountant they hire has any sense.
I had an accountant for years, but all he ever did was my taxes. Never once did he tell me I should put money in Roths instead of tIRAs. Now I'm furiously doing Roth Conversions because the up coming Dividends, SS, and RMDs will put me in a higher tax bracket. I learned to late, pay the taxes due when you tax bracket is low. Our wage income was much lower than our retirement income will be. Unless, we have a real market surprise.
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Old 06-25-2022, 07:49 AM   #4
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I made over $300k for many years. The first thing they need to know is they are the target for high taxation. Anyone earning big bucks, will take a tax hit.
We maxed out all deferred accounts.
We used the right investment in the right account. Index ETFs, muni’s in taxable. Managed funds, corporate bonds, dividends, etc in deferred.
Start a giving trust like they offer at Fidelity. Good way to move capital gains into donations.
If they still need more deferred contributions, maybe consider a deferred annuity. Another way to shelter assets from taxes. Just don’t annuitize the income.
They could also look at incorporating as a professional so they can get additional deferred account options with higher contribution maxs.
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Old 06-25-2022, 07:58 AM   #5
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If your high income is W-2 earnings then there isn't much that you can do other than suck it up and pay the tax bill. You can do maximum contributions to tax-deferred 401ks, tIRAs, HSAs, etc but not much else. Very few levers to pull to reduce taxes.

Investing taxable account money in municipal bonds can help lessen the tax bite. Also, investing taxable account money in domestic equities results in qualified dividends and LTCG being taxed at preferential rates.

I've never been very keen on 529 plans but some people love them. For our GK I'm thinking of a Treasury Direct account where the taxes will be deferred but there are fewer restrictions than 529 plans and if GK decides not to go to college then the money isn't hung up in the 529 plan.
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Old 06-25-2022, 08:04 AM   #6
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Best method: get a good accountant.
Better method is to understand taxation so they can be proactive. I did all my own taxes throughout my high earner years using TurboTax. It got easier every year and I thought I was a good planner. I used an accountant for a year and most of the time I ended up pointing out his mistakes because I understood my position far better than he did.
I also had a full service broker. Ditto - bad mistake.
A more recent example with not trusting a professional is when I signed up for our ACA policy. I had to point out to the broker that tax free income is included when considering subsidies. His response to me was ďwe normally donít have people with muni bondsĒ.
So in summary, professionals donít always know what you think they should know.
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Old 06-25-2022, 08:19 AM   #7
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I made over $300k for many years. The first thing they need to know is they are the target for high taxation. Anyone earning big bucks, will take a tax hit.
We maxed out all deferred accounts.
We used the right investment in the right account. Index ETFs, muniís in taxable. Managed funds, corporate bonds, dividends, etc in deferred.
Start a giving trust like they offer at Fidelity. Good way to move capital gains into donations.
If they still need more deferred contributions, maybe consider a deferred annuity. Another way to shelter assets from taxes. Just donít annuitize the income.
They could also look at incorporating as a professional so they can get additional deferred account options with higher contribution maxs.

She is starting with an established Dental company having many offices. so she is an employee for now. They are just getting established and don't need to be concerned about donating, she needs to build a net worth for when she starts her own business. If she decides to stay with the company, than at least start saving for retirement.
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Old 06-25-2022, 08:23 AM   #8
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Better method is to understand taxation so they can be proactive. I did all my own taxes throughout my high earner years using TurboTax. It got easier every year and I thought I was a good planner. I used an accountant for a year and most of the time I ended up pointing out his mistakes because I understood my position far better than he did.
I also had a full service broker. Ditto - bad mistake.
A more recent example with not trusting a professional is when I signed up for our ACA policy. I had to point out to the broker that tax free income is included when considering subsidies. His response to me was ďwe normally donít have people with muni bondsĒ.
So in summary, professionals donít always know what you think they should know.

That was in my comment, I want the kids to know enough to see when the account is clueless. Then hopefully they won't need one.
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Old 06-25-2022, 08:26 AM   #9
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We maxed the 401ks, IRA's & HSA. A couple of years, DW was designated a "Highly Compensated Employee" which allowed up to 50% deferred income for federal & state taxes into a Vanguard account (separate from the 401k).

You may want to research this. Our experience with it worked great. We had to pick a payout duration (lump, 5yr or 10yr) and when she quit, it activated the payments quarterly in our case (we did 5yr). We took some time off and practically paid no federal tax on the payout & got a tax refund for the state tax from California.

YMMV
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Old 06-25-2022, 08:28 AM   #10
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Originally Posted by pb4uski View Post
If your high income is W-2 earnings then there isn't much that you can do other than suck ot up and pay the tax bill. You can do maximum contributions to tax-deferred 401ks, tIRAs, HSAs, etc but not much else.
Exactly. While working, DH and I were in the same situation, no kids, in the 35%ish bracket (forget exactly, and it kept moving). Not much you can do, we typically had nothing other than the standard deduction, charity, basic stuff, simple taxes. No roths even. Max the 401k and HSA, and then pay up.
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Old 06-25-2022, 08:29 AM   #11
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Originally Posted by Time2 View Post
She is starting with an established Dental company having many offices. so she is an employee for now. They are just getting established and don't need to be concerned about donating, she needs to build a net worth for when she starts her own business. If she decides to stay with the company, than at least start saving for retirement.
Donations can reduce taxes though, your original question.
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Old 06-25-2022, 08:35 AM   #12
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Exactly. While working, DH and I were in the same situation, no kids, in the 35%ish bracket (forget exactly, and it kept moving). Not much you can do, we typically had nothing other than the standard deduction, charity, basic stuff, simple taxes. No roths even. Max the 401k and HSA, and then pay up.
+1. That was my conclusion while making big bucks, along with being very careful with capital gains/excessive trading. But that’s just deferring taxes - not necessarily “minimizing” as the OP asked. Now that I’m retired I’m doing huge (worthwhile) Roth conversions optimizing tax rates throughout retirement and I’m also sitting on huge LTCGs - though I will take them in small bites in the decades ahead so not a mistake IMO.

Future tax rates could be a big factor in minimizing optimizing after all as well, but none of us can predict the future. I know what I’m planning on though…
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Old 06-25-2022, 08:40 AM   #13
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Assuming they have inquired of employers and determined that there are no deferred compensation programs available, there aren't a lot of good options for W2 employees.
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Old 06-25-2022, 08:43 AM   #14
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Donations can reduce taxes though, your original question.
Agreed! Plus, I think it is very important for the younger generation to start appreciating charitable giving once they get into a position where they have the means to do so.
We have tried very hard to raise our kids with some sense for community and charity. In general, they turned out well, but I have to say, they are still not in a very charitable mindset even at near age 30. In fact, so much so that DW and I are in the process of changing our estate plans so that when we pass, half of our estate will go to charities we select. The other half will be split between our two kids. Chances are that they will still get a very nice inheritance and this way, we can make sure charity doesn't get short-changed. YMMV
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Old 06-25-2022, 08:48 AM   #15
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Donations can reduce taxes though, your original question.
The OP's OP did not mention donations at all... you were the first to mention donations.

Quote:
Originally Posted by Time2 View Post
I'm trying to get my newly graduated Dentist daughter educated on how to minimize taxes and maximize savings. I expect between her and he husband they will gross $250k a year and it will increase. I was never in that ballpark and all I know are using IRAs and maximizing her HSA. They have 12 year old so could do some type of tax deductible educational account, but I only see a maximum of $2,000 a year can be invested.

So my question is, Are there any methods a couple with high wage income can minimize taxes?
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Old 06-25-2022, 08:51 AM   #16
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The OP's OP did not mention donations at all... you were the first to mention donations.
Right, but the OP was looking for "ways to reduce the taxes", and charitable donation are one way to reduce taxes.
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Old 06-25-2022, 10:29 AM   #17
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^^^ Only if you itemize and most people do not.
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Old 06-25-2022, 10:49 AM   #18
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^^^ Only if you itemize and most people do not.
If the donation is large enough, it may make sense to itemize even for someone who doesn't typically itemize. Note, the OP did not specify that he was looking only for ways to reduce taxes without itemizing. Whether you like it or not, COcheesehead's answer was a legitimate response to the OP's question.
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Old 06-25-2022, 11:23 AM   #19
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^^^ Only if you itemize and most people do not.
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If the donation is large enough, it may make sense to itemize even for someone who doesn't typically itemize. Note, the OP did not specify that he was looking only for ways to reduce taxes without itemizing. Whether you like it or not, COcheesehead's answer was a legitimate response to the OP's question.
Over 85% do not...so a qualified response seems appropriate.
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Old 06-25-2022, 11:36 AM   #20
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Investment Order and Prioritizing investments discuss common strategies. How many of those are available to her and her spouse?

Tax-efficient fund placement is also pertinent.
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