Where are the tax breaks for people making 200k/year

[dadoftwo]

I recently got promoted and now with my spouses income we make close to 200k per year. Leaned that our small loss on rental is no longer a tax write off. We can no longer invest in our Roth IRAs. Can someone point me in the right direction where I should be researching investment options that will also create a tax break? We are getting killed now at tax time and I'm now living in a different income bracket that has removed the few vehicles we once enjoyed.

Thanks in advance!

PS I should add that my wife and I currently max out our work TSA/401k and have 529 plans for both our kids. Outside of that, our money sits with a rental condo and cash.

 

[gauss]

Have you researched a Backdoor Roth IRA yet? This 2-step method should be available at your income level. Just make sure that you understand the tax implications of the Pro-Rata rules before you actually convert to the Roth. There is lots of info in the forums and the web in general on this strategy as it is available to almost everyone.

Another option to seriously look into is if either of your 401k plans will allow "after-tax" contributions. Most 401ks only allow pre-tax or Roth contributions up to to the elective deferral limit of $17,500. If you are fortunate enough to have a plan that allows "after-tax" contributions you can save up to the "defined contribution" limit of $52,000 yearly. The beauty of this setup is that these after-tax contributions can then be converted to a Roth IRA.

Oh, and by the way, congratulations on your promotion. When looking at investment options be sure not to let the tax tail wag-the-dog. When we were dual income I didn't like the high tax numbers but I did like the high after tax income. It made me even more motivated to attain ER when the tax bills would go way down.

-gauss

 

[panacea]

I agree with the backdoor Roth possibility. Anyone can do that and if you have no other IRAs, you can convert to Roth tax-free if you do it right. Not so sure I agree on the after-tax 401k contributions. If you're looking for a tax break now, pre-tax is what you want.

If you have a high deductible health insurance plan you should definitely be maxing your HSA contributions. It's better than a Roth from a tax view because the contributions are made pre-tax and the withdrawals are made tax-free. Also not subject to FICA.

Charitable deductions are still good, as well as your mortgage interest deduction.

You are doing 529s, but have you opened 529s for yourselves? No reason you can't do that- just choose self as beneficiary and then if you don't use the money for your own education change the beneficiary to the kids. In some states you get a deduction for each beneficiary so that could be helpful.

With higher income, you may be able to save more after-tax dollars as well. Look at tax-exempt bonds for your fixed income and tax-efficient index funds and ETFs for your equity holdings.

That's what I've got off the top of my head. Congrats on the income bump!

 

[phil1ben]

See the following thread which evidences my frustration with the high tax rate and phase out of deductions and exemptions:

http://www.early-retirement.org/forums/f52/tax-rates-and-er-decision-70051.html

As your income rises and the government becomes your 50-50 partner (or worse in my case) you should start buying and understanding municipal bonds. If you do not have the inclination to undertake this education municipal bond funds will work also.

By the way, you will find that the vast majority of the 99% ignore the 1%......until they are one.

 

[Pleeplus]

Congrats on the promotion! Just out of curiosity when you say that you are earning almost $200k a year is that pre-tax dollars? If it is then you should still be able to qualify for Roth's with the 401k deductions which would bring your AGI under the limits. Also, is there any opportunities to open up HSA's at either of your work places?

 

[LOL!]

Here are the tax breaks clearly laid out:
Bogleheads • View topic - Taxes on a family with $200,000 gross income

After reading AND implementing that, your family should hardly pay any income taxes.

 

[target2019]

I recently got promoted and now with my spouses income we make close to 200k per year. Leaned that our small loss on rental is no longer a tax write off. We can no longer invest in our Roth IRAs. Can someone point me in the right direction where I should be researching investment options that will also create a tax break? We are getting killed now at tax time and I'm now living in a different income bracket that has removed the few vehicles we once enjoyed.

Thanks in advance!

PS I should add that my wife and I currently max out our work TSA/401k and have 529 plans for both our kids. Outside of that, our money sits with a rental condo and cash.

First line of defense is the 2013 1040, and the advice of your tax preparer. Tax software is very powerful these days, and you can run scenarios very quickly, and see the impact on your tax burden.

Since the tax is graduated, it is a big surprise to get to April 15 and feel the impact of a promotion, good fortune, etc. Compare that to the impact of losing 20% of your wages and dropping down a bracket. Ok, I feel good about the 15% bracket, but why does my head tell me it is so bad?

As mentioned, tax-free municipals are a good start. The prices are high right now, but you can drop a few dollars every couple of months, and reap the benefits later.

Kids? How many ya got? Additional exemptions, child tax credit, and education deductions. And they pay you back when you get to RE! Just kidding on that one, but it would be nice if each child handed over a lump sum when you get kicked out of megacorp...

Hopefully, your good times will continue. Watch the taxable investments for efficiency.

 

[CorporateSoldier]

My income has gone up steadily over the past ten years. I remember hitting that 200k mark a few years ago and, yup, that's when the world changed for my taxes. All of a sudden you seem to qualify for none of the stuff you used to get. I am now over 300k (not complaining! well, actually i do) and not only have i lost all those credits and deductions but have that nast alternative minimum tax thing. Hate that!

The backdoor Roth is good advice. I wish I had more ideas but have basically just been sucking it up.

 

[RunningBum]

You aren't paying SS tax, so that's a 6.2% tax break on the amount over $117,000.

 

[F4mandolin]

Not to go too far off the original post.....but as had been said a million times, our tax process needs to be adjusted. I don't think it will as long as certain people want to keep it like it is. I guess I am a fan of the UK method where your tax just gets taken out as you earn it.....period. No getting it back. Tax rates in the US could be lowered (I think)....and tax revenue would go up (I think). Everybody knows it needs to be fixed.....but they won't do it.

 

[calmloki]

Consider the lucrative world of tax loss harvesting! A number of years ago we made a very bad loan - when we finally decided it wasn't worth chasing after we declared it a loss and had been able to write off $3000 of that loss each year thereafter! Last year we sold a rental and showed a honking great profit but were able to write off the remaining loan loss against the profit! Score! We only wrote IRS and state checks for a silly amount rather than a gobsmacked amount!

Now I punctuate with only exclamation points because it makes me feel better about our taxes!

(really, I'd rather have money and pay taxes on it than not have money and pay no taxes) (first world problem)

 

[Fermion]

I am reminded of the "ultimate game" theory where one person gets to choose a split on the pot of money and the other person only gets to accept or reject that split. If they reject it, both parties get nothing.

If taxes get too high, the government (the entity who gets to decide the split ratio) might find they get nothing.

 

[ShortInSeattle]

Congrats friend, you are now a member of the rich.

Few people are going to play a sad song for a couple pulling down 200k. Henceforth, when you ask about tax breaks or complain about the cost of things you may be seen as an entitled whiner.

So be careful at dinner parties.

 

[Fermion]

Congrats friend, you are now a member of the rich.

Few people are going to play a sad song for a couple pulling down 200k. Henceforth, when you ask about tax breaks or complain about the cost of things you may be seen as an entitled whiner.

So be careful at dinner parties.

200K isn't even remotely rich. It is probably considered poor in NYC.

 

[AllDone]

Does either employer offer a salary deferal program? Fees on those things can be high (ask me how I know!) though, so check first.

 

[sanfanciscotreat]

Rich is better defined as net worth, not income. To be "rich" in today's economy, 5 Mill would be the minimum.

 

[RetireAge50]

Not sure about all the breaks but our 2013 income was $196,223 and our federal taxes paid was $22,377 or 11.4%

This excludes 7.4% SS/Medicare and about 4% in various state taxes (no income tax state).

We have charitable contributions of$10,000 along with property/sales tax so itemize instead if standard deduction.

4 exemptions and about $1,700 in education credits. $28,000 deferred in 401k/a accounts.

Max Roth $11,000

 

[Fermion]

$256,911 gross, federal taxes paid $62,780 or 24.4% (I am including SS and Medicare since those are taxes too, without those it is $51,402, 20% ).

Not bad. Not great. We max a 401K and HSA, backdoor a Roth and use standard deduction plus two personal exemptions.

There are a lot of other taxes that add up though. State tax, real estate tax, vehicle registration. A lot of work expenses from long commute ($4 gas @ 90 mile round trip commute = $3,000 a year minimum)

 

[soupcxan]

I have a previous thread on this topic. As 325k gross W-2 DINKS we get hosed by all sorts of taxes that don't kick in below 250k. Something for you to look forward to...

 

[robnplunder]

I just bite the bullet and pay the taxes. I am sure it is being put to good use - ha ha. The only thing I do that's significant is to participate in my megacorp's income deferral program. But even that has a drawback as it cuts down 401k match from the megacorp. Can't win.

 

[Sue J]

A few years ago I has a conversation with a sister-in-law. Our kids were coming up on college and hers were a few years behind. I mentioned the wonderful college tuition credits that would help offset our costs and she said their family wasn't eligible for those, they made too much! I had to look up the income cutoff levels for those. I knew they were doing well, just didn't know how well.

They weren't even eligible for the next best college tax benefit, the tuition and fees credit on Line 34. Good for them to have a high income. They may make a lot, but they spend a lot and owe a lot, too.

 

[jetpack]

Self employed individual here: ($220k from business + $130k from investments) = $350k Gross, $280k net after maxing out contributions & deductions.
$82k in fed taxes. I'm sure I could pay a lot less by spending more, I'd rather keep things
simple... Also concentrate on longer term investments with less taxable income.

 

[nash031]

I guess we're lucky in that DW and I gross well over $200k, but our taxable is under $150k and our MAGI is less than that. Combination of 403(b)/TSP contributions, mortgage interest, and a few other smaller itemized deductions... BIG part of it I have to consider after my military time is over is that a good chunk of entitlements are in the form of non-taxable "allowances." Many separated military people don't understand how much their salary needs to increase to compensate for the tax benefit we receive.

 

[FIREd]

We get a few tax breaks: pre-tax health insurance, FSA, pre-tax transit, pre-tax life and disability insurance, DW's 401K, munis, MLPs, I-bonds, backdoor Roth IRA, qualified dividends, foreign tax credit, etc...

 

[robnplunder]

A few years ago I has a conversation with a sister-in-law. Our kids were coming up on college and hers were a few years behind. I mentioned the wonderful college tuition credits that would help offset our costs and she said their family wasn't eligible for those, they made too much! I had to look up the income cutoff levels for those. I knew they were doing well, just didn't know how well.

They weren't even eligible for the next best college tax benefit, the tuition and fees credit on Line 34. Good for them to have a high income. They may make a lot, but they spend a lot and owe a lot, too.

At your SIL's income level, donations, property tax & mortgage interest are probably the only major items which can be deducted. Most other deductions fall off the list.