Taxes are killing me

[pletal]

Hello,
Here is me and the DW situation. We are both in our early 50's. Have minimal deductions, no small children, house payments etc. She maxes out her 401k, I have no retirement program at work. Our income includes about $140k per year of taxable CD interest. I have saved 300k in a SEP years ago. I am being approached at all angles on how to save taxes by whole life insurance etc , etc, etc. We are in the top tax bracket, live in a state that has income tax and will be in that bracket for at least the next 5 years. Been approached about land credits etc. Most of it sounds like bull****. Just paid my second qtr estimated taxes at 48K. Have learned more on this forum and could use the advice. We have started putting money into muni's but really wont make much of a dent in our taxes. Any advice would be great on how to trim the tax bill... legally! thanks

 

[audreyh1]

Once the CDs mature, switch to munis. That's really about all you can do if you want the stability. Otherwise, if you don't need the income, investing long-term in stocks or funds that don't pay much in dividends will help.

Other "tricks" to avoid taxes aren't likely to be good investments.

Do the employers not do tax withholding? I don't understand why you are paying $48K in estimated taxes per quarter when you have $140K in CD interest income - that's $35K income per quarter. Why are the quarterly payments so high?

 

[pletal]

Once the CDs mature, switch to munis. That's really about all you can do if you want the stability. Otherwise, if you don't need the income, investing long-term in stocks or funds that don't pay much in dividends will help.

Other "tricks" to avoid taxes aren't likely to be good investments.

Do the employers not do tax withholding? I don't understand why you are paying $48K in estimated taxes per quarter when you have $140K in CD interest income - that's $35K income per quarter. Why are the quarterly payments so high?

I own a S corp , the dividends are rather high. Take a paycheck to sastify SS obligations, then dividends after that. Withhold taxes on payroll

 

[Davis65]

Would you rather hand over your money to an insurance company and its sales representatives through whole life insurance fees, or pay taxes?

 

[frayne]

$140K in CD interest, you've got some serious money tied up in CDs !

Pay the taxes and be happy.

 

[EastWest Gal]

I own a S corp , the dividends are rather high. Take a paycheck to sastify SS obligations, then dividends after that. Withhold taxes on payroll

Your profile says you retired in 2014 and that you live in Georgia. Georgia is a tax friendly state for retirees over 62. Sales tax is low, income tax is moderately low, and property taxes are low compared to other states. So I'm not sure what your complaint is.

Are you retired? If you are paying almost $200K annually in taxes, you must be making some serious money for a retiree. With no debt, no kids, no house payments, you should start enjoying your life. Be grateful that you have such an income that you pay such high taxes. I kind of doubt the taxes are "killing" you.

Having to pay high income tax is a nice problem to have, since it means you have a really significant income. Your quarterly tax payment is higher than many people's annual income. You should be proud to have such a problem.

 

[phil1ben]

I also own my own business and in the highest tax bracket. Virtually all my deductions are phased out through the Pease limitation. As suggested above I would slowly phase into individual municipal bonds. 50% of my asset allocation for the past 10 years has been in individual muni bonds with varying maturity dates, issuers and states. By the time the feds, state and locals finish with you more than half of that CD interest is gone.

 

[MooreBonds]

I also own my own business and in the highest tax bracket. Virtually all my deductions are phased out through the Pease limitation. As suggested above I would slowly phase into individual municipal bonds. 50% of my asset allocation for the past 10 years has been in individual muni bonds with varying maturity dates, issuers and states. By the time the feds, state and locals finish with you more than half of that CD interest is gone.

It may not be worth it, but one option is to create a pension plan for your company. It would make sense if you were in a high tax bracket now, AND don't have any employees. However, it would only be deferring your income, not eliminating taxes altogether. The benefit is that with your age, you would be required to make huge payments into your pension plan to be on track to buy an annuity payout when you turn 65 - which would drop your income bracket now. If your salary is on the order of $250k+ and your age is up there (like over 55), then you could be forced to make pension plan contributions that are on the order of several hundred thousand dollars each year. This would be a deduction against your business income.

Then, when you retire, you end the pension plan, and you can do a rollover to a IRA with the accumulated funds in the pension plan when it's closed. The 'problem' then, would be that your withdrawals from the IRA would then be taxed at ordinary income. Which might be lower when you're retired vs now.

 

[soupcxan]

Assuming your CDs are earning 2%, you must have $7,000,000 worth of them to generate $140k interest per year. I can't imagine having that much tied up in CDs unless I had a portfolio +$100M.

 

[ERD50]

Assuming your CDs are earning 2%, you must have $7,000,000 worth of them to generate $140k interest per year. I can't imagine having that much tied up in CDs unless I had a portfolio +$100M.

+1, and I might not even complain about the tax rates (OK, test me - give me the money and we will see ), but as others said - just enjoy life.

BRK pays no dividends, so that could be far more tax efficient than CDs, etc. I'd avoid all other 'schemes'.

-ERD50

 

[Texas Proud]

Most tax savings schemes have a negative side also.... and they can bite you at the wrong time...

You can be like my old boss and complain about how they are stealing your money etc. etc.... but as I told him, just pay it and be happy it is not the 70s or 80s when you would have been paying MUCH more...

 

[JPatrick]

I feel your pain, albeit at a lower level for sure. In a way, losing the deductions we have enjoyed for so long is sad, but, there's something pretty nice about being debt free and financially secure.

Step up your contribution to the muni bucket, especially if they are tax free in your state. You didn't mention stocks and/or mutual funds, but if you have any funds that are kicking out big taxable distributions, switch to the ETF equivalent. If you hold stocks that are losers, manage them for tax benefit.
Of course, if you'd like , I'll trade my money situation for yours..

 

[Bryan Barnfellow]

Have you considered making a gift to a nonprofit in the form of a charitable gift annuity? You get an immediate tax writeoff and then you can have the income start later when you no longer have such a high income. These CGAs can work well. There are also other such life income vehicles that can be helpful in shaping a tax strategy. Talk to the planned giving officer at an established nonprofit for some guidance and illustrations. You can save on taxes and also do some good.

-BB

 

[pixelville]

Once the CDs mature, switch to munis. That's really about all you can do if you want the stability. Otherwise, if you don't need the income, investing long-term in stocks or funds that don't pay much in dividends will help.

Other "tricks" to avoid taxes aren't likely to be good investments.

+1
Intermediate muni bond fund for your state is a good start.
And invest some in growth stocks or non-dividend paying stock MFs. Then you can pay long-term capital gains rate when you sell (in retirement) or your heirs get a step-up in cost basis or you ultimately donate the appreciated stock to charity and get a benefit.
Look into any retirement plans for your S-corp.

 

[David1961]

$140K in CD interest, you've got some serious money tied up in CDs !

Pay the taxes and be happy.

+1

 

[papadad111]

Look into relocation / domicile to Puerto Rico. Some fantastic tax benefits of doing so if that's your goal.

Buy Muni bonds, 7+ year durations and plan to hold them to maturity.

Buy Berkshire Hathaway and other zero dividend equities - hold for the long term.

 

[pb4uski]

I'm sure that you understand that you have a nice problem to have. I agree with others that munis and tax-preferenced equity investments are probably your best alternatives. Forget about whole life insurance unless you have a big estate tax issue (which i suspect might be the case). I would be wary of land credits and other "free lunch" pitches.

 

[Texas Proud]

Just as an FYI.... for people who think they pay a bunch of tax money...


Back when I was doing tax work in the early 80s.... we had one client who had to make estimated tax payments of (IIRC) $1,250,000 per quarter...

I remember doing a tax calculation for a proposed sale of a small bank he owned.... the tax bill would have been $10 million.... he decided to keep the bank...

Everybody said they would 'hate' having to pay that much in taxes.... I said I would 'love' paying that much... since I would have had to earn much more money to have that tax liability... sorry for me I never ever came close...

 

[pletal]

Your profile says you retired in 2014 and that you live in Georgia. Georgia is a tax friendly state for retirees over 62. Sales tax is low, income tax is moderately low, and property taxes are low compared to other states. So I'm not sure what your complaint is.

Are you retired? If you are paying almost $200K annually in taxes, you must be making some serious money for a retiree. With no debt, no kids, no house payments, you should start enjoying your life. Be grateful that you have such an income that you pay such high taxes. I kind of doubt the taxes are "killing" you.

Having to pay high income tax is a nice problem to have, since it means you have a really significant income. Your quarterly tax payment is higher than many people's annual income. You should be proud to have such a problem.

Thanks for the advice, I guess it is a good problem to have. Was planning to retire in 2014 but lost a great son who was going to take over the business. Yes the cost of living in Georgia is rather low.

 

[Fermion]

I am still stuck on the $140,000 in CD interest. I can't even wrap my mind around having $7,000,000 in CDs.

Did you buy your $10,000 in I-bonds this year? The taxes are deferred, so that might save you some money (except the bonds are paying 0%)

 

[EastWest Gal]

Thanks for the advice, I guess it is a good problem to have. Was planning to retire in 2014 but lost a great son who was going to take over the business. Yes the cost of living in Georgia is rather low.

I am so sorry for your loss. I cannot imagine how painful that must have been.


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[marko]

I am still stuck on the $140,000 in CD interest. I can't even wrap my mind around having $7,000,000 in CDs.

+1. $7MM is @ 2%. It could be as high as $10MM or $14MM considering rates over the past 8 years or so.

Even at 3.5% this would be almost $4MM in CDs.

Having trouble making the words go with the music.

If there's that much cash in CD's, you need more help than this forum can give. You need a good accountant. IMHO.

 

[aaronc879]

+1. $7MM is @ 2%. It could be as high as $10MM or $14MM considering rates over the past 8 years or so.

Even at 3.5% this would be almost $4MM in CDs.

Having trouble making the words go with the music.

If there's that much cash in CD's, you need more help than this forum can give. You need a good accountant. IMHO.

I don't see anything wrong with having that much in Cds. He's getting $140K/yr to live off of without touching principle. Sounds like a great retirement to me and he doesn't have to worry about losing 40% with the next market crash. Sure, over 20+ years he'd probably be better off with a balanced portfolio of stocks and bonds but it's not necessary. He may lose a small amount of purchasing power over the years due to inflation but if he invests in 5 years or longer CDs then they should stay close to the inflation rate so shouldn't be a big deal.

 

[daylatedollarshort]

I don't see anything wrong with having that much in Cds. He's getting $140K/yr to live off of without touching principle. Sounds like a great retirement to me and he doesn't have to worry about losing 40% with the next market crash. Sure, over 20+ years he'd probably be better off with a balanced portfolio of stocks and bonds but it's not necessary. He may lose a small amount of purchasing power over the years due to inflation but if he invests in 5 years or longer CDs then they should stay close to the inflation rate so shouldn't be a big deal.

+1. I like the idea of CD ladders myself for those reasons. I know my grandfather did quite well with CD ladders during high inflation years. I also agree with Marko. With that much in CDs, if it were me I'd diversify (if you are not already), get help from a fee only planner and pay for expert tax help and possibly a custom retirement plan for your business.

Here is an article from Forbes on a household with $200K in income and no federal income taxes for some ideas:

http://www.forbes.com/sites/baldwin/2013/06/05/how-retirees-pay-zero-taxes/

"Our model portfolio for the Bostonians includes $2.5 million in U.S. stocks yielding 2%, $1 million in foreign stocks yielding 3.3% in cash plus 0.33% in foreign tax credits, $1.25 million in Massachusetts bonds, $1 million in tax-exempt bonds from other states, $750,000 in 20-year Treasurys yielding 2.8% and $500,000 in partnerships yielding 5%."

Sorry to hear about the loss of your son, pletal.

 

[SumDay]

Thanks for the advice, I guess it is a good problem to have. Was planning to retire in 2014 but lost a great son who was going to take over the business. Yes the cost of living in Georgia is rather low.

I am so very sorry for your loss. I can only imagine how tough this must be on your family.