Minimizing taxes on high wage income

[COcheesehead]

^^^ Only if you itemize and most people do not.

I did and still do.

 

[pb4uski]

It’s in the title.

For me the title shows as "Minimizing taxes on high wage income" and the first instance of the word "donation" is your post #4.

 

[pb4uski]

I did and still do.

Yup, there are some people who still do.

I do 7 tax returns and none itemize since the 2017 changes, including my DD and DSIL who have income closer to $300k. With the increase in the standard deduction it takes a lot to have enought to itemize... its hard for a married couple if you live in a no-tax state with a modest home.

 

[Time2]

Actually the OP was looking to minimize taxes and maximize savings. Since no matter how nice a tax benefit you get contributions are a net outflow I think doing donations to reduce taxes is not a good idea... it doesn't maximize savings which was one of the OPs objectives.

Amen, I don't see donations as a way to build a reasonable net worth. She can donate her time to dental clinics to help the poor. She worked in one fairly recently and said pulled 31 teeth in two sessions and could have pulled many more but she had to share!

Make donations because you want to and like the cause, and the tax benefit is nice, but at the end of the day it is still money out the door.

"still money out the door"

 

[Music Lover]

Amen, I don't see donations as a way to build a reasonable net worth. She can donate her time to dental clinics to help the poor. She worked in one fairly recently and said pulled 31 teeth in two sessions and could have pulled many more but she had to share!



"still money out the door"

Yup, she can donate time and medical expertise and save the money for herself and her family...at least at first.

 

[ivinsfan]

The lady is a dentist and has an intelligent spouse. I fine all this 3rd party advice kind or strange OP how much of this advice has your DD actually asked you for..

 

[SecondCor521]

The lady is a dentist and has an intelligent spouse. I fine all this 3rd party advice kind or strange OP how much of this advice has your DD actually asked you for..

I think unsolicited advice between adults is rude.

That being said, I have three 20-something offspring, and have varying rules for how/when/to what extent I can or do give them advice. Most of the time we figure the worst case they can listen and choose to ignore me.

I make no assumptions about Time2's relationship with his kid(s). Maybe she did ask for advice and he forgot to mention that detail in his post. Maybe they have a codependent relationship. Maybe she is like one of my kids and is ego-free and happily takes in all advice. Maybe they're from a different culture or different country where this kind of advice is acceptable to give.

And in situations where I have been cleared to give advice but don't know everything myself, I'll often ask for advice. Either here on the forum, or on other forums, or from family members, or friends. Heck, sometimes these days depending on the topic I'll ask my kids for advice.

 

[ivinsfan]

I think unsolicited advice between adults is rude.

That being said, I have three 20-something offspring, and have varying rules for how/when/to what extent I can or do give them advice. Most of the time we figure the worst case they can listen and choose to ignore me.

I make no assumptions about Time2's relationship with his kid(s). Maybe she did ask for advice and he forgot to mention that detail in his post. Maybe they have a codependent relationship. Maybe she is like one of my kids and is ego-free and happily takes in all advice. Maybe they're from a different culture or different country where this kind of advice is acceptable to give.

And in situations where I have been cleared to give advice but don't know everything myself, I'll often ask for advice. Either here on the forum, or on other forums, or from family members, or friends. Heck, sometimes these days depending on the topic I'll ask my kids for advice.

I a

I just find even solicited financial advice often is ignored . But a good discussion about taxes is always fruitful. I've learned to keep an eye out for the Mom is droning on look in my kids eyes.. I'm always interested in financial back and forth between parents and kids. I've learned keeping comments neutral and not pushing something can work best but isn't always easy

My kids are both past 40 now and have started giving us advice which feels strange.

Generally the best lesson is one we learn ourselves

 

[Sunset]

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

In the land of unintended consequences, when you both pass, perhaps your kids will get on this site and say how glad they are, that they didn't donate lots of money as their inheritance was pretty small since most was given to charities.

They are young, at age 30, with lots of worries about the future, it just takes 1 car accident or a host of other possibilities to cause them to fall from the land of plenty to barely scraping by for the rest of their lives. Maybe they don't know how well off you are, and are storing up some money to take care of their sick elderly parents. Lots of reasons.

If they are still rich and cheap when 60, then feel free to criticize them.

 

[COcheesehead]

Amen, I don't see donations as a way to build a reasonable net worth. She can donate her time to dental clinics to help the poor. She worked in one fairly recently and said pulled 31 teeth in two sessions and could have pulled many more but she had to share!



"still money out the door"

Man you guys are twisting the question. If someone is donating and most should, then starting a giving account like they offer at Fidelity, allows you to transfer appreciated shares, which reduces your capital gain thus your taxes instead of giving cash. Enough said. Tough crowd.

 

[Music Lover]

Man you guys are twisting the question. If someone is donating and most should, then starting a giving account like they offer at Fidelity, allows you to transfer appreciated shares, which reduces your capital gain thus your taxes instead of giving cash. Enough said. Tough crowd.

It's not a tough crowd, you're missing the point. She's an employee just starting out and wants to build some net worth and also pay less tax. Spending $100 to save $30 is not the way to do that.

 

[swakyaby]

I think the OP’s question comes from a good place, and is not out of line. When I began my professional career as a self-employed physician 26 years ago, in the first year my father asked me, “So what is your retirement plan?” I responded, “What retirement plan?” He said, “Even as a self-employed person, you should have a retirement plan.” So then he discussed Sep-IRAs vs traditional IRAs vs Keough plans. There were no Roth IRAs back then. I was grateful he brought the subject up when he did, because I had no clue just starting my career.

 

[RobbieB]

Maximize all 401's, HSA's, child edu if planning for child. Buy a house and deduct the interest.

Yeah, the usual stuff.

 

[Koolau]

I'm a big fan of 1st World problems. May all our problems be 1st World.

If seeking professional help, I've found that "tax guys" (and gals) do taxes. They don't typically know much about planning. It may be better to hire a fee-only CFP. Good luck - and thanks for paying your "fair" share though YMMV.

 

[Closet_Gamer]

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.

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.

Very good advice in these posts along with COcheesehead's later point about taking the time ensure they actually understand how the tax systems works.

The only thing I would add is that if they see an opportunity to get into a Non-Qualified Deferred Compensation plan through their work, they should take a hard look at it.

These plans bring their own (sometimes substantial) risks if they are not managed properly, but I've been able to shelter a lot of income via this vehicle. Again, its not without risk and plan structures vary wildly. My guess is that at a young age they do not have access to this, but if they get to the point where they do, they should really look at it.

I've only ever really negotiated/pushed for compenstation bumps three times in my life. Once was when I realized that I was about $15k/year shy of getting access to my megacorp's NQDC plan. I pushed, got the raise and got into the plan. Single best financial decision I've ever made.

(As an aside, I think NQDC plans are so lucrative for high-earners that they should be curtailed by the government...but so long as these are the rules, I will play be them.)

 

[Koolau]

I've only ever really negotiated/pushed for compenstation bumps three times in my life. Once was when I realized that I was about $15k/year shy of getting access to my megacorp's NQDC plan. I pushed, got the raise and got into the plan. Single best financial decision I've ever made.

(As an aside, I think NQDC plans are so lucrative for high-earners that they should be curtailed by the government...but so long as these are the rules, I will play be them.)

That would be pretty rarified air at my megacorp - actually "asking" for compensation. I'm sure a few layers above me, it was possible (as were NQDC plans.) Otherwise, compensation was rigidly controlled by years of service, "official" qualifications (like degrees), "performance", etc. Not to say I wasn't well compensated. I was.

 

[Time2]

The lady is a dentist and has an intelligent spouse. I fine all this 3rd party advice kind or strange OP how much of this advice has your DD actually asked you for..

I find it strange that others would not want to help there kids. I wish I was given some advice before before I was 59 and found MMM and a few years later E-R. My big mistake was funding IRAs while in a low tax bracket and now finding I will be paying a higher tax with dividends and interest, SS and RMDs. Ya, I'm doing Roths now and staying a lower bracket, but I only have 3 years left before SS and 5 before RMDs. Or even not using any tax deferred accounts and live LTCGs of less than $105,000 and pay $0 tax.

I can give her the info and she can use it or not, but at least she will know.
But, to each their own!
Thanks to all that contributed to the thread.

 

[Time2]

Very good advice in these posts along with COcheesehead's later point about taking the time ensure they actually understand how the tax systems works.

Yes, I have an email written that starts with the standard deduction, she's probably aware of this, the next item is a site that shows the tax brackets and percent of tax on each income bracket. I have a link from here on the important trigger income levels, and that's about all. Later I will probably send a link to Firecalc.

The only thing I would add is that if they see an opportunity to get into a Non-Qualified Deferred Compensation plan through their work, they should take a hard look at it.

These plans bring their own (sometimes substantial) risks if they are not managed properly, but I've been able to shelter a lot of income via this vehicle. Again, its not without risk and plan structures vary wildly. My guess is that at a young age they do not have access to this, but if they get to the point where they do, they should really look at it.

I've only ever really negotiated/pushed for compenstation bumps three times in my life. Once was when I realized that I was about $15k/year shy of getting access to my megacorp's NQDC plan. I pushed, got the raise and got into the plan. Single best financial decision I've ever made.

(As an aside, I think NQDC plans are so lucrative for high-earners that they should be curtailed by the government...but so long as these are the rules, I will play be them.)

I have taken note of the risk, and also at 30yrs old, how long can you defer that income, what good is it if she takes it in ten years when her income is even higher?

 

[euro]

Yes, I have an email written that starts with the standard deduction, she's probably aware of this, the next item is a site that shows the tax brackets and percent of tax on each income bracket. I have a link from here on the important trigger income levels, and that's about all. Later I will probably send a link to Firecalc.


I have taken note of the risk, and also at 30yrs old, how long can you defer that income, what good is it if she takes it in ten years when her income is even higher?

Depends on the specific plans. Mine allowed basically “deferral until death”. Once I retired, I ended up structuring the payouts spread out over 15 years (to fill the gap until SS and mandatory IRA withdrawals), but I could have extended the deferred compensation payouts much longer, had I wanted to. I agree that this was a hugely positive benefit option for me.

 

[ivinsfan]

I find it strange that others would not want to help there kids. I wish I was given some advice before before I was 59 and found MMM and a few years later E-R. My big mistake was funding IRAs while in a low tax bracket and now finding I will be paying a higher tax with dividends and interest, SS and RMDs. Ya, I'm doing Roths now and staying a lower bracket, but I only have 3 years left before SS and 5 before RMDs. Or even not using any tax deferred accounts and live LTCGs of less than $105,000 and pay $0 tax.

I can give her the info and she can use it or not, but at least she will know.
But, to each their own!
Thanks to all that contributed to the thread.

I was simply curious if your DD had asked you for information. We old people know a lot about many things. How you translate that to not wanting to help your kids is mystifying. Oddly enough I know almost nothing about the finances of my adult children. And I'm fine with that because taking care of my own money is enough hassle Now at your DD age I most likely would talk about life insurance and disability insurance in case she can no longer earn income.

Keep in mind tax laws change and will continue to change. I've pretty much found out as far as taxes you can pay me now or you can pay me later.

 

[Time2]

I was simply curious if your DD had asked you for information. We old people know a lot about many things. How you translate that to not wanting to help your kids is mystifying. Oddly enough I know almost nothing about the finances of my adult children. And I'm fine with that because taking care of my own money is enough hassle Now at your DD age I most likely would talk about life insurance and disability insurance in case she can no longer earn income.

She has got disability insurance if she is unable to work as a dentist, pays even if she can do other work. I'm not sure about life insurance, her husband earns a good living, she has no children of her own, if she does, then life insurance will be important.

Keep in mind tax laws change and will continue to change. I've pretty much found out as far as taxes you can pay me now or you can pay me later.

 

[pb4uski]

...Start a giving trust like they offer at Fidelity. Good way to move capital gains into donations. ...

Man you guys are twisting the question. If someone is donating and most should, then starting a giving account like they offer at Fidelity, allows you to transfer appreciated shares, which reduces your capital gain thus your taxes instead of giving cash. Enough said. Tough crowd.

There is really no need to have a giving trust or giving account.... I think you are referring to a donor advised fund. You can just donate appreciated shares to the charity... I've done that before... you avoid the capital gains tax on the unrealized appreciation and get a deduction for the value of the stock transferred.

The benefit of the donor advised fund is the timing of the tax benefit. With the DAF you get the tax benefit ihe year that you transfer funds to the DAF rather than when the donation is made to the charitable organization.

 

[marko]

She's an employee just starting out and wants to build some net worth and also pay less tax. Spending $100 to save $30 is not the way to do that.

This.

But I'll reiterate my earlier post: Find a good CPA, CFP or such (vs someone who just does taxes) and let them do the heavy lifting while learning as you go. This is a professional couple with high income potential and should be super serious about the financial side of things.

 

[Closet_Gamer]

I have taken note of the risk, and also at 30yrs old, how long can you defer that income, what good is it if she takes it in ten years when her income is even higher?

The actual terms of NQDC vary wildly by company and are influenced by some specific government requirements in terms of deferrals, re-deferrals, etc.

My megacorp's NQDC plan is pretty allows deferrals up to 15 years including time after you leave the company.

I've heard of other NQDC plans that require the participant to take all of it as income immediately when they leave the company, resulting in a huge tax hit and serving as a retention mechanism to delay the tax hit into the future.

There also is the question of how the funds are invested in the meantime. Some companies invest the funds in S&P 500 or other approches. My megacorp pays a simple interest rate that drops materially when you leave the company. That means if you do a 15 year deferral and the leave, you're locking in a pretty low interest rate for that duration.

The unifying risk that one MUST be aware of on all NQDC plans is the "Non-Qualified" part. These are not a 401k plans where the assets in the plan belong to the employee. By law, these plans are unsecured assets of the business...the employee is an unsecured creditor of the company. If the company goes bust, their deferred comp payout is in line behind all secured debt holders and typically alongside vendors who are owed money.

So if the company goes under the entire value deferred can go to ZERO.

How long and how much of one's assets are you willing to loan a company on an unsecured basis?

It becomes a serious balancing act between taxes, time, risk & asset concentration.

I hope that's helpful.

 

[Closet_Gamer]

That would be pretty rarified air at my megacorp - actually "asking" for compensation. I'm sure a few layers above me, it was possible (as were NQDC plans.) Otherwise, compensation was rigidly controlled by years of service, "official" qualifications (like degrees), "performance", etc. Not to say I wasn't well compensated. I was.

We're pretty tightly banded as a company, but this was a pretty unique scenario.

We were starting a new business unit and I had just moved across the country to get it going. With cost of living and taxes in the new location, I had actually taken a de facto pay cut for the promotion into the role to help start the unit. I was betting on the come that the business would work out and good things would happen.

Six months later, I'm doing three jobs while they try to build out the team. The new VP of Sales joins the company and promptly asks me if I participate in the Deferred Comp plan and should he join it.

It took me about 10 minutes to realize that he made enough money to access to the plan and I didn't. I was not amused.

But I waited to deal with it. I had my boss over a barrel because so much of what we were doing was wired into me at that point. If I had gone in and asked for the raise then, it would have felt like I was leveraging him.

Instead I waited six months until his team was built, things had settled a bit, and we had a longer relationship. I gently put the issue to him and pointed out that I had waited to bring this up. He said he would look into it.

My boss was (and is) a great person. Two months later I asked him about it and he said "You don't need to worry about that." Um, OK.

When raise time came next year he got me the bump into the right pay band + some more.

We've had a great relationship for 15 years and the risks I took for the company (those above and others) have more than worked out.