Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (19) | Ignore Thread Prev Thread | Next Thread
Author: JimmyTheDevil Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120819  
Subject: Help Reduce taxable income. . Please! Date: 1/4/2002 12:58 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Hello Fools!

I got married in 2001 and now I am painfully aware of the marriage penalty that I've heard about but never listened to.

2001 was a great year . . I had a nice increase in salary so my tax burden went up. . however I maxed out my 401k. So, I thought it would be a wash. . not the case. My wife is a teacher and putting $1200 annually into her 403b. I don't really like the the 403b as a great investment vehicle, but we need to reduce our taxable income.

Are there any other ways to reduce our taxable income so that our bill to Uncle Sam is not so high?

Please help! Taxes too high!!! Advice?

Thanks
JimmyTheDevil
Print the post Back To Top
Author: malakito Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56744 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 10:29 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
JimmyTheDevil,

Now that it's 2002, your options are pretty limited. The only option I'm aware of that is available to you now is to contribute, if you or your wife are eligible, to Traditional IRAs. Given that you maxed out your 401(k), I kind of doubt you are eligible, but your wife may be.

Had you asked a month or so ago, you could have additionally:

1. Made charitable contributions
2. Prepaid January 2002 mortgage payment (therefore deducting an additional month of interest).
3. Prepaid property taxes (similar to #2).
4. Deferred income; for example, any year-end bonuses.
5. Increased your wife's 403(b) contributions.
6. Realized capital losses by selling stocks or bonds that were down from when you bought them.

...and there are probably others. Usually most of the good financial websites will have "end of the year tax planning" articles around November/December that describe more of the common options available.

Congratulations on getting married!

malakito.

Print the post Back To Top
Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56749 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 11:50 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 5
"Please help! Taxes too high!!! Advice?"

Okay, I'm not a nice guy like all these accountants, so I'll say it.

Be thankful, in these troubled times, that you have well paying jobs that let you pay taxes.

Understand that the so-called "marriage penalty" is because two people live more cheaply than one, which is why the joint exemption is less than two individual exemptions: the "penalty" comes from getting married instead of just living together.

And, before you complain too much about taxes, let me point out that your school-teacher wife is paid by taxes, and that many of us pay very high property taxes to support the schools, even when we have no children in those schools. (By the way, I think your wife is grossly underpaid.)

Print the post Back To Top
Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56754 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 1:41 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Are there any other ways to reduce our taxable income so that our bill to Uncle Sam is not so high?


Consider increasing your charitable donations. Calculate whether or not you'd be better off using a tax-exempt mm fund instead of a taxable fund. Have children.

:)
rad


Print the post Back To Top
Author: RobFritz One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56760 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 3:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Get SSNs for your pets?

Print the post Back To Top
Author: yankeesmyteam Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56766 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 5:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
buy a house or get yerself some youngins.

Why do people do tax planning for the tax year 2001 in 2002 duhhhhhhhhhhh?

Print the post Back To Top
Author: JimmyTheDevil Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56767 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 5:32 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Malakito,
Thank you so much for your info. I've pretty much put 2001 behind me and my focus is a year long goal to reduce our taxable income for 2002. So, thanks again for your info. You are right about the deductable IRA, we make too much to be able to deduct. . .is there any other vehicle besides my wife's 403b that we can use to reduce our taxable income?
Also I know that $11000 is the 401k maximum, but is there a 403b max or a 401k & 403b combined max limit?
JimmyTheDevil

Print the post Back To Top
Author: JimmyTheDevil Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56769 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 5:52 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Lokicious

Okay, I agree you may not be a nice guy, but you do bring up the other side of the coin. Point made.

First, I am very thankful in these trouble time to have a job that lets me pay taxes. I just wish I didn't have to pay so much. :-)

Next, I understand the penalty and I still don't have to be enthused about it.

Last, I agree. . my school-teacher wife is grossly underpaid. Also as you pointed out many of us (me included) do pay high school taxes even though we don't have children enrolled in those schools (no kids for us). However, the taxes that I am referring to are not school/property taxes. . . .but Federal Income Tax. The Fed provides less the 5% of the total funding for our public schools and my wife's salary does not come from that percentage. So, I agree with you again that my wife is paid by taxes. . .State taxes. .. not Federal taxes. Besides the School/property taxes can be deducted to help reduce my federal taxable income. . .which was the desired objective of my original post.

Thank you for your perspective and if you have any ideas for the tax year 2002 for me to be able to reduce my Federal taxable income. . . it will be much appreciated.

JimmyTheDevil

Print the post Back To Top
Author: JimmyTheDevil Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56771 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/4/2002 5:58 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
yankeesmyteam,

I already have the house. . .youngins. . whew! That's a stretch. We can barely take care of our dog. :-)

By the way, as I mention in another reply. . .I've put 2001 behind us and I have a year long goal for 2002 to reduce our taxable income (all while increasing our Gross). I know. . I'm dreaming. . .but I might as well dream big!

Thanks,
JimmyTheDevil

Print the post Back To Top
Author: yankeesmyteam Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56806 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/5/2002 3:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Jimmy just because you can't deduct the IRA still fund it dude.

Print the post Back To Top
Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56808 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/5/2002 7:00 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Jimmy just because you can't deduct the IRA still fund it dude.

Actually this may not be good advice for higher income individuals. Money coming out of an IRA is taxed as income. For a non-deductible IRA, this means you would choose to forego deducting any losses in the account or the ability to have it taxed as long term capital. Some "universal" advice really isn't.

rad

Print the post Back To Top
Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56819 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/6/2002 11:11 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
"Jimmy just because you can't deduct the IRA still fund it dude. "

"Actually this may not be good advice for higher income individuals. Money coming out of an IRA is taxed as income. For a non-deductible IRA, this means you would choose to forego deducting any losses in the account or the ability to have it taxed as long term capital. Some "universal" advice really isn't."

It's still pretty good universal advice to fund even a non-deductable IRA: it may just not be the best place for certain kinds of investments. Assuming people want to build towards a balanced portfolio, an IRA can be a great place to put those parts of the portfolio (value funds, bond funds, REITs, mid-cap index funds, small cap index funds) that generate significant annual taxes at one's marginal rate.

Even with a tax-efficient vehicle, such as an S&P index fund you hold onto for years and years, it may work better to have it in a retirement fund. It is true, if you were to cash in the fund in the same way (either all at once or dripping it out) when you reach retirement, you would pay more taxes in the retirement account, because you pay at your marginal not long term capital gains rate. However, if you think about wanting to reduce your exposure to the stock market when you near or reach retirement, the retirement account lets your cash in without paying taxes, then you can continue to earn tax deferred interest as you gradually withdraw money from the account. When you factor in the taxes you pay annually on distributions (in a taxable account), the actual difference, even if you cashed out of the retirement account all at once, is so small, all you would have to do is leave the money in a conservative investment (in the retirement account) for a year or two after getting out of stocks to catch up; after that you're clearly ahead.

Now, for those of us saving for retirement in both official retirement accounts and taxable accounts, clearly it makes most sense to have the more tax efficient parts of our portfolio in the taxable accounts. But I'd be pretty hard pressed to imagine any real world situation where I wouldn't rather have the earnings tax deferred.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: acm4tax Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56828 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/6/2002 3:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Jimmy just because you can't deduct the IRA still fund it dude.

Why isn't anyone mentioning the ROTH IRA? If your MAGI is below the allowed limit, phase out begins at $150k, ends at $160K MAGI if you file MFJ, you qualify to contribute. ROTH IRA's aren't taxable after age 59 1/2 AND 5 years after you make your first contribution. Also the principal amount invested in a ROTH can be withdrawn at any time without taxation or early withdrawal penalty.

You say you're looking for tax shelters for 2002. Don't rule out after retirement considerations too, like the ROTH which have been increased to $2500 this year.

Not all financial decisions should be made on tax consequences alone.

Remember retirement plans are taxed at ordinary rates, not long term capital gains rates. When you consider what you may have to live on in your retirement, and the tax bracket you'll probably be in then, you might be better off investing in growth stocks or funds that don't have taxable dividends.

It might be to your advantage to pay the tax on capital gains as they're earned at capital gain rates that apply, and pay less tax when you withdraw them down the road. Nobody's crystal ball is capable of accurately forecasting the future to my knowledge. And as the facts show, financial planners lost money in the recent market downturn, you can't trust their judgment much more than your own.

Best wishes to you. It sounds like you're doing the responsible thing checking out all your options.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56844 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/6/2002 9:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
But I'd be pretty hard pressed to imagine any real world situation where I wouldn't rather have the earnings tax deferred.

Is it hard for you to imagine a scenario when your income tax rate is higher than your capital gains rate ? I calculated what the forced distributions of my husband's IRA will be based on the life expectancy tables and we would have been better off with a taxable account with stocks. I wasn't talking about mutual funds, specifically because of annual distributions.

I'm a doubter of any "universal" advice. I run through my own scneario because much of the universal advice has not turned out to be the best for me.

rad

Print the post Back To Top
Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56847 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/7/2002 7:41 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Why isn't anyone mentioning the ROTH IRA? If your MAGI is below the allowed limit, phase out begins at $150k, ends at $160K MAGI if you file MFJ, you qualify to contribute.

I didn't mention because it's never been available to me and my post was directed to higher income individuals.

rad

Print the post Back To Top
Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56853 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/7/2002 11:57 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Scenarios in which you pay less taxes on gains with certain stock investments in taxable accounts than in tax deferred retirement accounts, because you can pay long term capital gains taxes instead of being taxed at your marginal rate, presume: a) low ongoing taxes in the taxable account; b) cashing in relatively close to when you will spend the cash. The higher your marginal rate, after retirement, the more time you have to spend the money before taxes on interest allow the tax deferred approach to catch up.

I believe a tax efficient mutual fund, such as a Total Market Fund or an S&P 500 fund, is a far more likely scenario for something that can be held onto indefinitely than individual stocks. An S&P fund's annualized returns in a taxable account will be reduced, depending on tax bracket and exact distributions of dividends and capital gains, somewhere between around .3% and .7%. The only way you will beat that with individual stocks is if you really do find some of those hold-for-a-lifetime stocks that are the Gardner Bros. holy grail. They are easy to find in retrospect, but many of the stocks that might have been chosen 30 or 40 years ago have badly underperformed the S&P 500, or worse. I think it is a lot safer to assume you will have at least the same churn rate as the S&P 500 (about 10%). A tax-managed mutual fund would be another very low ongoing tax option, though the extra fees make it hard to approach the pre-tax returns of an index fund.

Even with the ongoing taxes on an S&P fund, you will still pay less total taxes in a taxable account, if you succeed in selling only what you need a relatively short time before you need it (ball park figure would be a couple of years, longer for the top bracket or in low tax states). This means not making huge adjustments to reduce exposure to stocks when you retire and not panicking when you fear a bear market. I think it is both possible and desirable to achieve this tax efficient goal of slowly dripping money out of stocks, or at least extracting what you need at 2-year intervals when stocks are doing well, but you can only pull it off if you have a diversified portfolio that lets you wait out times when stocks are doing badly. The tax-inefficient parts of the portfolio, which are necessary for diversification, are best kept in tax deferred (or Roth) accounts. Also, if you envision major reallocations out of stocks as you near retirement, that is also going to generate less taxes when done in tax-deferred (and Roth) accounts.

I am strongly supportive of placing your most tax-efficient holdings in a taxable account. I certainly would not suggest putting tax-efficient holdings you plan on keeping "forever" in tax-deferred accounts. But that is very different than arguing against maximizing your tax-deferred options, even the least desirable one of a non-deductible IRA. Use it to buy a value fund or a balanced stock/bond fund, or buy an index fund and plan on selling it during some boom near your retirement to rebalance your portfolio. The only way a tax deferred account is going to hurt is if you want to retire with a portfolio heavily weighted towards stocks. The last couple of years should have taught us a lesson about that.




Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: noratr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56862 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/7/2002 3:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
>> You say you're looking for tax shelters for 2002. Don't rule out after retirement considerations too, like the ROTH which have been increased to $2500 this year. <<

ROTH Limit is $3000 for 2002.


Print the post Back To Top
Author: malakito Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56906 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/8/2002 9:46 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You are right about the deductable IRA, we make too much to be able to deduct. . .is there any other vehicle besides my wife's 403b that we can use to reduce our taxable income?

Well, a good way to answer this question is to look at the 1040 form and see how your taxes actually work and what gets subtracted out. A few of the more common ways to reduce taxable income follow. These happen to apply in my case and I believe are generally applicable but may not apply to you.

1. Kids. If you have kids, you get an exemption and a tax credit ($600 per child in 2002, going up to $1000 per child at some point).

2. Mortgage. Mortgage interest and property taxes are deductible.

3. Retirement plan contributions. Already discussed.

4. Charitable contributions. Already mentioned.

5. Investment losses. Up to $3000 in net losses can be subtracted from taxable income.

6. Health care and dependent care reimbursement accounts. My employer allows me to defer part of my salary into these kinds of accounts to pay for unreimbursed medical expenses such as copays, prescriptions, deductibles, and uncovered medical expenses. (The dependent care thing is usuallly used similarly for day care expenses.) This part of my salary is not taxed by the federal government.

7. Buy and hold. If you are doing well on your investments, selling will trigger capital gains taxes.

8. Roth IRA's. You can avoid capital gains tax mentioned in 7.

9. Index funds. Or any funds with low dividends. You pay taxes on any dividends yearly. Capital appreciation is deferred until you sell.

I don't know about your latter question but I *think* the answer is that you can contribute up to $11k to your 401(k) and your wife can contribute up to $11k to her 403(b). Doublecheck on that.

malakito.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: jcmn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 57330 of 120819
Subject: Re: Help Reduce taxable income. . Please! Date: 1/18/2002 10:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The "flexible spending" health account is a great option and often underutilized. Remember, you can include Prescription Eyeglasses, dental care & orthodontics and several things that might surprise you. It, in effect, lets you "deduct" medical expenses under the 7.6% AGI threshold. Most companies with the plan, have a very detailed list of allowed expenses. Use that as your "shopping options" list for this year.

You may want to consider funding somebody else's education or making a gift to your favorite niece or nephew in college. Can the gurus out there tell him if he qualifies for a tax deduction on this? Regardless of the tax implications, those are very often good (karma) investments.

There also may be an opportunity to create a tax deduction with "worthless stock" you may have. After talking to a friend of distant relative, arrange with your broker to FORMALLY sell the stock worth pennies a share to your friend or relative. Have them write you a check for the amount of the sale and keep copies of everything. The commision may be more than the stock price, but, you will be able to deduct your loss in value of the stock and your friend or relative *might* realize a nice gain if and when the company "resurrects" again. Otherwise they are just out a couple of bucks. Call it a type of Lotto... I think the limit on capital losses per year is $3K. What do the gurus say?

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (19) | Ignore Thread Prev Thread | Next Thread
Advertisement