Before I ask my question, I would like to first describe my position: I am a 26 year-old married, college graduate finishing my second year in a commision sales position. Our commissions are paid out once a year in a lump sum the March following the year commissions are earned. The rest of the year from that time on, we earn a 90% draw of the previous years sales. (i.e. If last year my commission was $50,000, then from April on forward to the next March my draw would be $45,000, if in the previous year, my draw had been only $25,000 then on that last day of March I would receive a lump sum of $25,000 (the difference between $50K-what I earned and $25k - what I was paid) I think it is rather apparent the surge in income one can have in one year if they started relatively low the first year but sold exceptionaly well receiving both a large lump sum commission and also a sizable increase in monthly income. In short, this tax year I am looking at a 'bubble' of income of about $125,00 total combined for the year, about $40k higher than our income would have been if I had been paid the commssion the year it was earned.Having said that, I am trying to determine how to best position myself to avoid (or defer) paying taxes on all of my income this year. The only two vehicles of which I am aware that can reduce or defer tax is contribution to the company 401k to the maximum allowable ammount, and claiming the interest agains a mortgage (which means I would have to buy a home, because as of now, I'm a renter).What I would like to know is if there are other methods to defer taxes than the two I mentioned abover? And, if it is really worth my while to purchase a home (do these savings really exist and would it necesarily be better than investing the lump sum). Any advice is appreciated.
Watch out for the house trap. For many years we were told to buy the biggest house we could afford, because appreciateion would beat inflation hands down. Howerver, lately we have heard that good stock investments actually made more money over the long haul. The problem is that with a 30 year loan, you pay three times the cost of the house (with today's low rates). If inflation does kick up, and you loose that job, and can;t meet the payments, you may well have to sell for a profit, and you will owe taxes on the gain, even if the gain is only on paper due to inflation. This happened to me, and I was luckey enough to recover before taxes were due. Unfortunately, I was forced to buy a large house again to avoid taxes, so I am now paying on a new 30-year mortgague. Buy only when you are reasonably sure you will stay put, and buy a smaller house that you can easily afford, and pay it off ASAP! In fact, if I had stayed in my first house instead of upgrading, I would still be there, and I would have a lot more money to spend on other things.There is a book out now on Millionaires. The average Millionaire lives in a modest neighborhood, and drives inexpensive cars, and lives modestly. His neighbors would be shocked to know of his finances, because they think he is just another joe living next door.The moral is: Use the 401K to the max, invest the remainder Foolishly, and don't be overly concerned about the taxes. Remember, you only pay taxes if you earn money. Better to earn more and pay more, than to earn less and pay less.
The mortgage interest deduction does not save any 'real' money. Assuming a 28% tax bracket, you pay $1.00 in interest to get .28 off your tax bill. Not a great deal.You also don't necessarily save the whole $.28, unless your other itemized deductions are sufficient to cover the standard deduction.
<<The mortgage interest deduction does not save any 'real' money. Assuming a 28% tax bracket, you pay $1.00 in interest to get .28 off your tax bill. Not a great deal.>>I do not think it is a deal at all! If there were no such deduction, people would not be able to bid current real-estate prices, so the drop in demand would lower the asked price to conclude a sale. I view this mortgage interest deduction as direct subsidy from the U.S.Taxpayer to the mortgage banking industry.
I don't understand why I'm not getting a copy of the previous post in here . . . but I'll type anyway.I agree about mortgage interest deductions. I've never quite understood why my two brothers who rent (and make less money than me) are subsidizing my house payment.You could also argue that my kids (via the national debt) are also going to pay for the house, but since they also live in it, I don't feel quite so bad about it <g>.
<<The moral is: Use the 401K to the max, invest the remainder Foolishly, and don't be overly concerned about the taxes. Remember, you only pay taxes if you earn money. Better to earn more and pay more, than to earn less and pay less.>>While I agree that maxing out the 401k is an excellent idea, I'm not so sure about not purchasing the home part. Buying a home has many benefits OTHER than tax reduction. So you really have to determine if those OTHER benefits are ones that you want to have in your life, and accept the responsibity of ownership. If you do, then buying a home may be a good thing for you. If not, don't. But as was pointed out, I would certainly NEVER recommend buying a home just to reduce your tax liability. As was noted in the post, the interst expense could be a killer. And as was also pointed out, taxes are still a percentage game. If you are in a combined 45% tax bracket, the $100 that you pay in interest expense to the bank will reduce your tax liability by $45, but the other $55 that you paid is gone forever. You'll never get it back unless the property appreciates this amount AFTER taxes on the gain on the sale. So handing over $100 only to receive $45 in direct benefits is really kinda silly, unless there are OTHER benefits (personal and economic)that account for the $55 that you have to pay out. And if you don't think this is silly, send me $100, and I'll send you back $45. And I'll continue to take every $100 bill that you have. But there are methods by which you can compare your current living expenses after taxes to the after tax cost of purchasing a home. Run the numbers and see what the economic impact is for you.Finally, with respect to other methods to defer your tax or spread your bonus out over a number of years, there is not much that you can do. Income Averaging is long gone. Maxing out your 401k is certainly your best option to defer the income. Since you are involved with a 401k plan, you would receive NO tax benefit for making an IRA contribution (althouth you could make the contribution and allow those funds to earn tax deferred in the future), which may be an option for you. But as W-2 employees throughout the US know, there are not many ways to defer the income that shows up in the "wages" box of your W-2.TMF TaxesRoy Lewis
<<I view this mortgage interest deduction as direct subsidy from the U.S.Taxpayer to the mortgage banking industry.>>Right you are. And as soon as more people understand that our current tax system is NOT a method by which to generate funds to run the government, but a polity for income redistribution, the sooner things may change for the better.But don't just pick on home mortgage. The deduction of medical expenses are a subsidy to the AMA. Charity subsidizes the various organizations that do good works throughout the country. The tax exemption on municipal bonds provides a subsidy to the various state and local governments. You can view virtually EVERY tax deduction or credit as a subsidy to one organization or another. Some you like. Some you don't. Some fit with your political view of things, some don't. So you (the editorial "you"...don't take this personally) generally want to keep the ones you like, and git rid of the ones that you don't like or have no impact on your taxes. Until the folks in Congress decide to make the hard decisions, expect things to remain this way. Too bad.TMF TaxesRoy Lewis
<<I agree about mortgage interest deductions. I've never quite understood why my two brothers who rent (and make less money than me) are subsidizing my house payment.>>Because Uncle Sam, many years ago, decided that home ownership would be "good" for the country. Hence, the tax deduction as an incentive to purchase a home. A tax collection policy? Nope.A social program? Yup. And as noted in my last post, you could feel the same way about charitable contributions. You brothers, that probably can't itemize their deductions, are probably also subsidizing the contributions that you make to your favorite church, temple, or charity. And so it goes...TMF TaxesRoy Lewis
if you itemize deductions (instead of using the standard deduction) and are in a state that allows write offs of sales tax it might be better to buy a car (or truck) as opposed to buying a house.
Do you want to own a home? It comes with responsibilities, the possibility of either appreciation or depreciation, and other costs of such as taxes, maintenance and increased utilities. You are early in your career. Are you committed to staying in the area long enough to justify buying a home? Buying a home just for the tax deduction is a mistake.
The mortgage interest deduction does not save any 'real' money. Assuming a 28% tax bracket, you pay $1.00 in interest to get .28 off your tax bill. Not a great deal. The other part is imputed rent. What would have been paid for rent is being paid towards the house or house related expenses. Whether or not that is a positive or negative depends on rent in the area and expenses for the house. Locally, rent for a 3 bedroom house is in the 3K a month range.
Welcome to TMF. Since the original post that you replied to was over 17 years old, the advice that you are giving probably isn't needed any more. You may want to try looking at some of the newer posts.AJ
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |