We're paying a boat load in taxes, need tips

[Russell]

Anyone has better tips than what's typically found on the net ?
We're paying a huge chunk of money to uncle Sam. Our situation:

- Two incomes (high tax bracket, don't qualify for most credits like child credit etc)
- No house
- 401K maxed out
- we're already using FSA
- not enough deductions to itemize so we take standard deduction

Am I missing any tax saving ideas ? I'm not even sure if speaking with a tax advisor will make a difference ?

[Fern]

are you fully funding your IRA each year? You can still make a partial contribution to roth ira as a high income earner (you didn't say how high) and you can deduct the full amount on a traditional IRA if you have no 401k.

do you ever donate used clothing or other items to charity, like good will? This is tax deductible. (OH, never mind, i see you claim the standard deduction.)

have you considered a variable annuity, which offers a tax-deferred umbrella for your investment during your earning years, and is only taxable upon withdrawal upon retirement.

There are also certain tax-advantaged mutual funds offered by the well-known fund companies like T. Rowe Price.

[sweeps]

You could lower your state taxes by investing your short-term savings in T-Bills. Or you can lower both federal and state taxes by investing in certain municipal bonds, or as Fern pointed out, a tax-free money market fund.

[jmjj215]

Russell are you self-employed at all?

[Russell]

Thanks for the suggestions and I'll need to get more educated on the things you guys have suggested so far.

Fern, we've been contributing to ROTH partially, we don't qualify for IRA.

Sweeps, my understanding was that these saving vehicles only lower taxes on the investment returns not on your taxable income ? Where we're getting hit the most is the income from our day jobs. We don't really any big investments outside the 401K and the interest earnings are from ED, HSBC etc are not big enough to impact the overall taxes.

Jim, its my dream to be self-employed but I'm too chicken and lazy to take the initiative but tell me how that helps lowering taxes ? Say for example I start a computer consulting business for example, the most I could write off would be a few computers and office supplies, then I'll have to pay SE tax and income tax etc ?

[JBinKC]

You don't necessarily need a house to use schedule A on your tax return. State Income tax and personal property taxes are tax deductible as well as unreimbursed business expenses and investment expenses subject to 2% of AGI. Years like that are good to plan ahead and donate your things you don't use to charity as a non cash contribution or if you can swing it stock assets that have appreciated considerably.

[weiwentg]

Originally Posted by Fern

have you considered a variable annuity, which offers a tax-deferred umbrella for your investment during your earning years, and is only taxable upon withdrawal upon retirement.

variable annuities often come with high fees attached, and you can't deduct contributions. the only situation they're appropriate is if you've maxed out your 401k and your IRA contributions.

[sweeps]

Good point, weiwentg.

Russell, you mention you're contributing to an FSA. Is that a health care FSA or a dependent care FSA (or both)? Also some employers offer a tax-free benefit for commuting and parking expenses. That can lower your taxable income as well.

[stngymama]

Originally Posted by Sweepsplayer

You could lower your state taxes by investing your short-term savings in T-Bills......

Is it REALLY 10K minimum at that website or am I misreading something? Sounded really attractive 'til I saw that

[sweeps]

No, minimum investment is $1,000.

[DivaJen]

Originally Posted by Sweepsplayer

You could lower your state taxes by investing your short-term savings in T-Bills.

Can you talk about this some more, or point me to a good link that explains this? I know basically nothing about T-Bills. Thanks.

[kashi]

DivaJen, you can learn more about T-bills here.

[sweeps]

Hi Jen. goodtosave started a thread about it a while ago. Basically they are an ultra-safe short-term investment, and the interest rate is very good. Plus as I mentioned, the interest is exempt from state and local taxes, so if you live in a state like California, it can be a really good deal.

TreasuryDirect has a FAQ and there is also a link to a Guided Tour to show you how it works. Investments are done electronically -- you can link your TreasuryDirect account to an account (usually savings), so when you buy T-Bills, your account gets debited, and then when the T-Bill matures, your account gets credited. For example, let's say you want to buy a $1,000 T-Bill. Your account may be debited, say, $970. And then 28 days later, your account will be credited $1,000. You've earned $30 in interest. You can only buy T-Bills on certain days, and the interest rate fluctuates (but has been very competitive with high-yield savings accounts).

[DivaJen]

Thanks you guys - I appreciate the links and now have something new to learn about.

[boefixepa]

If you do not own a house are you paying rent? Living expenses are a big ticket item and that may be difference when it comes to being able to itimize. You may want to do the math and see if the $$ you save on taxes would offset the additional money it would take to own a home. Plus you earn $$ as the house vaule increases. Once you can itimize, then comes the creativity in finding how to work the system. Single, homeowner making aprrox 50K a year and I pay taxes on something like 22K. I claimed 8 on my with holdings last year and still got about $200 back this year....don't think I'll be so lucky next year, but I put away a little each month for a tax bill. That way I'm making money on my money not them.

Second idea....if you can't or don't want to get to point where you itimize then make as much money on your money as you can. Meaning....make sure you have to pay a big chunck of taxes come the 15th. Not enough to pay a penalty, but close if that is what it takes. Save the 300-400 hundred a month in the best account you can find. You do this by changing the witholding on your W-4 form that you can change at any point. ALSO WHAT YOU PUT ON THAT W-4 HAS NOTHING TO DO WITH YOUR TAX BURDEN!! Just how much the goverment takes out because they don't think you have the brains to be able to pay your taxes at the end of the year. Yeah, the goverment loves to do that! So jack your withholdings up to married 10. When you see the difference in your check (now make sure you are sitting down so you don't fall and hurt yourself when you pass out) take that differnce and find the absolute best place to rat hole it. Earn some interest and when you have to go thorugh the pain of figuring the taxes have comfort in knowing the money is there and you at least earned interest on it and not them!!

PS...you can do basically the same thing with anything you pay once a year...home owners insurance and property taxes are another great example. or car insurance

[Fern]

Originally Posted by weiwentg

variable annuities often come with high fees attached, and you can't deduct contributions. the only situation they're appropriate is if you've maxed out your 401k and your IRA contributions.

I wouldn't recommend a variable annuity for everyone, but if you're high income earners and are looking for a tax shelter, this is it. Their main attraction, of course, is that they can provide you with a stream of income you can't outlive.

[CJsoccerchic]

Originally Posted by Sweepsplayer

You could lower your state taxes by investing your short-term savings in T-Bills. Or you can lower both federal and state taxes by investing in certain municipal bonds, or as Fern pointed out, a tax-free money market fund.

Hey just wondering - how does buying T-bills lower your state taxes? ABy making revenue, are you not increasing taxes on yourself? Lost....

[sweeps]

Originally Posted by CJsoccerchic

Hey just wondering - how does buying T-bills lower your state taxes? ABy making revenue, are you not increasing taxes on yourself? Lost....

You're correct. The assumption I'm making is that Russell has money invested in taxable savings accounts or CDs. If he transfers that money to tax-friendly investments like T-Bills, the interest would not be taxed, and his reported income at the end of the year would be lower.

[CJsoccerchic]

T-bill interest is not taxed?!?!?!?!?!?!?!!?!?!?!?!?!?!?!?? How do you report the additional revenue when it comes to tax time?

[sweeps]

T-Bills are not subject to state and local tax. You do pay federal tax on the interest. If you're in a state with income tax, you should have a line on your tax form that lets you deduct interest from T-Bills.

Municipal bonds (and funds that hold municipal bonds) are usually not subject to federal, state and local tax. If you look at the 1040 tax form, there is a line item for tax-exempt interest. That amount does not get added into your total income.

The tricky part is comparing taxable yields to tax-free yields... You have to figure in your own tax rate to find out which investment is worth it to you.