Tax Advisor

[jIM_Ohio]

Hi Jim -

I've seen some of your other posts about the importance of staying within a specific tax bracket and that in your case it saves you 10%. When I look at the tax table from the link you provided below I am having trouble making this math work. In your example, $62K in taxable income falls within the 15% bracket. Based on the tax table it appears that someone with taxable income of $62K would pay $6892 in taxes: 1605 + ((62000 - 16050)*.15). This would mean that you are paying 13.7% of your taxable income (6892/62000). If your taxable income went up to $68K which is in the 25% bracket, it looks like your tax would be $9687: 8692+ ((68000 - 65100) * .25). As a percentage of your taxable income this would be 14.2%. How does this equate to a 10% savings? Am I thinking about this incorrectly?

It's a 10% cost on any dollar earned above $66100.

That is really 10% cost on any dollar above $66100+$10900 (std deduction)+$7000 (personal exemption for husband/wife)=$84,000. So 84k of net income is $66100 of taxable income (with taxes owed of 8,962.50).

In your case you would look at 200k of gross income, $10900 std deduction+$7000 of personal exemptions that 200-17.9=182.1k. You are in the 28% tax bracket and the cap for that bracket is $200,300.

I would consider munis in your case if the interest generated from savings, bonds and money markets approaches $17k per year. Your general tax planning should be to stay in 28% tax bracket and avoid the 5% increase to 33% tax bracket ($200301+ of taxable income). If you don't invest much, then it would not make a difference one way or the other. if you are planning to retire and maintain a similar income level, munis would make LOTS of sense in your case.

There was a blog discussion about whether taxable investing accounts in your case would be better than using traditional IRAs. A discussion to this effect for you (and what your retirement plans are) would be in order.

Are your 401ks maxed? What % of gross income do you save? When do you plan to retire?

[JinCO]

I see what you are saying regarding the 10% savings. That makes more sense.

In terms of whether munis make sense or not, it seems that they would not in the near future. We are focused on paying off student loan debt for the near future, so the amount that we will be able to invest in stocks / bonds will be around $30K - $40K in 2009. I'm anticipating / hoping that this will increase in subsequent years as we shift focus from debt repayment to investing, so at some point it might make sense.

It looks like we should be able to stay in the 28% bracket for 2008, but it is very unlikely that we could in 2009. For 2008, I am anticipating our AGI will be about $235K and our taxable income to be about $195K.

Yes, 401Ks are both maxed ($31K / year) total. In 2007, we will have saved this plus about $10K toward our emergency fund. We also will have paid about $50K towards debt repayment and mortgage payment acceleration. So this year, we were only able to save about 15% of gross because of focusing on debt but next year we should be able to save closer to $70K which would be about 25%. Assuming our house is paid off I wouldn't think we would need more than $100K per year in retirement. I don't have a target age for retirement at the moment but somewhere around 55 sounds nice.