Taxes - Lowering bracket

**jIM_Ohio** · 10-21-2010, 08:09 AM

Originally posted by cypher1 View Post

Is it possible to get myself in lower tax bracket 15%, given my current status? I have a rough idea of how it works, with deductions, and maxing out 401k contributions, etc. but was hoping for more information and advice.
I'm currently 29, single, no children, with a mortgage. My annual salary is 66k, I contribute 6% of that (company matches up to 6) for 401k, and just opened a Roth. I also have a FSA for $500. My friends say to claim more on my W2 (right now 2 listed), so I won't get as much back in tax return, so govt doesn't need to hang onto any longer than they need. I realize with itemized deductions, I have interest on mortgage, PMI, and property taxes. Not sure what else I'm missing for other factors. I'm not planning on opening a business anytime soon, but was just an idea. For claiming expenses, but having separate property or room to manage for business only.
Any thoughts?
This whole idea has been more of curiosity than a major priority. I always read about a lot of you mention maintaining lower tax bracket, but just need some additional education on this topic.

What you claim in withholdings and allowances will have no impact on tax bracket

My math is this:

66k gross
minus 6% 401k ($3960)
minus std deduction ($5700)
minus adjustment to std deduction for property taxes ($500)
minus exemption (single) $3650
minus health care premiums paid (assuming employer plan is pre-tax) $3600 ($300/mo?)
minus $500 for FSA

I have taxable income at $48,090
15% bracket for single is $34k.

You need 14k of other adjustments.
If you are putting 5k into a Roth, that is $6250 which could be put in 401k
If you itemize deductions, I assume that means you have more than $6200 in mortgage interest, property taxes and qualified PMI. How much higher are you than the std deduction?

If you can get into lower tax bracket doing the same things you are doing now (just being smarter with money) it is a goal. I would not lower standard of living to get into lower tax bracket though.

The best ways to get into lower bracket:
switch health plan to HDHP and max an HSA (so the $3000/yr I estimated for your health care premiums should drop- maybe to $1500- then put the other $1500 into an HSA, plus the $500 FSA should be $500 more to HSA... and then look to max the 401k and HSA and that should cover MOST of the $14k gap identified.

**KTP** · 10-21-2010, 08:28 AM

It would probably be pretty tight to do it, but if you could kick an extra $12,000 into your 401K you would be pretty dang near the 15% bracket. Your take home pay would drop by $9000 though, which probably is a pretty large chunk of your budget.

**cypher1** · 10-21-2010, 09:10 AM

Appreciate all the feedback. jIM, that breakdown is exactly what I need for options/research. As for specific numbers, annually I pay 2800 property taxes, 1140 PMI, roughly 10260 mortgage interest (calculating from monthly statement). Med/dent/vis benefits total annual 422+500 FSA.
Open enrollment is still going on for next year so I'll need to do more reading on our plans for HDP.
I agree with not trying to lower standard of living drastically as you and KTP mentioned. I like the idea of also changing majority of money to roth back to increase 401k instead. Another note to mention, next month I'll have another renter (just an excuse to save), so $800 total monthly income (from 400). I always forget to add since I usually put rent in sep account for home repair/projects.

**jIM_Ohio** · 10-21-2010, 09:31 AM

Originally posted by cypher1 View Post

Appreciate all the feedback. jIM, that breakdown is exactly what I need for options/research. As for specific numbers, annually I pay 2800 property taxes, 1140 PMI, roughly 10260 mortgage interest (calculating from monthly statement). Med/dent/vis benefits total annual 422+500 FSA.
Open enrollment is still going on for next year so I'll need to do more reading on our plans for HDP.
I agree with not trying to lower standard of living drastically as you and KTP mentioned. I like the idea of also changing majority of money to roth back to increase 401k instead. Another note to mention, next month I'll have another renter (just an excuse to save), so $800 total monthly income (from 400). I always forget to add since I usually put rent in sep account for home repair/projects.

New math

My math is this:

66k gross
minus 6% 401k ($3960)
minus schedule A deduction (2800+1140+10260)=14200
also add state taxes paid or sales tax to above- that number can get higher
minus adjustment to std deduction for property taxes ($500)
minus exemption (single) $3650
minus health care premiums paid (assuming employer plan is pre-tax) $4800 ($400/mo?)
minus $500 for FSA

I have taxable income at $38,890
15% bracket for single is $34k.

You need 5k of other adjustments.
I would modify my previous advice and suggest you add $5000 to 401k, (means add 8% to existing 6% and contribute 14% total to 401k) then only put in $1250/year into a Roth (with any new money being added to the Roth). This should NOT change take home pay by more than $25 either way assuming you were maxing out the Roth and not including the Roth into take home pay.

You also need to confirm your health care is being withheld PRE TAX. It usually is, but don't assume anything.

Taxes - Lowering bracket