What if you make more than 186K jointly and want an option for reducing your taxable income? Can you still invest in an IRA?
Standard disclaimer: We are not professionals. Consult a professional with fiduciary responsibility and/or do your own research before making important monetary decisions.
In 2017, if you make more than $133,000 you can purchase a traditional IRA but doing so will provide no tax benefit (more than 118K, and you only get a partial tax benefit). You can roll that traditional IRA over into a Roth IRA, but Roth IRAs do not reduce your taxable income this year. Roth IRAs decrease your taxes on earnings in the future when you start living off those retirement assets. (That 186K number is the beginning limit for the Roth IRA.)
What can you do to reduce your taxable income?
- Contribute the maximum to a traditional 401(k)/403(b)/457 through your work if that’s available– if you have Roth versions that these won’t decrease your AGI (taxable income) this year, just at some point in the future. If you have both a 403(b) and a 457, you are allowed to contribute to the max for each (but you can only contribute a total of 18K to all your 401(k) options, although if your company offers a mega backdoor roth option, that’s a way to shelter future income by putting away up to 36K this year)
- Contribute to an HSA (health savings account) through your work if that’s available.
- Pay a lot of interest on a mortgage (not the best idea for your finances overall, but it may decrease your AGI depending on where it hits compared to the standard deduction).
- Sell stocks or other investments at a loss. If the loss is big enough you may be able to carry those losses over to future years. Again, it’s nicer to get profits than to get losses, but there’s a little benefit in terms of decreasing your AGI.
- Donate a bunch to charity, or start a donor-advised fund to donate a bunch of charity in the future and to get the tax break now (you won’t get the tax break later when you actually give the money away though). Again, be aware of standard deductions and alternative minimum taxes.
- Something I don’t understand called a “bond fund swap” which sounds a bit sketchy, but a lot of tax
dodgingsaving stuff is sketchy.
- Have a baby or adopt a kid (again, not an overall money saving strategy, but it will help your AGI).
- Pay a lot in state taxes possibly by moving to a place (for work!) that has higher taxes. (See above about not overall money-saving.)
- Those moving expenses that aren’t reimbursed may also be tax deductible.
- Have a bunch of job-related expenses.
- Plan when you pay your home-owners taxes so that they make the most tax sense, which may mean doubling your payment one year and not paying it the next (this will depend on your other deductions and the standard deduction).
- Keep all your receipts for itemized deductions, even little things like $5 donations.
- Marry someone who makes a lot less than you do. (Or divorce someone who makes close to what you make.)
- Pay alimony.
- Put off taking retirement income until you have to.
- If you have high medical expenses (>10% of your AGI), bundle them as much as you can into one year.
- If you have self-employment income, look into the SEP and Solo 401(k). Also make sure you’ve accounted for all business expenses and maybe make some business expenses. You may also be able to do some dodgy things about paying your kids as employees.
- If you have a rental property, make sure you document your costs.
- You can deduct some money for qualifying education expenses.
Grumpy Nation, what other suggestions do you have to lower Adjusted Gross Income?