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?
October 20, 2017 at 1:23 am
You omitted a few obvious ones: retire, quit your job, reduce your hours at work (if paid hourly), or negotiate a part-time position (if salaried).
October 20, 2017 at 5:34 am
But then you won’t be high income anymore
October 20, 2017 at 12:05 pm
well yeah, but the question WAS to reduce taxable income. :-) I confess I had the same reaction. … There are apparently infinite ways for capital-rich rich people to hide money from the tax man, but not that many ways for people who are merely high-income to do the same.
October 20, 2017 at 7:27 am
You did mention it sort of, but we deduct some of my wife’s commuting mileage. She teaches at 3 different campuses and you can deduct the mileage if you go from one campus to another. Considering she does that every day it adds up. You cannot deduct your mileage from home to your job and back again, but if you go to multiple places with your vehicle you can deduct that mileage.
October 20, 2017 at 7:53 am
October 20, 2017 at 8:01 am
I would also say to make sure you are investing tax efficiently outside of your retirement accounts. If you have access to a Mega Backdoor Roth IRA through your work then I would use that. Technically Roth IRA contributions don’t affect your AGI today, but if you would have invested that money in a regular investment account instead then it does reduce your AGI by not having those dividends in it or any fund exchanges.
We can’t bunch our property taxes and being married, we don’t itemize enough to get past the standard deduction (before marrying we essentially got 1.5 standard deductions with how much I itemized), so that’s why we resolved to do the Donor Advised Fund. I really like it. It’s sort of like a targeted savings account but it’s very much committed to being donated once you’ve added the funds to the account!
Don’t forget about the sales tax deduction if you’re itemizing and in a no income tax state. It can be quite worthwhile if you are high income.
October 20, 2017 at 8:50 am
COUNT YOUR BLESSINGS & GOOD FORTUNE & PRIVILEGE & PAY THE TAX so people with far far far less than you can have a good education, some shelter from the storms, medical coverage for AT LEAST THEIR CHILDREN, and old people do not have to die in the streets. Because, with great fortune, some compassion and responsibility for those less fortunate is supposed to happen. Because with the income you have generated, I suspect the additional tax you would pay will not leave you hungry, homeless, without life saving medical care for yourself, your children or your elders.
I know this is a concept the 1% is not capable of considering but it still needs to be said. I understand questioner’s income is not in the 1% range but the behavior needs to start somewhere if we are not to step over dead elders and children in the street.
October 20, 2017 at 8:52 am
But what if the questioner is not interested in paying for trumps weekend golf trips?
October 20, 2017 at 12:26 pm
If you don’t want to pay to refill Trump coffers or his golf weekends or his cabinet’s spending public money for their personal desires and power symbols……. donate to better candidates and VOTE.
THANK YOU BOGART.
October 20, 2017 at 12:36 pm
I had been holding off on saying this, but, uh, yeah. #firstworldproblems? I am not high income by any means, but the only method I use to “reduce” my taxable income is the 403(b), and I do that primarily to save for my retirement.
October 20, 2017 at 9:50 am
What can you claim as job expense or what could you itemize as a professor? It sounds like a good idea to do these things but I don’t know what items would be most useful to count.
October 20, 2017 at 11:27 am
Buy (and finance) a second home and you can deduct the interest, plus (I believe) the property taxes you pay on it. Obviously be sure you follow various rules about what constitutes a home and how it is used, but the rules on this really seem pretty flexible. Again, not a money-saving strategy, but particularly if you will actually use the home (e.g. it is in a vacation destination you visit often or a place you will retire to) and/or if it turns out to be a sensible investment that you can sell in the future and not at a loss, not necessarily a money-losing strategy either.
And then, to address @Crone’s reasonable concern, donate the difference in what you paid in taxes versus what you would have paid in taxes to Planned Parenthood, the ACLU, Doctors without Borders, Meals on Wheels, or any of a number of other good causes that will make better use of your money than our current government would. Of course if the causes you pick are tax-deductible, you can deduct the donations too.
October 20, 2017 at 12:12 pm
I think it’s important to remember that, notwithstanding the epic shit show that is the DJT administration, tax dollars pay for a lot of stuff that we actually want. We won’t be paying for his bullshit golf trips and his garbagey cronies’ luxury travel forever, but we will need the Interstate Highway System and the FAA (just for starters) forever.
Shelter what you can, sure. The suggestions above all seem good; there are usually ways that we haven’t thought of, and it’s just a matter of cobbling together the combination (in my case a rollover IRA, a 401k, and an HSA) that delivers the most benefit with the least hassle.
There is also the option of simply giving money away. Individuals are allowed to gift a certain amount per person per year without paying gift tax, and if there are people in the family who need help now or may need help soon, that would be the first thing I would look at, personally.
October 20, 2017 at 12:36 pm
Giving money away doesn’t reduce your income, though — it just gives money to someone else. There are ways to do it without incurring more taxes, but not (to my knowledge) ways to give to individual people (as opposed to non-profit organizations) that reduce the giver’s taxes.
October 20, 2017 at 6:21 pm
just goes to show, I don’t have enough income to make this a problem or I would know more about it. LOL
October 20, 2017 at 2:59 pm
Something to note about #18 (document costs for rental property), the OP won’t be able to benefit from so-called “passive losses” (when expenses to maintain the rental property exceed the income) because they exceed the $150,000 income threshold it is phased out. Keeping records on the expenses will help if the property is sold and there are gains, as those expenses reduce the gain, however, so it’s not a totally useless exercise.
I’ve been putting 100% of my 401(k) contributions in my Roth 401(k) for the past 7 years, so as my income has gone up none of that money is sheltered. Now that I’m old enough for catch up contributions, I’m thinking that if I can afford to do that this year I should put it in my regular 401(k). At least that will reduce my taxable income a bit.
October 20, 2017 at 3:14 pm
You’re alive! How are you doing? Is your house ok?
October 20, 2017 at 3:24 pm
Yes, I am alive and doing OK. The house is fine. I live in the city of Napa not far from downtown so my house wasn’t really in danger. The losses in Napa were in areas outside the city limits. The smoke was terrible, though. I had to leave for a few days and stay with a friend in San Francisco.
October 20, 2017 at 3:28 pm
October 20, 2017 at 9:46 pm
Hi everyone. Thanks for using my question! Some background on this: a few years ago our income rose and we did not account for it sufficiently in our withholding and we had a heck of a tax bill. We absolutely do count our blessings, and, trust me, we do pay our taxes. There has been more than one post on this blog about what reduces a person’s taxable income and I just want to make sure we are making smart decisions. We’re certainly not trying to duck our responsibility and we do contribute to charity, but I also want to make sure I’m taking advantage of what’s available to us. Thanks for all the advice.
October 21, 2017 at 8:19 pm
Since you donate to charity, doing a donor advised fund might be a really smart idea. Or donating a lot in general.
My apologies for being a bit flip above. I wish I had your problem.
October 24, 2017 at 5:24 pm
No offense taken. There were many years we did not have this problem so I completely understand. Many years ago my husband lost his job and I was not working so we were on food stamps and WIC for a short time. Trust me, I get it and I didn’t take your response as flip:)
October 20, 2017 at 10:55 pm
I had this conversation with our tax person to make sure I wasn’t missing any legal and correct tax breaks and her list was all of two items. But then again I had emphasized that I only wanted not-shady ways to ensure we were being tax efficient. I hate that so much of our money is being burned on that shyster’s golf trips but there are tons of other legitimate things those tax dollars are paying for too :/ I’ve always maintained that more of our taxes go toward the common good than it goes toward the thing I hate but it stings a lot more this year.
October 21, 2017 at 11:56 am
Definitely. I wonder what the results would be if income-tax returns allowed citizens to check the things they want their money used for.