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  • Decreasing federal tax burden

    This is not a troll thread or brag but a sincere request for advice. I have been very fortunate to land a high paying job in a state that does not have income tax, due to low desirability of the place to live. I do not have student loans anymore. I already have a SEP IRA that I have been maxxing out (my jobs are IC status, and I work in EM) with Vanguard index funds. The tax bills that I get are obviously substantial. I don't have kids (yet). Are there any other ways that I could be minimizing my federal tax burden? A large share of my income is in the 33% income tax bracket, and there is also a chance that I could be hitting the 39.6% mark for a not insignificant portion. I am in my early 30s. Any advice?

  • #2

    1. Set up a SOLO-k and roll your SEP into it.

    2. If you are married, hire your spouse to assist with bookkeeping, scheduling, and whatever else (s)he can help with and set up SOLO-k for spouse.

    3. Contribute to a backdoor Roth. You won't get a deduction, but you will reduce future tax burden.

    4. Set up a Personal Defined Benefit Plan to supplement your defined contribution (401k) plan (a "combo plan"). Contributions will be determined by an actuary and are calculated based upon the amount needed to fund a specific annual retirement benefit (defined "benefit").

    5. Hire a fee-only financial planner with tax experience who can help you define goals beyond tax savings. This will help you see the "big picture" and spend and save more purposefully, in pursuit of the goals in your plan. [Full disclosure: Of course, I realize this describes me, but not only me. There are several others on this site.]

    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Sorry for the upcoming linkfest, but as WCI has pointed out, it's easier to link than to write out the same answers time after time.

      First, South Dakota's not that bad.   I've written several posts about tax reduction, but I no longer practice as an independent contractor, so I haven't focused on those strategies in a while. Fortunately, Johanna gave some solid advice above. And WCI posted about hiring his wife.

      You don't say if you're married, but being married to someone with low or no income will change the picture substantially if you're not.

      If you don't like all those taxes, you could always work less. Half the salary means much less than half the tax. But you're young. I would make hay while the sun is shining.

      Best of luck with the new job!

      -PoF

       

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      • #4


        First, South Dakota’s not that bad.
        Click to expand...


        Ok, Carnac, how did you intuit the OP landed a job in SD and not AK? This is driving me crazy.

        (no PC in the old days!)
        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5





          First, South Dakota’s not that bad. 
          Click to expand…


          Ok, Carnac, how did you intuit the OP landed a job in SD and not AK? This is driving me crazy.

          (no PC in the old days!)
          Click to expand...


          For all I know, it could be Wyoming, which also has high salaries and might be considered by some to be "undesirable."

          Thank you for the classic Johnny Carson. Good stuff.

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          • #6
            Thanks for the replies. I actually live in Texas, not in SD or AK. I am actually engaged and will be getting married in October; my fiancee is a medical resident currently. She has a ton of student loan debt but despite all of my trying, she refuses to let me help out/pay her loans (it's a pride thing), and she makes a typical resident salary at about 50k, if that helps. My bookkeeping and scheduling are extremely simple, for what it's worth (I basically just tell my schedulers at my two sites/jobs my availability, and I have a part time academic job with similar scheduling). What are the advantages of a SOLO-K over a SEP-IRA?

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            • #7


              What are the advantages of a SOLO-K over a SEP-IRA?
              Click to expand...


              You will not be able to do a tax-free backdoor Roth conversion if you have any pre-tax IRAs in your name. A SEP counts as a personal IRA, a 401k is not a personal IRA.

              Which is better: a SEP IRA or a SOLO-401k?
              Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8




                Thanks for the replies. I actually live in Texas, not in SD or AK. I am actually engaged and will be getting married in October; my fiancee is a medical resident currently. She has a ton of student loan debt but despite all of my trying, she refuses to let me help out/pay her loans (it’s a pride thing), and she makes a typical resident salary at about 50k, if that helps. My bookkeeping and scheduling are extremely simple, for what it’s worth (I basically just tell my schedulers at my two sites/jobs my availability, and I have a part time academic job with similar scheduling). What are the advantages of a SOLO-K over a SEP-IRA?
                Click to expand...


                I see. I don't normally think of Texas as being considered a bad place to live. This is particularly true when talking to a Texan. West Texas might be a lesser draw.

                When married, the federal income tax brackets will look kinder. Until she has physician income. Then you'll be in the envious position of paying a whopping tax bill year in and year out. Be grateful that there's no state income tax.

                 

                 

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                • #9
                  Because you are getting married this year, will you be maxing out your resident wife's retirement accounts? Does she have availability to max out her resident 401k or 403B? Will you be able to contribute the maximum to an HSA now that you can count as a family?

                  Maybe she does not want you to pay her student loan debt now but will that change when you get married? If she is doing a payment contingent repayment (IBR, REPAYE, etc) then my understanding is that your income will affect her repayment amount.

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                  • #10
                    A lot of ink is spilled in the name of tax reduction, but once you have maxed out your retirement accounts and defined benefit and contribution plans, and Health savings accounts if you have a qualifying health insurance plan, and taken all the usual deductions that you see when you do your taxes, there isn't much more that can be done.

                    You can give money to charity, and while that lowers your tax bill, it lowers your net worth by more.   If you give away all your income, you won't pay any tax at all, but that's not a good option for most.

                    Beware of insurance and annuity salesmen, who will try to convince you that their products are tax advantaged, but they will cost way more than they save you ( and they usually don't really save on taxes at all ).   Avoid those at all costs.

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                    • #11




                      She has a ton of student loan debt but despite all of my trying, she refuses to let me help out/pay her loans (it’s a pride thing)
                      Click to expand...


                      I hope you convince her that once you're married, they're as much her loans as they are your loans.  This is a really good place to put money after tax-advantaged space is used up.

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                      • #12







                        She has a ton of student loan debt but despite all of my trying, she refuses to let me help out/pay her loans (it’s a pride thing)
                        Click to expand…


                        I hope you convince her that once you’re married, they’re as much her loans as they are your loans.  This is a really good place to put money after tax-advantaged space is used up.
                        Click to expand...


                        Don't think so. In a CP state (even in TX), debts incurred while single are usually attached only to the person who incurred before the marriage. That would change if OP takes action to make the debt joint after the wedding. Paying on her debt might affect that position so it is actually a good thing she has refused to let @Morgen do so.
                        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          I live in South Texas, in the RGV. It's not a bad place to live, just not a desirable place to live. I'd have to ask her about the retirement accounts thing, but on multiple attempts to convince her otherwise, she had flatly turned me down about the loans.

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                          • #14
                            Legally that is true, but I was talking assuming they would combine finances.  When I was engaged to my wife at the end of medical school, if I had told her, "technically, those loans aren't mine so I won't help pay them," I would've been sleeping on the couch.

                            Five years later, I consider our finances joint.  Whether OP plans on doing this isn't stated.  If I had extra cash to pay off my wife's loans now, I would because I look at it as our money we're saving for FI/RE.  Putting some money towards a guaranteed 6.8% would be good use of our money.

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                            • #15




                              Legally that is true, but I was talking assuming they would combine finances.  When I was engaged to my wife at the end of medical school, if I had told her, “technically, those loans aren’t mine so I won’t help pay them,” I would’ve been sleeping on the couch.

                              Five years later, I consider our finances joint.  Whether OP plans on doing this isn’t stated.  If I had extra cash to pay off my wife’s loans now, I would because I look at it as our money we’re saving for FI/RE.  Putting some money towards a guaranteed 6.8% would be good use of our money.
                              Click to expand...


                              Exactly, at some point, its all in and you have to view it this way, doesnt make any sense to not do so.

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