Help with taxes

[DrMoneyTails]

I posted a similar topic on Bogleheads and wanted to share it here as well to get you guys' suggestions too!

I realize it may be too late to fix my screw up.. but this will be, at worst, an opportunity for me to learn and do better next year.
I have been doing my taxes by myself (using Turbotax free software), and since it has always been very simple, I never had any problems.

Until 2015, when instead of breaking even like in previous years, I owed around 1500 to the IRS. 
In the beginning of 2016, I made adjustments to my W4 - I set my allowances to 0 instead of 2. I didn't set an additional amount to be withheld as I thought it would've been enough.

I got married in April 2016, and made adjustments to my wife's W4 as well - we also set her allowances to 0. I thought I was on track this year. Wishful thinking.. 
I am using online calculators to estimate my tax and all calculators are telling me I will owe between 5 and 6 thousand dollars. Ouch! ops:" /> 

A little more information about us - info I am gathering from our last paycheck in 2016.

Me:
Total gross earnings: 65,000
Fica taxes: 4,000
Federal income taxes: 7,300
Medicare: 900
Moonlighting (1099) income: 5,200
I have no access to retirement plans at work, and I did not contribute to an IRA (at least not yet)

Wife:
Total gross earnings: 77,000 
Fica taxes: 4,600
Federal income taxes: 7,000
Medicare: 1,000
403b contributions: 13,000

We paid around 1,000 in interest in student loans.
We have no mortgage. 

We have no capital gains nor losses from any investments.

I did have expenses related to my moonlighting gig, and I am not sure I can deduct those. It includes Full unrestricted Medical License, DEA, and some equipment I had to buy for that job (otoscope, ophthalmoscope, etc). Total of $1,360

My wife is currently going to nurse practitioner school, and our expenses with that in 2016 were $2,200. 

I was given the suggestion of contributing 5,500 towards a traditional IRA, and I think I will do that.

I was reading about LifeTime Learning credit as I am trying to figure out whether I can either deduct or receive credit for the expenses we had with my wife's graduate school, but know that the limit on MAGI is $130,000 for Married couple filing jointly. Is there any way I can further reduce our MAGI in order to be eligible for that credit?

Any other suggestions you guys can think of? (I will absolutely make changes in 2017 so I don't end up in the same situation next year)

 

[jfoxcpacfp]

1. Contribute to a Health Savings Account (HSA) if you had a qualifying HDHP in place for 2016: $6,750


2. Contribute to a deductible IRA: $5,500


3. Set up a SOLO 401k for your IC income and contribute all of your net profits.


4. You will deduct 1/2 of your FICA taxes due as an adjustment to income, also.

This would put you at $129,750, which is below the 2016 limit of $131k (not $130k). Of course, that is the total phaseout limit, so you will qualify for little of the LLC.

Your wife's education expenses may qualify as "qualified education expenses" for the Tuition and Fees deduction (Form 8917).

I ran the numbers, and it looks to me as if you are going to owe around $5k. Sorry - I was hoping you were wrong  :?  Unfortunately, contributions to your SOLO-k will not reduce your FICA, which is responsible for part of the amount due.

If you are graduating from your residency program this year and will have a half year as an attending, the best suggestion I can give you is to form a relationship with a proactive CPA. Graduation year is notorious for high tax-due bills because you under-withhold in the first part of the year and don't catch up in only a few months as an attending - especially with a spouse who is working, also.

[Peds]

You need to adjust your withholding, you can set up a solo 401k for the 1099, and increase her retirement to 18k. Would hesitate on trad IRA because of prorata rule in future for backdoor IRA.

[jfoxcpacfp]

Peds wrote:

Would hesitate on trad IRA because of prorata rule in future for backdoor IRA.

Click to expand...

If he sets up the SOLO-k, all he has to do is to roll the TIRA over into it before the eoy.

I would not recommend hiring the spouse and, particularly, contributing so much to her SOLO-k given the limited amount of income. Pigs get fat and hogs get slaughtered.

[DrMoneyTails]

Thank you for the detailed response!

I won't be able to do both a 5500 contribution to a traditional IRA and also putting money in a solo 401k. Which one would be better? I do plan on doing a Backdoor Roth in the future once my salary increases as an attending, so I do worry about having a deductible traditional IRA.. is it too difficult to "get rid of it" in the future? as in, rolling it over into some other account?

[jfoxcpacfp]

DrMoneyTails wrote:

Thank you for the detailed response!

I won’t be able to do both a 5500 contribution to a traditional IRA and also putting money in a solo 401k. Which one would be better? I do plan on doing a Backdoor Roth in the future once my salary increases as an attending, so I do worry about having a deductible traditional IRA.. is it too difficult to “get rid of it” in the future? as in, rolling it over into some other account?

Click to expand...

If you have a SOLO-k, you'll be able to r/o your TIRA into it, easy peasy. You can do a little of both or you can max out the SOLO and contribute any extra $$ you have to the TIRA. It doesn't matter how you divide it up, it's the same effect on your taxable income. I'd start wth the SOLO so you'll have that account to receive any future 401k/403b rollouts - it's a very valuable account for that reason.

[DrMoneyTails]

jfoxcpacfp wrote:

DrMoneyTails wrote:

Thank you for the detailed response!

I won’t be able to do both a 5500 contribution to a traditional IRA and also putting money in a solo 401k. Which one would be better? I do plan on doing a Backdoor Roth in the future once my salary increases as an attending, so I do worry about having a deductible traditional IRA.. is it too difficult to “get rid of it” in the future? as in, rolling it over into some other account?

Click to expand…

If you have a SOLO-k, you’ll be able to r/o your TIRA into it, easy peasy. You can do a little of both or you can max out the SOLO and contribute any extra $$ you have to the TIRA. It doesn’t matter how you divide it up, it’s the same effect on your taxable income. I’d start wth the SOLO so you’ll have that account to receive any future 401k/403b rollouts – it’s a very valuable account for that reason.

Click to expand...

Ok, got it.

But is it too late for me to do a Solo 401K?

"The deadline for establishing an Individual 401k is December 31st of the year in which you would like to receive the tax deduction or fiscal year end for corporations."

[jfoxcpacfp]

DrMoneyTails wrote:

Ok, got it. But is it too late for me to do a Solo 401K? “The deadline for establishing an Individual 401k is December 31st of the year in which you would like to receive the tax deduction or fiscal year end for corporations.”

Click to expand...

Actually, yes, sorry for overlooking that. I was so focused on the math I overlooked the logistics  ops: ! At this point, you are limited to a SEP IRA, which is 20% of net profits. Going forward, you can set up the SOLO for 2017 and r/o the SEP into it.

[DrMoneyTails]

 

jfoxcpacfp wrote:

Actually, yes, sorry for overlooking that. I was so focused on the math I overlooked the logistics   ! At this point, you are limited to a SEP IRA, which is 20% of net profits. Going forward, you can set up the SOLO for 2017 and r/o the SEP into it.

Click to expand...

Ok, got it. Am still confused as to what would be best to reduce my tax burden. Should I open a traditional IRA and contribute 5500 to it, and also do a SEP IRA and put in 20% of my net profits? Would it all be tax deductible? And how would that affect my ability to do a Backdoor Roth in the future?

From the IRS (I'm having a hard time wrapping my brain around that, lol):

If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?

If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.

And another question, for 2017, I will have a W2 from my current job (fellowship), a W2 from a part time job (Fee basis physician at a VA), and starting in August 2017, a W2 from my attending job. None of those give me access for a retirement plan in 2017. Would I be eligible to open a Solo 401K in 2017?

[jfoxcpacfp]

DrMoneyTails wrote:

Am still confused as to what would be best to reduce my tax burden. Should I open a traditional IRA and contribute 5500 to it, and also do a SEP IRA and put in 20% of my net profits? Would it all be tax deductible? And how would that affect my ability to do a Backdoor Roth in the future?

Click to expand...

Yes, that would all be deductible. A SEP is considered an "employer" plan while a TIRA is a "personal" account. i see no reason to co-mingle your TIRA with your SEP. You won't want to convert to a back-door Roth while you have a balance in either of these accounts, though. You need to have some moonlighting income in 2017 in order to set up a SOLO-k for 2017. You can then roll your TIRA and SEP into the 401k before 12/31 and qualify to do the tax-free back-door Roth.

DrMoneyTails wrote:

And another question, for 2017, I will have a W2 from my current job (fellowship), a W2 from a part time job (Fee basis physician at a VA), and starting in August 2017, a W2 from my attending job. None of those give me access for a retirement plan in 2017. Would I be eligible to open a Solo 401K in 2017?

Click to expand...

No. As I mentioned above, you need self-employment income to open a SOLO-k.

[DrMoneyTails]

Got it. Okay, thanks!

[FutureDoc]

Slight hijack, maybe someone more experienced than me could chime in.

This thread worries me.  My wife and I are dual residents and thanks to only working half a year and having a kid we're looking at owing virtually nothing for 2016 in taxes.  However we each claimed 3 on our W4's when we started residency and haven't changed, and especially since we're making roth contributions it just occurred to me that we might end up undercontributing and get burned come next april.

Stats: 105k income, 5k in HSA, 5k childcare FSA, 10k in Roth contributions, have one dependent kid.  Not enough to itemize, taking standard deduction.  Might start moonlighting in the fall as well.

 

Should I change our witholdings to 0 to cover increased liabilities this year?

[DrMoneyTails]

I believe you can use this calculator to figure it out:

https://apps.irs.gov/app/withholdingcalculator/

[DrMoneyTails]

Are any of these expenses tax deductible:

1) I had to apply for a full unrestricted license as well as a DEA this year (required for my moonlighting job as well as for my "day" job in fellowship)

2) Subspecialty boards

3) Medical license in a different state for my attending job later this year, which will not be reimbursed

 

[DMFA]

All the non-reimbursed expenses related to doing your job are deductible, including mileage between work sites. All of those count, as do any medical app subscriptions, stethoscope, white coat, etc. Could even consider your phone bill, data plan, etc if it's the phone you use for your job.

If you're W-2 employed, though, then you can only deduct expenses above 2% of your income.