Tax saving strategies for Doctors without without their own practice

[fjay]

I and my wife fall in the 33% marginal tax bracket. Both of us work on W-2s. She's a Doctor but has no practice of her own.

Based on most of the articles and suggestions on this website I've tried to plan tax savings throughout the year:

• Putting money and maxing out 401k, 457, etc.


• Back door IRAs


• High deductible health insurance plan and HSA


• Charitable contribution deductions


• Mortgage interest deductions


• Child care expenses - mostly phased out.

Is there anything else that can be done at this point or anytime during the year so that we can get more deductions?

Much appreciate your response.

[PhysicianOnFIRE]

Low-tax / no tax state can make a huge difference.

Once you have some money in a taxable account, tax-loss harvesting can reduce your ordinary income by $3,000, so there's another $1,000. Own tax-efficient funds in the taxable account, of course.

There aren't too many ways to reduce taxes as a pair of W-2 employees. If you earn some 1099 income, you can start a solo 401(k) and put 20% of your profits in there as an employer contribution.

Best,

-PoF

 

[artemis]

fjay wrote:

I and my wife fall in the 33% marginal tax bracket. Both of us work on W-2s. She’s a Doctor but has no practice of her own.

Based on most of the articles and suggestions on this website I’ve tried to plan tax savings throughout the year:

• Charitable contribution deductions


• Mortgage interest deductions

Click to expand...

Be careful with these two.  Sure you'll get a tax deduction, BUT in order to get that deduction you'll spend way more than you get back.  And those deductions get phased out/capped at higher income levels when AMT kicks in.  So don't buy more house than you need, or donate more to charity than you otherwise planned to do, just to get a tax deduction.

[jfoxcpacfp]

fjay wrote:

I and my wife fall in the 33% marginal tax bracket. Both of us work on W-2s. She’s a Doctor but has no practice of her own.

Based on most of the articles and suggestions on this website I’ve tried to plan tax savings throughout the year:

• Putting money and maxing out 401k, 457, etc.


• Back door IRAs


• High deductible health insurance plan and HSA


• Charitable contribution deductions


• Mortgage interest deductions


• Child care expenses – mostly phased out.

Is there anything else that can be done at this point or anytime during the year so that we can get more deductions?

Much appreciate your response.

Click to expand...

Are you simply focusing on deductions? If so, a backdoor Roth isn't accomplishing your purpose. Or are you incorporating tax planning as only one part of a comprehensive financial plan wherein it may or may not always best serve your purposes? For example -

• Alimony is deductible but getting divorced is far more harmful to your wealth.


• Well-timed Roth IRA conversions will cost you taxes but may very well increase lifetime wealth and its impact when incorporated as part of a comprehensive estate plan

Some ideas:

• You can save taxes by making wise home purchases and moving every few years - the first $500k gain per couple is not taxable (not a deduction, but tax savings).


• A taxable account will also subject you to lower LTCG tax rates on the sale of investments - which we greatly encourage over tax-loss harvesting.


• Working with your CPA to lower AMT, if possible, can help you save taxes.


• Donating appreciated property.


• Keeping track of non-cash charitable contributions throughout the year (use Deduct It! Deduct It! for valuation purposes)


• Mortgage interest deductions are not necessarily a good return on buying a more expensive house, imo, but you do get a writeoff on the first $1.1M.


• As PhysicianOnFIRE mentioned, where you live can have the greatest long-term effect on your tax bill.

[DMFA]

For child care, if you have a Dependent Care FSA, that's another $5,000 you can remove from both WH and FICA, which could save you another $2,000 or so.  You can still take the Dependent Care Tax Credit on top of that for any funds you used beyond the FSA, at a total of 20% of $3,000 for one child (max $600) or $6,000 for more than one (max $1,200).

So if you have two kids in daycare costing $1,000/mo for each ($24,000/year), you can spend $5,000 from the FSA (getting 33% deduction for WH, up to 6.2% for SS, and 1.45% for MCR), and then claim the 20% credit on $6,000, p much ending up with $3,200 back.

[StarTrekDoc]

If you are having trouble having too much taxable; one can consider delving into owning property and leveraging the depreciation on those properties with income/cash flow stream -- it's complicated and takes knowledge and effort, but it can be a useful way to offset the taxable rate if you find yourself out of tax sheltered options.

AMT sucks.  It's a major reason why my wife's income beyond all the sheltered accounts wasn't too much of a help after balancing nanny+AMT costs+ Cali tax---the marginal earnings was paltry --- like working in Canada!

[jhwkr542]

Stolen from bogleheads forum, appropriate in this situation.  The line between #16 and #17 probably the best advice:

The tax code is relatively simple: You pay less taxes when you earn less money. Some typical ways to reduce taxes:

1. Contribute max to 401(k) and self-employed retirement plans.
2. Contribute to Roth IRAs (only reduces future taxes, not today's taxes)
3. Invest tax efficiently (only reduces future taxes)
4. Give your money away to charity
5. Buy biggest house in world and pay huge property taxes
6. Have huge mortgage on that house and pay huge amount of interest
7. Get married and have lots of kids
8. Be sure to lose money in the stock market since $3000 of losses are deductible each year against ordinary income.
9. Move to a state with high income taxes because state income taxes are deductible.
10. Have severe health issues that you pay for out of your own pocket as you can deduct health care expenses above 7.5% of AGI
11. Grow old, you get more exemptions for being old
12. Go blind, you get more exemptions for being blind
13. Buy property and rent it out at a loss. The more losses the better.
14. Quit your jobs. With no earned income, it's not surprising that your taxes drop.
15. Avoid investments that create taxable income. You want losers to reduce your taxes.
16. Etc.

Or just pay the tax and enjoy life.
...
17. Hire accountants and investment advisors and pay them lots of money. Anything you pay them that is more than 2% of your AGI is deductible.

[fjay]

DMFA wrote:

For child care, if you have a Dependent Care FSA, that’s another $5,000 you can remove from both WH and FICA, which could save you another $2,000 or so.  You can still take the Dependent Care Tax Credit on top of that for any funds you used beyond the FSA, at a total of 20% up to a credit of $3,000 for one child of $5,000 for more than one.

So if you have two kids in daycare costing $1,000/mo for each ($24,000/year), you can spend $5,000 from the FSA (getting 33% deduction for WH, up to 6.2% for SS, and 1.45% for MCR), and then claim the credit on the rest of the $19,000 spend for $3,800, p much ending up with $5,800 back (basically a 24.2% discount on child care).

Click to expand...

That's pretty much my 2 kids daycare cost. so I do have an FSA, so it takes out 5000 from 24k and leaves behind 19k and finally phases out the credit to come around some petty 200 bucks.

 

[DMFA]

fjay wrote:

DMFA wrote:

For child care, if you have a Dependent Care FSA, that’s another $5,000 you can remove from both WH and FICA, which could save you another $2,000 or so.  You can still take the Dependent Care Tax Credit on top of that for any funds you used beyond the FSA, at a total of 20% up to a credit of $3,000 for one child of $5,000 for more than one.

So if you have two kids in daycare costing $1,000/mo for each ($24,000/year), you can spend $5,000 from the FSA (getting 33% deduction for WH, up to 6.2% for SS, and 1.45% for MCR), and then claim the credit on the rest of the $19,000 spend for $3,800, p much ending up with $5,800 back (basically a 24.2% discount on child care).

Click to expand…

That’s pretty much my 2 kids daycare cost. so I do have an FSA, so it takes out 5000 from 24k and leaves behind 19k and finally phases out the credit to come around some petty 200 bucks.

 

Click to expand...

I did edit my post, fwiw...

Taking that $5,000 out of your income = basically both at your WH rate (33%) but also your FICA (6.2% for SS if under $120k-ish, 1.45% for MCR).  The credit is maxed at 20% of up to $3,000 for 1 kid or $6,000 for more than one...so if you're claiming 20% credit on $6,000, [it subtracts the $5,000 from the FSA] that's $200 back to you (a credit, not a deduction).  There is no income limit for the credit per IRS Pub 503.

It's a credit, not a deduction, so I don't think it plays into the itemized deduction phaseout or how it plays with AMT.  Also the FSA is a reduction of your eported salary, not an itemized tax deduction, so it shouldn't be affected by either.

[corrected an error about stacking FSA and the DCC]

[fjay]

@dmfa
The way I see the software calculate it is subtracting 5000 pretax from 6000 limit. So then it calculates 20% of remaining 1000 which comes to $200 allowable credit.

[DMFA]

fjay wrote:

@dmfa
The way I see the software calculate it is subtracting 5000 pretax from 6000 limit. So then it calculates 20% of remaining 1000 which comes to $200 allowable credit.

Click to expand...

Crap. You're right. Example 2 under "Reduced dollar limit." https://www.irs.gov/publications/p503/ar02.html#en_US_2016_publink1000203367

Well, that credit isn't nearly as good as I thought. Oh well. Guess it can buy you a nice dinner to help get over a lousy tax bill...