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  • High tax rate....am I missing something?

    Hello all-

    After running our yearly “financial M and M,” my wife and I paid an obscene amount in taxes last year.

    We are dual income high earners and solidly in the top marginal bracket, but our total effective tax rate of 36.36% shocked me. We live in PA (3% state tax), and my wife also pays a city wage tax of 3.5%.

    We took advantage of the following tax advantaged accounts:
    1- maxed both 401k’s
    2-$12k in backdoor roths
    3-$5900 in hsa (employer puts 1200)
    4-we put $30k/kid x 3 in 529’s to get the PA deduction

    Our employer contributions are measly, and the rest of our savings went into taxable.

    We are both employed with no 457’s, defined benefit plans or mega back doors available.

    Are there any other tax reduction or retirement savings strategies I’m missing? I’m open to any/all ideas.

    Thanks in advance.





  • #2
    Charitable contributions. Mortgage interest deduction. Seems like you're using all of your tax advantaged space to save into.

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    • #3
      Originally posted by gasdoc86 View Post
      Charitable contributions. Mortgage interest deduction. Seems like you're using all of your tax advantaged space to save into.
      That city tax is rough.

      The backdoor Roth saves you very little up front -- maybe $30 to $40 in taxes on dividends if the money were in taxable instead.

      If you did nothing more than what you've outlined, there are definitely options for you. Most are obvious, some involve real estate, some are kind of shady, some require giving money away...

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      • #4
        Sometimes you just gotta pay taxes. Also, 3.5% city tax? F that.

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        • #5
          Originally posted by CordMcNally View Post
          Sometimes you just gotta pay taxes. Also, 3.5% city tax? F that.
          here here!

          Luckily only my DW pays the city tax.


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          • #6
            Originally posted by HeyAnesthesia View Post
            Are there any other tax reduction or retirement savings strategies I’m missing? I’m open to any/all ideas.

            nothing fancy. just the same old same old.

            have more kids
            buy a bigger house
            give more to charity
            make less money
            move.

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            • #7
              You could use muni bond fund in taxable account to avoid fed and possibly state taxes on interest. Also, do you itemise deductions?

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              • #8
                ?Invest in real estate...but will have no effect on earned income tax liability. Many overestimate the tax benefits of RE investing but they are real once you get the ball rolling with some passive losses, depreciation, etc.

                Would steer clear of conservation easements until the dust settles with IRS/congress.

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                • #9
                  Originally posted by CordMcNally View Post
                  Sometimes you just gotta pay taxes. Also, 3.5% city tax? F that.
                  Good old Philadelphia

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                  • #10
                    Like you, I pay an obscene amount of tax each year. I believe my effective tax rate was right at 37%, even with all of the deductions.

                    You see media reports of the super wealthy (ie, Warren Buffet) having an effective tax rate of 18%......or les than his secretary pays. But, what they have that we do not is the ability to utilize capital gains (rather than income tax rates), and likely large deductions based on real estate investments.

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                    • #11
                      Originally posted by Eye3md View Post
                      Like you, I pay an obscene amount of tax each year. I believe my effective tax rate was right at 37%, even with all of the deductions.

                      You see media reports of the super wealthy (ie, Warren Buffet) having an effective tax rate of 18%......or les than his secretary pays. But, what they have that we do not is the ability to utilize capital gains (rather than income tax rates), and likely large deductions based on real estate investments.
                      For Buffet and others truly wealthy, they have multiple ways to reduce beyond capital gains vs. earned income. For one, they have reached a point where the investments in taxable instruments do not have to be cashed and is an inherent tax advantage in leaving the investments in individual stocks alone to grow with no capital gains drag. If the investments do not pay dividends, even better. So the investments grow and little income is realized to be taxed, even at preferred capital gains rates.

                      Comment


                      • #12
                        Originally posted by Eye3md View Post
                        Like you, I pay an obscene amount of tax each year. I believe my effective tax rate was right at 37%, even with all of the deductions.

                        You see media reports of the super wealthy (ie, Warren Buffet) having an effective tax rate of 18%......or les than his secretary pays. But, what they have that we do not is the ability to utilize capital gains (rather than income tax rates), and likely large deductions based on real estate investments.
                        Zero dividends and only takes comp for his living expenses. Travel etc is company business. His hobby is bridge. Not sure how much he spends at restaurants in Omaha. Go figure.

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                        • #13
                          yeah I'd love to pay 18% instead of 37%........guess I'll have to wait until I'm retired.

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                          • #14
                            Originally posted by Eye3md View Post
                            yeah I'd love to pay 18% instead of 37%........guess I'll have to wait until I'm retired.
                            Pretty much. First world problems..

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                            • #15
                              Don’t feel too bad. We live in a very high tax state. We pay 46% marginal and for 2019 we paid 42% effective.

                              Our effective tax rate will be significantly lower in 2020 due to some tax benefits relating to the pandemic legislation, and significantly lower again in 2021 if all goes as planned with increased real estate paper losses and bonus depreciation.

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