Tax advice for Fellowship and Moonlighting

[chika]

I am a fellow and just started moonlighting in the same hospital. I got my usual fellowship salary and moonlighting salary in the same paycheck and (by rough estimate) was taxed almost the same on both the incomes. I live in NYC, so my taxes are almost 45%. I have not enrolled in any 401k yet. With fellows salary and expenses, it was not feasible for me to do so.

To give a bit of the background, I got married last year (although we could have filed the tax return jointly last year, we didn't). I changed my W2 from to 'married' status this year and I intend to file jointly from now on. My wife is also a physician, but currently is in another state. We are also expecting a baby in few months.

I will really appreciate some advice for financial planning and how can I maximize my tax returns. I read online from forums and sites, that setting up a single member LLC for moonlighting might help, however since I am moonlighting in the same hospital, i don't have any travel or other expenses. I am planning to do few shifts a month such that the pre-tax income from moonlighting will be around 6-7k/month? Is opening up an LLC worth then? In total, mine and my wife's joint salary will be in the $153,101 to $233,350 (28%) bracket.

Thanks so much!

[jfoxcpacfp]

I need some clarification about your situation.

chika wrote:

I got my usual fellowship salary and moonlighting salary in the same paycheck and (by rough estimate) was taxed almost the same on both the incomes.

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It appears that you are being paid via W2 for your moonlighting as you are being paid for it along with your regular salary and are having taxes withheld. Is this correct?

chika wrote:

I read online from forums and sites, that setting up a single member LLC for moonlighting might help,

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LLC's are for liability protection, not for tax savings. You get the same write-offs with a sole proprietorship. However, if you are being paid via W2, the point is moot.

chika wrote:

I am planning to do few shifts a month such that the pre-tax income from moonlighting will be around 6-7k/month

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Focus on your cash flow. A wise spending and saving plan will pay off huge long-term rewards, especially this early in your careers. There is little tax relief available to you at this point and I never recommend drastic measures (such as buying a house to "get a write-off") before taking practical steps with cash flow. Get in the habit of watching where every dollar goes and save as much as possible.

A few other tips:

• I don't understand why you would forego the 401k given your combined earnings.


• Changing your W4 to "Married" may result in a tax liability next April.


• You may have saved taxes last year by choosing MFJ - wouldn't hurt to run the numbers and see if an amended return should be filed.

[hightower]

You need to be contributing to a 401K if you're interested in reducing your tax load.  Contribute the full 18k each year for this purpose.  That's 18k that won't be taxed at all now.  Plus, by not contributing to a 401k, you're leaving money on the table (assuming your employer does a match).  Consider contributing to a Roth each year as well.

[chika]

I appreciate your prompt reply. I should have mentioned these details in the initial post.

Yes I got a single paycheck which had both my regular fellowship salary and moonlighting salary and taxes were withheld.

I agree that I should have opted for 401k earlier which would have helped me save taxes. It's a mistake on my part due to lack of proper knowledge. Actually my wife does have a 401k through her employer. I did not focus on these things before.

My fellowship salary is around 79k/yr, my wife's salary is around 75k/yr. Anticipated Moonlighting salary ~75k/yr. I am sorry for the dumb question but is it so that filing jointly and with baby as dependent, we can claim higher standard deduction and exemptions?

I didn't know that changing W4 to “Married” may result in a tax liability next April!

Since I am moonlighting in the same hospital and don't have any extra expenses per se with salary through same W2, I also thought that sole proprietorship might not be helpful to me.

I am lucky that I don't have any student loans or other loans.

Till now I was filing my tax returns as single individual but now I think I should seek help to better manage our tax filings.

 

[jfoxcpacfp]

chika wrote:

My fellowship salary is around 79k/yr, my wife’s salary is around 75k/yr. Anticipated Moonlighting salary ~75k/yr. I am sorry for the dumb question but is it so that filing jointly and with baby as dependent, we can claim higher standard deduction and exemptions?

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Not a dumb question, but are you asking why I recommended you check to see if MFJ would be beneficial? If so, I said that because some deductions are limited when you file separately. I don't know if that is the case for you, but it wouldn't hurt to check. The IRS allows you to amend MFS to MFJ but will not allow you to amend MFJ to MFS.

chika wrote:

I didn’t know that changing W4 to “Married” may result in a tax liability next April!

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Possibly, because you will have less taxes withheld when you claim Married unless you check "Married but withhold at higher Single rate". There's really no way to know w/o a tax projection - I wouldn't be too worried about it.

chika wrote:

Till now I was filing my tax returns as single individual but now I think I should seek help to better manage our tax filings.

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You're filing a return for a married couple with two W2's, if I am understanding correctly. No student loans to decipher (pat on the back to you). I don't know that hiring a tax preparer can really help that much if there are no other complexities.

[chika]

Thank you so much for your expert advice! I really appreciate it.