Empty Nester Tax Strategy
by Crimsontide » Wed Nov 27, 2013 7:42 pm
Hi All,
Long time lurker, first time poster. The DW and I have been empty-nesters for the past few years and need some help with our tax strategy. I’m 51 and she is 48, our only child is married and doing a great job of being independent. Our current tax filing parameters are:
- Married filing jointly
- Zero dependents
- AGI = $185,000 (all income from our jobs)
- Both contributing max to 401ks.
- We have no mortgage or any other debt, we own our home free and clear.
- Taxable income after standard deduction = $165,000
So the question is what options do we have for reducing the amount of tax owed or the amount of income subject to federal taxation? I believe we are ineligible for taking any deductions for traditional IRAs and do not qualify for Roth’s either (I guess a back-door is possible but I’m not sure if this will help with the tax owed on income situation). We don’t qualify for any sort of tax credits either, as far as I can tell. Is there anything we can do other than maybe buying some rental property or starting a “business”?
Thanks,
Crimson
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Joined: 25 Oct 2013
Re: Empty Nester Tax Strategy
by livesoft » Wed Nov 27, 2013 7:47 pm
Bunching deductions was recently discussed along with giving to charity via a donor-advised fund.
Also, look at your Schedule B. You all should have no income in the top half of Schedule B and only qualified dividend income in the bottom half. But with all income from your jobs, you probably don't even file Schedule B.
Tax-loss harvesting could reduce AGI by $3,000.
See also the Taxes on family with $200,000 gross income thread even though some will not apply to you.
Maybe start working part-time to reduce job income?
Why don't you qualify for the foreign tax credit?
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Empty Nester Tax Strategy
by Crimsontide » Wed Nov 27, 2013 8:21 pm
Thanks for the quick reply Livesoft. I'll check the link you posted and also investigate the Foreign Tax credit. You are correct about the Schedule B, the vast majority of our money is in tax deferred accounts. We do have a pretty nice emergency fund and some CDs but with interest rates as low as they are we are not seeing much taxable return at all...
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Re: Empty Nester Tax Strategy
by Bob's not my name » Wed Nov 27, 2013 9:51 pm
Crimsontide wrote:do not qualify for Roth’s either (I guess a back-door is possible but I’m not sure if this will help with the tax owed on income situation).
I don't see why you wouldn't do back door Roths. Aren't you saving in taxable space with $230,000 of gross income and no mortgage? You will be glad you have the Roths if you move from Texas to an income tax state to retire (that is, an income tax state that doesn't exempt all retirement plan withdrawals). Your marginal rate is 28% now but it might actually be higher than that in retirement if you're in the 25% bracket and have moved to a state with a high income tax. In any case, you don't have a choice of pre-tax vs. post-tax retirement savings, since you're maxing all your pre-tax space already, so Roth IRAs are the obvious next thing to do.
Maybe pretty soon you won't have to use the back door. At $185,000 MAGI you're in the eligibility phaseout, but not all the way through it. In 2014 the phaseout is $181,000 - $191,000, so you'll be in about the middle of it. In 2015 she'll be able to contribute $23,000 to her 401k just as you're doing already. Considering that the phaseout, the 401k contribution amount, and your salaries are all inflation-adjusted, you may be just under the phaseout in 2015. Are you using a health FSA or HSA? That would knock more off your AGI and taxable income -- and off your wages for ACA tax purposes. You're not currently subject to the ACA tax on wages but the $250,000 threshold (wages, defined as earned income minus pre-tax insurance premiums and FSA contributions -- not sure about HSA), is not inflation-adjusted so you may hit it before you retire. It's only 0.9%, but it will add to your effective marginal rate.
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Re: Empty Nester Tax Strategy
by Calm Man » Wed Nov 27, 2013 10:54 pm
[OT comments removed by admin LadyGeek]
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Re: Empty Nester Tax Strategy
by SGM » Thu Nov 28, 2013 5:34 am
Maximum 401k is 22,500 for you and 17,500 for your spouse. So if you have a salary of 185,000 and taxable income of 165,000, you have investment income. At age 50 your spouse will max out at 22,500 yearly too.
I bonds will defer some income and up to 10k per ssn can be put away yearly. Muni bonds might be helpful. Both might be considered loans to the government or to state government and agencies. That is just as patriotic as paying taxes. 
I would consider some Roth conversions now or even non deductible traditional IRA contributions that might be converted or not at a later date. Saving more for retirement by paying less taxes now so that you will not be a burden on society as you become elderly is admirable behavior in my book....also very actionable.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
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Re: Empty Nester Tax Strategy
by Bob's not my name » Thu Nov 28, 2013 5:40 am
SGM wrote:you have a salary of 185,000
MAGI of $185,000, not salary. Gross income would have to be about $230,000 to produce a $185,000 MAGI.
SGM wrote:Maximum 401k is 22,500 for you
$23,000
SGM wrote:I would consider some Roth conversions now or even non deductible traditional IRA contributions that might be converted or not at a later date.
Converting pre-tax savings at 28% tax wouldn't make sense, especially if early retirement is a possibility. Why would you not convert non-deductible TIRA contributions immediately -- viz., do back door Roths?
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Re: Empty Nester Tax Strategy
by SGM » Thu Nov 28, 2013 1:01 pm
Oops yes it changed to 23k. I knew that and already did that for myself.
Thanks I didn't notice the AGI.
I think there are reasons to not convert immediately. Say your traditional IRA contribution goes down in value. That might be a better time to convert. Recharacterization is an alternative, but I tend not to use it. Say income goes down for some reason. That may be a better time to convert. Say you have filled your 8606 and you have to pay taxes on some percent of the conversion. The opportunity may come up to put some tIRA into a 401k and change the basis to your advantage. Most of the time you would want to do the back door immediately. Maybe I am misunderstanding the back door, but don't you have to pay some taxes on it if you have other tIRAs?
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
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