How to lower my US Federal Taxes

ubermichaelthomas said:   Here's a good plan:

Find a high paying 1099 position. Doctor, Lawyer, Web Developer, Skilled Niche Consultant, etc. Something that you can earn $100+ per hour.

Work a few weeks to a couple of months per year, earn about $50k gross then stop working. Deduct a bunch of expenses related to the business. Put $17k into Individual 401k, put 20% of your net income into employer-contribution to 401k, put $5k into Traditional IRA, get standard deduction, personal exemption, write off half of SE Tax.

Get your Adjusted Gross Income down to $15k. Qualify for EIC, Saver's Credit, and 80% O-Bama-Care Health Insurance Subsidy.

Relax for 11 months out of the year that you don't need to work because you can live off $40k per year (that only looks like $15k due to tax breaks)
Screw the working intelligent and they will screw you back. When the government rewards the worthless it's time to join them at their own game.

Get Married
Contribute to 529 plan (anyone in your family including your future children can take advantage of it as long as its for Education)
Buy I-Bonds (10k/year) from the US Treasury (no tax savings here but your money can grow without more Fed Tax on the interest)
Check with your state what state deductions exist..there are always special ones like Volunteering at local fire station/police etc.
Invest your savings in stocks and hold for a year or more or get more dividend yielding stocks (this will just increase your cash)

remember tax is always a percentage of income..so don't ever earn less to pay less! However, I agree with earlier msg from someone that

"
you should take some long vacations between jobs to sensibly balance your work and life. Some fools think it's moronic to put living life ahead of stockpiling cash. Deferred gratification got you into a good position, but if you continue that path without moderation you'll die rich (which means short-changing your life)."

Very well said!

ksuwldkat said:   I would also assume it should be easier to qualify for a mortgage as a w2 employee, all things being equal, especially if you only have a short employment term as a 1099 contractor.

Unless the banker reads this thread and learns that a W2 "Contractor" position has the same "risk" as a 1099. Then all bets are off.

"a prime benefit of the 529 plan is
that the principal grows tax-deferred and
distributions for the beneficiary's college costs are
exempt from tax."

What's this about T-IRAs only being deductible if your employer doesn't offer a 401k? Is that in all cases or just at certain income levels?

I thought there was some income level where T-IRAs are not deductible at all... is this a second phase out level as well? Or is it the same level but it says T-IRAs are deductible even above that income level if one doesn't have access to a 401k/403b?

JTausTX said:   ubermichaelthomas said:   Here's a good plan:

Find a high paying 1099 position. Doctor, Lawyer, Web Developer, Skilled Niche Consultant, etc. Something that you can earn $100+ per hour.

Work a few weeks to a couple of months per year, earn about $50k gross then stop working. Deduct a bunch of expenses related to the business. Put $17k into Individual 401k, put 20% of your net income into employer-contribution to 401k, put $5k into Traditional IRA, get standard deduction, personal exemption, write off half of SE Tax.

Get your Adjusted Gross Income down to $15k. Qualify for EIC, Saver's Credit, and 80% O-Bama-Care Health Insurance Subsidy.

Relax for 11 months out of the year that you don't need to work because you can live off $40k per year (that only looks like $15k due to tax breaks)

Why not just work one more month out of the year and make more money than you'd save with this tax scheme?

This reminds me of the thread where the guy was trying to figure out how to live on less than $15k per year for the rest of his life so that he would never have to pay his IBR student loans.

Diminishing returns. This is trying to avoid working more yet receiving less per incremental hour worked. If working 1,000 hours equals X compensation but the second 1,000 hours equals .6X effective compensation I'd prefer to not work the extra hour. This is really why income-based taxation is inherently evil in my opinion. I'm definitely getting to the point where taxes are encouraging me to work less.

vxmike said:   JTausTX said:   ubermichaelthomas said:   Here's a good plan:

Find a high paying 1099 position. Doctor, Lawyer, Web Developer, Skilled Niche Consultant, etc. Something that you can earn $100+ per hour.

Work a few weeks to a couple of months per year, earn about $50k gross then stop working. Deduct a bunch of expenses related to the business. Put $17k into Individual 401k, put 20% of your net income into employer-contribution to 401k, put $5k into Traditional IRA, get standard deduction, personal exemption, write off half of SE Tax.

Get your Adjusted Gross Income down to $15k. Qualify for EIC, Saver's Credit, and 80% O-Bama-Care Health Insurance Subsidy.

Relax for 11 months out of the year that you don't need to work because you can live off $40k per year (that only looks like $15k due to tax breaks)

Why not just work one more month out of the year and make more money than you'd save with this tax scheme?

This reminds me of the thread where the guy was trying to figure out how to live on less than $15k per year for the rest of his life so that he would never have to pay his IBR student loans.

Diminishing returns. This is trying to avoid working more yet receiving less per incremental hour worked. If working 1,000 hours equals X compensation but the second 1,000 hours equals .6X effective compensation I'd prefer to not work the extra hour. This is really why income-based taxation is inherently evil in my opinion. I'm definitely getting to the point where taxes are encouraging me to work less.

I guess I just never understood the advantage of earning less money because you want to save money on your taxes, considering that additional earnings (per hour or per day or whatever) will always outweigh whatever you pay in taxes.

ubermichaelthomas said:   JTausTX said:   
I guess I just never understood the advantage of earning less money because you want to save money on your taxes, considering that additional earnings (per hour or per day or whatever) will always outweigh whatever you pay in taxes.

What if your boss said, "hey we're going to need to come in on Saturday and Sunday this week. Oh but instead of 1.5x overtime pay, I'm only going to be able to pay you half."


Would you still come in to work?

9 to 5 jobs with a lunch break are a thing of the past. Now they are all 8 to 5 and you're eating lunch at your desk while you work. Many are 8 to 6. And you're checking emails when you leave.

Add in an hour commute each way, and you're quickly working a significant portion of your life. At a certain point you decide it's not worth working the higher paid but longer-hour job because there's less marginal benefit due to the progressive tax structure.

That's my situation in a nutshell. And getting out is difficult because recruiters want to interview you during working hours. Since you're at your desk or commuting at least 10 hours a day, it just doesn't work. If you have a not so demanding job you can take a lunch break or make up an appointment to go to, but when you're hammered all day with work, and they call me evenings and weekend for support.

I'm saving hard for an emergency fund so that I can quit in order to have enough time to find a better position.

In the meantime, I need the income stream .

fortezza said:   
Is the $100/day an independent contractor benefit? If not, who would I be collecting this from? My employer agree to pay me an hour rate and that is it.

Don't be quick to call per diem a benefit. It's not meant to be a benefit, but it can work out as such under the right arrangement (and not as an independent contractor, but a w2 contractor). I have to say, $100 was just an off-the-cuff rough guess at what some cities might cost today. You should look at the real figures, here:

gsa.gov/perdiem

Look up your destination city. NYC, for example, allows $204/night for lodging during some months, and $295/night lodging during other months, and $71/day for food.

Suppose you want to contract for FWF in Wisconsin. I'm not sure what city they're in, but let's say Milwaukee, where your expenses are expected to be $97/night for lodging and $61/day for food. That's $1106/week for "expenses". An interesting contracting agency will offer that amount to you tax-free. These figures are not actually intended for private use -- it's for the fed to decide how much to reimburse federal workers on travel. But the private sector uses those fed per diem figures anyway because they are considered relatively "safe" in an audit. Anyway, say your hypothetical contracting agency wants to pay you a net $50/hr for your head. They will assume a 40 hr work week ($2k). Of that $2k, $894/40 ($22.35) is your "hourly rate", and $27.65/hr is paid to you tax-free for room and board expenses, which you do not have to report or justify as a w2 contractor (i.e. "employee"). The contracting agency will quote you an offer as "$50/hr per diem split".

Now if you want to do overtime, usually the "hourly rate" would go up from $22.35/hr to ~$50/hr, and per diem hits a ceiling so zero hourly per diem. Or they will simply say OT is double time, or time and a half. In any case, you can never exceed the per diem amount because that starts to get difficult to justify in terms of tax-free expenses.

YMMV: every company has a different comfort level with how the per diem works out.. don't expect the above to always apply.

ubermichaelthomas said:   JTausTX said:   
I guess I just never understood the advantage of earning less money because you want to save money on your taxes, considering that additional earnings (per hour or per day or whatever) will always outweigh whatever you pay in taxes.

What if your boss said, "hey we're going to need to come in on Saturday and Sunday this week. Oh but instead of 1.5x overtime pay, I'm only going to be able to pay you half."


Would you still come in to work?

9 to 5 jobs with a lunch break are a thing of the past. Now they are all 8 to 5 and you're eating lunch at your desk while you work. Many are 8 to 6. And you're checking emails when you leave.

Add in an hour commute each way, and you're quickly working a significant portion of your life. At a certain point you decide it's not worth working the higher paid but longer-hour job because there's less marginal benefit due to the progressive tax structure.

Depending on your classification, they have to pay you overtime; it's illegal not to. If you are salaried, they don't pay you anything extra at all.

But that's not what we're talking about, since if you're salaried, then working extra (as we were discussing) won't affect your income at all.

I'll add also that if you're salaried, the onus is on you to set boundaries for your work/life balance. Don't make a habit of working 12 hour days and coming in on the weekends, and your bosses won't expect it of you. ***

*** - Obviously this isn't universally true, but I see this happen all the time in my office with normal professionals who have no reason to work 60 hour weeks.

fortezza said:   Back to topic of saving money on taxes, I keep hearing that itemizing is better than taking the standard deduction.

But, being a single, no dependent, 100k/yr income, renter, I don't see what I can itemize.

Itemizing is better than taking the standard deduction if you can itemize more than the standard deduction.

Start a failing business. Write reviews for all the gadgets you buy, or a photohraphy website selling stock photos and subsidize your vacations to nice scenic places, write a book or blog. Ymmv

For the taxes you must pay, there are a few ways to shave 2-10% off the bill stacking rewards and rewards cards. Every little bit helps.

antonmartin said:   Hello fortezza,
As you have shared your financial scenarion, I suggest you to invest your money in medicare & insurance policies as well as you can look for little investments in stocks & bonds. There is option of annuities where you can invest your savings, for all this you need one experienced and certified financial expert who can look after your financial scenarion and who can provide you with best of investment option with respect to your available money. I hope you can understand what I want to tell you.Yes. We all understand you want to help fortezza find investment and tax strategies that are better for his advisor than they are for him. Your techniques are ineffective on this board, shill. Happy Thanksgiving!

From this thread, so far I've gotten

Useful Tips
Start a business, create a SEP
I-Bonds - Tax Deferred interest income. 10k/year
Traditional IRA - This look like a great tool. I'm building 2-months of of unemployment(emergency) fund until around January-Feb 2013, after that I have March-April to sock money in a traditional IRA before I switch to debt reduction until next November.

Not Sure
Take standard deduction every other year.

Useless
SEPP - I don't see how that lowers my tax bill.
Make less - I live in one of the most expensive cities, making less means living in a box.

Humorous
Get married
Annuities - lmfao

The OP, in my opinion, should set as a long-term goal the generation of tax-free and tax-deferred income, while keeping his nice $100K salary. Over his lifetime, this will lower the tax rate on his total income, and build a large portfolio. Several suggestions were made in this thread. And of course the traditional IRA and HSA as I mentioned before. Take the few hundred each month you save in income taxes by these two deductions and start investing.

If you have to pay health insurance premiums out of pocket because they are not available through your employer, and you have an idea for a small business (maybe online sales, or consulting)that will generate at least enough income to pay those premiums, and it doesn't take much of your time, I would do that. This is because you can deduct the full health insurance premium (assuming you have made that much profit) from your total income as an adjustment. Effectively, this would be tax-free health insurance premiums (plus you can still take a deduction for a contribution to a HSA if you have qualifying insurance).

Playing games to lower income to extremely low levels, perhaps through establishing a self-employment activity, to get credits is not going to be of much advantage, assuming the IRS allows it (which is not likely). The maximum Earned Income Credit for a person with no child is less than $500. The Savers Credit can be up to $1,000, but if your income is so low to qualify you for the EIC with no child, you have no tax liability and therefore the Savers Credit is useless to you, as it is nonrefundable. Plus, if you are actually paying expenses and sheltering most of your income, you have to find money to live on from another source.