How to lower my US Federal Taxes

Archived From: Finance
  • Go to page :
  • 1 2
  • Text Only
Voting History
rated:
Here is my financial picture:
Single, no kids
Income: Just above $100k
Employment: No benefits contract ( no medical, dental, retirement plans, etc )
Home: Rent
State: Colorado
Investments: Roth IRA(FFNOX), plain old saving account
Not going to school( graduated)
Commute to work using public transportation
Vehice: Used early-2000's Altima


I don't really see anything that I can itemize or deduct. Some ideas that I have:
*Buy a single family home instead of rent using a fixed-rate home loan.
Monthly cost is about the same, and I get interest deduction. Also, the constant increase in rent every time I renew is such a waste when the apartment is getting a larger or better. My
income doesn't go up, so I have to cut spending every year to offset the increased rent.
*Start a home business and put the income in a SEP. I just learned about these and as long as my overall income doesn't disqualify me, I think it will give me a tax-advantaged account
*Find an employer who offers retirement savings plan and get hired

From an investment standpoint, I just use set and forget funds since I don't have time to stay on top of the market.


I'm I missing any tax-reduction strategies?. I'm only looking for things that are legal. i.e. tax savings, not evasion!

The reason for this question is that I'm on a cost cutting hunt to increase available income in order to increase savings. I've knocked out a few hundred/month worth of items just today,but I don't see anything I can do to reduce money flowing out to the IRS.

Member Summary
Most Recent Posts
From this thread, so far I've gotten

Useful Tips
Start a business, create a SEP
I-Bonds - Tax Deferred interest income. 10k... (more)

fortezza (Nov. 22, 2012 @ 9:28p) |

Move to a lower COL city. Then you can accept a lower paying job or cut back on hours and pay less taxes.

ubermichaelthomas (Nov. 22, 2012 @ 9:49p) |

The OP, in my opinion, should set as a long-term goal the generation of tax-free and tax-deferred income, while keeping ... (more)

ninasgramma (Nov. 22, 2012 @ 10:29p) |


r u on working visa or a us citizen?

if the later, you can start a business.

Keep in mind that the mortgage deduction doesn't lower your tax burden unless you itemize and don't take the standard deduction. With interest rates so low most first time home buyers get little to no benefit from the mortgage deduction. It is generally a subsidy that helps wealthier individuals with more deductions and/or million dollar houses.

With 100K income and being single you should be able to live on around 25-30K a year and the rest is pure savings.

brettdoyle said:   Keep in mind that the mortgage deduction doesn't lower your tax burden unless you itemize and don't take the standard deduction. With interest rates so low most first time home buyers get little to no benefit from the mortgage deduction. It is generally a subsidy that helps wealthier individuals with more deductions and/or million dollar houses.


This is generally true, but state income tax can push higher income individuals/couples into itemizing, so mortgage interest deduction does have the full effect. In OP's case, CO has a flat state income tax of 4.63%, so if he makes 100K, he's only $1320 short of the standard deduction after only state tax.

If you have no retirement plan at work, you can contribute to a traditional IRA and take a tax deduction instead of contributing to a Roth IRA. In your tax bracket it makes sense to deduct your IRA contributions.

Be sure to run the numbers on Schedule A because of your state income taxes, you may be able to itemize after all.

If it suits your situation, switch to a High Deductible Health Insurance Plan and establish a Health Savings Account. That will give you a deduction, plus another tax-advantaged savings vehicle.

If you are planning on saving money, purchasing a house doesn't make a lot of sense. The tax savings are overrated.

sunspotzsz said:   r u on working visa or a us citizen?

if the later, you can start a business.


When did you graduate 1st grade?

If you're buying your own medical insurance, medical expenses (including insurance premiums) that exceed 7% of your income is deductable. If you have a "pre-existing condition", this might be the case.

ninasgramma said:   If you have no retirement plan at work, you can contribute to a traditional IRA and take a tax deduction instead of contributing to a Roth IRA. In your tax bracket it makes sense to deduct your IRA contributions.
OP's income is high so his regular IRA contribution may be non-deductible. Since he is an independent contractor, he may want to consider the SEP IRA instead.
Be sure also to keep track of business related expenses. Together these two things should take a big whack out of his taxable income.

$5k Traditional IRA + $17k Individual 401k + 20% of 1099 income as "employer" contribution to Individual 401k + $6k standard deduction + $4k personal exemption + $3k HSA deduction + deduct half self-employment tax

There you go OP.

ANAL Accountant/Lawyer/Financial Adviser.

Where did it say he was a independent contractor? If that's not the case all you can do is the traditional IRA, which is allowed regardless of income if you're not covered by an employer's plan.

awstick said:   Where did it say he was a independent contractor? If that's not the case all you can do is the traditional IRA, which is allowed regardless of income if you're not covered by an employer's plan.

fortezza said:   
Income: Just above $100k
Employment: No benefits contract ( no medical, dental, retirement plans, etc )


What kind of W2 job in Colorado pays over $100k with zero benefits of any kind?

Also the word "contract" tips me off he's a 1099.

As long as we're guessing and just pulling ideas out of our a$$, perhaps he's a W2 contractor without benefits.

mikeres said:   As long as we're guessing and just pulling ideas out of our a$$, perhaps he's a W2 contractor without benefits.

Is that a real thing?

I know the IRS has explicit rules on who must be considered an employee, but I never heard of a W2 Independent Contractor. That would likely blur the line between employee too far, pushing him into employee territory.

ubermichaelthomas said:   mikeres said:   As long as we're guessing and just pulling ideas out of our a$$, perhaps he's a W2 contractor without benefits.

Is that a real thing?

I know the IRS has explicit rules on who must be considered an employee, but I never heard of a W2 Independent Contractor. That would likely blur the line between employee too far, pushing him into employee territory.


Someone who gets a W2 is an employee.

it is very easy, the reason you are paying so much in taxes is because you are MAKING TOO MUCH money. so work less, get a job that pays low enough so you can get EITC. at the end, you can come out ahead with a negative tax rate.

just a suggestion.

dawhim said:   it is very easy, the reason you are paying so much in taxes is because you are MAKING TOO MUCH money. so work less, get a job that pays low enough so you can get EITC. at the end, you can come out ahead with a negative tax rate.

just a suggestion.


You're a moron.

cdryuncle said:   dawhim said:   it is very easy, the reason you are paying so much in taxes is because you are MAKING TOO MUCH money. so work less, get a job that pays low enough so you can get EITC. at the end, you can come out ahead with a negative tax rate.

just a suggestion.


You're a moron.


tell those who milk the welfare system, they are certainly not morons.

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)

if you have a HDHP health insurance plan, you can look into HSA.

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)


This is the acting profession in California except you get unemployment payments also.

dawhim said:   cdryuncle said:   dawhim said:   it is very easy, the reason you are paying so much in taxes is because you are MAKING TOO MUCH money. so work less, get a job that pays low enough so you can get EITC. at the end, you can come out ahead with a negative tax rate.

just a suggestion.


You're a moron.


tell those who milk the welfare system, they are certainly not morons.


Earned income tax credit is not possible for the OP as he stated he is single and has no kids. Those who "milk" the system may not be morons, but it does seem you might qualify for the sobriquet. Congratulations!

I'm a W-2 contractor.
Note in expenses.

In rhe Denver area, anywhere near where i work(50min commute by light rail), $1k/month for a 1Bedroom apt is normal.so that's 12k a year right there, another $1800/yr for public transportation. The cost to drive to work would be close to double if I drove since partink in downtown areas just got increased to $15/day.

It's great that I have a job, but the no-benefits part is a hassle. I don't have medical insurance, so that helps keep costs down.

Today I'm working on getting out of my verizon contract to move to a cheaper provider. I think I'll save f $80 a month with that move.

The easiest way to make more is to spend less, right?

fortezza said:   I'm a W-2 contractor.

What the heck is a W2 contractor?

Are they contracting your single-member owned "loan-out" LLC/S-Corp and your entity is issuing yourself a W2?

If they are directly giving you a W2, how can they avoid you being an employee and thus required to offer you health insurance, FSA, and 401k along with their other employees as per discrimination testing?

Just because they don't consider you an employee doesn't mean you're not an employee [per IRS regs]. I could decide to not consider myself black but that wouldn't change my skin color.

There's something shady afoot here and I'm going to get to the bottom of it.

W-2 means they give me a W-2 tax form at the end of the year.

My employer gets contract to fill positions at a variety of IT companies . my agreement is contract to hire. The gaining company pays my employer an hourly rate based on how many hours I work., my employer takes a percentage of that for operating expenses/profit and gives the rest to me.

ie Company A says I need a database architect, company be finds a qualified candidate, lets company A interview them. If company A likes the candidate, company B hires them at an agreed upon hourly rate.

So I'm employed by company B but do work for company A

At some point, company A can decide then position is needed long term , covert it to a permanent position, and hire the employee away from company B

They could decide the position is iffy and leave it as a contractor position until later. Renewing the contract every so many months in the meantime.

Or they could decide the position isn't long term,
and let the contract expire.

It's a bit surprising you do not get per diem. Normally the w-2 contractor gets per diem. How long have you been in Colorado?

Consider taking your next contract somewhere other than Colorado, and make sure the contract is not for more than a year (so it's seen as "temporary duty"). If you do it right, the per diem is immune to taxation (state and fed), and you do not have to show actual expenses. If you can't get enough of Colorado, just return to Colorado every other year for a 1yr contract.

Some cities are sharply over-rated or under-rated by the fed. So take a contract in a city where the fed over-estimates the per diem rate.

BTW, dawhim accidentally said something smart when he said stop working. Do you need $100k/yr? No. As a contractor, 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). When the client reaches a certain comfort level with you, try cutting back to part time. Your effective tax rate obviously drops when you have less income, so you're taking home more money per unit of work.

tl; dr

quick answer is to make less money.

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)


This is a great plan that I've thought of as well. The sweet spot is around $40K/year income with maximum deductions to pay zero federal income tax. The main question I've yet to answer is how to increase cash flow with most of the income going into retirement accounts. Yes you're effectively making $40K tax-free but you lose access to 2/3 of it. I'd actually like to do this in a few years, but I have $500K+ in savings/investments that also generate income.

I suppose I could invest all my post tax money in Royalty Trusts that throw off cash but defer all taxation until sale of the trust shares. This has potential tax problems though when one wants to get out though.

One could just spend down post-tax savings, but after a decade of this strategy one will end up with a huge percentage of assets tied up in tax-deferred retirement accounts. This might work great for older folks, but younger workers will need more cash flow since they're so far away from age 59 1/2.

Thoughts on solving the cash flow problem?

Become a sovereign citizen and refuse to pay taxes.

J/K

vxmike 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)


This is a great plan that I've thought of as well. The sweet spot is around $40K/year income with maximum deductions to pay zero federal income tax. The main question I've yet to answer is how to increase cash flow with most of the income going into retirement accounts. Yes you're effectively making $40K tax-free but you lose access to 2/3 of it. I'd actually like to do this in a few years, but I have $500K+ in savings/investments that also generate income.

I suppose I could invest all my post tax money in Royalty Trusts that throw off cash but defer all taxation until sale of the trust shares. This has potential tax problems though when one wants to get out though.

One could just spend down post-tax savings, but after a decade of this strategy one will end up with a huge percentage of assets tied up in tax-deferred retirement accounts. This might work great for older folks, but younger workers will need more cash flow since they're so far away from age 59 1/2.

Thoughts on solving the cash flow problem?


Irrevocable dynasty trust?

ubermichaelthomas said:   mikeres said:   As long as we're guessing and just pulling ideas out of our a$$, perhaps he's a W2 contractor without benefits.

Is that a real thing?

I know the IRS has explicit rules on who must be considered an employee, but I never heard of a W2 Independent Contractor. That would likely blur the line between employee too far, pushing him into employee territory.
W2 consultants/contractors are very real.
The IRS has rules on who may be considered a contractor.
Anyone that does not meet the IRS guidelines for contractor status is by default an employee.

Someone that works as a W2 contractor may or may not receive benefits depending on how the company is structured.
As a W2 employee the company paying you must withhold employee Federal taxes, employee SS, employee Medicare deductions, and all state mandated employee deductions.
The employer must also pay the employer portion of Federal income tax, SS, and Medicaid. The employee must also pay state mandated employee taxes and fees.

The employer may or may not offer other employee benefits such as a 401k plan, pension plan, medical insurance, etc.

Is there any benefit to the person to accept a W2 contractor position, other than a 1099 contractor position, assuming the 1099 position is compensated for the additional SE Tax? Presumably, all else equal, the employer would be equal to making the person a 1099 contractor and even paying the additional SE tax because the employer would be paying that as FICA if the person was W2ed.

As a 1099, I imagine the contractor is in a significantly better position to deduct stuff off taxes.

I don't know enough about it, but on face value a W2 contractor is the worst of all worlds. No deductions and no benefits. Hell, I'd probably rather take a 1099 contractor position that pays less than the W2, just because the additional tax deductions would compensate me for it.

AND TO THE OP:

Look at Substantially Equal Periodic Payment to get money from your retirement accounts. Google SEPP

ubermichaelthomas said:   Is there any benefit to the person to accept a W2 contractor position, other than a 1099 contractor position, assuming the 1099 position is compensated for the additional SE Tax? Presumably, all else equal, the employer would be equal to making the person a 1099 contractor and even paying the additional SE tax because the employer would be paying that as FICA if the person was W2ed.

As a 1099, I imagine the contractor is in a significantly better position to deduct stuff off taxes.

I don't know enough about it, but on face value a W2 contractor is the worst of all worlds. No deductions and no benefits. Hell, I'd probably rather take a 1099 contractor position that pays less than the W2, just because the additional tax deductions would compensate me for it.

AND TO THE OP:

Look at Substantially Equal Periodic Payment to get money from your retirement accounts. Google SEPP
Sometimes, especially nowadays, when you're looking for a new assignment or a new contract you may not have the option of picking and choosing between a W2 with benefits, a W2 without benefits or a 1099 job.
If all you can get a a w2 without benefits then you take it if you have a family to feed.

On a positive note, a w2 without benefits usually pays more than a W2 with benefits.
The most costly benefit is likely to be medical insurance.
If your spouse is employed and offered medical insurance through their job, they can often include you for a modest increase in premium.
Certainly for less than you would have to pay if you needed your own personal medical insurance policy.

Oftentimes a W2 without benefits is a win/win situation.
You make more money than a W2 with benefits and it costs the company less since they pay you no benefits.

Yes W2 without benefits can be win-win compared to W2 with benefits.

However, I'm comparing 1099 to W2 without benefits and I don't see the reason to accept it unless you really can't get any other work, in which case you're deliberately getting screwed relative to being a 1099. I also don't know why an employer would choose to W2 with benefits you relative to a 1099. What do they get out of it?

Or maybe I'm overestimating how many deductions a 1099 can have. I have never done it but expect to move into a 1099 consulting role next year at which point I'll finally get a non-cheapo postpaid cell phone, that I deduct from my income taxes, and possibly even deduct a portion of my home office.

ubermichaelthomas said:   Yes W2 without benefits can be win-win compared to W2 with benefits.

However, I'm comparing 1099 to W2 without benefits and I don't see the reason to accept it

A 1099 contractors per diem is capped by the lesser of the per diem rate and their actual expenses. A w-2 contractor can collect the full tax-free $100/day for food (for example, if that's the rate for the region) and eat at McDonalds for $10 and pocket $90 of it w/out showing anything. A 1099 contractor cannot do that.
ubermichaelthomas said:   
unless you really can't get any other work, in which case you're deliberately getting screwed relative to being a 1099.

Certainly that's part of it. Clients often refuse to work with independent contractors, and will only work with "preferred contractors" whom they are familiar with, because they insist on outsourcing the background check. If you want to work for such a client, you don't have the option of 1099ing the client, and must go via a contracting company.

ubermichaelthomas said:   Yes W2 without benefits can be win-win compared to W2 with benefits.

However, I'm comparing 1099 to W2 without benefits and I don't see the reason to accept it unless you really can't get any other work, in which case you're deliberately getting screwed relative to being a 1099. I also don't know why an employer would choose to W2 with benefits you relative to a 1099. What do they get out of it?

Or maybe I'm overestimating how many deductions a 1099 can have. I have never done it but expect to move into a 1099 consulting role next year at which point I'll finally get a non-cheapo postpaid cell phone, that I deduct from my income taxes, and possibly even deduct a portion of my home office.
If you as a contractor have an option of working as a W2 contractor or as a 1099 contractor then chose the one that offers the greatest overall benefit.
Sometimes you do not have such a choice.

The reason that employers (and contractors) are sometimes reluctant to be classified as a 1099 is because should you or they be audited by the IRS it's often difficult to legitimately meet all the IRS qualifications.

If the IRS determines that you do not have a valid claim to 1099 status there can be significant financial penalties and fines.
The IRS could then retroactively declare your 1099 tax sheltered funds to be reclassified as income and you would then be taxed and fined on that untaxed income.
Depending on the "mood" of the IRS, they might also pursue criminal charges against you and or your employer.

If you're expecting to do independent contracting (1099) next year you might want to look into forming an LLC, S-Corp, or C-Corp.
You would then contract on a Corp to Corp basis and you would be an employee (and President) of your corp.
You might want to speak with an accountant to help you evaluate the benefits and costs of each type of organization vs. billing as a 1099.

bilbo9747 said:   become a politition,,, or move to Costa Rica like i did....

What is politition???

and sorry about your situation that you got deported to Costa Rica...

jucus said:   bilbo9747 said:   become a politition

What is politition???


The world's oldest profession... pretending you can make people's lives better through government.

ubermichaelthomas said:   mikeres said:   As long as we're guessing and just pulling ideas out of our a$$, perhaps he's a W2 contractor without benefits.

Is that a real thing?

I know the IRS has explicit rules on who must be considered an employee, but I never heard of a W2 Independent Contractor. That would likely blur the line between employee too far, pushing him into employee territory.


I am a W-2 contractor, technically employed as a temp worker... for the last 7 months

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.

Skipping 32 Messages...
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.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014