It’s not what you make, but what you keep.
How do I minimize the amount of taxes we pay? It seems like with every promotion and pay increase, I end paying more taxes. Unfortunately, 20% pay bumps only equates to a few hundred more in net pay per month. Our marginal tax system means if your pay increase pushed you into the next tax bracket, every extra dollar earned is taxed more. I often hear that the super wealthy pay very little taxes as a percentage of income but they have businesses that might enable them to be crafty. Warren Buffett at one point even said his tax rate is lower than his secretary. How can we get in on some of that strategy?!?
My wife and I don’t own a business but make a solid earning. In 2017, we owed several thousands in taxes and the worse part was our adjusted income didn’t qualify us for a lot of deductions.
For example, when we had to evict one of our tenants there were some significant damages that ran us ~$30k. We thought that at least we could have written some of that off. NOPE! Our accountant tried to work her magic but our MAGI (modified adjusted gross income) didn’t allow us to.
When I was paying back my student loans, interest accrued weren’t deductible for me either. Apparently after ~$80k in earnings, interest was no longer deductible. You bet I paid them off as quickly as I could, especially with a nasty 6% interest.
Similar situation with our mortgage interest; the deduction is very marginal. Our accountant told us that we should have bought a bigger house with a bigger loan. I can see the point if it was to minimize taxes, but it doesn’t fit our FIRE goal. The last thing I want is more house to take care of, more property tax, and more mortgage payments.
How We are Minimizing Taxes for 2018
To minimize our tax bill for 2018, we opened up Mrs. Quest’s 403b plan and enrolled in my company’s HSA. We’re maxing both of these along with my 401k. Not sure how big of an effect it would have but at least it will hopefully trim our taxable income a bit. We are still learning about the tax game but trying to balance that with our FIRE plan. We plan to withdraw from our brokerage/post-tax account first since Mrs. Quest wants to keep being a teacher. We might not be able to do a Roth ladder (learned from the great Mad Fientist!) since we would still have income.
Regardless, we are still maxing those tax deferred accounts. We’ll keep on learning and optimizing our tax strategy.
What are you doing to minimize your taxes? Would love to learn from you.