Lowering taxable income

General Off Topic
21

Thanks Long Enuf, I get your point, but I am not making excuses for funding my future. Just trying to to make sure before I put all my eggs in one basket. This isn’t a scenario of funding a 401k or spending it on fishing trips. Forgive me for not wanting to go all in on a system that has is bairly older than I am vs. a system that is as old as man. Also for some, 23,500 a year isn’t enough to save for retirement. What’s your plan with the other money?

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

22

The $23,500 is not going to sit in a mason jar. Over time, it will multiply many times over, at least mine did. I worked at the Charleston Naval Shipyard when they closed. Several years before closure, the FEDS implemented a Thrift Savings Program, sort of a government version of a 401k. In our situation, we didn’t get matching funds, but our contributions were tax deferred. When they closed, I was hired by Georgia Pacific but left my Thrifts Savings account alone and let it grow. At the time, there was $17, 000 in it and I was no longer making any contributions to it. All of that account was invested in the S&P 500. I don’t recall exactly how many years it took, but it wasn’t long , and the original 17K had grown to 77K. At the same time I was maxing out the GP 401K which was matched up to about 6%, again all of it in the S&P 500. Fifteen years later, that facility closed and I rolled both accounts into a Vanguard IRA. I really haven’t started to tap it yet, but it is north of seven figures. Granted the market may not produce those returns in the immediate future, but I took a big hit in 2007 - 2008 and recovered. I have backed off the stocks considerably now since I have shifted more to capital preservation mode. My point is a that a 401k and /or IRA are the best tools out there for a working man’s retirement.

Pioneer 222 Sportfish
Yamaha 250

23

Question Long? Throughout your working career, were you itemizing or taking the standard deduction? Also how often did you owe Uncle Sam, if any?

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

24

During my working career, I was itemizing and always got money back. My wife and I both worked, had a house payment and a couple of kids. Now, with no kids and no house payments, I have to take the standard deduction and usually pay a little at the end of the year. We both are retired and between the two of us get about $65K in pensions, not counting social security. The reduction in taxable income while working because of 401K contributions was significant. Another thought, your contributions are pretax, so to put $100 in your 401k, you will only see about an $80 decrease in your net take home depending on your tax bracket.

Pioneer 222 Sportfish
Yamaha 250

25

That’s why I am at a crossroads. Our house will be paid off this year, lord willing, and we will be debt free without enough deductions to itemize. Insurance, taxes, and donations will be about it. So I will have to start paying Uncle Sam every year, find a way to lower my taxable income and/or get more deductions by starting a business for the wife. Also my company only matches 2% or a $5k max.

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

26

I feel your pain. Unfortunately, becoming debt free does have increased tax implications. Your 401K contributions will help bring that down if you load it up. Maybe Trump will lower our overall tax rate if we get lucky. Good luck with the business, just be sure to insulate it from your personal assets.

Pioneer 222 Sportfish
Yamaha 250

27

Thanks. I may still max it out, which is only putting about $8k more into it a year. However, I don’t think that will be enough to keep me out of owing in the long run. And I claim less dependents on my paycheck than I have already to try and curb it. I just need more deductions, but paying interest is not a smart deduction just for the sake of it unless I can get other gains. Like depreciation on the property, car, cell phone, tools, repairs, and just having the ability to keep itemizing.

It sounds like you were fortunate enough to work with good companies that had great benefits and promoted the idea of funding these accounts. Wish my employment situation was similar. But no pension, and a measly few thousand a year match in 401k is it.

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

28

Geronimo, you’re a few years behind me in the cycle.
We paid the house off several years ago. I’m maxing out the 401k and Roth contributions, then putting the extra into non tax sheltered investments. Most recently rental property and mutual funds.

There’s nothing magical about deductions and tax implications. That mortgage interest; you were probably paying out 10k / year to save 3k. If you want the same “return” or tax advantage, just donate that 10k to your favorite charity. The tax impact as well as cash impact are exactly the same.

Option 2 is put that 10k to work for you and deal with the taxes. You’ll pay Uncle Sam a little more that he can piss away, but you’ll have more in your pocket too.

It’s a good problem to have my friend.

Boat drinks, Waitress I need 2 more boat drinks!

29

Yeah, trust me I was not thrilled about paying $10k to save $3k a year in taxes, hence the reason I jumped on the house and cut a 30 year mortgage down to 7. I definitely would not want to give that $10k to charity to save $3k now. Nothing against charity, we do our fair share, but I am not wealthy enough to start giving back just because.

I may have jumped the gun a bit, even though there is never any harm in diving into these things and trying to hedge against future issues. But I think I overlooked being able to deduct your state income tax. Is that right? If so, I shouldn’t ever have to take the standard deduction, I should be able to itemize even after the mortgage interest is gone. What a relief, doesn’t look quite as bad as I thought.

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

30
quote:
Originally posted by Geronimo

Yeah, trust me I was not thrilled about paying $10k to save $3k a year in taxes, hence the reason I jumped on the house and cut a 30 year mortgage down to 7.

I don’t think there is anything really fruitful about paying off your house early unless you just don’t like the thought of debt looming over your head… Of course, this depends on your mortgage rate…

Sure, you are going to tell me that the 3.8% interest you are paying is going to mean you save money, but here is the part that most people don’t think about…

Will $1 million dollars in 2016 have the same “purchasing power” in 2046? History tells us this is NOT the case because of inflation.

So, if I borrow $1 million today and assume 3% inflation, that $1 million today would have the same “purchasing power” as 2.4 million in 2046. In other words, that money will be worth less over time.

Another way to put it… If I put $1 million in the bank today and just let it sit there with no interest, 30 years from now, it will only be able to be able to buy about $400K worth of stuff. In other words that money loses value…

So, if I borrow 1 million from you today and promise to pay you back in 30 years exactly 1 million dollars, you lost a LOT of “wealth” because of inflation… I would have to pay you back about 2.4 million after 30 years to “break even” on your 1 million dollar loan today…

So, the point is this… If you borrow $1 million for a house today, and over the course of your life you end up spending a total of $2.4 million, then you didn’t really pay that much in interest in terms of “wealth”… Thus, your interest rate is being gobbled up by inflation.

Furthermore, don’t forget you have a write off… So, if inflation stays at 3%, and I have a loan at 3.9%, but I can write off

31

The way I see it, no matter which way you shake it, you’re going to pay uncle Sam what is owed, whether or not you have to also pay the bank at the same time. It is always better to not have to pay a bank for the privelidge of being able to borrow money. Period.

'06 Mckee Craft
184 Marathon
DF140 Suzuki

32
quote:
Originally posted by tigerfin

The way I see it, no matter which way you shake it, you’re going to pay uncle Sam what is owed, whether or not you have to also pay the bank at the same time. It is always better to not have to pay a bank for the privelidge of being able to borrow money. Period.

'06 Mckee Craft
184 Marathon
DF140 Suzuki

Again, that is not always true. I depends on what rate you get. If you get a rate less than inflation, then it doesn't cost you anything to borrow.

Instead of paying that extra $100K to payoff my 3% mortgage, why would’t I buy At&t stock with a 6% dividend?

This is called “opportunity cost”… You basically LOST money because you went after a low rate mortgage when there was a better place to put your money.

Most trading accounts let you borrow money and “invest”“trade” with that.

I think it’s a wiser move to take on debt when borrowing rates are low, but avoid debt if rates are high.

33
quote:
Originally posted by skinneej
quote:
Originally posted by tigerfin

The way I see it, no matter which way you shake it, you’re going to pay uncle Sam what is owed, whether or not you have to also pay the bank at the same time. It is always better to not have to pay a bank for the privelidge of being able to borrow money. Period.

'06 Mckee Craft
184 Marathon
DF140 Suzuki

Again, that is not always true. I depends on what rate you get. If you get a rate less than inflation, then it doesn't cost you anything to borrow.

Instead of paying that extra $100K to payoff my 3% mortgage, why would’t I buy At&t stock with a 6% dividend?

This is called “opportunity cost”… You basically LOST money because you went after a low rate mortgage when there was a better place to put your money.

Most trading accounts let you borrow money and “invest”“trade” with that.

I think it’s a wiser move to take on debt when borrowing rates are low, but avoid debt if rates are high.

A paid for house won’t be foreclosed on. :wink:

Yes, there is opportunity cost, there is also risk.

Boat drinks, Waitress I need 2 more boat drinks!

34
quote:
Originally posted by Too Busy

A paid for house won’t be foreclosed on. :wink:

Yes, there is opportunity cost, there is also risk.

Boat drinks, Waitress I need 2 more boat drinks!

Well, I'm not suggesting to take that "payoff money" and spend it on booze and hookers... I'm assuming you put it into other investments that you could tap into if it meant losing your house...

And foreclosure on a house isn’t the end of the world. It’s more likely that you will short sale, but life will go on.

35

Some people just don’t like being in debt.

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

36

I mentioned that in my original post, but you asked about tax shelters, not about how get out of debt!

37

SJ talks sense with finance.

Paid cash for a new boat not long ago. Could have financed for 1.9%.

NN

www.joinrfa.org/

38

Yeah, we were at 5% and the closing costs to refinance were pretty high. So we decided to just pay it off. I also like the idea of having the family home free and clear, don’t mind owing money on investments, hence the idea to start on rental properties, but just want my personal stuff paid off. Never know when you might lose a job or get sick and just don’t want that burden looming.

And you are right. A foreclosure is not a big deal on investment property. But not something I want to go through on the family home. Pay off the house, and you pretty much always have a warm dry place to sleep.

“Wailord”
1979 17’ Montauk
90 Johnson

Wilderness Ride 115

39
quote:
Originally posted by Long Enuff

I am retired, always smoked the 401k and catchup contributions. A bird in hand is worth two in the bush. We never know what the future will bring or how employment situations may change. I have never heard of anyone that complained of having too much money in a retirement account. Bear in mind, your personal exemption increases at age 65 for income taxes. You also get a discount on property taxes. Overall, your tax situation should be much lower than when you were working. If you have hundreds of thousands, or even a million or two, in a retirement account that you have to pay taxes on as you withdraw what a wonderful problem to have. Quit looking for excuses not to fully fund your future. Might be a pro tip.

Pioneer 222 Sportfish
Yamaha 250

Sounds like you and your wife have done very well for yourselves.

So when we all reach that 65 year mark and start drawing on the tax deferred retirement money, what % tax do we pay?

“If Bruce Jenner can keep his wiener and be called a woman, I can keep my firearms and be considered disarmed.”

40

Geronimo, one thing to help on itemized tax breaks, start an LLC. Geronimo’s Air Cooled Tiny Small Motor Service. Business losses, equipment, tools, travel, meal expenses, clothing, Phone, Tires, Etc. Keep a folder and put every receipt you get in it. Crazy what you buy over the course of a year. If people can get Earned income tax, we can at least use all legal avenues to tax breaks.

“If Bruce Jenner can keep his wiener and be called a woman, I can keep my firearms and be considered disarmed.”