Reduce taxes ?

[mrbill]

Client is single (divorced), Children are educated and on their own. AGI is $200K, which includes $100K in Alimony. Client maxes out her 401K, including the +age 50 extra amount. Cannot make an IRA & ROTH contribution. Low Mortgage. Not interested in owning rental property. Anything the client can do to reduce taxes ? Thanks,

[DaveinTexas]

What to do

Client is single (divorced), Children are educated and on their own. AGI is $200K, which includes $100K in Alimony. Client maxes out her 401K, including the +age 50 extra amount. Cannot make an IRA & ROTH contribution. Low Mortgage. Not interested in owning rental property. Anything the client can do to reduce taxes ? Thanks,

It seems I have a lot of clients in this ballpark, frustrating that most of their tax deductions and credits fly out the window after about $75K in income.

Rental property definitely wouldn't save the client any taxes for the current tax year; any losses would be suspended until disposition. I would tell the client that although it seems hopeless, there are a few things that he/she can do to set themselves up for the future tax rates.
1. Instead of maxing out the 401K, maybe just meet the employer's match. Then if there is any excess, dump that into the 401K (Roth designation contributions). That is, if their employer has a Roth contributory function within the company 401K. This won't save tax dollars today but this will enable the client to enjoy some tax free monies at retirement (sounds like it's not too far off).

2. I don't know of this loophole closing yet. If your client doesn't have a Traditional IRA, tell them to consider opening one. Make a contribution, deem it non-deductible on form 8606, then convert the entire IRA amount to a Roth IRA. The timing, is something I don't know about. Some say you have to wait a tax year, some say it can be done immediately. This is a work around to the income limit for Roth contributions and since the Traditional IRA has basis, the conversion is tax free. Be careful though, the economic substance doctrine has been codified so the IRS may be close to closing this loophole. Have the client seek the advice of a qualified financial advisor.

3. This takes some VERY careful planning and a little humor that I share with every client in this situation: Marry someone who doesn't work!! Now, I wouldn't recommend this strategy to this particular client, but I have seen tax bills drop significantly if the client marries someone who is a stay at home dad/mom. Especially, if the client and their loved one have lived together; this could be the best reason to marry (leave out the emotional side!!)

Just tell them to avoid schemes to save large amounts of tax (the ones involving investing in an oil well, limited partnership that throws off passive losses, etc.)

[buzzardbreath]

Individual Stocks

Buy individual stocks. Dividends are taxed at a reduced rate. Every year in December, go through and sell the losers. Since losers/winners are all netted out on mutual funds, she will not have losers with mutual funds outside of a complete tank in the economy like we had five years ago.

[FEDUKE404]

IRA question

re "Make a contribution, deem it non-deductible on form 8606, then convert the entire IRA amount to a Roth IRA."

Isn't the first hurdle to clear whether the client can make any IRA contribution (filing status, income limits, etc.) and then decide if the choice of a non-deductible IRA contribution is, in and of itself, a wise decision ??

(I despise Form 8606 - the gift that keeps on giving. )

FE

[TaxGuyBill]

re "Make a contribution, deem it non-deductible on form 8606, then convert the entire IRA amount to a Roth IRA."

Isn't the first hurdle to clear whether the client can make any IRA contribution (filing status, income limits, etc.) and then decide if the choice of a non-deductible IRA contribution is, in and of itself, a wise decision ??

(I despise Form 8606 - the gift that keeps on giving. )

FE

Maybe I'm out of it this morning, but there are no restrictions to CONTRIBUTE to a traditional IRA.

There are income limits for a Roth IRA and there are income limits for DEDUCTING an IRA if the taxpayer or spouse have a retirement plan.



My answer for the best way to reduce taxes would be to work less. She is getting $100,000 in alimony. Quit work (or work part-time) and go out an enjoy life.

[DaveinTexas]

Correct

Maybe I'm out of it this morning, but there are no restrictions to CONTRIBUTE to a traditional IRA.

There are income limits for a Roth IRA and there are income limits for DEDUCTING an IRA if the taxpayer or spouse have a retirement plan.



My answer for the best way to reduce taxes would be to work less. She is getting $100,000 in alimony. Quit work (or work part-time) and go out an enjoy life.

There are no inome limits for contributing to a Traditional IRA, the 8606 route, then converting is the only way to get to the Roth for a Single person earning this level of income.

I'll also throw in the HSA, make sure the client is taking advantage of fully funding their HSA plan each year. And give to charity, look into gifting appreciated stocks to charities/churches, etc.

[FEDUKE404]

On further review

There are no inome limits for contributing to a Traditional IRA, the 8606 route, then converting is the only way to get to the Roth for a Single person earning this level of income.

I'll also throw in the HSA, make sure the client is taking advantage of fully funding their HSA plan each year. And give to charity, look into gifting appreciated stocks to charities/churches, etc.

OK...I misspoke (no morning coffee) re the "income limits" but what I likely was trying to say is that there ARE some limitations on the amounts of funds that can be placed into a traditional IRA.

The OP also stated "Client maxes out her 401K, including the +age 50 extra amount."

And I always have a hangover as to why anyone would knowingly put non-deductible funds into a Traditional IRA in the first place, especially when there are likely other options available.

Queue the "I don't like 8606" music, please.

Peace.

FE

[Roland Slugg]

Tax-free municipal bonds.

[mactoolsix]

I like the "work less" idea - especially if you combine it with "do something you love."

Quick story - when I was getting ready to close a longtime business and retire, a longtime customer asked me why I had waited so long and promptly showed me on a tape measure how long I had to live compared to how long I had already lived. (I was 57, he was 64). I told him I wanted to do things I was never able to do while working 60-80 hour weeks for almost 30 years, and recommended he join me. He declined, even though he claimed to hate coming to work every day. And he was much better off than I . . .

I attended his funeral a couple years later - he worked long hours right up to the day he died!

Why work if you'll never enjoy it? Uncle Sam isn't going to say thanks, and hopefully your kids and relatives will be self-sufficient.

Just my 2 cents,
Mike

[Roberts]

I'm guessing the OP wanted to reduce CURRENT income taxes.

I don't know of a method. I have a few clients who every year want to magically reduce their income tax bill without reducing their income. As an employee with a W-2, there aren't many options.