Tax bracket question

[RoadToRiches]

Something I read in another thread, but didn't want to hijack it.

If I am in 25% tax bracket now and considering if I max out my 401k (16.5k per year) and that still will not put me in 15% tax bracket, which is 34k a year.. what can a person do in addition to maxing out their 401k to get to 15% tax bracket if they have lets say still 15-17k to reach it after their 401k is maxed out?

[Taxman10]

Donate the 15-17k to your favorite charity :-)

it will get you into a lower bracket and bring a smile to the face of the charity.

it won't do anything for your personal net worth though........................

[RoadToRiches]

well, right now, I am my favortie charity lol

[Sum Dum Gai]

You need more deductions. I suggest babies, huge mortgages, uh... oh student loans (think big six figures at least to really maximize the credit), let's see what else... energy efficient appliances (replace everything from the water heater to the stove), I think there's still something for electric cars. Plenty of stuff out there.

Of course, you could just pay your taxes too. I mean, I know it's crazy, but some people do go that route.

[Angel!]

Maybe you understand this, but just because you are in the 25% bracket doesn't mean that you are taxed 25% on all your income. You have the 25% tax only on the income above 34,000 (after all deductions). So, hitting the 15% isn't going to magically save you tons of tax money, just the taxes you paid on the income above 34,000. But, if you are still looking to get your taxable income below 34K, then some options include:
- put money into other pre-tax things - IRA, HSA, FSA (only if you will use it).
- Increase your exemptions (have some kids)
- Increase your deductions (donate lots of money to charity, buy a house & pay lots of interest, pay tons of after-tax medical bills)
- lower your income

But, the 34,000 bracket is based on your taxable income. So make sure when you are calculating your bracket that you consider the exemption & deduction that you already have & consider any pre-tax items that are taken from your check (health insurance).

[ontrack]

Sadly the deduction for student loan interest maxes out at $2500 and has an income phase out. You can't take it at all if you make $75K.

[DVM gone riding]

I know you were being sarcastic dark but Large SL don't help since the max int you can deduct is 2500 and it steps down bassed on Sal. I made almost 75k last year and paid about 4k in SL interest but only got to deduct 400.

indebt-to ans your question you can't. You can do things to help maximize deductions and keep yourself out of even higher brackets but if you are half way up a bracket you aren't going to get out of it (nor should you)

[Angel!]

Because I feel my post wasn't completely clear on the tax brackets - a person that goes only $100 into the 25% tax bracket will only pay $25 more in taxes than the person that hit the top of the 15% bracket. They paid the exact same amount of taxes on the first $34,000 (or whatever the actually cut-off for the 15% bracket is) of income, then the last $100 is taxed at 25% giving them the extra $25 in taxes.

So, the only tax savings you will see is 25% of whatever amount you manage to lower your taxable income. There isn't going to be a huge jump in savings if you get down below $34,000.

Hope that is clearer & maybe you already understood this concept. I just know some people believe that if they are in the 25% bracket, then they pay 25% on all their income & that isn't true.

[alabamagal]

Angel, thanks for your explanation on tax brackets. It is as clear as it could possibly be. But most people who complain about their tax bracket just do not understand this!

[Deleted]

I often don't think people understand how the tax system works. As Angel D has pointed out, it's a progressive system. If the cutoff between the 15% and 25% tax bracket is $34,000, there is negligible difference between having an AGI of $33,900 vs $34,100. Who cares that you crossed over the $34K limit, right?

But....I finally found a good reason to care about the difference. If you stay in the 15% tax bracket you can harvest long term capital gains tax-free. Once you bump into the 25% tax bracket you have to pay 15% on the capital gains. Maybe somebody can confirm for me that this is legit, and this would be a real reason to care what tax bracket you are in?

[tskeeter]

One tax management technique that some people use is to consolidate certain deductible expenses into alternate years. Things like pay your property taxes for the next year just before year end, if you have unusually large medical expenses and are close to being eligible to deduct medical expenses, have the entire family get all planned medical treatment done before the end of the year, make current year and next year charitable contributions in a single year, etc.

If you made a major purchase subject to sales tax, look at whether or not it is advantageous to deduct sales taxes on your federal return, rather than state income taxes.

Manage your income. Can you delay some of your income into next year? The year when you would be in a 25% bracket anyway? Something like ask your boss to delay writing your bonus check until into January?

Overall, look at your current income and deductions and develop strategies for minimizing income and maximizing deductions every other year.

[Sum Dum Gai]

I know you were being sarcastic dark but Large SL don't help since the max int you can deduct is 2500 and it steps down bassed on Sal. I made almost 75k last year and paid about 4k in SL interest but only got to deduct 400.

Huh. Good to know... I guess. Better stick with the huge mortgage, I know that the limits for those puppies (if there is one) are huge. I also like the electric car idea. Google Tesla Roadster and tell me you don't want one of those things in the driveway. I dare ya!

[Baby Fawkes]

Apr 7, 2011 15:59:31 GMT -5 @jimmo85 said:

But....I finally found a good reason to care about the difference. If you stay in the 15% tax bracket you can harvest long term capital gains tax-free. Once you bump into the 25% tax bracket you have to pay 15% on the capital gains. Maybe somebody can confirm for me that this is legit, and this would be a real reason to care what tax bracket you are in?

I'm pretty sure you are correct for the current legislation. I think that in 2013 the rules are set to change. It's still advantageous to be in the 15% but it's not set to be tax free forever. This article shows the breakdown as it currently stands.

en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States