Discussion - Any tax professionals? (1 Viewer)

[Diamondmine]

This year I had to pay the IRS. It is the first time in my life. By standards I make a lot of money between military retirement and contracting. I was reading on a reddit thread that if I max out my pretax 401K @ $22k will essentially reduce my taxable income and could save money?

I already max out deductions through itemization so what's next?

Obviously I am going to talk to a financial advisor in the future vs the internet but what are some things I should talk to them about? How do I not pay the IRS at the end of the year?

let's discuss!

 

[zuesizgod]

Have more taken out in taxes, do a lot of deductible donations like charities and such.

 

[Sic]

This year I had to pay the IRS. It is the first time in my life. By standards I make a lot of money between military retirement and contracting. I was reading on a reddit thread that if I max out my pretax 401K @ $22k will essentially reduce my taxable income and could save money?

I already max out deductions through itemization so what's next?

Obviously I am going to talk to a financial advisor in the future vs the internet but what are some things I should talk to them about? How do I not pay the IRS at the end of the year?

let's discuss!

i used turbotax this year instead of H&R Block that i've used since i was a teenager - difference was pretty substantial

 

[dewey2461]

I am not a tax pro but ...

You want to find any pre-tax deductions you can.

Your 401k is a pretax deduction. You remove $22k of your income now to be "taxed later" when you tap your 401k

The other thing you can do to avoid having a lump payment is to just change the amount you with hold. Either from your employer or better yet, do a direct deposit to an account you specifically setup for taxes. Then when its time for taxes you have the extra money handy and may earn a few dollars in interest.

 

[da Man]

never use H&R the IRS has connections to them

 

[Doc James]

I second the H&R block is a bad idea route.

It is tempting to use software as a cheap and easy way to do your taxes, but it is not comprehensive at all.

Honestly, if you have that much liability it helps to have an independent CPA do your taxes. It is better all the way around.

 

[Naeeldar]

Not a a tax professional - use one though for past 24 years. It’s worth noting IRS updated the forms a while back so if you are correctly inputting your information you shouldn’t get a refund and/or might pay very little. The idea is it’s within $500 - $1000 of accurate. You said you paid was it a large amount like over $2500? It means something was wrong or you had income from other sources (rentals for me for example) not paid taxes on.

If it was a little bit it’s just the joys of taxes.

 

[Naeeldar]

I second the H&R block is a bad idea route.

It is tempting to use software as a cheap and easy way to do your taxes, but it is not comprehensive at all.

Honestly, if you have that much liability it helps to have an independent CPA do your taxes. It is better all the way around.

Not to mention usually as expensive or less expensive than H&R Block. Love my CPA.

 

[naamloseeen]

A financial advisor is a good practice for everyone, but you really need to find a CPA for your taxes.

On a personal anecdote, the first year I started making a lot of money, I found a CPA that saved me $10k that year over what turbotax was telling me.

Tap your network and find someone local that you can sit down with. You may even be able amend this years return. Either way, it's a relationship that will pay off for years to come.

 

[Granditos]

I can help, this is what I do.

If you can afford it and want to save more for retirement maxing out your pre-tax 401k is the right move and it will help deduce your taxable income (hence lowering your tax bill). So do that.

You owed money because the tax withholding from your paycheck wasn’t enough to cover the taxes due. All you have to do is talk to HR and update your W4. They recently changed the form to make it simpler but made it way more complicated. Now you fill out the form with your information (total income including all sources) and your company adjusts how much taxes come out of your paycheck.

I think you are confused on taking the standard deduction versus itemizing. 85% of people use the standard deduction nowadays which is $13,850. To itemize you would have to have more than $13,850 of eligible deductions. That means if you gave $12,000 to charity and it was your only eligible deduction you wouldn’t get any tax benefit from the gift. Since it isn’t more than the standard deduction. You also can’t max out your itemized deductions… if you have more deductions than income they will rollover to the next year (can usually roll for up to 5 years or more- depending on the deduction).

I can go into a lot more detail if you want. But to answer your question- max out your 401k and adjust your W4 tax withholding.

 

[dewey2461]

I totally agree with that a good CPA can go a long way. Especially if you are self employed and making "real" money.

 

[Diamondmine]

I can help, this is what I do.

If you can afford it and want to save more for retirement maxing out your pre-tax 401k is the right move and it will help deduce your taxable income (hence lowering your tax bill). So do that.

You owed money because the tax withholding from your paycheck wasn’t enough to cover the taxes due. All you have to do is talk to HR and update your W4. They recently changed the form to make it simpler but made it way more complicated. Now you fill out the form with your information (total income including all sources) and your company adjusts how much taxes come out of your paycheck.

I think you are confused on taking the standard deduction versus itemizing. 85% of people use the standard deduction nowadays which is $13,850. To itemize you would have to have more than $13,850 of eligible deductions. That means if you gave $12,000 to charity and it was your only eligible deduction you wouldn’t get any tax benefit from the gift. Since it isn’t more than the standard deduction. You also can’t max out your itemized deductions… if you have more deductions than income they will rollover to the next year (can usually roll for up to 5 years or more- depending on the deduction).

I can go into a lot more detail if you want. But to answer your question- max out your 401k and adjust your W4 tax withholding.

For clarification: Turbotax said I maxed out my itemized deductions. Thats why I posted that. I will definitely be seeking a professional this year.

 

[Aandien]

By contracting do you mean a 1099 contractor?

 

[Granditos]

For clarification: Turbotax said I maxed out my itemized deductions. Thats why I posted that. I will definitely be seeking a professional this year.

I think I know what you are referring to.

It is marketing terminology they are using. Basically, TurboTax has “MAXED” out everything you could save by using the deductions you listed. But in reality, they just selected itemized deduction versus the standard due to the information provided.

 

[Valdemar]

By never having paid the IRS before, I'm assuming you've never had to pay over what was already taken from your paycheck and pension checks. Anyway, what I'm about to say is not a political statement, it's simply the facts. The top 50% of earners in the USA pay more than 90% of the taxes. It's that simple. And the more income you earn, the percentage of that income that they take from you escalates in a non-linear fashion. I owned a business in a low-tax State and I had every conceivable deduction you could mention and I still ended up paying 20% of my income in taxes. The only way to pay less tax, is to earn less money, earn money that is taxed at a lower rate, like capital gains, or earn money outside the US. Of those three options, the only desirable and practical one is to earn money that is taxed as capital gains. While I think you should consult a tax professional to save as much as you can. That doesn't fix the real issue, which is the rate you pay. In order to earn more from capital gains, you need to consult an investment professional that can help you find and invest in income-producing investments that are taxed as capital gains. Dividend stocks, alternative investment category vehicles like, BDCs, MLPs, closed-end funds, venture capital firms, and REITs are some examples. Something I think is a very attractive income investment is real estate. But investing in RE is far outside the scope of this discussion. All-in-all, either make less or learn to make more through means that are taxed at a lower rate. Now, to illustrate how impactful this is, if your total income is less than $47,000, you pay no capital gains tax. If you earn between $47,000+ and $519,000, your CG rate is only 15% and anything above $519,000 is taxed at 20%. So, the greater percentage of your total income that is classed as capital gains, the lower your overall tax burden will be. Ideally, you'd want all your income to be from capital gains. You should - if feasible - consider moving to a State with no State income tax.

All the best.

 

[Wild Beagle]

This year I had to pay the IRS. It is the first time in my life. By standards I make a lot of money between military retirement and contracting. I was reading on a reddit thread that if I max out my pretax 401K @ $22k will essentially reduce my taxable income and could save money?

I already max out deductions through itemization so what's next?

Obviously I am going to talk to a financial advisor in the future vs the internet but what are some things I should talk to them about? How do I not pay the IRS at the end of the year?

let's discuss!

Hate to say it but you have almost certainly ALWAYS had to pay the IRS. This time you just didn't get a refund of the taxes you had already paid them. That said its all about minimizing the amount of taxes due and then minimizing the taxes paid or refund received come tax day. No one on the internet can tell you the best ways to get the most out of your income and deductions without knowing all sorts of information you don't want out in public.

 

[knave23]

I can help, this is what I do.

If you can afford it and want to save more for retirement maxing out your pre-tax 401k is the right move and it will help deduce your taxable income (hence lowering your tax bill). So do that.

You owed money because the tax withholding from your paycheck wasn’t enough to cover the taxes due. All you have to do is talk to HR and update your W4. They recently changed the form to make it simpler but made it way more complicated. Now you fill out the form with your information (total income including all sources) and your company adjusts how much taxes come out of your paycheck.

I think you are confused on taking the standard deduction versus itemizing. 85% of people use the standard deduction nowadays which is $13,850. To itemize you would have to have more than $13,850 of eligible deductions. That means if you gave $12,000 to charity and it was your only eligible deduction you wouldn’t get any tax benefit from the gift. Since it isn’t more than the standard deduction. You also can’t max out your itemized deductions… if you have more deductions than income they will rollover to the next year (can usually roll for up to 5 years or more- depending on the deduction).

I can go into a lot more detail if you want. But to answer your question- max out your 401k and adjust your W4 tax withholding.

Piggyback on this, we somehow owed A LOT last year due to (we think) my wife's company not taking out enough. We think this was also due to the W4 getting more complicated even though we didn't adjust ours. FYI I'm pretty sure it's going to get worse next year as well as that's year 7 of the Trump tax "cut" thing that (as I understand it) is meant to hit more people/tax brackets for 7 years. Regardless, our CPA told us to change our W4s to take money out like we were single but then file jointly. We made that change summer of last year and pretty much broke even this year federally so I guess it's good advice.

 

[da Man]

welcome to the perpetual war society that we have. taxes were never meant to be permanent... unless there is a war or a chance of a war. with that being said there was only 1 president without a new war, pay close attention to whom you vote for

 

[TVCChiver]

i used turbotax this year instead of H&R Block that i've used since i was a teenager - difference was pretty substantial

Try out Freetaxusa.com next year. I've used it the past couple years and like it way better than turbo tax. It's actually free for federal and only a small fee for state taxes (if you live in a state that has them).

 

[Nunyo]

Use the IRS Tax estimator, it's pretty accurate throughout the year to gauge how you should adjust withholding.

https://apps.irs.gov/app/tax-withholding-estimator

Also, have you used the W-4? They changed how the form looks a few years back.

 

[da Man]

yeah like the IRS has your best interest at heart. several thousand IRS agents slated for hire and only recently with the requirement of being armed dropped, yep good will abounds

 

[Silverspaceman]

This year I had to pay the IRS. It is the first time in my life. [...] I make a lot of money between military retirement and contracting. [...] How do I not pay the IRS at the end of the year?

This is a loaded statement (owing at tax time for the first time in your life); without knowing what changed between 2022 and 2023, no one can give you specific information. Usually I hear this when someone has a major change in their income and didn't actually do anything about it, expecting someone else would. You should be able to sit down with your tax preparer and look at your year-to-year analysis to see where you fell short. Any tax software provides a 2yr comparison report and figuring out what happened usually takes like 3 minutes. There are many strategies to reduce your taxes and those expand as your level of income and assets increase.


401(k) reduces your taxable income now, but you're taxed on the distributions later (hopefully after your originally investment has grown)
Traditional IRAs have a smaller annual contribution limit, but work similarly (in that you are able to reduce your current income and pay tax on the distributions later)
There's a big tax credit for solar installations right now. 15% of your cost basis as a nonrefundable credit that can carry over to future years, if you're already interested in solar (taxes are used to incentivize and disincentivize taxpayer behavior)
The biggest deductions you will find are going to be through your business if you're self-employed, but those are generally going to come from spending money on the business; if you're self-employed, you have some extra options in regards to tax advantaged retirement accounts

 

[tervalas]

never use H&R the IRS has connections to them

Lol.....this is true about all of them.

I think what you should really say is "Don't have your taxes done by someone who works for these companies. Learn to do them yourself either on paper or with software."

 

[tervalas]

This year I had to pay the IRS. It is the first time in my life. By standards I make a lot of money between military retirement and contracting. I was reading on a reddit thread that if I max out my pretax 401K @ $22k will essentially reduce my taxable income and could save money?

I already max out deductions through itemization so what's next?

Obviously I am going to talk to a financial advisor in the future vs the internet but what are some things I should talk to them about? How do I not pay the IRS at the end of the year?

let's discuss!

As mentioned before, tons of things could have caused this. If your retirement pay went up, you may need to change withholdings. By 'contracting', do you mean you perform work under your own terms or do you work for a company that provides contract services? If the former, then there isn't anything to do on the withholding side, but if the latter then this is still a possible thing to check.

Adding to your 401k can help reduce your taxable income....but don't forget that it also reduces your take-home pay. If changing this won't affect you much, then you probably should.

There aren't many other things you can do beyond that if you are already itemizing (as you should already know which of those you could affect).

 

[poopoop]

You can contribute to 401(k), participate in a flexible spending account at work to pay for healthcare expenses, certain employer sponsored transportation benefits, and certain employer provided dependent assistance. There are a lot of deductions and things if you have children and work for an employer.

If you're contracting, then there probably isn't going to be any withholding. You can and probably should look into making estimated tax payments to spread the tax bill throughout the year and also avoid an underpayment of estimated taxes penalty.

 

[da Man]

IRA you can "dispose" of income in there at a rate of a little over 5k a year

 

[Rare Spawn]

IRA you can "dispose" of income in there at a rate of a little over 5k a year

Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

www.irs.gov

Up to $7,500 in 2023 if conditions are met.

 

[Naeeldar]

IRA you can "dispose" of income in there at a rate of a little over 5k a year

Income limits. Given what he described he might be over them.

 

[dagers]

I cant help here. Paid 44K last year and more for this year. My tax pro is a genius. Govt sucks! Hahaha!