What are some good legal ways to lower tax liability?

[Laker]

I know that student loan interest and mortgages, etc are a good way to lower tax liability, but for those of you "geriatrics" in attendinghood, how are you keeping uncle sam's hand off your cookie jar?

Just trying to get a feel for some options out there. Thanks.

[Sheherezade]

I don't know. If you find out, I'll be reading carefully!! We finally got hit with the AMT this year so it's discouraging. At a point (around 150K) you lose lots of deductions - including student loan interest, IRA contributions, etc.



Having deductions don't seem to matter at that point. DH is getting more excited about me starting a risky home business because he *thinks* the loss would help. That's a sad statement, isn't it?

[DCJenn]

Join the military? About a third of our income is non-taxable so Uncle Sam puts us into a different tax bracket than the rest of the geriatrics.

In lieu of that? I have no idea.

Jenn

(I've never paid federal income tax- social services incomes aren't the ones that feel the hit, typically...)

We have created side businesses to write off losses. I have sold Scrapbooking supplies and rubber stamps and take a loss every year. DH has a flyfishing guide business also where he takes his friends fishing and writes it off. He bought a boat last year and we wrote it off. You just have to be "Creative"

[Laker]

what about those of you with a spouse in private medical practice? Do your significant others have a car that is owned by the medical practice? I am thinking of buying a car when I open my law practice and running it through the business.

[Amiens]

When we were in residency we earned too little to qualify to itemize.

Last year was our first that we itemized- things that seemed to help-

I have a hobby business, so my "loss" helped us- (dh asked this year if I lost money, and I never thought in my life that he would be happy about a "yes"), and b/c of the business I am able to deduct expenses related to that

-donations, we tithe 10% of money to our church, and I go through the house every year and find things to donate to Deseret Industries, Goodwill, The Arc, Idaho Youth Ranch or St. Vincent de Paul;

any things related to dh job- tax yr 2005 we paid for boards, and some other things, this year we won't be quite so lucky I don't think

I know that my FIL dentist, who owns 2 practices, has his cars and a couple of other things that go through the practices, and is able to take a deduction that way.

We got knicked by AMT last year, and definitely it's going to bite us. Our accountant thought that last year was the last time we would get a refund. It will be interesting to see what we owe this year.

I don't know the details of how this works, but the partners in practice that DH is joining both lease cars through the business. If he joins as a partner we will definitely consider this. I think we can get 2 more years out of DH's car.

I had a business that did not show a loss but I was able to deduct some expenses related to it -- part of my cell phone bill, high speed internet, mileage, etc. I did prorate for business/personal use. It helped a little but not a ton.

I think you had this in your list but depending on your income level, 401(k) options and such, making a contribution to a Roth or regular IRA is a good idea.

I think you had this in your list but depending on your income level, 401(k) options and such, making a contribution to a Roth or regular IRA is a good idea.

You cannot deduct contributions to a Roth IRA, regardless of income level, as the distributions are tax free.

Like you said, depending on income level, you may not be able to deduct contributions to a traditional IRA. The 2006 phaseout for the traditional IRA is at AGI: $70K mfj/ $50K single and is completely nondeductible when AGI is between $150 -160K mfj. Maxing the contribution to a SEP through the business would be a better idea. The max for this past year was the lesser of either 25% of compensation or $44,000. For most SEP participants, it will be $44,000. To set up a SEP, you don't even have to file anything with the IRS, just fill out the form 5305-SEP and file at the place of business.

It is really difficult today to come up with creative, LEGAL ways to reduce taxes. The onset of Passive Activity Loss rules back in the mid-1980s, diminished the ability to completely deduct losses on ventures.

Thanks -- I didn't state that clearly. I think the Roth IRA is a nice option since the distributions are tax free but that doesn't really help you in the current year.

Do those income limits for IRA deduction apply only if you are covered by an 401(k) or apply in all cases?

Do those income limits for IRA deduction apply only if you are covered by an 401(k) or apply in all cases?

Sorry, you're right. I was too hasty in my typing. If both spouses are contributing to a 401K, 403b, SEP, SIMPLE, etc. the deduction is phased out at the income levels I previously mentioned.

If only one spouse is contributing to an employer-sponsored plan, then the phase-out for that spouse starts at the $75,000 AGI range. However, the non-employer contributing spouse can still take a deduction if the AGI is less than $85,000. When the AGI is between $85,000 and $149,000 then the phase-out for both spouses must be calculated. At AGI between $150,000 and $160,000, no spouse can deduct the IRA contribution.

You can make nondeductible contributions to a traditional plan, it is just better at that point to roll-over to a Roth, and pay the tax. The caveat to the above statement is that phaseout for a CONTRIBUTION to a Roth IRA is when modified AGI is between $150K and $160K. Modified AGI being AGI with certain income exclusions like interest on educational bonds, and certain deduction exclusions like student loan interest.

Okay, that was more than you probably wanted to know, and I have a feeling that my explanation doesn't even make sense.

Oh here are some new little tidbits of info.: starting this year (2007), you can have your tax refund deposited into your IRA. The refund does count against your contribution limit. I honestly don't know why anyone would do this, unless they are really bad about funding their IRA. DH and I have set up direct deposit for each month - maybe some folks don't do that. Another new tidbit: Starting in 2006, there are now Roth 401Ks and 403bs. So, that the distributions on the 401K aren't taxed. But, you have to take distributions on the Roth 401K, unlike the Roth IRA.

It does make sense! Thanks. I think we will be able to contribute to Roth accts this year but not next and that the traditional IRA would be an option...before things change again the year after that. (I get a little a/r about planning these things. ).

[Stella]

My parents wrote off an Escalade for their business... Not really sure how they did that but I could find out if you wanted me to.