Real Estate Investor · Member since 2008 · 56 posts · 0 votes
For those who are lucky enough to make over $450k/year, what changes are you making?
From what I understand
1) tax rate goes up to 39.5%
2) you cannot take mortgage deductions anymore?
3) dividends from your corporation will be taxed at 20%
anything else? how do you protect your earnings besides maxing out on your sepIRA?
is it worth it to keep a home mortgage or should you just go and pay it off early?
does it still make sense to invest in real estate?
I know this is a great problem to have but it sucks to have 52% of your pay go to taxes after factoring in CA state taxes!
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
James W.,
Let me clarify,
The mortgage Interest deduction is not what is limited.
You can take your deductions on your rental income just as normal.
This just affects your deductible itemized deduction total. If you income is 100k over the limit you will lose 3k of your itemized deductions; however, you can lose no more than 20% of your itemized deductions. It is stll highly worth it to keep your mortgage if you can earn more than the rate you are paying.
You can protect your earnings in very much the same way you were before.
Here are a few of the big changes:
Tax rate and bracket system §1—the current rates of 10%, 15%, 25%, 28%, 33%, and 35% have been made permanent. The pre-2001 rate of 39.6% applies to taxable incomes over $400,000 ($425,000 HOH, $450,000 MFJ, $225,000 MFS). These thresholds will be inflation adjusted after 2013.
Capital gains and dividends §1—the current rates for net long-term capital gains and qualified dividends of 0% and 15% have been made permanent. The pre-2001 rate of 20% applies to taxpayers with taxable incomes over $400,000 ($425,000 HOH, $450,000 MFJ, $225,000 MFS). These thresholds will be inflation adjusted after 2013.
Phase out of personal exemptions and itemized deductions (PEP and PEASE) §§68 and 151(d)—the phaseouts (reductions) of personal exemptions and itemized deductions are permanently repealed for taxpayers with AGI over $250,000 ($275,000 HOH, $300,000 MFJ, $150,000 MFS). These thresholds will be inflation adjusted after 2013.
Roth conversions for retirement plans—Under the Act, employees may convert non-Roth retirement accounts (401(k), 403(b), etc.) to Roth retirement accounts whether or not the non-Roth funds are distributable (such as for employees who are under 59½). Converted amounts will be immediately taxable.
Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
13y
I'll be happy if they ever allow me to take all or at least some of my funds from my current employer's 401k account and roll them into a Roth account where I can manage those funds in something other than the lousy funds the company 401k offers!
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Jerry K.,
Did you see this part of my post:
Roth conversions for retirement plans—Under the Act, employees may convert non-Roth retirement accounts (401(k), 403(b), etc.) to Roth retirement accounts whether or not the non-Roth funds are distributable (such as for employees who are under 59½). Converted amounts will be immediately taxable.
That will allow you to roll it over to the Roth function if they have one set up. Many more employers do now these days.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
13y
Originally posted by Steven Hamilton II:
Oh and it also always makes sense as I would rather make the dollar and pay the tax than to not make the dollar at all.
I'd rather pay the 52% and have the remaining 48% to spend.
-Steven
I know this is an individual thing, but at what marginal rate does it not make sense to keep working for additional income? I don't mean to politicize this, but I am curious.
Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
13y
Steven Hamilton II
I did see that part, but did not think that meant that if you are working at a company currently, and participating in the company 401k plan - that you could convert those funds to a Roth plan - while you were still employed at that company.
So if I had $500k in my current company's 401k plan, and I stay employed at the company - I could convert that $500k into a self directed Roth IRA?
Yes I would have to pay taxes now, but the government rules will now allow me to move 401k money to a Roth while I'm still employed at the company?
This is huge if true. We should have a thread on this topic alone on the forum.
(does the money moving from the 401k into a Roth then count as AGI and possibly move me into a higher tax bracket for the year?)
New York City, NY · Member since 2012 · 253 posts · 7 votes
13y
Hey Steven Hamilton II and Jerry K. I look forward to hearing the responses about rolling over the 401K to a Roth IRA if you are currently employed. If this is possible for people currently employed, I would assume 401Ks would see withdrawals as plans offer only a few options to invest in over time. I would absolutely pay the taxes now and enjoy tax free gains in the Roth in the future.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Honestly,
Only at the point that you think it is too much work to earn more. When the after tax return is not worth it to keep working. How much take home pay do you want per hour?
Brian Huggard,
You are right that you would not be eligible to contribute to a ROTH IRA; however, you can contribute to a ROTH 401k or traditional 401k. Now, as long as your employer's plan allows it you will be able to roll it over from the traditional to a Roth 401k. Just as you can roll over from a traditional IRA to a Roth IRA
Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
13y
Marc Bodinger - they key point will be if your employer allows it - right Steven Hamilton II? If they do not have that option available, then you're out of luck.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Well before they were limited by law in allowing the rollovers to the ROTH. Now the limit will be if it is even worth it to get to the same investments on the other side of the coin.
The employee should now be allowing it. They just more than likely won't allow you to take it out of the company's plan.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Jerry K.,
Thanks, I didn't realize I was that close.
That is correct; however, once you reach 59 1/2 you can remove it from the company anyway; however, that may have other consequences such as being limited as to when you can contribute again.
Investor · Paradise Valley, AZ · Member since 2012 · 361 posts · 214 votes
13y
I will not change my investing or spending habits just because my marginal rate went up 4.6% and the capital gains rate went up 5%.
If you calculate how much extra tax it is on an actual dollar basis it's negligible when compared to my entire tax liability.
I don't believe personally in a threshold where working no longer makes sense. Like Steve said I would rather have 52 cents of every dollar I make in my pocket as opposed to nothing if I stopped working after reaching a certain amount.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Now if it gets to a point where if I'm making 300 and hour on paper and only taking home 144; I might reconsider how much I am working and how hard. Depends upon how badly I NEED the money.
Real Estate Investor · League City, TX · Member since 2012 · 54 posts · 9 votes
13y
I can tell you this, I have alreay axed a couple of marginal employees in my service business this week. If I am going to put up with the BS involved with customers and employees it's going to be the good ones for a good return. Culled a couple of high drama marginal return customers as well.
Really starting to wonder about the whole S corp thing where all of the companies profit shows up on my tax return weather it makes it to my bank account or not.
When the passive losses from some investments don't do you any good because you reached a threshold level it makes you wonder why you got in that deal in the first place.
Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes
13y
My taxable income is not near the 450k but in past years I have made changes to my strategy when I was close to topping out my current bracket. I have used 1031E and another time I sold carrying back a loan to decrease my taxable income that year.
My uncle was a union contractor and he would quit working for the year when he was getting close to maxing out a bracket. Not sure if it was really worth it financially but I know it sure made him happy.
Rental Property Investor · Huntsville, UT · Member since 2012 · 127 posts · 35 votes
13y
Originally posted by Albert Hasson:
I will not change my investing or spending habits just because my marginal rate went up 4.6% and the capital gains rate went up 5%.
If you calculate how much extra tax it is on an actual dollar basis it's negligible when compared to my entire tax liability.
@Albert Hasson - You and I have different definitions of the term negligible.
Durham, NC · Member since 2012 · 498 posts · 48 votes
13y
It seems that I have been on the right track as I prefer appreciation
to rental income. This way the tax is deferred.
It just reported that in 1212,
In Las Vegas, Rental rate change / appreciation = -0.9 / +16.3
Nationally , Rental rate change / appreciation = +5.2 / +5.1
The long term holding is more advantageous as before.
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
13y
Originally posted by Brian Huggard:
Originally posted by Albert Hasson:
I will not change my investing or spending habits just because my marginal rate went up 4.6% and the capital gains rate went up 5%.
If you calculate how much extra tax it is on an actual dollar basis it's negligible when compared to my entire tax liability.
@Albert Hasson - You and I have different definitions of the term negligible.
It is only 4.6% on the dollars over 450K, so if you make 500K, you pay an extra $2300 which increases your overall tax liability by .46%. If you make $600K, your overall tax is increased only 1.1%. That is indeed negligible. Won't make a dent in my lifestyle or investments. Actually won't even notice it isn't there.
(of course, not including state)
Rental Property Investor · Huntsville, UT · Member since 2012 · 127 posts · 35 votes
13y
Originally posted by Eric Michaels:
It is only 4.6% on the dollars over 450K, so if you make 500K, you pay an extra $2300 which increases your overall tax liability by .46%. If you make $600K, your overall tax is increased only 1.1%. That is indeed negligible. Won't make a dent in my lifestyle or investments. Actually won't even notice it isn't there.
(of course, not including state)
Like I said, different opinion on the definition of negligible. For me, even the $2,300 you mention above as an increase isn't inconsequential. That's a trip to Disney Land for my family, that's less Christmas bonus money for employees or less of a contribution to Huntsman cancer institute. Instead, I'll have to give it to the fed to decide how best to spend it. That extra %, whatever it is as a % of your total tax liability, to me, is not negligible, inconsequential or unworthy of consideration or discussion. It's a step in the wrong direction. Just one guys not so humble opinion.