What was your Effective Tax Rate?

Matt

Administrator
Staff member
Just wrapping up my 2013 taxes... managed to get a rather low effective rate for the year. Everything dropped from prior years as I have focused on building this site, and laying the foundations for opening the RIA firm.

Without going into all the details, managed to allocate about 28K to retirement accounts, and rolled over another 14K from traditional to Roth, and paid an effective rate of about 2% including City/State/Federal.

How did you guys do for 2013, and how do you lower your tax rate?
 

Sesq

Level 2 Member
26.7% F/S/L for 2013 (22.0/3.14/.016) - I am an AMT payer. My only tax shelters are my non-working spouse and I had about $4k in dividends. I maxed my retirement accounts last year, though I bunch up my backdoor roth's depending on incentive comp, so last year I moved just over $50K into retirement (17.5 +5.5 x2 +5 x2 + ~12 in match).

2014 was a big year for me and I am looking at about 31.1% based on my spreadsheet.
 

ibleed0range

Level 2 Member
What are the easiest ways to lower your tax rate? I am not interested in maxing out my retirement contributions. Mine was about 28% last year.
 

ibleed0range

Level 2 Member
Then you're not interested in the "easiest way to lower your tax rate".
Can you explain to me the point of maximizing your retirement contributions. (Money that you can't touch until retirement). Your still paying taxes on the money if you make it to retirement, obviously you don't know what the rate is but I don't see the point unless your close to retirement anyway.
 

madage

Level 2 Member
1. I plan to "make it to retirement".
2. There's no way I can retire unless I save a long time for it. Hurriedly funneling ~$30,000 per year into retirement accounts starting a few years prior to retirement is not going to cut it.
3. Deferring taxes until later, when I'm (most likely) in a lower tax bracket, makes a lot of sense to me.
4. Money invested generates money. Investing longer is (exponentially) better.

@Matt may suggest specific resources, but before that you can read arguments for maxing-out all your tax-advantaged accounts at just about every personal finance blog on the internet.
 

Kim @Savy.Traveler

Level 2 Member
Just wrapping up my 2013 taxes... and paid an effective rate of about 2% including City/State/Federal.

How did you guys do for 2013, and how do you lower your tax rate?
Wow! I was feeling good at 8% and was worrying I did something wrong to get it that low.
 

Matt

Administrator
Staff member
Can you explain to me the point of maximizing your retirement contributions. (Money that you can't touch until retirement). Your still paying taxes on the money if you make it to retirement, obviously you don't know what the rate is but I don't see the point unless your close to retirement anyway.
You need to think about money within 'the family' - whether that is just you as a single person, or a traditional family, or even charitable organizations that you support. That concept is the expanding sphere of influence.

If you pay taxes you are taking money outside of that 'family' and when its out, its out. As such, it is best to keep hold of as much of your income as possible. When it comes to reducing what goes out you have two methods: Tax Deductions and Tax Credits. Both of these offset the amount you pay. There are tons of credits out there, but they are frequently phased out on income, so goals are to reduce taxable income, retirement accounts are great for that.

Tax Deductible retirement savings aren't necessarily those that you pay taxes on later. Or at least, they are, but the number isn't what you expect.

Last year I was in a high tax bracket -so I deferred SEP IRA income to reduce that. Let's say it was a 28% tax rate, for every $10000 I put into the SEP I 'saved' $2800.

This year, I decided to focus on other things, and dropped my starting salary downwards, so my starting effective rate was already very low, then I made a partial rollover into a Roth IRA of around $14K from last years money. That means that I kept $3920 'in the family' because I pushed it from one year to the next, and now it will earn tax free.

I use these partial rollovers to play with taxbrackets- puting more into SEPs or other deductible plans when earnings are in 'higher tier brackets' then moving it over to tax free whenever I spot a low tier bracket.

Technically speaking, for the employed it is very hard to do anything other than such deductions and rollovers to dramatically reduce income tax on salary. There are other elections to consider when it comes to stock incentive plans, or setting up businesses, but not so many for the guy with the average (well paying) job.
 

Matt

Administrator
Staff member
26.7% F/S/L for 2013 (22.0/3.14/.016) - I am an AMT payer. My only tax shelters are my non-working spouse and I had about $4k in dividends. I maxed my retirement accounts last year, though I bunch up my backdoor roth's depending on incentive comp, so last year I moved just over $50K into retirement (17.5 +5.5 x2 +5 x2 + ~12 in match).

2014 was a big year for me and I am looking at about 31.1% based on my spreadsheet.
HSA?
 

Haley

I am not a robot
If I only include income tax state/fed we came in around 1% but that is deceptive since my state has 0 income tax, but high tax rates on property. So including property tax we are at 2%.

We will be paying more next year.
 

Haley

I am not a robot
26.7% F/S/L for 2013 (22.0/3.14/.016) - I am an AMT payer. My only tax shelters are my non-working spouse and I had about $4k in dividends. I maxed my retirement accounts last year, though I bunch up my backdoor roth's depending on incentive comp, so last year I moved just over $50K into retirement (17.5 +5.5 x2 +5 x2 + ~12 in match).

2014 was a big year for me and I am looking at about 31.1% based on my spreadsheet.
Low income housing investment, maybe?
 

ibleed0range

Level 2 Member
You need to think about money within 'the family' - whether that is just you as a single person, or a traditional family, or even charitable organizations that you support. That concept is the expanding sphere of influence.

If you pay taxes you are taking money outside of that 'family' and when its out, its out. As such, it is best to keep hold of as much of your income as possible. When it comes to reducing what goes out you have two methods: Tax Deductions and Tax Credits. Both of these offset the amount you pay. There are tons of credits out there, but they are frequently phased out on income, so goals are to reduce taxable income, retirement accounts are great for that.

Tax Deductible retirement savings aren't necessarily those that you pay taxes on later. Or at least, they are, but the number isn't what you expect.

Last year I was in a high tax bracket -so I deferred SEP IRA income to reduce that. Let's say it was a 28% tax rate, for every $10000 I put into the SEP I 'saved' $2800.

This year, I decided to focus on other things, and dropped my starting salary downwards, so my starting effective rate was already very low, then I made a partial rollover into a Roth IRA of around $14K from last years money. That means that I kept $3920 'in the family' because I pushed it from one year to the next, and now it will earn tax free.

I use these partial rollovers to play with taxbrackets- puting more into SEPs or other deductible plans when earnings are in 'higher tier brackets' then moving it over to tax free whenever I spot a low tier bracket.

Technically speaking, for the employed it is very hard to do anything other than such deductions and rollovers to dramatically reduce income tax on salary. There are other elections to consider when it comes to stock incentive plans, or setting up businesses, but not so many for the guy with the average (well paying) job.
Yea I am that guy with the average well paying job. A friend of mine who is also "that" guy, says he goes around to all the units at his condo asking for donations to salvation army several times per year. He personally drops off all the goods and gets the tax write-off for all the stuff. Seems like a good idea if you have that resource available.
 

Matt

Administrator
Staff member
Yea I am that guy with the average well paying job. A friend of mine who is also "that" guy, says he goes around to all the units at his condo asking for donations to salvation army several times per year. He personally drops off all the goods and gets the tax write-off for all the stuff. Seems like a good idea if you have that resource available.
Funny- whenever I see a dropoff bin for charity clothes I shake my head and think someone is making money on that..
 

Sesq

Level 2 Member
Just started that this year. Naturally we then had a bunch of med stuff happen, so the high deductible plan took a few bites. I left all the cash in the HSA and paid out of pocket.

Low income housing investment, maybe?
Strikes me as the tax tail wagging the dog.

I don't love paying taxes, but I need to keep perspective, its the purest Cadillac problem in that I only get there with a high wage.
 

Marcus

Level 2 Member
Let's just say someone I know has just started his career and is making $400k, what would there effective tax rate be if you max out retirement accounts ($30k a year), mortgage deduction etc etc. Whats the best way to lower your tax bill? I heard there is a back door way of increasing IRA contribution, is it legit or is Uncle Sam going to throw your ass in jail for tax evasion?
 

Sesq

Level 2 Member
Backdoor roth = day 1 contribute to non-deductible IRA $5.5K. Day 2, convert to Roth. No income cap to convert since 2010. Conversion taxes only on gains, no gains in a day. Only hitch is of you have other traditional IRAs then you would have to spread the basis from your non deductible IRA to the other IRA's. Simple example, existing traditional IRA $5.5K, basis 0 (coincidence to make math easier), new non-deductible contribution 5.5K, basis 5.5K. If you convert the basis would be spread across both IRA's, so if you convert the non-ded IRA, conversion = 5.5K, basis, 2.75k, taxable income 2.75k. You can cure this by moving old IRA's into a 401(k) if your plan accepts rollovers from IRA's.

Does nothing to help your current year tax, but helps you in retirement by increasing your tax-free investments.

There is also the so-called "Mega backdoor IRA" that requires you to have a 401(k) plan that accepts after tax contributions and in-service withdrawals. Two feature my company's 401(k) lacks.
 

Scott

Level 2 Member
26.7% F/S/L for 2013 (22.0/3.14/.016) - I am an AMT payer. My only tax shelters are my non-working spouse and I had about $4k in dividends. I maxed my retirement accounts last year, though I bunch up my backdoor roth's depending on incentive comp, so last year I moved just over $50K into retirement (17.5 +5.5 x2 +5 x2 + ~12 in match). 2014 was a big year for me and I am looking at about 31.1% based on my spreadsheet.
I get the other numbers in your calculation above, but what is the "5 x2"?

Our 2013 federal effective rate was a painful 27%. Maxed out both our 401ks, itemized deductions, HSA, etc...every allowable deduction known. Still looking for other options to lower this percentage.
 

Haley

I am not a robot
Strikes me as the tax tail wagging the dog.

I don't love paying taxes, but I need to keep perspective, its the purest Cadillac problem in that I only get there with a high wage.
High income isn't always from wages. In my case it was a very good way to protect my assets. The credits offset tax liability (it is a credit, not a deduction) and carry forward 20 years.

You mean LIHTC? I've not seen too many of these for individual investors.. do you have any further reading for us on this?
Sorry Matt, it wasn't open to individual's exactly, I was a limited partner and the investor pool was very restricted. I was very lucky to get in.
 

Mel

Level 2 Member
Ditto, what is 5*2. I think my HSA Max is 3,750.

What is a Mega-Back Door IRA? I have after tax. I need to check on in service withdrawals.
 

Sesq

Level 2 Member
Ditto, what is 5*2. I think my HSA Max is 3,750.

What is a Mega-Back Door IRA? I have after tax. I need to check on in service withdrawals.
The 5*2 was me bunching the IRA contributions. So, in 2013 I made both 2012 and 2013 non-deductible IRA contributions for myself and my spouse and converted them in 2013. The limits were $5k in 2012, $5.5k in 2013. I was answering the question about my 2013 return.

To do the mega back door IRA you need after tax and inservice withdrawals. Effectively you fund your 401(k) to the max ($18k in 2015 if under 50) then do after tax thereafter to the IRC 415 limit ($53k in 2015 IIRC, less any
match or profit sharing your employer may give you (say its $7k for easy math, 53k - 18- 7k = up to 28k in potential after tax). Your after tax contributions have basis similar to a non-deductible IRA. So, you do an in-service withdrawal into a Roth IRA, and there is no conversion gain since your after tax contributions had basis = value.

What is changed is now the after tax dollars will grow tax free as Roth assets, not tax deferred (in excess of basis) if left in the 401(k). So, tax free growth with a nice meaty limit (unless you get a lot in your match, in which case no complaining).
 

Andres

Level 2 Member
This is the thread on Bogleheads where the strategy proposed by Sesq is discussed:

http://www(dot)bogleheads(dot)org/forum/viewtopic.php?f=2&t=66208&sid=03d17ed2482c1c90831b7d4915a224db&start=150

Isn't it funny how complex our tax system is? I think everyone should play by the same rules. If you don't have a 401(k) plan that allows inservice withdrawals to a Roth IRA, you don't get this high limits. You are stuck with the 5.5k + 17.5k = 23k limit. But complex is good for financial advisors and accountants ;)
 

kidooo

Level 2 Member
Sorry for the n00b question.

How do i figure out my tax rate for 2013?

I think i paid something like 20%-30% and would love some tips and how to lower it for 2014 ( iv'e maxed IRA's at $5.5K for me and spouse)
 

Matt

Administrator
Staff member
Sorry for the n00b question.

How do i figure out my tax rate for 2013?

I think i paid something like 20%-30% and would love some tips and how to lower it for 2014 ( iv'e maxed IRA's at $5.5K for me and spouse)
Your tax bracket is the highest band you are paying in.

Your effective tax rate is total tax paid/income.

So to answer that, just look at what you paid and divide it by what you earned.

  • If you have an effective rate of 20-30% then you should have more things going on than just IRAs. Do you have 401(k) plans in work? HSA accounts?
  • Also, are you paying taxes on investments (short term capital gains via trading?)
  • Are you tax loss harvesting investments?
 

kidooo

Level 2 Member
Your tax bracket is the highest band you are paying in.

Your effective tax rate is total tax paid/income.

So to answer that, just look at what you paid and divide it by what you earned.

  • If you have an effective rate of 20-30% then you should have more things going on than just IRAs. Do you have 401(k) plans in work? HSA accounts?
  • Also, are you paying taxes on investments (short term capital gains via trading?)
  • Are you tax loss harvesting investments?
For this calculation i only look at the Federal level taxes, Correct?

So after calculating last year it actually came out to 11% (not accounting for all the other many taxes besides federal) how good/bad is that?

I don't have any benefit's at work, so no 401(k) or HSA accounts

For investments i actually only started at the very end of 2013. so this will be the first year i will be reporting anything

I have money mostly with betterment.com, and a few thousand play money in some online brokerages
 
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Matt

Administrator
Staff member
Just wrapping up 2014. Have to cross check the work of my CPA, but preliminary tax rate for 2014 is 1.2% I actually screwed up and forgot to put in a final Traditional IRA payment which would have dropped it to zero.
 

Sesq

Level 2 Member
2014 was a big year for me and I am looking at about 31.1% based on my spreadsheet.
It did come in at 31.1% (26.7 Fed). 2015 isn't shaping up to be a windfall year like 2014, so my current estimate for next year is 29.2% (24.9% Fed).
 

kidooo

Level 2 Member
Just wrapping up 2014. Have to cross check the work of my CPA, but preliminary tax rate for 2014 is 1.2% I actually screwed up and forgot to put in a final Traditional IRA payment which would have dropped it to zero.

Are you maximizing crazy deductions or actually have losses or very little profit earned
 

Jus

Level 2 Member
Just wrapping up 2014. Have to cross check the work of my CPA, but preliminary tax rate for 2014 is 1.2% I actually screwed up and forgot to put in a final Traditional IRA payment which would have dropped it to zero.
Wow that's impressive I wonder what crazy maneuvers you pulled to do that or like Kidooo said having heavy losses or something. My wife makes the big bucks while I'm still being over worked and underpaid but our AGI made 6 figures so I think we ended in the 29% range. Hoping to do better for 2015
 

Matt

Administrator
Staff member
Are you maximizing crazy deductions or actually have losses or very little profit earned
All of the above. I've no desire to earn a lot, so I reduce that with deductions. I always have losses (Cap Losses). And after reducing everything there is sadly very little profit to be taxed on :)
 

RTR

Level 2 Member
All of the above. I've no desire to earn a lot, so I reduce that with deductions. I always have losses (Cap Losses). And after reducing everything there is sadly very little profit to be taxed on :)
That does take a toll on the ol net worth
 
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