how to pay less taxes

Started by jarjar5606
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jarjar5606

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Single pharmacist makes $100,000+. Lives in a state that has no state tax. Just did my taxes this year, very upset at how much taxes I have to pay. Any suggestions on how to get more tax deductions? Should I go buy a big house to save on taxes? But how much do I need to spend on the house in order to make the tax deduction worth it? Plus all the land tax, utility bills, and other housing expenses, is buying a house to get tax deduction really worth it?
Thanks for any suggestions
 
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If you are planning to stay in the same area for at least another 5-10 years, buying make more sense than renting. Just don't go out and buy a 7 figure mansion thinking: (1) My house is my biggest asset (2) I'm saving money in taxes.

How much house you should buy depend on your debt/income ratio.

As for tax saving advices, there are very few for people in our situation (employee, decent income, no dependents).

Do contribute to 401 K. I am not a believer that everyone should maximize the 401K. Again, it depends on your debt and return on other investment.
 
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jarjar5606 said:
Single pharmacist makes $100,000+. Lives in a state that has no state tax. Just did my taxes this year, very upset at how much taxes I have to pay. Any suggestions on how to get more tax deductions? Should I go buy a big house to save on taxes? But how much do I need to spend on the house in order to make the tax deduction worth it? Plus all the land tax, utility bills, and other housing expenses, is buying a house to get tax deduction really worth it?
Thanks for any suggestions
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Buying a house to get a tax deduction, especially if you are single, is a bad idea. The tax savings you will get from deducting your mortgage interest will pale in comparison to the extra money you will be paying. It’s the equivalent of saying I want to save $2000 so I am going to spend $10,000 to do it. Being able to deduct your mortgage interest is a side benefit to owning a home not a reason in itself to own one.

There are many legitimate reasons to buy a house verse paying rent. Buy a house for one of those reasons. Being single and a high income earner means you will have to pay more taxes. One way of the other you will be paying the money. You either pay it to Uncle Sam or you the money goes to having kids or into the cost of owning a big house.

You want to save on taxes? Max out your 401k contributions. Use a health savings account for your insurance and contribute the max amount to it. Both of those will lower your taxable income and you get to keep the money you contribute. .
 
Try to play around where you live too. For example, I "moved" out of NYC on paper and work outside of NYC so I dont have to pay NYC taxes. This means I save 4 percent which is roughly 6k a year in my pocket.
 
Start a small business. Small business can show losses for 4 years until the IRS gets PISSY!

EX. Pick a hobby that you spend money on. A hobby one may have is dirt bike riding. Start a imaginary racing business that looses money. Deduct your truck, trailer, gas, dirt bikes, equipment, ect. Lets say you blow 15k a year on dirtbiking, this 15k loss can be deducted from your salary you make as a pharmacist.

If you make 120,000k a year, you are now only pay taxes on 105,000 saving you 5ish grand in taxes.

There are many other small business one could start to show losses, just pick something you are interested in that you spend money on.
 
If you are going to pay a lot in taxes you might as well give your money to a cause you support and not to the gov't black hole of inefficiencies, just deduct the donations.
 
Put money into your 401k. It gets taken out pre-tax. For example, you make $100k and contribute $15k, you only pay taxes on $85k.
 
jarjar5606 said:
Single pharmacist makes $100,000+. Lives in a state that has no state tax. Just did my taxes this year, very upset at how much taxes I have to pay. Any suggestions on how to get more tax deductions? Should I go buy a big house to save on taxes? But how much do I need to spend on the house in order to make the tax deduction worth it? Plus all the land tax, utility bills, and other housing expenses, is buying a house to get tax deduction really worth it?
Thanks for any suggestions
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You live in a state w/o state taxes and are still upset!?!?!?!

You should be glad that you pay at the end of the year rather than get a rebate. Don't give Uncle Sam an interest free loan.
 
Get your real estate license. You can write off your car payment, car insurance, car repair, gas, any meals (dining with clients), office (a room in your house), etc. Plus, you can buy your house/investment properties and collect commissions off them.
 
CK8652 said:
Get your real estate license. You can write off your car payment, car insurance, car repair, gas, any meals (dining with clients), office (a room in your house), etc. Plus, you can buy your house/investment properties and collect commissions off them.
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Hmm, interesting idea. Though I fail to see how this would hold up in an audit?! Or am I missing something?
 
Agree with starting a hobby business. While in industry, I met someone who bought a chicken farm to get a big house and land with it. It operated at a loss which was deducted from IR tax. I started up small export and locum(relief) business and made a loss for 15 years. In the UK we get company cars and have to pay tax on use of these.
I once owed $1,000 tax on the car. However, had been to Caribbean to visit a customer in Trinidad and was able to deduct the cost of this trip.
johnep
 
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Enedium said:
Hmm, interesting idea. Though I fail to see how this would hold up in an audit?! Or am I missing something?
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Real estate agents are independent contractors so why wouldn't it be appropriate to write off business expenses like office, car, and phone? More than just starting up a phony business, you could actually make money by selling friends houses or buying investment/personal properties. You go to lunch with coworker Bob and write it off. Who's to say Bob won't be buying/selling a house someday?
 
twinspharm said:
Start a small business. Small business can show losses for 4 years until the IRS gets PISSY!

EX. Pick a hobby that you spend money on. A hobby one may have is dirt bike riding. Start a imaginary racing business that looses money. Deduct your truck, trailer, gas, dirt bikes, equipment, ect. Lets say you blow 15k a year on dirtbiking, this 15k loss can be deducted from your salary you make as a pharmacist.

If you make 120,000k a year, you are now only pay taxes on 105,000 saving you 5ish grand in taxes.

There are many other small business one could start to show losses, just pick something you are interested in that you spend money on.
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This is the fastest way to get audited and get in big trouble. The IRS has information on this under abusive tax shelters. Check out thier website. The bottomline is only an actual businesse can deduct losses from other income. You cannot deduct losses from your hobbies. If the IRS decides that you are indulging a hobby rather than trying to earn a profit, it won't allow you to deduct your business losses.
 
MountainPharmD said:
This is the fastest way to get audited and get in big trouble. The IRS has information on this under abusive tax shelters. Check out thier website. The bottomline is only an actual businesse can deduct losses from other income. You cannot deduct losses from your hobbies. If the IRS decides that you are indulging a hobby rather than trying to earn a profit, it won't allow you to deduct your business losses.
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The real estate thing sounds like a solid idea. If they ever audit you, it would be easy to tell them how bad you are at selling houses plus the generic economy excuse.

The best advice I can give (within the realms of the law) is to get married asap. If your wife makes a lot less you can save a good amount on taxes. If she makes $0, you can save ~$4500 for the 2010 filing.

On another note, I am surprised and amused (considering how many moral orels I regularly see on here) that nobody has tried telling him that evading taxes is evil and wrong, only warning him about possible consequences if he decides to take this route. :laugh:
 
Namishin said:
On another note, I am surprised and amused (considering how many moral orels I regularly see on here) that nobody has tried telling him that evading taxes is evil and wrong, only warning him about possible consequences if he decides to take this route. :laugh:
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I was going to write about how he should be paying his fair share because it goes to support important social programs and keeps the country running. (not looking to discuss how the gov't wastes money or abuse of these programs). But I deleted it becasue I figured all the teabaggers would call me a socialist and communist and the like.

I got nailed with taxes this year but I'm not gonna complain because a) I should be happy I make enough money to get nailed with taxes and b) They support programs I believe in and vote for. I'd be more than happy to pay more in taxes to support a national with a viable public option and more socialist (following the Nordic Model)
 
You know the wealthiest people in USA only pay 15% tax? This is because all of their income come from long term capital gain.

I hate how I pay 28-33% tax to support 17% of our GDP for health care spending just so that a single mom who forgets to use a condom can get their labor delivery for free, free plan B RX with 6 refills, EBT card, and free pay check. Then all of the sudden, they become too lazy and obese and ask for disability parking permit because they can't walk far and more Medicaids to support their 4 upcoming children. Think Octomom...

My plan to save taxes as a single with no dependent:
1. Max tax deferred 401k? This is not always a good idea because of the limited selection of the funds employers provided. Match them to your employers contribution at least. You can't pass up free money.

Financial adviser : "How about you put some money in here with no control of it for at least 30 years and I am going to cut your money 33-35% when you are 59 1/2 year old or possibly more when the gov increases tax rate every now and then?"
Me : "Screw that, I want my money tax free when I am old.."

Most people fail to realize tax deferred is not tax free!!! You can grow your money if you smart, pay 15% tax rate later in life, and have complete control over your money.

2. Put all of your emergency money in municipal mutual fund bond (tax free, 5% interest/year forget crappy taxable 1% CD/saving account) (i.e: FLTMX, SWNTX, USATX)

3. The rest in HIGH QUALITY mutual fund earning at least 9%, HOLD them at least 1 year to avoid income tax; the longer the better of course to avoid market fluctuations (i.e ASVIX, VEMIX, FAIRX, CGMFX, etc)

4. Real estate tax deduction.

For the long term in 10 year I am going to buy some cheap houses 100-150k and rent them out for at least break even point, then I will refinance to take the equity out every 5 years or so to put them in high quality mutual fund. Owning at least 3 houses with 80% mortgage loan balance most of the time that pays for themselves (with renters). These might seem counterintuitive but every money you spend paying your mortgage balance INCREASES your tax liability. And, every money you take out of your house to invest in somewhere else, will earn interest! Your house does not earn interest, no matter how much equity you put in, the house is still going to appreciate/depreciate.

House equity is a dead money, it doesn't work for you. What happen if you are not able to pay the mortgage on time? Bank are going to foreclose the house with the most equity first because that's how they make the most money instead of recouping the house with little or no equity.

You can also raise the rent adjusted to inflation every couple years to start making more money while these houses appreciate. When the economy comes back up, this is another $250k profit you can pocket free of tax if you decide to sell the house in 20-30 years later.

These are ways you can get the maximum possible tax deduction for your income.
 
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Momus said:
For the long term in 10 year I am going to buy some cheap houses 100-150k and rent them out for at least break even point, then I will refinance to take the equity out every 5 years or so to put them in high quality mutual fund.
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How would you expect to refinance after only paying on a loan for 5 years? First 5 years on a 100k loan you'd have 8k equity and have paid 26k interest, assuming no appreciation/depreciation. Does the tax benefits really outweigh paying points to throw away all long term equity in the house?
 
CK8652 said:
How would you expect to refinance after only paying on a loan for 5 years? First 5 years on a 100k loan you'd have 8k equity and have paid 26k interest, assuming no appreciation/depreciation. Does the tax benefits really outweigh paying points to throw away all long term equity in the house?
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If you understand interest rate arbitrage, leverage and compound interest to INCREASE cash flow, you always come out ahead over the course of 15-30 years. But of course, this strategy is not for everyone. It has risk and it requires discipline to pull though, definitely not for the weak heart. People get rich from leverage. House mortgage is one of the biggest asset you can have to provide leverage.
 
Momus said:
This is why I said you need at least 2-3 houses with renters that pay your monthly maintenance and PITI. With, 1 house you are barely break even... not worth it at all for the deduction...
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Its not as easy and clear cut as you think. See IRS Publication 527. You cannot deduct mortgage interest on loans for rental properties. You also have to report the rent you collect as income which you have to pay taxes on. Of course you can deduct all of your expenses to offset the rental income.

Do not forget all the time and effort it takes to maintain rental properties. One of the worst jobs out there, other than a CVS Pharmacist, is a landlord. See how much fun it is when the scum bag renters move out and do 30k worth of damge to your rental house. My Dad use to tell me "Son there ain't no such thing as a free lunch." It is as true today as it was 30 years ago when he first told me.
 
Momus said:
House equity is a dead money, it doesn't work for you. QUOTE]

Agree with Momus 100%. For many people, home equity is a Liability, NOT an Asset. I remember from reading Rich Dad/Poor Dad that the easiest way to discern between the two is: Liability is anything that takes money away from you. Assets is anything that puts money back into you.

Unfortunately, by that defn. I have many liabilities, and little asset.
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CK8652 said:
How would you expect to refinance after only paying on a loan for 5 years? First 5 years on a 100k loan you'd have 8k equity and have paid 26k interest, assuming no appreciation/depreciation. Does the tax benefits really outweigh paying points to throw away all long term equity in the house?
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This can be done. Let's say you buy a house for $100K.
(1) Put down $15K and acquire $85K loan.
(2) Then spend $5K-10K making proper upgrade. Get it re-assessed.
(3) Let say it now worth $120 K. Acquire a 2nd loan of $100 K, and pay off the 1st loan of $85K. Substract $5-10K you made in repair. You have left 5-10K POSITIVE cash flow.

This is $5-10 K is tax-free money because IRS don't collect tax on loans.

I agree it is easier said than done. You need to have the right TEAM of people to pull something like that together. I am planning on learning more on the trade and get involved in the next couple years.
 
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MountainPharmD said:
This is the fastest way to get audited and get in big trouble. The IRS has information on this under abusive tax shelters. Check out thier website. The bottomline is only an actual businesse can deduct losses from other income. You cannot deduct losses from your hobbies. If the IRS decides that you are indulging a hobby rather than trying to earn a profit, it won't allow you to deduct your business losses.
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I'm not talking about a hobby, I am talking about a business.

To make it an official business it will take you five minutes to fill out the forms and 70$ (In PA).

This is legal though and will hold up in an audit if done right. I talked to my accountant about it, and something similar would hold up in an audit. Its not a hobby, its a real business. If you do a racing business, you better attend at least some type of amateur race event, and be able to show some source of revenue.

IRS accountants are paid on commission, and don't have time to deal with little fish. If you make under 100k the odds you will get audited in your lifetime are slim. Anyways IRS doesn't audit small timers and if they do and you loose its just fines. It is expected for a business to show losses for the first few years. Anyways, most people who race cars and bikes put more money in than they get out, so this won't look too unusual. If you are audited and have an accountant you should be fine.
 
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Are you aware of the costs that are incurred when buying a rental property? Assuming you can get a 20% loan at a decent rate, you still have to pay ~3 points for closing costs and whatever they will charge you to refinance. You have inspection fees, appraisal fees, termite, utilities, hoa, taxes, home warranty fees on top of just buying a house for 100k. A 5k return wouldn't be worth a 20-25k investment with all the fees and liability you incur. Also, how easy do you guys really think it is to fully leverage a property and be able to cover the payment?

Let's say the investment goes south, you're going to ruin your credit for the opportunity to make 1-5k ? Also be prepared for a 1099c with your deficiency on it.

The more realistic way to do it would be buying properties at an extra discount for cash, renovating them, and then doing a cash-to-loan to bring your money back out. Even then, good luck finding a lending company to give you full appraised value on your investment property.
 
Not to sound like a know-it-all, because I know next to nothing, but why not ask some kind of a financial advisor? I understand asking pharmacists who make the same as you makes sense, but for anything financially-related, I have several people I know who deal with economics and finance exclusively. I figure if they have questions about meds they (will be) able to ask me; questions about my finances, I ask them. Always a good idea to keep a smart rich guy close by.

...unless his name happens to be Bernie Madoff.
 
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1. Take advantage of all pretax deductions that you are interested in.

2. IRA depending on income and how much you put in a 401k

3. HSA account if you are on a high deductible insurance plan (if you are pretty healthy, then I think these are the way to go) This is pretty much another IRA that can be used now for medical expense or retirement later.


Wages are the hardest thing to avoid taxes on because they are what they are. Businesses have a lot of special deductions (Section 179) and credits that help them avoid taxes.

Start voting for the folks against spending and taxing the heck out of you.

If you are serious about finding legal ways to get out of paying taxes, then contact a local CPA. Don't use HR Block or one of those places...find a CPA. HR Block and those firms pretty much deal with EIC/Rapid refund crowd and not people that actually make money during the year. I should know I worked for Block for two years.
 
apteryx said:
Not to sound like a know-it-all, because I know next to nothing, but why not ask some kind of a financial advisor? I understand asking pharmacists who make the same as you makes sense, but for anything financially-related, I have several people I know who deal with economics and finance exclusively. I figure if they have questions about meds they (will be) able to ask me; questions about my finances, I ask them. Always a good idea to keep a smart rich guy close by.

...unless his name happens to be Bernie Madoff.
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Because like any other professionals, financial advisors and CPAs have their own specialities. Other pharmacists might know whats best from experience, what can be deducted or not, etc. A tax professional then can confirm it. Also, for most of us, it costs more to consult a CPA. I think its only worth it to consult a CPA if you have several real estate properties, your own pharmacy/business, or making over 250k.
 
I agree with momus.

401K is not worth it for us. 401k serves two benefits which doesnt apply tous. One is that it is tax deferred which makes no sense since we will most likely be in a higher income bracket. The second is that 401k reduces your income liability allowing you to take advantage of deductions. Most of us make too much to do this.

For example, you can deduct student loan interest if you dont make more than 75k. If you make 80k and defer 5k into your 401k, you can thus take advantage of this. However for pharmacists where the average salary is 120k, even if you deduct the maximum allow (15k), you still wont qualify for the deduction.

Thus it is better to keep your money in other investments (after your employers match) and have better liquidity.

Real estate for the most part is definitely a liability. When you factor in property tax, maintance, closing costs, utilities, more maintance, interest on mortgage and liability (somebody slipping on your property), chances are good that you will be losing money if not breaking even. You are better off picking up extra shifts at work than becoming a landlord.
 
Aznfarmerboi said:
Because like any other professionals, financial advisors and CPAs have their own specialities. Other pharmacists might know whats best from experience, what can be deducted or not, etc. A tax professional then can confirm it. Also, for most of us, it costs more to consult a CPA. I think its only worth it to consult a CPA if you have several real estate properties, your own pharmacy/business, or making over 250k.
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Why not consult a CPA? A simple phone call won't hurt. And if a client only has a W-2 for 100k it is very simple and they can't charge much for it. However, if that client gets a Schedule C, Schedule E, or such they can almost double the price they charge you which equals money for them and money saved on taxes for you. So personally I think it would be worth it.
 
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