Benjamin Franklin once said that “in this world nothing can be said to be certain, except death and taxes.” True dat, Mr. Franklin. True dat. Now that tax season is upon us, I thought it would be interesting to write about our taxes, specifically how we try to SAVE money. Since I’m still in the process of preparing our taxes for the year 2016, I’ll go over some aspects of our 2015 returns. Disclosure time. I am not a tax professional. What follows is mainly for informational purposes.
Preparing your own taxes is a good way to learn the tax code. While you won’t become a tax expert, you can learn about the various deductions and credits available that can help lower your tax bill. This can be especially important for individuals or households with high incomes. The best way to learn about taxes is to prepare your return by hand, or at least do a practice run. If you don’t have the time or energy to do this, tax preparation software such as TurboTax does a good job of walking you through the deductions and credits you qualify for.
Deductions and Credits
Do you know what the difference is between a tax deduction and a tax credit? Which one is better? What about an above the line deduction versus below the line?
- Tax credits reduce your taxes dollar for dollar. This makes them more favorable than deductions, which reduce your tax liability based on your marginal tax rate.
- Above the line deductions reduce your adjusted gross income (AGI) on line 37 (the line). Your AGI can have a tremendous effect on your tax liability. It affects how you can use tax credits or exemptions. Also, some deductions can “phase out” depending on your AGI, while others disappear completely.
- Below the line deductions include the Standard Deductions, Itemized Deductions on Schedule A, and Personal Exemptions. Below the line deductions reduce your taxable income, however the actual tax benefit is subject to your AGI. For this reason, “above the line” deductions are more advantageous than “below the line” deductions.
Based on our 2015 returns, our effective tax rates were about 28% federal and 7% state (California). Given that our total income put is in the top tax brackets (39.5% federal and 12.3% state), I think we did a decent job of limiting our tax liability. How did we do it? My wife is a W-2 employee while I am a physician partner in a group, which for tax purposes makes me self-employed. This opens up a lot of tax reduction strategies and possibilities. For instance, I can deduct certain expenses such as medical license renewal fees and continuing medical education. This reduces my net self-employment income and thus my tax liability. I can also contribute much more to my 401k, which in turn reduces our AGI and taxable income. Below are some of the deductions that we were able to take advantage of.
2015 Deductions – $103,814 Total
Above The Line Deductions – $64,743
Our above the line deductions included contributions to my self-employed retirement plan (line 28) as well as the deductible part of self-employment tax (line 27). For 2015, I maxed out my 401k plan to the tune of $53k, which was fully deductible. The remaining $11,743 was 50% of the self-employment taxes that I paid. I did not contribute money to an HSA in 2015, so I am looking forward to this deduction for 2016. We were phased out of IRA and student loan deductions.
Itemized Deductions – $39,071
Since our state income taxes put us above the standard deduction threshold for married filing jointly, we itemize our deductions. Our big-ticket items were our state income taxes, mortgage interest, and real estate taxes. We did not make any charitable contributions that year, and we also didn’t incur any medical or dental expenses.
2015 Exemptions and Tax Credits – $0
Our adjusted gross income completely phased us out of any personal exemptions. We were also phased out of any eligible tax credits. First world problems, I guess.
2016 Taxes and Beyond
Our 2016 return should be pretty similar to the previous year, although our total income will probably be lower. I worked a lot in 2015, felt a bit burned out, and cut back on some of my hours. Another difference is that I was able to contribute $3,350 to my HSA, which is an additional above the line deduction. It will be interesting to see how our taxes turn out this year compared with last.
Going forward, I would like to eventually make charitable contributions. First, it’s always good to give back if you have the means to do so. Second, we can itemize and deduct these contributions for potentially more tax savings. With the exception of the child and dependent care credit, our household income will probably keep us phased out of all of the remaining tax credits and deductions.
Readers, do you prepare your own taxes? Do you itemize or take the standard deduction? Which deductions and credits are you able to take advantage of? Share below!
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