How can I reduce the amount of my taxable income?
I am 38 years old and have two jobs at non-profit companies. My annual income is $115,00. I am contributing 8 percent of my bi-weekly salary into my 401(k) which is not matched by my employer, though they typically deposit about $2,500 annually depending on their financial status. Last month I paid off all credit card debt and now the debt I have is $7,800 on a car loan and $50,000 in student loans. I live in a cooperative apartment and pay about $1,000 monthly for living expenses.
How can I reduce the amount of my taxable income? What should my financial strategy be?
You can put up to $18,500 into your 401(k) so that would be the obvious spot to start. This would deduct that amount from your $115,000 salary and thus you will show less income, be taxed on less income, and naturally pay less taxes. Also it gives the added benefit of properly saving for retirement now that you are debt free (congrats by the way). Other than that not a ton for you in your current situation short of giving more to charity that would have a big impact and worth it in my humble opinion. Hope this helps.
You can increase the amount you're contributing to your 401(k) to max out at $18,500 in 2018. This reduces your taxable income by that amount. Meaning your taxable income would be 97k in 2018. If you have access to a health savings account, you can also make tax-deferred contributions of up to $3,450 in 2018. Reducing your taxable income again by that amount.
Before you consider making tax-deferral your priority, consider what your interest rate on your student loans is. If they're above 5%, you should consider allocating more cash flow towards paying them off. If less, it may be worth it to reduce taxable income and stash away more in retirement accounts. When considering the long-term average equity returns of the stock market (roughly 8-10% depending on time period) you'd rather have your money grow on average at that rate, rather than "locking in" a 5% return by paying off your student loans quicker. This is a balancing act when working towards multiple goals, and obviously you can't go wrong by paying off debt quicker, however, there just may be a better way to "maximize" your cash flow as you've suggested by reducing taxable income and stashing more away in a retirement account.
Congratulations on you positive cash flow! An easy way to decrease your taxable income is to invest more into your workplace retirement accounts. At your age, you can put up to $18,500 away pre-tax. However, before you do that, make sure you have an emergency fund in a savings account of at least 3 month's bills (rent, loans, utilities, taxes, food, insurance).
I know you came here with tax reduction as your first question. My question is what kind of repayment plan are you using for your student loans? Does Public Service Loan Forgiveness play into your financial strategy at this time?
I really don’t love giving tax advice online without seeing the entire picture. I personally look at all benefits employees are taking or not taking, along with taxes, and other goals.
Do you have plans to buy or rent, etc?
When student loans are part of the equation I highly recommend speaking to a professional that does this day in and day out. Seek out a fee-only planner for this case. I’m part of a network called XY Planning and this is the type of case that we work with on a regular basis. Some of us have starter plans to help you get your foot in the door without minimum investment requirements that other firms might charge.
I know this comes off as a biased answer but it I highly recommend it. The money paid now can save you a lot in the long run.
It all depends on whether your annual income is $115,000, $11,500 or $115.00. Assuming it is the first, if your budget permits plow the maximum of $18,500/yr. into your employer 401(k)s. Once you're over age 50 you can kick in another $6000/yr. Both these contribution limits supposedly increase with inflation. These pre-tax contributions are the most dramatic way available to you to reduce taxes. They will come at a future price, however, if you retire into a higher bracket and/or tax rates rise dramatically. So it's good to hedge your bet with some Roth IRA contributions too. But they won't save you any taxes now.
Since the deductiblity of student loan interest is now limited to $2500/yr. you might want to pay down the nondectible interest on the car and then go after the student loan. This calculator can help you decide: