If all of my income is in a deferred compensation plan, will I still be able to make itemized deductions?
I received a non-taxable inheritance in 2016 of approximately $250,000. I invested the inheritance, and I am drawing on it for living expenses. My financial advisor recommended I put my entire annual salary of $57,000 into a 457 Plan for the next two years in an attempt to be places in a lower tax bracket during retirement. However, I currently have itemized deductions of about $11,000 per year as a result of property taxes, mortgage interest, and medical expenses. If i have no taxable income in 2017 and 2018 because I am putting my entire salary into a 457 Plan, will I lose the value of my itemized deductions?
Interesting situation, and one that seems to be done to reduce taxes to a minimum. Itemized deduction (not tax credits) reduce your income that is subject to income taxes. If your taxable income is zero, then itemized deduction will NOT help you as they cannot be used to earn a refund.
Also, if you are married, your standard section for 2017 is $12,600 or if you are single your standard deduction is $6,300. You can use either the standard deduction OR your itemized deductions whichever is greater. So if you are married, your itemized deductions will not help you.
I would suggest that you also look into using the Roth Plan if available in your 457 plan as well. This would not give you a deduction, but it would give you tax free growth and payout in retirement would be tax free. Getting a deduction at a low (most likely 10% tax bracket), may be more fee beneficial than getting the tax free nature of the Roth. If you don't have a Roth component, look into putting money into a Roth IRA instead.
If you are really stuck on wanting a 0% tax bracket, put a little less into the 457 Plan and leave yourself $11,000 of taxable income from wages, use the itemized deductions to go to zero and put some money in a Roth on top of it.
Hpe this helps!
I am glad that you are asking the question before signing the dotted line.. You would be effectively turning tax free income into taxable income.The proper steps would have been to determine your taxable income without any contributions and then contributed that amount. They have ignored the exemptions for you, your spouse and dependents, if any, as well as the standard or itemized deductions.
In addition, you may wish to understand where all your money is going to come from in retirement. My most successful retirees, tax-wise, are those that contributed to both taxable and tax-deferred accounts while working. The danger of having all of your money in a deferred account is that your $30,000 automobile will cause you to draw down about $45,000.
I really find this an interesting question and wonder who's going to benefit by the advisors recommendation. I could thoroughly understand maxing out contributions to the 457 plan but taking your taxable income to zero doesn't really seem to make much sense. If your total gross income from wages is $57,000 and assuming you have some other smaller amounts of income, you're not necessarily in a high tax bracket to begin with. It seems kind of foolish to waste the deductions which would also include your personal exemption's that you would probably have close to $20,000 of taxable income that would generate a tax, at the federal level ,of almost 0. There really is not enough information to give you a specific recommendation except to say be careful and although there are significant advantages to contributions to the 457 plan in the form of current tax deductions, you might want to begin the project what your taxable income would be in your years of retirement. This may be a ways off but, it's worth considering. I hope this helps a little and good luck.
In general I love the idea of maxing out your 457 plan to minimize you tax bill. Where you lose me is the benefit to maxing it out if you are putting your entire income and losing your other itemized deductions. Technically your itemized deductions will be deductible but THEY WON'T LOWER YOUR TAX BILL. So it is like you are losing them.
If you have roughly $11,000 in itemized deductions it may make more sense to put say $46,000 into the 457plan to pay no income taxes this year and next. This is assuming you don't need the money before retirement.
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DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Fiduciary Financial Planner LA blog.
You have to have adjusted gross income in order to apply a deduction. So if you have no income you will have no deduction. This whole stradegy sounds unusual to me and I am sure there is more to the story. Make sure your advisor is a fiduciary and is a registered investment adviser. Preferrably a Certified Financial Planner. If not, go seek one for a second opinion.