Looking for strategies to reduce taxable income

namaste · Post by **namaste** » Wed Mar 28, 2007 1:03 am

Just joined the group and would really appreciate inputs from other... I am looking for strategies to reduce our taxable income.

We are a DINK couple working in US with an AGI of around 180k. Currently, each of us contribute 6% pre-tax to our employer's 401k plan to get 3% company match. As far as monthly loans/liabilities are concerned, it is $1200 monthly for family maintenance and house loan in India. No other loan (house/auto) loans here in US.

We plan to R2I in another 6 years and with the current housing market, we are not sure about buying our first home and may continue renting. Given that we have no mortgage interest to deduct, what are the different ways to reduce our taxable income other than maxing out 401k contributions? Right now our 6% 401k contributions are to get full company match.

Thanks in advance for your advice. :emsmile:

realentity · Post by **realentity** » Wed Mar 28, 2007 1:18 am

Ask your company to pay part of your salary as per diem expenses. Keep most of your savings in your NRE account so the interest would not be taxed.

http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentId=17943&contentType=GSA_BASIC

vivmat · Post by **vivmat** » Wed Mar 28, 2007 2:31 am

#2, I believe Interest accrued in an NRE account IS taxable at your marginal US tax rate

#1, nice problem to have :) trying to reduce tax because of high income....wish I had the same problem to deal with...:)

one way is to try reducing income:emwink: - just kidding

In all seriousness, you can look to increasing your 401k contributions. Ofcourse, this is a sticky wicket - please search the forum (and the old one) for 401k withdrawal strategies based on r2I and resident status etc - tonnes of info on that is available.

Are you deducting your home loan payments?

namaste · Post by **namaste** » Wed Mar 28, 2007 2:49 am

vivmat;16020
In all seriousness, you can look to increasing your 401k contributions. Ofcourse, this is a sticky wicket - please search the forum (and the old one) for 401k withdrawal strategies based on r2I and resident status etc - tonnes of info on that is available.

Are you deducting your home loan payments?[/quote]

Thanks for your reply. I will surely search for old posts about 401k contributions and R2I strategies. The interest paid on home loan in India, when converted to USD, works out to be less than the standard decution for married filing jointly. This becomes useful when you have a primary home in US and secondary home say in India.

Chicago Desi · Post by **Chicago Desi** » Wed Mar 28, 2007 3:02 am

namaste;16025Thanks for your reply. I will surely search for old posts about 401k contributions and R2I strategies. The interest paid on home loan in India, when converted to USD, works out to be less than the standard decution for married filing jointly. This becomes useful when you have a primary home in US and secondary home say in India.[/quote]

If your R2I is at least 6 years away, why not buy a home now? If the RE market is soft now, you can get some great deals. Also, just because it is soft now does not mean it will be soft 6 years from now. I would also maximize the 401K contributions. Make sure you consider impact on R2I when you take distributions at the time of R2I into account. In any case, you don't pay taxes now and pay them later. With your tax bracket, it seems like you will pay less later, esp if you are able to show less income when you take the distributions during R2I.

Then there are govt securities and bonds, which the gurus will point out. The only thing is appreciation is low, so you miss out on growing your investments at the same rate as the market.

vivmat · Post by **vivmat** » Wed Mar 28, 2007 3:08 am

Some ways of reducing tax (as CD pointed out)

1) Ibonds and T bills - exempt from state tax
2) Tax exempt Municipal bonds
3) Tax exempt money market funds

But when considering these

only if (tax exempt return)/(1 - marginal tax rate/100) > regular taxable return

then the above options make sense

namaste · Post by **namaste** » Wed Mar 28, 2007 3:27 am

Chicago Desi;16030If your R2I is at least 6 years away, why not buy a home now? If the RE market is soft now, you can get some great deals. Also, just because it is soft now does not mean it will be soft 6 years from now. I would also maximize the 401K contributions. Make sure you consider impact on R2I when you take distributions at the time of R2I into account. In any case, you don't pay taxes now and pay them later. With your tax bracket, it seems like you will pay less later, esp if you are able to show less income when you take the distributions during R2I.

Then there are govt securities and bonds, which the gurus will point out. The only thing is appreciation is low, so you miss out on growing your investments at the same rate as the market.[/quote]

Thanks CD and vivmat for your inputs.

RE market in Seattle, WA is still pretty hot as compared to rest of the country, especially on the Eastside. I guess I need to do some homework on tax exempt munis and money market funds, while still working out buy v/s rent strategy with 6 years to r2i.

Chicago Desi · Post by **Chicago Desi** » Wed Mar 28, 2007 8:26 am

namaste;16033Thanks CD and vivmat for your inputs.

RE market in Seattle, WA is still pretty hot as compared to rest of the country, especially on the Eastside. I guess I need to do some homework on tax exempt munis and money market funds, while still working out buy v/s rent strategy with 6 years to r2i.[/quote]

I think you will need to do a AAP. That will really tell you if you need to worry about tax exemption at all. Start one and get inputs from the gurus like Desi and they will guide you in the right direction. Good luck.

FreeSpirit · Post by **FreeSpirit** » Fri Mar 30, 2007 1:45 am

We were in a similar situation five years back. Finally we bought the house and then realized how much money we were paying in taxes because of STD deduction. Anyway there are not whole lot of options once AGI crosses above 160K.

1. Maximize 401K contribution to 2007 limit (I believe it's $15,500)
2. Invest in I-bonds - to defer fed taxes
3. Think about whether one of you can work as consultant - 1099 or S-Corp. This has the most advantages in terms of minimizing taxes - both Fed taxes and FICA through various ways - business expenses, max tax deferral (upto $44K per year) etc.

athlon · Post by **athlon** » Thu Jan 13, 2011 9:57 pm

Newbie question.
I have Vanguard account. Can I purchase the tax exempt funds now to reduce 2010 taxable income?