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My gross pay for 2009 is going to end up right about $ 50K which would put me into the 25% federal tax bracket. Once you back out 401K and medical, my taxable wages are around $ 46,000. However, I am a “legitimate” telecommuting worker that works out of a home office for a company that is based in a different state. Here are the exemptions that I plan to use:
-portion of rent/utilities for home office
-portion of vehicle payment for work use
-portion of auto insurance
-50% of cellular phone bills
-student loan debt interest

I’m guessing these will effectively reduce my taxable income by around $ 8-10K. This leaves me with two questions…

1) Are there any exemptions that I am leaving out? I have not included anything that my work already reimburses me for (meals, etc).

2) I think I read somewhere that by having your taxable income below something like $ 34K it drops you from a 25% tax bracket to a 15% tax bracket and would save me thousands of dollars. If I am just shy of the next lowest tax bracket, is there anything that I can do within the next 3 days to reduce my taxable income? I considered doing a 100% 401K contribution for my paycheck on the 30th but it had already been processed for payment.

Thank you for any suggestions! And by the way, I am not trying to do ANYTHING ILLEGAL! I just want to make the best use of my LEGITIMATE exemptions to save as much money as possible on taxes.
Thanks for the clarification on how the brackets work, I was obviously way off on that. As far as what I mean by a telecommuter, I am a sales rep for a company that is headquartered elsewhere in the country. I work from a home office to cover a large region of the northeastern United States. I will review the document you provided to make sure I’m counting everything, and it’s obvious that I need to pay a professional to sit down with me, I just want to have my ducks in a row going into this. Thanks again!

6 Thoughts on How to reach lower tax bracket down from ~$46,000 using “telecommuter” exemptions?
  1. Reply
    rtfm
    August 11, 2013 at 9:52 am

    You need a refresher course on how tax brackets work.

    If you are “just shy” of the next lowest bracket, then only those few extra dollars of your income are the ones that will be taxed at the highest percentage. All the dollars below that bracket level are taxed at the lower percentage, as they always have been.

    For example, say anything below $ 40,000 is the 15 percent bracket, and above that is the 25 percent bracket. Say you make $ 42,000. ONLY THE EXTRA $ 2000 will be taxed at 25 percent. The rest of your income is taxed exactly as it would be if you made $ 39,999.

    So there’s no way you’re going to make a difference of “thousands of dollars” by adding a few more deductions.

  2. Reply
    Leonard
    August 11, 2013 at 10:39 am

    The US Tax system uses graduated brackets, so you will pay 10% on you first $ 8,350, 15% between $ 8,351 and $ 33,950, and then 25% between $ 33,951 and $ 82,250.

    Note that this is different than a hard bracket system, which would theoretically result in extra tax if you were on the cusp of a lower bracket, and which is the system you seem to believe is in place. You will only pay the 25% tax rate on income earned between $ 33,951 and whatever your AGI turns out to be.

    If your gross is 50K, I did not see you take your standard deduction or your personal exemption (assuming no one else can claim you), or any other exemptions that you may be entitled to (spouse, dependents). The personal exemption is $ 3,650 and the standard deduction is $ 5,700 if you are single, so that is another $ 9,350 right there.

    Doing a very quick calculation of your taxes owed, at $ 50K gross with the standard deduction and one personal exemption, plus an (assumed) adjustment of $ 2500 for student loan payments and the making work pay credit, your tax owed is $ 5,325 (10.65% effective rate). Compare that against your deposits/withholdings to see if you owe additional tax or if you are due a refund.

    As far as the deductions for home office use – please read the publication I am linking thoroughly to ensure that you are entitled to the deduction.

  3. Reply
    randy
    August 11, 2013 at 10:58 am

    You really need to sit down with a professional tax preparer in like the next few days before they get swamped and have about an hours work of talking and explaining. You need two way verbal and pencil & paper communication going on.

    I’m not sure what you mean by “telecommuter”.

    Sounds like you are wanting to Itemize your Employee Business Expenses.

    From the way you described stuff you aren’t in the ball park to do your own return. Get help.

    EAs and CPAs are professional tax preparers who have passed IRS sanctioned test of tax knowledge and are allowed to represent people before the IRS. Seek out someone with these credentials to help you.

  4. Reply
    Lauren F
    August 11, 2013 at 11:04 am

    The rules for deducting home office expense are very complex and an easy thing to audit, so do yourself a favor and at least buy the taxcut software or pay a professional to do your taxes.

    You have quite a few mistakes here:

    1. You cannot deduct medical expenses and medical insurance unless it exceeds 7.5% of your income. If you sheltered money in an FSA account, then that is ok to consider as a reduction in your gross pay.

    2. Any expenses your employer reimbursed to you cannot be deducted. For example, if your employer paid you $ 0.45 per mile reimbursement for using your own car, you cannot deduct the car payment or the auto insurance. And, you generally cannot deduct the interest on a car payment unless you are self employed and only use the car for your business – the interest is built into the per mile rate you are paid by your company. You also cannot deduct your cell phone bills unless you can specifically identify the costs for work-related calls, and even then, those unreimbursed expenses have to be more than 2% of your adjusted gross income which is unlikely.

    3. Good news – you income tax bracket is based on buckets – not an all in category. And, you also get to deduct a standard deduction and personal exemption. If you are single, these are worth $ 9,350 taken right off the top of your adjusted gross income. So, if your wages after 401k and medical are $ 46k, and your student loan interest is $ 3k, your adjusted gross is $ 43k and then with the $ 9,350 standard deduction and personal exemption your taxable income will be around $ 33k. Your tax bill for that amount is around $ 4,500 or less than 10% of your gross earnings. If you go to the IRS’s website, look for the detailed instruction booklet for 1040 tax return, and specifically look at page 101. It will show you the different tax brackets and how to estimate your taxes. The income amounts on that page are your TAXABLE income, which is the amount after all deductions and exemptions.

    More good news: One big thing you left out that you can do up until April 15th (if you can afford it) is to open an 2009 IRA with up to $ 5,000 which you can use to further shelter income. If you go to a reputable investment site – like vanguard.com or fidelity.com they have easy instructions on how to open and fund such an account. If you are in a marginal tax bracket of 25%, then putting $ 5,000 into such an account will save you $ 1,250 in taxes. If your other deductions have dropped you down to the 20% marginal bucket, then you will save $ 1,000 in taxes for a $ 5,000 IRA contribution. From what information I have seen here, you are likely in the 15% marginal tax bracket, which means if you deposit $ 5,000 to an IRA, the IRS will reduce your tax bill by $ 450, plus your investment will grow (hopefully!) over time to help you with your retirement. You could also open a ROTH IRA, which does not give you the $ 450 tax deduction, but is significantly better if you are a young person because when you take the money out years later you do not pay any taxes on the withdrawal or on any earnings it grew over the years. If I were you and could spare the cash, I would go with a ROTH instead of a regular IRA.

    If you don’t want to spend the money on the software, then at least get the tax forms for free at http://www.irs.gov and start to fill them out. I think you are probably in a better situation than you expect.

  5. Reply
    travelguruette
    August 11, 2013 at 11:48 am

    You must itemize to deduct employee business deductions and they are subject to 2% of your agi.

  6. Reply
    tro
    August 11, 2013 at 12:46 pm

    assuming this is W-2 wages, you are actually working in your home and that is where your tax home is, regardless of where the company headquarters are located
    if your office is entirely for the use of the business, no personal items of any sort in the room, you can use the % of this are to the total of your home for business related expenses, this will adjust the amount of mortgage interest and property taxes you can itemize etc
    and the use of your vehicle, is limited to the actual business useage(you don’t commute so that is not a problem)
    you can use actual mileage(which includes everything except tolls and parking fees) or you can use actual expenses, but you cannot switch back and forth
    the student interest is a credit to reduce your gross income
    the phone use, cell or otherwise would need to be for the business, if you have a phone for your home, it cannot be considered for the business, you have to have a second phone
    you can call 1 800 829 3676 and request Publication 34 for business expenses or publication 17 for individual

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