Good Salary, High Taxes: advice?

My salary is $160k. I'm married with one kid and am just getting killed with taxes (well over $4k per month is taken out for taxes). Other than buying a house, which I can't afford yet (I have very high debt), does anyone have any ideas about how I can lower my tax rate? How helpful would it be to hire an accountant? I don't want to waste any more money than I have to, and I'm not sure if there's really much an accountant would do for me given that I have no house and no investments. I'd be curious to know whether others have found it worth paying for an accountant or whether there are any ideas that might consider to structure my finances in a way that will reduce my taxes. Buying a house is out of the question at present.

when you say salary, it implies you are employed by a company. as an employee, you can only cut your taxes by cutting your (reportable) income. that means 401k or deferring compensation.

if you are self employed (or at a minimum a statutory employee) then you have some other options.

so, essentially, if you are not self employed you are likely kinda screwed. dig yourself out of debt then worry about reducing your taxes.

dont feel bad, you make 4 times the national average for income. there are plenty of people who would like to be suffering like you.

dont feel bad, you make 4 times the national average for income. there are plenty of people who would like to be suffering like you.

It is a salary (not self employed), and that's what I feared: not much I can do. Of course I am happy to have a solid salary, but with $180k of debt, $20k on credit cards, etc., it's hard not to stress.

None of your $180k of debt is tax deductible? And what kind of debt is it? It seems that if it is student loan debt on an extended payment period (15-30 years), your monthly payments should be no more than $1500 per month ($18,000 annual) and some portion could be deductible.*

-Take out the annual taxes of $4000 per month ($48000 annual) and you have an income net of about $94,000 dollars.

-Throw in $2000 month for rent ($24000 annual) and that still leaves you with $70000.

-Take $500 month for food ($6000), $500 for utilities and such ($6000), a $500 car payment ($6000) and you are still left with $52000.

-Take out your $100 per month credit card payment ($1200 annual) and you are left with $50000.

Now $50000 of spendable NET INCOME including expenses means you have OVER $4000 of discretionary income left over each month.

Either you are making payments in excess of $6000 per month to your $180k debt, or there are some serious issues here. Did you borrow your $180k down by the docks in the dark of night?

Are you sure this isn't a spending problem????

*Upon review...not likely based on your high income.

I don't think so. A bit over $20k is credit card debt. Most of the rest is student loans (law school and wife's undergrad). I don't think you can deduct much if any of that, especially with my salary. Am I wrong?

Also, what is your take on 1MO's response pertaining to loading up your retirement accounts? You can potentially shelter tens of thousands of dollars from current taxation in a 401k or comparable plan.

Now $50000 of spendable NET INCOME including expenses means you have OVER $4000 of discretionary income left over each month.

Are you sure this isn't a spending problem????

*Upon review...not likely based on your high income.

After taxes, I take home about $8,700 per month. Subtract $2k for rent, and that leaves $6,700. If I pay the minimum on the student loans, I pay $1,220 per month, which leaves $5,480 per month. Car payments are approximately $700 per month because I didn't have any money to put down. That leaves $4780. My minimum credit card payment per month is, in total, $520. That leaves $4,260.

I figure eating out costs me about $400 per month. That sounds outrageous, but it is easy to get there with a pizza per week plus one or two other visits to a restaurant for three people. My wife and I each have $200 per month for allowance, and I eat that up on lunch and coffee. There's obviously some serious waste in there.

So now I'm down to $3860. My wife spends about $1,000 on household expenses a month. That always seems like too much, but every time I go to the grocery store, I see how easy it is to blow through money. I could probably tighten up in this area, though.

So, now I'm down to $2860. Tack on cable, cell phone, phone, internet and all the rest and you shave off some more, etc. The remainder goes to debt. But even so, it's slow moving.

As for the debt, it's mostly from law school loans, including credit cards I ran up trying to get through, spouse's student loans, and car loans to buy two cars.

I'm just starting up a 401(k), but I'm not sure if I should be putting much in there given the size of my credit card debts. Also, it seems like the Roth might be a better option, and that gives me no tax benefit.

Thanks for the breakdown DebtMonkey, now we have some good info. Let's say you "shave off" an additional $860 of spending leakage would you agree that you are left with ~$2000 per month to allocate to bettering your situation? And, since this $2000 is "the rest", do you truly send $2000 additional dollars toward your debt?

I would definitely recommend doing a line-item budget (record everything) for at least the next two months so that you can "discover" where your funds are actually going. I'm not saying you need to follow a strict spending regimen, I only mean that you need to find out where the true leakage is occuring. You may be very surprised! I say this because $1000 month for household expenses seems a bit excessive considering you have accounted for most of the bills associated with running a household and then you still "shave off" an additonal $900 or so.

My bigger concern than reducing your taxes and debt at this point would be the lack of an emergency fund. You have $6000 per month of relatively fixed expenses and nowhere to get it if something should interrupt your income. Does your employer offer disability income insurance? Does your spouse have the capacity/training/time to work and earn a decent salary if you are out of commission for awhile? Do you have life insurance to replace your income to your spouse and child? How old are you and how old is your child?

Also, what type of retirement/pension plan(s) is/are available to you via your employer? Does your employer match 401k contributions, etc. Is there a deferred comp option? This info is necessary to determine the order in which you tackle all of the options you have mentioned.

There more we know, the better the answers will be!

I agree with pricespectors' recommendation that you go through your budget line-by-line and find the "leakage". And is your wife working outside the home? Can she? Her education was an investment- make it pay off for you.

You should really think about cutting back on the eating out and the "latte factor". My husband and I are living on about the same take-home you are and the same monthly housing expenses and we cut each others' hair, own one car and I brown-bag lunch. (Husband is retired and drives me to work.) Then we go to Europe twice a year. No debt other than the mortgage.

1mo put it a bit harshly, but you do have some big positives going for you, including an education, a job and a good income. But you may have to cut back for awhile till you get the debt down.

hey athena, i wasnt harsh with this poster ... it was the other poster i was harsh with.

as we have all discovered, he is kinda "screwed" on minimizing taxes. we all agree he needs to work on his debt. that was what i said?!?!?!

Debt Monkey,
I'm going to be blunt here. Either you are serious about getting a handle on this or you are wasting our time trying to help you. Where is your discipline man? 160K a year? We make 1/2 of that and carry no debt other than the monthly utilty bills. Before even considering tax shelters you need to "afford" to shelter your money from taxes. Sounds like your spending isn't allowing that. I saw your breakdown of expenses and I'm "floored". You need to cut these in half. There is no magic bullit here; only discipline. How about renting a cheaper place? How about selling those cars and paying cash for something that you can write a check for? You need to quit eating out and going to Starbucks - brew your coffee at home and pack a lunch. $1K a month for household expenses - how is that even possible?? I know I sound cruel but you need to decide what your future is going to look like and more importantly get your child started out right by setting an example of self control. Once your credit cards are paid off, you've eliminated your car payments, quit spending so much frivolously, then you will have no problem maxing out all of your tax shelters such as 401Ks, IRAs & Health Savings Accounts, along with setting up Educational IRAs for your kids. We make exactly half of your income at 80K a year (not including bank interest or stock returns) and our monthly looks like this:

Income -
My gross: 5,100 a month
Wife's gross: 1,600 a month
CD interest income: 1,100 a month

Expenses -
House payment: paid off at age 35
Car payments: have never made one
Credit card interest: never paid a dime in my lifetime
Meals out: 2 a month (with coupons of course)
cable: limited cable ($12 a month)
lunches purchased at work: 2 in 16 years
transportation costs: vanpool ($12 a month)
TOTAL OF ALL EXPENSES = $1,800 a month

Tax shelters -
Max to 401Ks
Max to IRAs
Max to Health savings Accounts
Educational IRAs - fully funded

I'm 41 now, but made the decision early where I wanted to be at my age. It's discipline, discipline, discipline. Good Luck!

Thanks to everyone for the comments. I'm going to itemize everything for a few months and see if I can cut expenses.

We have a similar income, but no debt. We're at the 25% level fed. and 9.3% state. It's high but I look at it as the price for being successful. We use a tax preparer (enrolled agent, not an accountant). He specializes in taxes for public employees: teachers, firefighters, police, etc. although works with business folks and others too. I think he is worth every dollar. He's not cheap but, he squeezes the tax code mercilessly and gets us as much as we are legally entitled to claim. I've had a number of other preparers over the years and frankly found that, other than the hassle of spending the time, I could have done it myself as well as they did. I have turbotax and can use it for running my own scenarios. But this fellow is really good at what he does. The tax code is constantly changing. He tells us what to keep track of and where we can make advantageous adjustments. I actually enjoy the tax prep sessions now. It has definitely lowered my stress level at tax time. It's his job to worry about it. It's well worth it for us.

this comes out to budgeting

I suggest OP put 10% into a retirement plan from the start (401k or IRA/ both).

I suggest the CC debt get most attention, pay that off and budget so it does not go up again.

The pay off student loans.

Even with such a high income, OP needs to learn to live below his means.

I would work on looking at your life and figuring out what you need to be doing with you money. You number one priority should be paying of the debt then saving. If I made that much I would rolling in it.

Paying off the $20K CC debt should be No.1 priority - set a goal, such as six months, to pay off the entire amount. This will also have a positive impact on controlling spending.

I would work on reducing the debt on the card first.