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Just want to add that it might be worth checking if your state has a "physical presence" test or a "domicile" test for establishing residency. Some states consider you a resident if you're physically present for a certain number of days (often 183), while others look at your domicile (permanent home). This can complicate reciprocity because you need to be officially considered a resident of the reciprocal state for the agreement to apply. I had an issue with this between Minnesota and Wisconsin where I had moved but hadn't established domicile yet according to the state's definition.
Can you explain more about the domicile test? I thought just having an apartment in the new state would be enough to establish residency on the day I moved in. Are there other requirements?
Good question about domicile! Having an apartment alone might not be enough in some states. Domicile is about your intent to make the state your permanent home, not just physical presence. States look at various factors to determine domicile: where you're registered to vote, your driver's license state, where your vehicles are registered, location of bank accounts, where you have professional licenses, community involvement, and even where your family lives if you're splitting time. Some states have specific forms or tests to determine when your domicile officially changed.
Anyone know if there's a way to get a letter ruling or some kind of official determination from the state before filing? I'm in a similar situation between Virginia and DC, and I don't want to find out I did it wrong if I get audited.
You can usually request a private letter ruling from the state tax department, but they often charge a fee (sometimes hundreds of dollars) and it can take months to get. Probably not worth it unless you're talking about a lot of money at stake.
Thanks for the info. Definitely not worth hundreds of dollars since I'm only talking about maybe $2000 in state taxes total. Guess I'll just have to do my best with the reciprocity rules and keep good documentation.
Have you considered a Donor Advised Fund? It allows you to bunch several years of charitable contributions into a single tax year to potentially get over the standard deduction threshold. You get the tax deduction upfront but can distribute the actual charitable gifts over many years. Also, if you own your home, a HELOC used for home improvements might provide some deductible interest. And don't forget about medical expense deductions if you can exceed the 7.5% of AGI threshold.
The Donor Advised Fund sounds interesting! If I bunch several years of donations together, would that help me stay under the IRMAA threshold for multiple years, or just give me one good year and then potentially push me over in subsequent years? Also, do you know if medical premiums count toward that 7.5% threshold? I have some pretty hefty supplemental insurance costs.
Bunching donations can give you one year with a lower MAGI, which helps with IRMAA for just that determining year. You're right that you'd need to plan for the subsequent years too - that's where QCDs become helpful since they can reduce your taxable income each year without needing to itemize. Yes, your premiums for Medicare Part B, Part D, Medicare Advantage, and supplemental policies all count toward the 7.5% medical expense threshold! Many retirees don't realize this. Track all your out-of-pocket medical costs including dental, vision, hearing aids, and long-term care insurance premiums too. With the higher healthcare costs in retirement, you might be surprised how often you can clear that 7.5% threshold.
As a retiree who just went through this last year, don't sleep on investing in a small business! My daughter started an Etsy shop and I invested as a silent partner. The business expenses during startup gave me some nice deductions through my Schedule K-1, and now I'm getting some income too. Just make sure it's a legitimate business with profit motive - the IRS gets suspicious of "hobby businesses" that only generate losses.
Be really careful with the OIC process! I submitted one last year and it got rejected because I didn't include all my assets correctly. The IRS is VERY thorough in checking your financial situation. Make sure you account for: - All bank accounts (even small ones) - Retirement accounts (they count these too) - Any property or vehicles - Future income potential My advice is to be 100% transparent. They'll find everything anyway, and hiding assets is the fastest way to get rejected and possibly face worse consequences.
Do they really count retirement accounts? I thought those were protected. I have about $45k in my 401k but didn't think that would count against me for an OIC calculation.
Yes, they absolutely consider retirement accounts in your OIC calculation. While you're right that they can't directly seize most retirement accounts, they still view them as assets that could be used to pay your tax debt. The IRS typically includes a percentage of retirement account values in your "reasonable collection potential" calculation. They don't necessarily expect you to cash them out (especially given the penalties), but they do factor them into what they think you could potentially pay. This is one of the most common misunderstandings that leads to OIC rejections.
What happens if the IRS rejects your Offer in Compromise? Do they keep the 20% payment you sent with your application? I've been hesitant to apply because I don't want to lose that money if they say no.
They apply any payments you've made toward your tax debt, they don't just keep the money. So if your offer gets rejected, that 20% payment (or whatever payments you've made) will reduce your overall tax debt. It's not lost money.
The loophole I want eliminated is the carried interest loophole. It's insane that hedge fund managers get to classify their income as capital gains instead of ordinary income. They're just doing their jobs managing other people's money, but they pay way lower tax rates than regular working people.
What exactly is the carried interest loophole? I hear about it but don't really understand how it works or why it's such a big deal.
Carried interest is basically the share of profits that hedge fund and private equity managers get as compensation for managing investments. Instead of being taxed as ordinary income (which can be up to 37%), it's taxed at the capital gains rate (usually 20%). So imagine a fund manager who makes $10 million from managing other people's money. Instead of paying $3.7 million in taxes like other high-earning professionals would, they might only pay $2 million. That's a $1.7 million tax break just because of how their compensation is classified! Meanwhile teachers, doctors, and engineers all pay the higher ordinary income rates on their earnings.
The mortgage interest deduction needs major reform. It mostly benefits wealthy people with expensive homes. The deduction should be capped at houses worth $500k or less. Why should taxpayers subsidize mansions?
That would totally screw over people in high cost of living areas though. $500k won't even buy you a 1 bedroom condo in San Francisco or NYC. Not everyone with a mortgage over $500k is wealthy - many are middle class families in expensive metro areas.
Aisha Ali
I asked my HR about this last yr and they said sometimes it looks like more taxes are taken because they also take the regular deductions from your bonus (health insurance, 401k, etc). So check ur bonus stub carefully to see what's actually being taken for taxes vs other stuff. Might explain why it feels like more than 22%!
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Ethan Moore
ā¢Pro tip: if you want less tax withheld from your bonus, increase your 401k contribution just for that paycheck if your company allows it. I put 50% of my bonus straight into 401k last year and it lowered my taxable income. Double win!
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Yuki Nakamura
Something nobody mentioned - if you get your bonus in a different calendar year, it can affect which tax year it counts for. My company pays year-end bonuses in January, so they count for the new tax year, not the year the bonus was earned for. Worth keeping in mind for planning purposes!
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StarSurfer
ā¢This is actually a really important point! My bonus pushed me into a higher tax bracket last year because it came in December. If it had come in January, my tax situation would have been completely different. Timing matters!
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