TaxAssurances Blog

Executive Summary

In this case study I’ll walk through the details of a tax return I did for a high-income earning couple living in the suburbs of NYC.

Having a household with two high income earners can create a great lifestyle. But managing the tax liability is important. Proper tax planning and preparation is crucial for high income earning couples as they look to maximize deductions, manage tax liabilities, and ensure compliance with regulations.

High income earning couples require meticulous organization and a review of their finances to file an accurate tax return on time. Key considerations will include properly documenting income sources, claiming applicable deductions, managing investments, accounting for rental real estate properties, and minimizing their overall 2022 tax liability.  Comprehensive tax preparation is critical for this couple to maximize available tax savings opportunities and ensure full legal compliance.

Background

• In 2022 the couple earned a total combined income of over $600k
• One spouse works in business development with three companies and the other spouse heads marketing for a corporation
• One spouse had W2 income and independent contract income. The other spouse had W2 income and schedule E income from a NYC condo rental property that was a primary residence prior to the marriage.
• One spouse does not contribute to their company 401k plan. The other spouse does contribute to their company 401k plan.
• The couple lives in Westchester County which is a suburb of NYC
• The couple does not live in Yonkers, NY which imposes an income tax on its residences in addition to the federal and state government
• The couple have two dependent young children
• Both spouses did not contribute to their respective company dependent care benefit plans
• The couple has three interest bearing savings accounts. One account is an escrow account for home property taxes.
• The couple does not have any cryptocurrency investments that need to be reported but they did have two investment accounts that had taxable dividend income. They did not have any capital gains or losses
• The couple made contributions to charitable organizations

Results

• At the end of the tax preparation process the couple owed $50k in federal taxes.
• Married filing separately was a more advantageous way to file the tax returns by less than $200, but in the interest of simplicity, we filed the tax returns as joint tax returns.
• At the end of the tax preparation process the couple incurred an estimated federal tax penalty of a little over $1k
• The couple received a NYS tax refund of almost $6k and had it returned to them by direct deposit to their bank checking account.
• Because of the total amount that the couple paid in state income and property taxes, interest on their primary residence and what they gave to charitable organizations, it was more advantageous to take the itemized deduction then to take the standard deduction.
• Because the couple made over $250k together, they were assessed an additional Medicare Tax. We attached Form 8959 to the tax return.
• Because the couple made over $250k together and had interest and dividend income they were assessed a net investment income tax. We attached Form 8960 to the tax return.
• Because one spouse had independent contractor work, the couple did incur a self-employment tax and we attached Schedule SE to the tax return.
• Because one spouse had independent contractor work, the couple was able to take the deductible part of self-employment tax. We attached Schedule SE to the tax return.
• Because one spouse had two separate W2 jobs they overpaid their social security taxes. That excess social security withheld was reflected on part 2 of schedule 3.

Challenges & Solutions

At the end of the tax preparation process the couple owed $50k in federal taxes. Also, at the end of the tax preparation process the couple incurred an estimated federal tax penalty of a little over $1k.

Solution #1

If the couple has the funds available, they can write a check for the $50k and pay the tax liability for the year.

Solution #2

If the couple does not have the full amount available, they can pay off the tax liability in installments over the course of a few months or years.

Solution #3

To avoid having a large tax liability at the end of the year, each spouse can increase the amount of their tax withholdings in their respective paychecks by making the appropriate changes on their W4 form through their respective employers.

Solution #4

The couple can work with their employer and other outside advisors to uncover any other tax deductions they are not currently taking advantage of.

Conclusion

Proper tax planning and preparation is essential for high income earning couples like this couple to maximize deductions, minimize liabilities, and remain compliant. Despite their complex financial situation across multiple income sources, investments, and properties, working closely with a tax professional allowed this couple to get a full understanding of their income tax situation.

Key takeaways from this case study include the importance of documentation, claiming applicable deductions, managing investments/assets strategically, and exploring filing options. For the them, while married filing separately provided a small potential tax advantage, joint filing simplified the overall process. Their high income also triggered additional taxes like the Medicare surtax and Net Investment Income Tax, which must be properly accounted for.

While they owed $50,000 in federal tax and faced an estimated penalty, solutions exist such as increasing withholdings, paying in installments, or finding additional deductions. Overall, their refund from New York State helped offset some of these costs. With sound advice and preparation, high income earners can thoughtfully file taxes to optimize their financial position.