With two full-time teaching salaries, we were on the borderline of the 15% and 25% tax brackets for many years. The biggest jump in tax brackets is between 15% and 25%. To avoid the 25% tax bracket, we contributed to retirement through a 403b plan (public sector 401k), or an IRA. I always hated paying a 25% rate, because it means for each additional dollar I earned, I only got to keep about 61 cents, since I also had to pay 7.65% in Social Security and Medicare, as well as 6% to our state retirement plan. If we contributed an additional 10% to charity, that only left about 51 cents on the dollar.
For the 2015 tax year, we want to stay out of the 25% tax bracket again. We had not had this problem for several years, because our salaries fell behind the rate that tax brackets are being adjusted for inflation. We have that problem for 2015 because our older daughter is no longer a dependent and our income didn’t drop much because pension payments overlapped with pay from the school district.
For a married couple filing jointly, the top of the 15% tax bracket is $74,900 in taxable income. Our gross income is roughly $103,000. Taking out the standard deduction of $12,600 and our three exemptions of $4,000 each for $12,000 total, that makes our taxable income $78,400. Whatever we put into retirement this year above $74,900 will save us 25 cents on the dollar in income tax this year, and we’ll only pay 15 cents on the dollar in income tax when we take it out in a future year. We plan to contribute to a traditional IRA. You can make IRA deductions for 2015 through April 15 of 2016. For people 50 and older, the maximum IRA contribution per person is $6,500. It’s $5,500 if you’re under 50. The deduction does begin to phase out at $98,000 taxable income for people married filing jointly and $61,000 taxable income if you are single or head of household.