Reducing tax liability

Errata: I got married in 2012.

majority of my wife's income (about 75%) goes to support my mother-in-law. Our adjust gross income is ~180K. We claimed my mother-in-law as a dependent and took an exemption on her

live there a few years back, it was my main residence. Now, I'm in the west coast and converted that house to a rental with a management company. I still do active management on the property by making decisions etc. I have a rental loss of about $25K on this property (rents - expense - depreciation - carryover from

forward how can I manage this so we can take advantage of the rental loss? We are still 4-5 years away of buying a house in CA so we will probably not have significant itemized deductions. Now, all the mortgage / property taxes I pay on my rental property can't be deducted (it seems form IRS rules).

As far as the rental loss goes, that's tough. It's based on a MAGI, which would suggest that maxing your 401(k)s would help. But. Starting at $180K, if you managed to put $35K away, that's still $145K, along with any cap gains and other addons. Form 8582 is what I'm looking at, it has the details for this.

The good news is that the 'loss' (quotes as some of the loss is due to depreciation, and not all from true out of pocket) is carried forward. One of two, maybe three, things can happen. a) the rent rises to just over breakeven, and you are taking cash each month with no tax due, b) when you sell, instead of having a large cap gain along with recaptured depreciation, the tax hit is mitigated if not completely eliminated by taking the accumulated loss, or c) the year your wife decides to bear a child, you max the 401(k), withhold the maximum for flexible spending, and dependent care, sell losing stocks to create a $3K loss, and you're good to get a decent Real Estate write off. d) I know I've missed something. Others will add a few things, i'm sure.

In addition, note that the rental loss is a business deduction that goes on Schedule E, so it does not depend on your other deductions like mortgage interest deduction that go on Schedule A. That is, even if you have no other deductions, you still get the rental deduction (as long as your income under 150k). The rental loss is carried forward, and will be useful when you start turning a profit or when you sell the property. If you contribute

Also, be sure you revisit your W-2 and change from Single to "Married but withhold at higher single rate".

Are you paying medical expenses for your mom-in-law such as health insurance premiums, doctor fees, dentist fees, vision fees, eyeglasses, eyeglass repairs, etc? These are deductible subject to the 7.5% of AGI rule, which I think might be 10% now because of Obamacare. That is, you can only deduct the amounts above 10% of your AGI -- but this includes amounts paid for you, your spouse, and all of your extended dependents.

FSA has been reduced to $2500 this year (2013), the rest of this answer had a great list of observations.

Thank you fo your replies.

1. I max out my work 401(k) every year. I also try to max out my IRA (have both Roth/Traditional) every year. I probably won't be able to max the contribution IRA for 2012.

1. My wife makes the mandatory (minimum, about 8% of her salary every month + employer contribution) contribution to the CA state pension system. Beyond that she doesn't have additional retirement accounts (i.e. no 401K or IRA). She is trying to pay off one of her student loan ASAP (about K left). She pays for her mother's rent + living expenses. Given her lower income (compared to mine) + expenses, she can't afford to contribute to any tax-deferred retirement accounts. Hopefully in 1-2 years that will change as her loan will be paid off, and I will encourage her to contribute that money to 401k.

2. Her mom does work 2 days per week at a retail store so she does have some sort of health care from the employer. Thankfully, we are all in good health so we haven't had major health expenses.

1. I have changed my W-2 allowances from 4->2 (married status) so more tax is withheld from my paycheck. So for this year, hopefully, we won't have a tax liability when we file next year. I'll estimate mid 2013.

2. I have one question regarding IRA contribution. Since we are married, I believe we can contribute a total of 000 (5000 per individual) / year. Since both IRAs are under my name (she is listed as the primary beneficiary though), do I need to open up another IRA in my wife's name to contribute the extra 00? Or I can just put it in my IRA?

Thank you.

believe we can contribute a total of $10000 (5000 per individual) / year. Since both IRAs are under my name (she is listed as the primary beneficiary though), do I need to open up another IRA in my wife's name to contribute the extra $5000? Or I can just put it in my IRA?

The 'I' stands for individual. If you wish to contribute the second $5000 (for 2012, in 2013 it's $5500) it must be in her name. But as a family, you are over he limit for it to be deductible. You might be able to contribute to Roth. In 2012 the phaseout range is $173K-$183K MAGI. It bumps up $5K in 2013, i.e. $178-$188K.