After tax return question

Tax, SDIRAs & Cost Segregation
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After tax return question

Marek J.
Chicago, IL · Member since 2017 · 19 posts · 2 votes

High w2 earner and was wondering what would be savings i make on tax regarding rental income after all tax write off?

for example I’d need to make 18 at work to equal 9k rental income.

So I calculated that with real estate I’m saving 35% fed 7.75% IL tax 7.25 Social security tax and 0.9% niit tax.

50.6% savings ? So 

I have to make 50.6% more at work to equal what I’d keep with real estate. Just checking my math.

This is obviously after all expense , depreciation, cost set, property tax write offs, 20% etc.


my question is are my assumptions correct? 

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Jason WatsonBusiness Member
CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
2y
Ooof. Sorry, and perhaps it is just me, but I cannot follow your math and I don't fully understand your question. Sidebar, you usually don't have a Social Security savings with typical rental losses.
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  • Jason WatsonBusiness Member
    CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
    2y
    Ooof. Sorry, and perhaps it is just me, but I cannot follow your math and I don't fully understand your question. Sidebar, you usually don't have a Social Security savings with typical rental losses.
    [email protected]719-387-9800
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  • Marek J.
    OP
    Chicago, IL · Member since 2017 · 19 posts · 2 votes
    2y

    What equivalent w2 income I need to make to keep $9000 after tax rental income?

    so if I’m in 35% fed and 7.8% state and 7.5% social security that I pay as an employee I DONT need to pay that on rental income so wouldn’t I need to make that much more to keep $9000 after tax from w2 ? 


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  • Account Closed
    CPA · NY · Member since 2023 · 891 posts · 157 votes
    2y
    1. Your federal income tax rate is 35%. This means that for every $1 of rental income you generate, you save $0.35 in federal income tax.
    2. You mentioned an Illinois state income tax rate of 7.75%. Similar to federal tax, for every $1 of rental income, you save $0.0775 in state income tax.
    3. The Social Security tax rate is 6.2% for employees. However, as a high earner, you might be subject to the Social Security tax wage base limit, which is $147,000 (as of 2022). Once your income exceeds this limit, you no longer pay Social Security tax on additional income. Therefore, if your W-2 income exceeds this threshold, you wouldn't save on Social Security tax for rental income.
    4. The Medicare tax rate is 1.45% for employees. Additionally, high-income earners are subject to the Net Investment Income Tax (NIIT) of 3.8% on certain investment income, including rental income. So, your combined Medicare and NIIT tax rate would be 5.3%.
    5. To calculate the total tax savings on rental income, you would add up the savings from federal and state income tax, and Medicare/NIIT tax:
    6. Total Tax Savings = Federal Tax Savings + State Tax Savings + Medicare/NIIT Tax Saving
    7. Given your tax rates, you can calculate the total savings. However, remember to consider deductions, depreciation, and other tax benefits associated with rental income. 
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  • Marek J.
    OP
    Chicago, IL · Member since 2017 · 19 posts · 2 votes
    2y
    Quote from @Account Closed:
    1. Your federal income tax rate is 35%. This means that for every $1 of rental income you generate, you save $0.35 in federal income tax.
    2. You mentioned an Illinois state income tax rate of 7.75%. Similar to federal tax, for every $1 of rental income, you save $0.0775 in state income tax.
    3. The Social Security tax rate is 6.2% for employees. However, as a high earner, you might be subject to the Social Security tax wage base limit, which is $147,000 (as of 2022). Once your income exceeds this limit, you no longer pay Social Security tax on additional income. Therefore, if your W-2 income exceeds this threshold, you wouldn't save on Social Security tax for rental income.
    4. The Medicare tax rate is 1.45% for employees. Additionally, high-income earners are subject to the Net Investment Income Tax (NIIT) of 3.8% on certain investment income, including rental income. So, your combined Medicare and NIIT tax rate would be 5.3%.
    5. To calculate the total tax savings on rental income, you would add up the savings from federal and state income tax, and Medicare/NIIT tax:
    6. Total Tax Savings = Federal Tax Savings + State Tax Savings + Medicare/NIIT Tax Saving
    7. Given your tax rates, you can calculate the total savings. However, remember to consider deductions, depreciation, and other tax benefits associated with rental income. 

     Thank you so much so basically when I add up the % using what you said above savings is 49.6% which means I have to earn that much MORE w2 income equal that in rental income.

    Roughly 18k w2 income tax (savings of not paid on rental 49.6%) would be the $9000 in rental income ? Correct 

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  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Marek J.:

    High w2 earner and was wondering what would be savings i make on tax regarding rental income after all tax write off?

    for example I’d need to make 18 at work to equal 9k rental income.

    So I calculated that with real estate I’m saving 35% fed 7.75% IL tax 7.25 Social security tax and 0.9% niit tax.

    50.6% savings ? So 

    I have to make 50.6% more at work to equal what I’d keep with real estate. Just checking my math.

    This is obviously after all expense , depreciation, cost set, property tax write offs, 20% etc.


    my question is are my assumptions correct? 


     I think i know what you are trying to do, but this isolation exercise isn't giving you the answer you want. I think your trying to figure out your real after tax income on w2 earnings vs rental income earnings, but for that you need to consider all benefits of real estate and benefits of w2 which has much more variables then just this 

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  • Marek J.
    OP
    Chicago, IL · Member since 2017 · 19 posts · 2 votes
    2y
    Quote from @Account Closed:
    Quote from @Marek J.:

    High w2 earner and was wondering what would be savings i make on tax regarding rental income after all tax write off?

    for example I’d need to make 18 at work to equal 9k rental income.

    So I calculated that with real estate I’m saving 35% fed 7.75% IL tax 7.25 Social security tax and 0.9% niit tax.

    50.6% savings ? So 

    I have to make 50.6% more at work to equal what I’d keep with real estate. Just checking my math.

    This is obviously after all expense , depreciation, cost set, property tax write offs, 20% etc.


    my question is are my assumptions correct? 


     I think i know what you are trying to do, but this isolation exercise isn't giving you the answer you want. I think your trying to figure out your real after tax income on w2 earnings vs rental income earnings, but for that you need to consider all benefits of real estate and benefits of w2 which has much more variables then just this 

    Yep was just checking rough numbers and logic behind calculation. 
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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    I would not factor in social security since, if you are in the 35% tax bracket, you are likely already over the social security base.

    sounds about accurate of 45% to 50%

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  • Jason WatsonBusiness Member
    CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
    2y
    Sounds like a tax planning opportunity for you and your tax pro.
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