How do I lower my W2 income?

Rental Property Investor · Honolulu, HI · Member since 2018 · 11 posts · 17 votes

HELP OFFSET HIGH W2 INCOME! As the end of the year quickly approaches, I have maxed out my 401k and wife’s 401k and both IRAs. We have a primary residence and a Airbnb rental unit that we own and manage. We purchased the rental this year. Neither of us will qualify as “real estate professionals”. We have another 50k liquid (asIde from reservse) and I am wondering what I should be doing with this money in the next 2 months to potentially offset this years very high W2 income. We operate the property mangement out of an llc. Would buying another house help this equation significantly? Is there a simple solution that I am missing?

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Account Closed

Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes

Here's what you gotta do. Go to your employer and tell them hey you need to stop paying me because all this money is going to cost me too much in taxes. Then at the end of the year you'll have a lower W-2, maybe significantly lower. ;) HAPPY FRIDAY!

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Steve Milford
Lender · Vancouver, WA · Member since 2015 · 482 posts · 316 votes
7y
@Stephen Thomas This cracks me up! Here is my version of what I hear. I have so much income that I would rather find out how to decrease it versus hiring financial experts in my area (vs DIY) for the best ways to shelter my income, treating myself to better vacations and more play time, being proactive with my current investments, giving to charity, or investing in new businesses. As I earn more, I value my time more.
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Noah Rosenblatt
Saint Louis, MO · Member since 2018 · 6 posts · 2 votes
7y
@Dmitriy Fomichenko If you make money on real estate, then you should be able to open up a solo 401k and make employer contributions that deduct up to 20% of your self-employed income. You could also contribute up to 18.5k in pre-tax contributions, but that should already be done via the W2 job.
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Richard G.
Rental Property Investor · NY/NJ · Member since 2017 · 6 posts · 3 votes
7y
Definitely consider purchasing another property.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Richard G.:
Definitely consider purchasing another property.
Not for tax purposes though - read the thread for an explanation
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
@Noah Rosenblatt
Real estate income can be active or passive. For example: rental income is passive, you can't use that to contribute to a retirement account. Interest income on real estate notes is also passive. Income from flips or wholesaling would be considered 'active'.
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Bryan Clement
Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes
7y
@Stephen Thomas don't know how helpful this would be to you but if you haven't maxed out your HSA contribution you could do that also. Might help a little!
0 Reply
Peter Schuyler
Fort Myers Beach, FL · Member since 2016 · 225 posts · 124 votes
7y
@Brandon Hall
@Dmitriy Fomichenko i
Is investing as a partner in a syndication active or passive and if I'm over the AGI limit and need to keep pushing losses forward could I offset some of this with a syndication contribution?
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Mike Alt
Rental Property Investor · Santa Monica, CA · Member since 2017 · 40 posts · 27 votes
7y
Interesting thread since I just spent the last several weeks diving down this rabbit hole.
At the end of the day, there weren't many options. I'd rather pay taxes now and have the money than put it into an IRA or 401k and hopefully have less taxes in 20 years.
The only reasonable maneuver I have found is to go Real Estate Professional, group rentals at 500hrs and claim the losses against w-2. Lots of people will say this IS NOT possible if you have a W2, but that is not true. I work remotely and it's a matter of justifying your hours on W-2 vs your hours on real estate. If you're an 8hour office worker, then that is definitely gonna be a risk, but I'd be comfortable with claiming ACTIVE RENTAL LOSSES via RE Pro .... IF I could realistically justify the # of hours..
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Mike Alt:
... I'd rather pay taxes now and have the money than put it into an IRA or 401k and hopefully have less taxes in 20 years.
The only reasonable maneuver I have found is to go Real Estate Professional, group rentals at 500hrs and claim the losses against w-2. Lots of people will say this IS NOT possible if you have a W2, but that is not true. I work remotely and it's a matter of justifying your hours on W-2 vs your hours on real estate. ... IF I could realistically justify the # of hours..
On your IRA thing - missing the point, I think. If you invest money outside the IRA, then every year taxes eat into your money, undermining the incredible power of compounding. If you do the same investments inside an IRA, the growth is unimpeded by taxes and is therefore much greater. Like 10 times greater over a long term, not 10% greater.
Secondly, if you go the Roth route - you escape taxes on the growth permanently, which is <insert Trump voice> yuuuuge.
On RE Pro hours - yes, it is possible, but remember that you will have to prove your hours with a detailed log, and it have to be hours of actual work. Hours browsing BP posts or attending REI mixers do not count.
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Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
You need to talk to your CPA. The tax laws have changed. Even long term capital gain rates have reduced, many chose to pay the tax as properties are getting too expensive or price is at apex of the cycle.
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Eric C.
Laguna Niguel, CA · Member since 2012 · 122 posts · 58 votes
7y
Originally posted by :

DEPRECIATION: Let me see if I have this right? So if I have an extra 50k, and I purchase a house by December of this year worth 250k where the structure is worth 200k of that 250k, could I offset 3.6% or $7270 in depreciation? At at 33% tax bracket, Im saving about in federal taxes.
There is no 33% tax bracket this year. The brackets have changed dramatically this year and you might not owe as much federal tax as you think. I would double-check your numbers.
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Ahad AliPro Member
CPA/Investor · Bronx, NY · Member since 2018 · 236 posts · 45 votes
7y
@Stephen Thomas Get a CPA to carefully examine your finances and income. You can strategize ways to lower the amount of taxes you’ll owe. There’s options, just consult with someone who is well versed on your situation.
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Jim Cummings
Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
7y
@Stephen Thomas.
1. Pre-pay any RE or Income Taxes that might be due.
2. As a commissioned Salesperson, I asked my Broker to hold some of my late year income and pay it in the next year. Is this something your employer could / would do?
This would give you another year to find a good answer to your question.
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Jim Cummings
Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
7y
And of course - such a problem to have!!
1 Reply
Mike Hanneman
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
7y
Buying a property will only do so much with out it structered correctly.
In any case, you need to get a CPA and not rely on internet forums, even the CPA's here which are very good can only do so much for oyu since they don't know your whole financial picture. Don't be cheap and try to do taxes yourself with free forum advise, this will get you in trouble down the road.
1 Reply
Eric Chin
Rancho Cucamonga, CA · Member since 2017 · 1 post · 0 votes
7y
@Mark Braun do you know what the annual married joint income limit is before getting phased out of these depreciation write offs is? Does making 1099 income (rather than w2) change the discussion at all?
0 Reply
George M.
Rental Property Investor · Albany, NY · Member since 2018 · 55 posts · 65 votes
7y
As many have said here. Hire a CPA. Although you may find that your options for offsetting your Income are slim If you make above $150,000. High W2 income is a good thing....save and invest.
Many of the tax deductions mentioned previously (depreciation/repairs/maintenance) cost more than the benefit. The Tax Man comes back for depreciation recapture on the back end and repairs have a real cost. That cost exceeds the benefits of a ~30% recoup from tax deductions. Don’t let that discourage you from real estate investing. Real estate can help you build wealth if you invest prudently (or lose it if you don’t....)
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Kate J.
Rental Property Investor · Austin, TX · Member since 2016 · 294 posts · 104 votes
7y
@Stephen Thomas your properties and your w2 are taxes separately. If you have a loss in rentals it will not reduce w2, but you can move it to the next year. There is literally no way to reduce w2 income, unless you take a heavy mortgage or something. Also are you sure you are legible to contribute to IRA? There is a limit on w2 income that forbids to contribute to ira. If you found the way around it I would like to hear it.
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Kate J.
Rental Property Investor · Austin, TX · Member since 2016 · 294 posts · 104 votes
7y
@Cody L. No this is not correct. You can not mix taxation on properties and w2 income. These two are different and loss in one cant be substracted from the gain of another.
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Kate J.
Rental Property Investor · Austin, TX · Member since 2016 · 294 posts · 104 votes
7y
@Stephen Thomas you should get a cpa or read on taxation. You can not reduce w2 with whatever property loss. The loss will be carried over to the next year
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Noah Rosenblatt
Saint Louis, MO · Member since 2018 · 6 posts · 2 votes
7y
@Dmitriy Fomichenko Hmm, well that sucks that you can’t contribute rent to a solo 401k (I haven’t bought a property yet, so still learning). Is there anything involved with the BRRRR method that would make any income be considered earned income?
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Stone Jin
Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
7y
Just as your employer to defer your salary until next tax year. I've seen that happen at large multi nationals so it never hurts to ask.
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Kevin Taney
Member since 2018 · 10 posts · 20 votes
7y
@Stephen Thomas There has been quite a bit of valuable information volunteered here. Simply put, Robert Kiyosaki harps on this difficulty on “the ‘E’ side of the quadrant.” To piggy back on value that’s been already offered, best case scenario is to speak personally with a financial professional who will know if there is a way to drastic reduction. Although The government finds a way to keep taxes particularly with W2. The best and most common deductions have been stated: HSA’s, IRA’s, starting a business or even starting a college fund (depreciation) if you have children.
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Stephanie MedellinBusiness Member
Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
7y
@Mark Sullivan LOL
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Chris A.
Accountant · los angeles · Member since 2016 · 24 posts · 9 votes
7y
@Stephen Thomas does your property management llc have a loss or a profit?
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