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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Grant Rothenburger
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
7y
Originally posted by @Brandon Hall:

@Matt Millard @Stephen Thomas @Michael Plaks @Costin I.
There are few ways to lower your W-2 but plenty of ways to lower your taxable income. To get into the "drastically lower" area, you must meet certain minimum thresholds which is why I said "it depends."
If your taxable income is in excess of $157,501 if single and $315,000 if married filing joint, then I'd point you to a land conservation easement. You get a Sch A charitable deduction equal to a % of the basis you invested and drastically reduce your tax bill as a result.
For example, if I put $50k into a conservation easement, I'd get roughly a $225k charitable contribution deduction. As long as that deduction amount is less than 50% of my AGI, I can take the full amount of the deduction via Sch A. Assuming I'm in the 35% tax bracket, my $50k contribution yields $78,750 in fed tax savings and also more on the state level depending on the state.
That is one of several ways to drastically lower your tax bill. And it's all 100% legal and legit.
Of course, there are many aspects to a land conservation easement that must be considered prior to pulling the trigger, such as the fact that these are considered listed transactions, but if you're not willing to play ball, then you're stuck with your current tax situation.
There are all the small things that can be done as well such as HSA, 401(k), starting a biz and deducting the costs, etc etc. Often times you can do all of that without having a CPA on your team. We aim to save our clients a significant amount of money.
Hope that helps!
What a post! Thanks for taking the time to do this Brandon.
1 Reply
Daric Myers
Gillette, WY · Member since 2018 · 44 posts · 19 votes
7y
@Stephen Thomas You can gift some to me...😂 Only kidding, looks like some good replies up further. Have a great day!😎✌️
0 Reply
Aaron Hunt
All Over, USA · Member since 2017 · 689 posts · 756 votes
7y
@Brandon Hall Interested in learning more about this. Where/how would one find a land conservation easement?
1 Reply
Aaron Hunt
All Over, USA · Member since 2017 · 689 posts · 756 votes
7y
.
0 Reply
Bill Goodland
Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
7y
@Stephen Thomas Tax Free Wealth by Tom Wheelwright has some great strategies to go about this. Got the audiobook for free through access to an app through my public library. Good read/listen
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Account Closed
Rental Property Investor · Seattle, WA · Member since 2018 · 129 posts · 163 votes
7y
@Stephen Thomas Depending on the structure of your W-2. If it is bonus based, simply ask them to pay that portion after 1/1/19.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Brandon Hall:

@Matt Millard @Stephen Thomas @Michael Plaks @Costin I.
There are few ways to lower your W-2 but plenty of ways to lower your taxable income. To get into the "drastically lower" area, you must meet certain minimum thresholds which is why I said "it depends."
If your taxable income is in excess of $157,501 if single and $315,000 if married filing joint, then I'd point you to a land conservation easement. You get a Sch A charitable deduction equal to a % of the basis you invested and drastically reduce your tax bill as a result.
For example, if I put $50k into a conservation easement, I'd get roughly a $225k charitable contribution deduction. As long as that deduction amount is less than 50% of my AGI, I can take the full amount of the deduction via Sch A. Assuming I'm in the 35% tax bracket, my $50k contribution yields $78,750 in fed tax savings and also more on the state level depending on the state.
That is one of several ways to drastically lower your tax bill. And it's all 100% legal and legit.
Of course, there are many aspects to a land conservation easement that must be considered prior to pulling the trigger, such as the fact that these are considered listed transactions, but if you're not willing to play ball, then you're stuck with your current tax situation.
There are all the small things that can be done as well such as HSA, 401(k), starting a biz and deducting the costs, etc etc. Often times you can do all of that without having a CPA on your team. We aim to save our clients a significant amount of money.
Hope that helps!
Besides CE, the “flip partnership” can be utilized where a W-2 employee can be an tax investor and use almost 100% tax credit.
As we have discussed, except for CE, there are few ways to drastically reduce w-2 income.
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Greg Reed
Rental Property Investor · Fallston, MD · Member since 2018 · 3 posts · 1 vote
7y
@Stephen Thomas If you are married, our accountant has been able to accomplish your goal. She lowers my wifes W-2 income from my rentals. She is a well known accountant from who posts responses on this site. So there are ways to do it. Greg
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Greg Reed:
@Stephen Thomas If you are married, our accountant has been able to accomplish your goal. She lowers my wifes W-2 income from my rentals. She is a well known accountant from who posts responses on this site. So there are ways to do it. Greg
It is only working when one spouse has a full-time W2 job, and the other is working in real estate, either exclusively or at least primarily in real estate. Known as the "Real estate professional" status.
This must be your situation, but it is not the situation of Stephen.
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Benyam Alemu
Real Estate Investor · San Antonio, TX · Member since 2016 · 1 post · 0 votes
7y
@Stephen Thomas There'd are two things you can do now before the end of the year to offset your W-2 taxes 1. Talk to your employer if they have deferred compensation plan and you can put your two months salary there.Most companies have deferred compensation plan and you will be able to shelter up to 40% (yes 40%) of your gross income.These benefits are usually reserved for high income W-2 earners. 2. You can lease a vehicle that you can use for business and take section 179 depreciation ,I would advise you to talk to a savvy tax advisor for that.Are there any equipments that you ordinarily use in your W-2 job? You can lease any equipment that you use for your work and get the full price deducted from your income .Again, you will need a savvy tax advisor.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
@Stephen Thomas
Please be careful with tax advice from non-accountants.
1. Deferred compensation is the money you do not receive now. And you simply push that income into the next year, where it will be taxed anyway. Is it worth the temporary deferral of taxes? Besides, what if the company goes under meanwhile, which does happen.
2. You can no longer deduct any expenses for your W2 job. Not leased car, not equipment - nothing at all. The law has changed.
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Samantha Miller
Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
7y
@Stephen Thomas First, props to you guys on maxing out 401k's, owning/managing a business, and having $50k to play with! That is seriously awesome. I hope to be where you are someday. What a good problem to have!
I know your goal with the post was to get some tips on creative tax strategies, but might I suggest - with the holidays around the corner - to do something charitable with no expectation of return? Obviously that is a personal choice, you may already donate, or you may be planning to donate in the future and therefore want to use this $50k to grow your portfolio and have more to give down the line - all being fair enough! Just wanted to throw the idea out there, as I think it is always good to give back. Sometimes it is more rewarding to just do something that is good for the soul, so to speak. The satisfaction you get from making a hugely generous donation to a good cause might motivate, uplift, and propel you forward (in your investing career and in general) more than any tax savings could do.
Best of luck!
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Dane C Allen
Rental Property Investor · Milwaukee, WI · Member since 2018 · 16 posts · 11 votes
7y
@Daniel Kong Passive losses can only offset passive income. W2 earnings not considered passive.
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Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Dmitriy Fomichenko Wouldn't the AirBNB income count as self employment?
0 Reply
Solo Malik
Real Estate Broker · Fort Lauderdale · Member since 2018 · 15 posts · 5 votes
7y
Focus on making more money. It is that simple.
0 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
@Charles Kao,
Short term rental income should be considered self employment.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Charles Kao:
@Dmitriy Fomichenko Wouldn't the AirBNB income count as self employment?
Maybe, and maybe not.
Read this excellent blog post by Brandon Hall, CPA:
https://www.therealestatecpa.com/2016/10/20/avoiding-tax-traps-short-term-rentals/
1 Reply
Jim Thomas
Contractor · Atlanta, GA · Member since 2018 · 32 posts · 14 votes
7y
@Stephen Thomas Buy materials you know you will need for your properties next year. IE: HVAC units, water heaters, flooring, light and plumbing fixtures, and a storage shed. Don't store paint in an unconditioned space though.
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Richard Sherman
Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes
7y
This will not work for W2, but anyone with a business that has high profit and few employees, a Cash Value Pension Plan (NOT A CASH VALUE LIFE INSURANCE!!!) has been HUGE for me...incredible the amount that can be put away in a sheltered plan (can be rolled to an IRA if/when the business closes.)
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Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Michael Plaks That article dd not address anything in regards to Solo401ks.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Charles Kao:

@Michael Plaks That article dd not address anything in regards to Solo401ks.
It did address the issue of AirBnB qualifying as a self-employment income. Which is a requirement for funding Solo401k.
0 Reply
Bruce C.
Seabrook/Galveston · Member since 2018 · 274 posts · 178 votes
7y
I might have missed the part where you told us what your AGI is, but if it is less than 150k, you can reduce you W2 via your rental properties if they are 'losing' money. Up to 100k AGI, you can deduct $25k in real estate losses. It phases out to no deduction at 150k.
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Eli Ren
Member since 2018 · 15 posts · 8 votes
7y
Bruce C brings up a good point-it depends on your AGI (Adjusted Gross Income)-
1-if your AGI is low enough you can deduct up to 25K of passive losses against your regular income
2-real estate professional-you can offset losses against non-passive income but be prepared to be challenged by the IRS if you are a real estate professional
3-there are massive breaks for real estate and regular businesses starting in 2018-a 20% deduction which is too complex for a post
4-there are great write offs for real estate starting in 2018-full expensing for certain items as opposed to depreciating over many years
Sit down with a solid CPA and pay for a consultation-yours truly itaxfind
Best of luck!
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Scott L.
Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes
7y
Originally posted by @Michael Plaks:

@Stephen Thomas
Please be careful with tax advice from non-accountants.
1. Deferred compensation is the money you do not receive now. And you simply push that income into the next year, where it will be taxed anyway. Is it worth the temporary deferral of taxes? Besides, what if the company goes under meanwhile, which does happen.
2. You can no longer deduct any expenses for your W2 job. Not leased car, not equipment - nothing at all. The law has changed.
Additionally, if you had the right to receive your bonus/salary in 2018 and you "asked" your employer to wait until 2019 to pay it, then it would be considered this year's income. They may incorrectly fail to report it on this year's W2...but you are supposed to pay tax on it.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Originally posted by @Scott L.:

Additionally, if you had the right to receive your bonus/salary in 2018 and you "asked" your employer to wait until 2019 to pay it, then it would be considered this year's income. They may incorrectly fail to report it on this year's W2...but you are supposed to pay tax on it.
I disagree. If the money has not been paid - i.e. you do not have access to it - then it is not income to you until the next year. Also, not a deduction to your employer.
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