400k bonus - tax mitigation

[Nathan M kiefer]

If you were to receive a 400k bonus from a w-2 employer what is the best way to legally avoid as much tax as possible?

[Sean Graham]

Quote from @Nathan M kiefer:

If you were to receive a 400k bonus from a w-2 employer what is the best way to legally avoid as much tax as possible?

I would personally invest in real estate and use depreciation to offset income.

I would either be a real estate professional or have my wife qualify for REPS so the depreciation could be used to offset the bonus. 

Or I would buy STRs a s materially participate so I could use the depreciation to offset the bonus income. 

[Gregory Wilson]

This depends on what level of control you can exercise over the W-2 employer. If its your own company or your father-in-law that gets one answer. If its General Electric it is another.

[Bill Hampton]

@Nathan M kiefer

I recommend that you get professional financial/tax advice. The best strategies will be tailored to your specific situation. 

Here are a few options: max out 401k contributions for you and your spouse, max out HSA contributions, make charitable donations, harvest tax losses, etc.

I recommend finding a tax strategist who specializes in real estate taxation, financial planning and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

Good luck.

[Ricky A.]

@Bill Hampton lists some good ideas.  If this is a bonus that's coming soon, the timing could really limit the number of moves you can realistically make between now and Dec 31st to mitigate taxes.  I'd see if the employer would let me receive part or all of the bonus in 2025 for a number of reasons:

- More time to pursue and execute tax-saving strategies

- (Possibly) more time to hold on to the $$$ before taxes are due (2026 vs 2025)

- Chance that, post-election, there is a possibility that there could be tax changes effective 2025 that could possibly help your situation.  Other than reduced bonus depreciation (if you're using that strategy), without any tax law changes, rates will be largely the same for 2025 as 2024, so you may not lose much by delaying receipt of the bonus by a month or two.  Also, if it's a one-time bonus, you may want to push only a portion to next year if that minimizes the total taxes you pay over the two years based on your expected tax brackets.

[Nathan M kiefer]

Quote from @Gregory Wilson:

This depends on what level of control you can exercise over the W-2 employer. If its your own company or your father-in-law that gets one answer. If its General Electric it is another.

 family owned company and i can time the payout of the bonus

[Gregory Wilson]

As much as I hate annuities, you might speak with an annuity agent about the employer awarding a bonus in the form of a single premium deferred annuity invested in index funds and that you do not have the right to access until a date certain and then a full payout over time. But, you can't have constructive receipt.

[Ashish Acharya]

@Nathan M kiefer To mitigate taxes on a $400K W-2 bonus, maximize contributions to your 401(k) (up to $22,500 or $30,000 if 50+), HSA (up to $7,750 for families), and Traditional IRA if eligible. Consider deferring income through an employer NQDC plan or negotiating bonus timing. Make charitable contributions via a Donor-Advised Fund to reduce taxable income. Explore real estate investments, leveraging depreciation or cost segregation to offset income.

If you qualify for Real Estate Professional Status (REPS) or invest in a short-term rental with material participation, rental losses can offset W-2 income. Accurate withholding is essential to avoid penalties while optimizing these strategies.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Aaron Zimmerman]

One other point to add is considering donating appreciated stock. However, if you’re just a W-2 with no STRs or REPs, it’s going to be challenging to reduce that tax via real estate.