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. 

[Jason Malabute]

If you're looking to defer taxes on that $400k bonus, as Sean pointed out, one way to do so is by qualifying as a real estate professional. This means meeting the 750-hour rule, the 50% rule, and the material participation rule of 500 hours. Beyond that, you can look into contributing to your IRA or maxing out your 401(k) within the limits for 2024—$7,000 for IRA contributions and $23,000 for 401(k). If you're a business owner with no employees or only part-time employees working less than 1,000 hours per year, you could set up a solo 401(k) and contribute up to $69,000, which includes both employee and employer contributions. Many real estate investors also leverage their IRAs and 401(k)s, including solo 401(k)s, to invest in more deals while deferring taxes. It's definitely worth exploring these strategies!

If you're itemizing your deductions, another great strategy is making a strategic donation to a charity or organization you believe in, like your favorite nonprofit or your church. Not only does this lower your taxable income, but it also allows you to support a cause you're passionate about. Combining this with other tax-deferral strategies, like maxing out your IRA, 401(k), or solo 401(k), can help significantly reduce your tax burden while aligning with your personal values. It's a win-win! I would highly recommend proactive tax planning if you are in this situation.

[Chris K.]

@Nathan M kiefer

If you are getting $400k in W-2 income, unlikely you will qualify as a real estate professional unless: (1) you have equity in the company and its in an industry that allows you to qualify as real estate professional; or (2) you have a spouse that qualifies. Even then, you would need to make an investment that would generate enough depreciation to offset that income. Might be doable if you combine it with contribution to 401k, IRA, HSA, etc. STR idea might work as well although that's a matter of execution.

You could also ask the employer if they can spread out the bonus over multiple years. 

If it is smaller family-owned business, see if it makes sense to offer a Defined Benefit Plan. Many people saved a lot on taxes utilizing those vehicles versus a Defined Contribution Plan like a 401(k).  

Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

[Nathan M kiefer]

Quote from @Jason Malabute:

If you're looking to defer taxes on that $400k bonus, as Sean pointed out, one way to do so is by qualifying as a real estate professional. This means meeting the 750-hour rule, the 50% rule, and the material participation rule of 500 hours. Beyond that, you can look into contributing to your IRA or maxing out your 401(k) within the limits for 2024—$7,000 for IRA contributions and $23,000 for 401(k). If you're a business owner with no employees or only part-time employees working less than 1,000 hours per year, you could set up a solo 401(k) and contribute up to $69,000, which includes both employee and employer contributions. Many real estate investors also leverage their IRAs and 401(k)s, including solo 401(k)s, to invest in more deals while deferring taxes. It's definitely worth exploring these strategies!

If you're itemizing your deductions, another great strategy is making a strategic donation to a charity or organization you believe in, like your favorite nonprofit or your church. Not only does this lower your taxable income, but it also allows you to support a cause you're passionate about. Combining this with other tax-deferral strategies, like maxing out your IRA, 401(k), or solo 401(k), can help significantly reduce your tax burden while aligning with your personal values. It's a win-win! I would highly recommend proactive tax planning if you are in this situation.

 solo 401k never heard of- awesome thanks!