Any High W2 earners out there?

[Bilal A.]

To the High W2 earning BP members out there, what strategies have you used to decrease your W2 taxable income? Depending on what state you earn your wages, income tax rates of 40-50% are unreasonable. Most of you likely don’t qualify as real estate professionals and won’t unless you quit or dramatically reduce your regular work hours so what tax planning strategies (particular to real estate investing) have you used besides taking depreciation and mortgage interest deductions? I realize that with enough properties, you can eventually replace your W2 with passive income and deduct losses against it. Do you massively leverage your high income to get loans and build your portfolio fast? Paying multiple three figures in taxes plus FICA is simply ridiculous. Thanks in advance!

[Joseph Delia]

Great thread!  I've often thought there ought to be a niche community within BP for the "high paying non-RE job" demographic.  The number of replies to this thread proves there are a lot of us.

My solution to your problem is not a direct answer but it is effective, if it's possible for you.  Change from a W2 to a 1099 earner if possible (or leverage your wife's new real estate business in similar fashion).  By doing the same job as a consultant there are a ton of opex and capex tax breaks (which are even better if you don't have an office space and thus have to setup a home office).  One of my favorites is that I get to write off 14% of any remodeling I do to my home (the percentage of my home that my home office takes up)....and of course, I can write off 100% of anything I do to my home office itself (new double pane insulated windows and automatic blinds, for example).  All legit, thus no audit fear.
 

For retirement, the Personal Defined Benefit is much better than even the SEP, if you are a bit older (thus the actuarial math is phenomenal), with steady high cash flow.  I've turned down multiple HR recruiters who think they "get 1099 consultants", by trying to beat out what they think I contribute to SEP.  Also, I just like my job ;-).

There are other breaks, but you get the picture.  It took me too long in life to realize that W2 income really is "wage slave" income.  Not only does your company control you but the IRS uses W2's to keep you inline.  Running your own business (even doing the exact same job!) is the way to go if your client/company will allow it.

P.S.  The latest tax bill does absolutely ZERO for HIGH INCOME pass throughs and also for service based pass throughs.  That's a red herring.

[Janelle Groenhout]

This will be my husband and my first year claiming our REI deductions on our tax return but even without the RE income we were high W2 earners and our accountant just suggested to max our 401K's, max our HSA and put away into our IRA's.

We will see how this year goes with the REI and filing our taxes.

[Andrew Johnson]

@Bilal A. I think others have said it but there really isn't a magic bullet.  For what it's worth I try and ensure that we have enough mortgage interest and depreciation to offset any *actual* earnings from the properties.  So while they do make money it ends up (essentially) being tax-free income.  The challenge is that over time you pay less mortgage interest and (hopefully) rents will rise.  So it's not exactly a full-proof or "forever" plan.  And I don't think anyone really knows what creative solutions lawyers and accountants are going to come up with over the next 12-18 months.  That's anyone's guess...

One strategy that's simple:  don't move to California...

[Bilal A.]

@Justin Goode I have read most of that good and it has opened my eyes to a few things like the sandwich technique. Wish I could do the Solo 401k but that will have to wait for the future. 

[Bilal A.]

@Dmitriy Fomichenko @Jonathan R McLaughlin @James Kojo Thanks for tips. Points well taken!

[Bilal A.]

@Andrew Johnson I lived in the Bay Area for a year. That was enough for me to realize that I will never be more than just a CA tourist in the future. 

[Bilal A.]

@Janelle Groenhout I hope it has a massive impact. Looking forward to seeing how it changes my 2018 tax return.

[Janelle Groenhout]

We hope so as well @Bilal A.

[Raymond Dipre]

Try looking into charitable remainder trusts.  These are vehicles where you can donate property (cash, stocks, real estate etc) where the charitable organization that is the beneficiary would receive the property after 20 years.  During those 20 years you would earn income on the property donated and at the end of the 20 years it would be distributed to the charity.  An example is if you own a condo worth $1,000,000 and place it in the charitable remainder trust, you would in the current year, receive a tax write off up to 50% of your AGI.  Say you bought the property for $500,000 and it is an income generating property.  Normally if you sell the property you would pay tax on $500,000, however, by donating it, the trust that sells the property would sell it tax free to you.  Now with the $1,000,000 in the trust, you would receive about $60,000-$80,000 of annual income for 20 years.  At the end of the 20 years you would have received about $1,500,000 of income.  If you like this strategy, you can buy rental properties each year and contribute them to a different charitable remainder trust to utilize a large tax deduction each year and receive income from the trust on an annual basis.

Thanks,
Ray Dipre, CPA

[Manish Satwani]

I just read about conservation easement? And we can deduct 5-6 times of that investment(donation) as a deduction.

More is available here https://www.youtube.com/watch?v=X68nCNAKb8U&t=841s

Anyone has idea about it?