Opportunity of going from Six Figures to Zero

Have you ever had a major, unexpected life change? What were the consequences on your real estate business? Whether it be children, a new job, moving, or something terrible like death, we need to be prepared for everything that life might throw at us. If we aren’t, it could have disastrous financial consequences. Or, to be less dramatic, it could simply mean that we aren’t seeing change as the opportunity it might be.

I will be going back to school for graduate school. I’ll be sponsored; I get to work a partial year for two years (about four months in 2018 and six in 2019); and I don’t have to pay taxes on the income while in school. I need to have a financial strategy to make the most use of this circumstance.

My taxable income is being taxed as if I’m going to make X for the year, which is going to be drastically overstated. When your check is taxed, it’s taxed by taking how much you earned for that period. So, for instance, if you made $2,000 in two weeks, the tax that would be withheld would be calculated by multiplying your weekly income by 52. This would be your projected income for the year. Since no one knows if you’re going to be employed at that rate for the year, it’s the best way to estimate your taxes for a given pay period. You would have a deduction from your check based on $52,000 of income for the year.

So, with this in mind, I’ve been getting taxed like I’m going to make X, but in reality I’m only going to make about 33 percent of X. If you made $100,000 you would owe $11,278 in federal income tax. If I made 33 percent of $100,000, or $33,000, I would owe $1220. My effective tax rate (your average rate of taxation) just went from 11.3 percent to 3.7 percent.

Now let’s think this through a little further: if you could choose, should you take a loss while in school or when your taxes go up after school. The logical thing seems to be to take the loss when you’re in the higher tax bracket. What if your income goes over $100,000? Now there’s a phase out on the amount you can offset your ordinary income with a passive loss. I’m not a CPA, so it is at this point that I am going to get some professional advice. If I keep trying to figure out my best tax strategy, I’m not going to find my next deal any time soon.