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If you are a high net worth individual or high-income earner, it’s likely that you are looking for ways to reduce taxes on your W-2 income. You have plenty of tax savings options, and as Real Estate CPAs, we have both general and real estate specific recommendations.
Read on to learn all of your options for saving on taxes on W-2 income, and be sure to check out Tax Smart Investors™, which offers in-depth insights and information on real estate tax strategies.
How Can I Save on Taxes on my W-2 Income?
Let’s start with the general recommendations.
If you want to save money by reducing taxes on W-2 income, there are a few options.
Contribute to Retirement Accounts
The money you put into a 401k reduces your taxable income, which results in a lower payment of income tax. For IRAs, you can also receive a deduction based on contributions if certain requirements are met. For instance, if you are in the 32% income tax bracket, paying $6,000 towards your IRA could potentially save you $1,920 on your tax bill. Paying toward retirement consistently throughout the year will save you come tax time.
Pay Into a Health Savings Account (HSA)
Putting money into a health savings account can save you money on taxes in a few ways:
- You receive a deduction for HSA contributions
- HSA funds used for qualified medical expenses aren’t taxed upon withdrawal
- Any interest or investment earnings aren’t taxed
Keep in mind, money from an HSA must be spent for qualified medical expenses to not be taxed. You can deduct your HSA contributions, which reduces your taxable income.
If you itemize deductions, charitable contributions can reduce your taxable income by being write-offs. The more you give, the more you can save.
Earn The Real Estate Professional Status
Let’s pivot to real estate-specific tax savings on W-2 income. These tactics have brought a lot of high earners into the world of real estate. Regardless of whether you had any previous interest in owning real estate, the tax savings alone make these approaches attractive.
To qualify as a real estate professional, one spouse must work 750 hours and more than half of their working time in a real property trade or business (there are eleven). This becomes relevant for taxes because real estate professionals can reduce taxable income through cost segregation studies and writing off depreciation and other significant passive losses. In some cases, this could reduce a 35% tax bill to 15% or lower.
Use the Short Term Rentals Tax Loophole
At The Real Estate CPA, we talk a lot about the short-term rental tax loophole, and have helped people save thousands of dollars on taxes using this method.
Very basically, the short term rental loophole refers to a section of the tax code that says if the average customer stay at a short term rental for seven days or less, then your short term rental is not a rental activity for the purposes of the tax code. It’s treated as any other business. Ultimately that means all you need to do is materially participate in that business for the losses to be non-passive and offset your W-2 income.
Related: Listen to the Podcast — How The Short-Term Rental Loophole Can Save You Thousands in Taxes
Those are five of the big ways to save on your W-2 taxes. If you work directly with a real estate accounting professional or someone else with high-level expertise, you may start to explore some of the less common ways to save.
Investing in Working Interests in Oil and Gas
There is a special carve out in the tax code that makes losses from your investment in working interests in oil and gas non-passive, regardless of whether you are a passive or active investor. Usually, you’ll see losses in the initial years due to the exploratory phases of an oil and gas investment. The downside is that you may be exposed to unlimited legal liability, which could represent an ongoing cost or risk.
Land Conservation Easement
If you own a piece of land, you could place an easement on that piece of land, restricting it from being developed. You will receive a charitable deduction in the difference between the fair market value of the land (had it been developed to its highest and best use), less the value of the land with the easement on it. The land should be worthy of being preserved and you will have to go through some measures to get a valuation and align with compliance guidelines.
NOT Recommended: Syndicated Land Conservation Easement
There’s another form of land conservation easement that people use to save money on W-2 income that we absolutely do not recommend. A syndicated land conservation easement is an approach where you invest money with partners and collectively pay for an easement on the land through the partnership. Each partner gets a piece of the charitable deduction through the partnership. This structure is under heavy scrutiny by the IRS, and we wouldn’t advise you to go this route.
Create a Strategy for Reducing Taxes on W-2 Income
Our overarching recommendation is that you enlist the help of a tax professional to create a strategy for reducing taxes on W-2 income. There are plenty of spots in the tax code that you could take advantage of, and sitting with a real estate tax expert one on one is your best bet to figuring out how both general and real estate-specific tactics can be optimized to save you money.
This kind of advice and partnership is a big part of what we do. For help with tax planning, or to explore your options more, reach out to us today.