March 2024
1. Health Savings Accounts (HSAs) are highlighted as a triple benefit tax-saving strategy, allowing pre-tax contributions, tax-free growth for medical expenses, and tax-free withdrawals for those expenses
2. Retirement contributions to plans like 401(k)s and IRAs are recommended for tax savings.
3. Marriage can offer tax benefits by providing access to wider tax brackets and potentially lowering the overall tax liability for the couple.
4. Some eco-friendly purchases on items like solar panels and electric vehicles can offer dollar-for-dollar tax credits. Click here to learn more.
5. Donor Advised Funds (DAFs) can be an efficient way to manage charitable donations, offering immediate tax deductions for contributions made to the fund, the ability to grow donations tax-free, and flexibility in distributing funds to charities over time.
6. Conducting a cost segregation study for short-term rentals can accelerate depreciation deductions. By doing so, owners can significantly reduce their taxable income.
7. Obtaining a professional designation in real estate can offset W-2 income with real estate losses.
8. Making less money will also minimize your taxes, although not recommended!
Watch previous episodes here:
Ep. 74 Tech Unicorns: Will Companies like NVIDIA Last?
Ep. 73 Brokerage vs. RIA: Is There Really a Difference?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE, your favorite place to find out what's going on in the world, how it affects you and what you can do about it. I'm joined here by wealth advisor Patrice Bening.
Patrice, thank you for joining us.
Always a pleasure, Chris.
Look, we pay taxes just like our clients. And I know that I get a visceral reaction to the thought of paying taxes very similarly to the conversations that we have extensively with clients around this time. And the majority of the conversations are like how can I pay less in taxes? And sometimes that is the right strategy and sometimes it's not, because one of the easiest ways to pay less in taxes is to make less money.
But I think probably even when I think about the things even when I talk to my friends, I feel that taxes sometimes favor a certain part of the demographic of the population. So if you're a business owner, you can write off more things. But with a W-2, you kind of feel boxed in, not a lot of options.Speaker 1
So maybe we can talk about some of the options that W-2 high earners have.
We should talk more about high earners. Because you're right. I mean, the tax code favors business owners and real estate. And look, I didn't write the rules. I am subject to both at times. It can be very frustrating when it comes to taxes. But yes, for today, let's talk about how high W-2 earners and or people that are retired could potentially save money on taxes.
So what are some of the options for those W-2, salaried people to save money on taxes?
A health savings account. HSA for short. It is my favorite.
I know it is. It's like the Triple Crown of evolved taxes.
I get a tax credit going in. I get to take tax money. I get to take money out tax free as long as I use it for medical expenses. And I get to grow it so I can invest that money and grow it tax free.
Now we can't really put that money, you know, an infinite amount of money in that account. So it's like, I think for this year, something around $8300, $8350 that a family can can put in. Yeah.
But if you're over 55 you can add an extra thousand. By the way, this is not tax advice. We're just talking about strategy and ideas that can help potentially save you money on taxes. So health savings account. I love that as an option.
And the caveat is that you have to have a high deductible medical plan in conjunction with this if you work for an employer, to be able to take advantage of it. So that's just a little nuance on that.
And one thing that people get confused about, because this is not a flexible spending account and or an FSA that that most are used to. A health savings account, if you have it or you choose to leverage it, the money that goes into that account, you don't have to use it at the end of the year. I remember a number of years ago I had, you know, money left over in my FSA account, ran to my friend who's got a sunglass place and it's like I picked up some sunglasses so I can, you know, not waste that money or let it go to zero.
So a health savings account is a great option. Yep.
Retirement contributions. Good old 401k. I think it's something that, you know, people maybe they're a little ambivalent on on that. But I would say put away maximum amount of funds out of your paycheck and be able to figure out how to pay less, even though some folks, if you do pretax contributions, understand that you're going to have to pay taxes on that.
Later on and if you're banking on a lower tax bracket, that's also up for debate. But, you know, this year the limit is 23,000. There's a catch up if you're over 50 of 30,500. So you can technically put in 30,500.
And you don't have to wait until you turn 50. It's the year in which you turn 50 that you can start making those catch up contributions that that often gets missed as well.
That's a great point there. And then if not, then good old IRAs, you know, putting $7,000 away this year and that and adding catch up of a thousand on that. That's also.
So before we get into anything really creative, like some real estate things or those sort of tax codes so far right now we've got maxing on health savings accounts. You actually don't have to do that in the calendar year. You have before you file your taxes, kind of like an IRA contribution to be able to fund it.
So if for some reason you put $2,000 in your health savings account and you can put an extra $6000 in there, you have until April the following year to make that contribution. You just have to let your CPA, your accountant, know that you did it so that way they can make the manual calculation. We talked a little bit about maxing out your retirement contributions.
You have to do that in a calendar year. What are some other ways besides making less money that you can save on taxes?
Well, I thought this was a little cheeky, but you can get married Chris.
And potentially save on taxes. Not that we're encouraging folks to go out there, get married, get married for the right reasons, but you're looking at a wider tax bracket. So almost double. Actually, most cases it is double what you would pay. You would have as far as limits as a single person.
So should I go home and ask Brianna if she married me for tax reasons?
No, I wouldn't.
All right. So you can get married.
Also, if you're looking to buy a new vehicle...
So if I qualify for, I think the highest ones with a $7,500 tax credit. So if I qualify for that $7,500 tax credit, that reduces my federal taxes by 7500. So it's money right back in my pocket.
That is correct. Okay. And then solar is the other one that you can actually look to to get credits back. So.
All right. So we've got HSA just say, retirement contributions getting married, tax credits through solar or an electric vehicle. What about charitably inclined people?
Well, we have lots of conversations around those particular items. But donor advised funds also known as DAFs out there. Probably one of our favorite ways when we talk to clients that are charitably inclined and I think if you were to take a step back, I think back in the day, if someone wanted to make significant contributions and be smart about it, they had to start a foundation.
And, you know, it was very expensive. So now if you want to donate 10,000 versus 5 million. But a donor advised fund, think of it as a brokerage account that you can fund now and then you get that deduction.
Right now, the money goes in, you can then sell it in that particular account. There's no taxes paid because it's protected because of the purpose of the account. And then you can allocate from there to the organizations of your choice.
And it's a beautiful account. It's not quite as much a favorite as the health savings account, but it is a great one, especially for the ease of use. The donor advised fund. It's just a charitable account that's in your name. And let's say I bought X, Y, Z stock at $10,000 and it's gone up to 100,000. If I had to sell that stock to then make a charitable donation, I have to pay capital gains. If instead, I chose to take that position or a portion of it and move it into the donor advised fund, I get credit for the amount that I contributed into that donor advised fund in that year so I can make that contribute portion during higher income years.
If I've got restricted stock units or stock options that are vesting so I can make a larger contribution. And then that money sits in that account and it's considered a donation for tax purposes. But I haven't given it to a charity yet. So I get one form saying I donated this money as far as the IRS is concerned, and then that money sits there.
I can choose to invest it or I can click a few buttons and donate money as I see fit in any increments I think is low is $50 to any 501(c)(3). It's a beautiful account. So we've talked about some really basic strategies and again, this is not tax advice, these are ideas. If you have questions, please come talk to myself.
Patrice, your wealth advisor here at Morton or even potentially your CPA. So the basic ideas that we talked about today are health savings account, maxing out your retirement contributions, getting married, donor advised funds, tax credits on EVs or solar. Now there are some more nuanced strategies that people can deploy, but they should really seek a tax or potentially legal professional to deploy them.
One of the ones I learned through a CPA friend of mine that talked about if you own short term rentals near the end of the year, if you let's say you purchased a short term rental near the end of the year. Again, this is not tax advice and don't just go buy a short term rental just to do this, but you can do a cost segregation study of that short term rental, depreciate that all that year and be able to use that cost segregation study to offset your W-2 income.
And then next year, you have a property manager run and oversee it as a short term rental. I think my CPA friend said that the IRS doesn't really like this, but it's technically legal and you should be very careful. But I thought that that was fascinating because normally you have to be a real estate professional in order to qualify for real estate investments to offset your W-2 income.
But short term rentals have a different classification. So I thought that that was interesting. Let's talk a little bit about the real estate professional designation.
So what's interesting about that, even if you think back to like, yeah, if you're married and you're able to now widen that tax bracket, but let's say that you have a spouse that maybe wasn't working at some point and now they're looking to go back to work. If they materially participate in, let's say, property management.
And that comes to about 12 hours a week, about 750 hours a year. Then you're able to use that particular expense of like whatever it is that it takes for you to do against the W-2 income that we have as being married in that context.
I wouldn't make these last two decisions just to save money on taxes. You know, it's quite kind of funny, at least around here where we live, you tend to see a lot of very nice, fancy, brand new SUVs towards the start of a new year. And that's because people take care of take advantage of some potential tax credits or deductions, because the vehicles over 6,000 lbs, I wouldn't even go into that.
But at the end of the day, I wouldn't just make some of these decisions just to save money on taxes. I think that you need to be able to have the liquidity and the ability to fund some of these things. The time, energy and interest to invest in some of these other ways. But if you're curious about ways that you could potentially save more on taxes, please set up the time with us.
We would love to run a financial plan, leverage our CPAs to help collaborate on your behalf and have a further conversation. Patrice, thank you.
Disclosure: Disclosure: Information and references tospecific investments presented herein are for illustrative purposes only andsubject to change without notice. It is not intended as investment advice andshould not be construed as an offer or solicitation with respect to thepurchase of any security. Investment opportunities described may only beavailable to eligible clients and involves a higher degree of risk. Eachinvestment opportunity is unique, and it is not known whether the same orsimilar type of opportunity will be available. Morton makes no representationsas to the actual composition or performance of any security. All investmentsinvolve risk, including the loss of principal. Past performance is no guaranteeof future results. There is no guarantee that the investment objectivewill be achieved. Morton Wealth makes no representation that the strategiesdescribed are suitable or appropriate for any person and should not be assumedthat Morton will make investment recommendations in the future that are consistentwith the views expressed herein. You should consult with your attorney, financialadvisor, or accountantto thoroughly review all information before implementing any transactionsand/or strategies concerning your finances. The views and opinions expressed bythe speakers are as of the date of the recording and are subject to change
