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I get a lot of questions from W-2 employees asking, “How can I save money on taxes?”
Many people know that business owners have a lot of flexibility to lower their tax bill, but what about W-2 workers? I’ll skip some of the more “obvious” strategies, like:
- 401(k)
- Backdoor Roth
- HSA/FSA
Here are some other ones you might want to think about:
- Commuter benefits
Some companies offer pre-tax commuter benefits that can be used for transportation expenses such as transit passes or parking.
In simple terms, say you earn $1,000/mo. You pay ~$150 in taxes, leaving $850. From that $850, you spend $100 on monthly parking.
With commuter benefits, you would earn $1,000, subtract $100 pre-tax for parking, pay roughly $135 in taxes, and take home $765, compared to $750 in the prior example. Of course, the exact tax amounts will vary, but you got the idea.
In short, you save taxes on commuting expenses you would have paid anyway with after-tax dollars.
- Mega Backdoor Roth
Some employers allow employees to contribute after-tax dollars to a 401(k) and then roll those funds into a Roth IRA or Roth 401(k). While you do not receive an immediate tax deduction, the growth is tax-free and qualified withdrawals are also tax-free.
High earners can potentially contribute $35,000+ per year to Roth accounts. For example:
- $24,500 to a pre-tax 401(k)
- $10,000 employer match (will vary)
- Up to $37,500 in after-tax contributions (rolled into Roth)
The total of pre-tax, after-tax and employer match limits is $72,000 in 2026.
That $24,500 could also go into a Roth 401(k), but for high earners it is often better to prioritize pre-tax contributions.
If you are currently investing in a taxable brokerage account, check whether your plan allows a Mega Backdoor Roth. Compared to a brokerage account, it offers:
- No tax drag from dividends
- Easier rebalancing once assets are in a Roth
- No capital gains taxes on qualified withdrawals
The primary drawback is reduced liquidity, which is important to analyze, especially if you are young.
3. NQDC
High earners may have access to a Nonqualified Deferred Compensation (NQDC) plan. This is a contractual agreement with your employer to defer a portion of your income until a future date (e.g. 5 or 10 years). These plans are typically offered to executives or highly compensated employees.
Deferred amounts can be invested, and taxes are paid upon withdrawal, similar to a pre-tax 401(k). The goal is tax rate arbitrage. For example, you defer income at a 37% marginal tax rate and withdraw it later at a 24% rate.
NQDC plans can be especially attractive if you expect to retire within the next 5 years, as future income is more predictable.
Unlike a 401(k), NQDC assets are subject to employer credit risk. If the company goes bankrupt, you could lose all your NQDC assets.. Company stability should be evaluated.
4. Tax Loss Harvesting
While not specific to W-2 employees, tax-loss harvesting is an easy way to generate up to a $3,000 annual deduction against ordinary income.
If the market declines and you have unrealized losses in stocks or ETFs, you can sell them to realize the loss and reinvest in a similar (but not identical!) security to avoid wash sale rules.
I discussed this one more in depth in my recent post.
5. Real estate
If you earn less than $100,000 (modified adjusted gross income) you can claim a real estate loss deduction of up to $25,000 and apply it to your W-2 income. If you earn between $100,000 and $150,000, the maximum deduction of $25,000 is reduced proportionally.
This real estate loss is a paper loss generated by bonus depreciation and a cost segregation strategy.
If you want to bypass these income limits, your spouse could qualify for a “real estate professional” status. W-2 workers typically can’t qualify on their own due to the time requirements.
Or another approach could be to get into short-term rentals. Because short-term rentals aren’t “passive” by default, as long as you materially participate, you could generate some tax savings there.
By the way, if you want to support my content and file your tax return for just $15.99, make sure to use FreeTaxUSA!
Any questions? You can always reply back.
Chat next week!
¹ I decided to partner with FreeTaxUSA to bring awareness to their affordable & effective tax filing software. As you know, I haven’t promoted anything on The Crunch, but I genuinely believe they are the best in the business and have personally used them for 5 tax years.