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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 will skip talking about the retirement accounts, as those are the obvious ones..
5 Tax tips:
- Commuter benefits
Some companies offer pre-tax commuter benefits to pay for your transportation (like transit passes, or parking)
In simple terms, say you make $1,000, you pay $150 of taxes, and now have $850, with which you pay $100 for your parking in a month.
If you used the commute benefits, you would make $1,000, subtract $100 from your earnings, pay $135 of taxes, and now have $765 vs $750 in prior case (of course the taxes would be different, but you get the point)
You basically save money on taxes on the commute you would’ve paid for anyways.
- Health Savings Account
A Health Savings Account (HSA) is a very tax-efficient investment account with three key tax benefits:
- contributions are tax-deductible
- earnings grow tax-free
- withdrawals are tax-free if used for medical expenses.
To contribute to an HSA, you must have a high deductible health plan (a deductible over $1,600 for self-only coverage or $3,200 for family coverage).
Some companies offer additional incentives for contributing to an HSA, which is very powerful, especially if you are young & healthy.
- Tax Loss Harvesting
This one is not specific to W-2 employees, but it’s an easy way for W-2 employees to receive up to $3,000 deduction.
The stock market has been sliding in the last 2 weeks, so if you have any losing stocks/ETFs, you can sell them at a loss, and buy back a similar stock/ETF (you can’t buy the same one as wash sale rules will apply)
If you want to learn about this one more, check out Issue #31
- Mega Backdoor Roth
There are companies that allow you to contribute “after-tax” money into a 401(k) and rollover to Roth IRA.
So, high earners can put up to $40,000+ into Roth per year.
While you don’t get an immediate tax deduction, all your withdrawals will be tax free in the future.
If you are investing in a brokerage account, check whether your plan allows this first. Game changer. I discussed this one a bit more in depth in Issue #45
- 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 due to the requirements.
Any questions? You can always reply back.
Chat next week.
MC, CPA
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 4 tax years.