Commercial Real Estate Investing From A-Z How to Reduce Taxes: W-2 Employees (Single and Married Scenarios)
How can you reduce your taxes if you are a W-2 employee that is single, or a W-2 employee with a spouse that doesn't work? This is a topic we have been wanting to cover for a while and Tim Gertz, partner at Provision Wealth will share his insights.
Read this entire interview here: https://tinyurl.com/2ckdcd6b
Tax can be confusing and we all want to reduce our taxes. Let’s break it down into different scenarios, starting with W-2 employees that are high earners and are not married.
Some would ask: what's the best tax planning advice for someone that single and a high W-2 earner, the joke is to get married! The tax laws incentivize you to: grow industry to create products, create revenue, create workforce, that can be taxed. Unfortunately, as a W-2 employee, you are in this little box where your opportunities are very minimal.
There are still some opportunities such as: oil and gas investing. It can be very advantageous because it is outside of the material participation rules of the passive activity loss rules. You can invest in an oil and gas fund and have no involvement in it and be able to offset W-2 income. It's one of the few carve outs in code section 469 that gives us that opportunity.
Another thing with the Inflation Reduction Act, it bumped up tax credits for energy efficiency. It reinstated the 30% tax credit on solar on residential properties. It increased the tax credits for vehicles, used vehicles, various energy efficient systems, whether it's HVAC, or things of that nature. Those are definitely things that you can look at to offset tax on W-2 taxable income.
One of the other opportunities if you are an individual that does itemize deductions, an opportunity is called deduction stacking. Especially with charitable contributions. For example, instead of giving $10,000 every year, you give $20,000 this year, then nothing the next year, then $20,000 the following year, and you flip flop between itemized and standard deductions.
What about W-2 employees with a spouse that does not work. What are their options?
This scenario opens up a huge opportunity. If the spouse wants to be involved in activities, they can look at: What is it that they want to do? Do they want to open a business? Do they want to operate a business? Do they want to invest in real estate and become a real estate professional? One of the nice things about being married is that your income is combined, and your income and losses are combined. If you've an individual that's a W-2 high wage earner, and you have a spouse that is a real estate professional, and you invest in real estate that throws off half a million dollars of losses every year. Because they spouse is active in real estate, that loss is active. Now we have an active loss, and we have active income from W-2 that are married to each other, then they will offset each other. It doesn't have to be a real estate professional because that's where a lot of people are investing in. It can be any activity, it can be any business that someone materially participates in. It could be: coin laundry, things of that nature, things that are highly capital intensive, that have a lot of equipment on the upfront that can be depreciated. That can create a loss that will create an active loss. If they're active in it and materially participate in that activity, it will offset the W-2 income.
A real estate professional has to:
1. Work 750 hours in real estate activities.
2. Do that more than any other income producing activity.
Tim Gertz
contact@provisionwealth.com
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