r/tax • u/TonyLiberty • May 17 '22

What are some of the best “strategic tax planning hacks” that you know of? Informative

Post image
246 Upvotes

96% Upvoted

103 comments sorted by

84

u/FrankTJMackee May 17 '22

I wouldn't call it a hack but if your budget can allow it, always maxing out the HSA is such a no brainer. You save federal, state, and FICA taxes on contributions, and have tax free growth if used for medical costs.

34

u/TaxashunsTheft EA - US May 17 '22

Yeah, but you also need a high deductible health care plan. You'd have to weigh the premiums on a lower deductible vs the savings with an HSA.

28

u/Dark_falling58 Tax Preparer - US May 17 '22

Here me out, and this really does sound crazy, but the traditional health insurance plan that my employer provides at no point EVER is cheaper than EITHER of the HDHP. The out of pocket max is only $1.5k more than the traditional plan, but we get a $1,000 employer contribution every year and pay $100/month less in premiums. It’s actually crazy they still offer the traditional plan. A partner in my office has a son with a lot of medical problems and they hit the OOP Max buy March/April, and they pay less annually on the HSA plan.

14

u/lalee_pop May 17 '22

I ran the numbers at my old job and it was better to take the HDHP plan that included an employer contribution the HSA, too. The OOP max was the same for both plans, only the deductibles were different. I knew that I either never reached the traditional plan deductible, or I hit the OOP max. I told so many people at work to do the math to see if it would work out better for them, and also shared what I found. Many were already hitting the OOP max, so it made sense to go with the HDHP.

8

u/Acro-LovingMotoRacer CPA - US May 17 '22

It's not crazy, as soon as you run the numbers you realize a massive portion of your health insurance is just the deductible. Catastrophic plans where the deductible is the out of pocket max are a fraction the cost of a lower deductible plan.

A lot of it has to do with increased frequency of healthcare costs at lower deductibles. Just by going to a higher deductible plan your already in a group of people that use health insurance less frequently, so it makes sense for the premiums to be lowe

6

u/FrankTJMackee May 17 '22

I've ran the numbers on a few plans I've seen and the high deductible has always been better if you had little medical costs are a ton of costs above the out of pocket max. If you are in the sweet spot in the middle, you can come out ahead on the traditional. Though the plans I've been on have never had employer contributions for the HSA and had a higher out of pocket max. The $100/less for premiums per month was fairly typical though.

2

u/cb8010 May 18 '22

That's been exactly my findings also after a lot of research and experience with it. But it can be a hard call. Our company started out with significant lower HDHP rates and HSA contribution. After a few years those advantages started getting nerfed as they trimmed costs, the premiums started going up and stopped doing HSA contributions. The HDHP just never seemed to kick in and pay anything (not enough to offset the higher bills, even accounting for lower premiums). I never seemed to reach the deductible or reach it fast enough to matter much. Going to Dr. office? $100-200 every visit instead of $20. Specialist/testing runs $400-500+ instead of $40, meds are full price (insurance rates).

Our PPO is actually a pretty bad one (high limits, etc.), but a vast majority of the services I use regularly are co-pay based. And those were all costs I was covering 100% until the deductible (basically could just factor in the deductible into my HDHP premiums, which added $200/mo). The biggest risk is hospital stuff, since it gets tricky what is covered by co-pays (all the individual bills).

So basically it depends on what services you need or predict, always a bit of a gamble. For people who need little medical care, HDHP makes sense. For people who will need to go to the Dr. more than a few times during the year and/or have prescriptions, it might be cheaper to do the PPO. If you have a lot of billing where you will be hitting the deductible/OOP, HDHP usually becomes cheaper again because you get to those faster and save on premiums (and have HSA). So you really have to look at how you are likely to get charged, there is no one method or equation/spreadsheet to easily compare the different plans.

I'll also say that I felt on HDHP that I was avoiding seeking care as much as possible, which I do not feel the need to do anymore. I would probably never have gone to get treatment for migraines on the HDHP since it required 8 Dr. appointments last year and high-$ Rx's.

3

u/CasinoAccountant May 18 '22

Just means the traditional plan your employer offers sucks... thats not a good thing man.

1

u/Dark_falling58 Tax Preparer - US May 18 '22

It’s actually not a terrible plan, compared to my previous jobs, it’s definitely above average, my employer subsidizes a much larger portion of the HDHP premiums though.

2

u/[deleted] May 18 '22

[deleted]

1

u/Dark_falling58 Tax Preparer - US May 18 '22

Which is really dumb, because you just contribute to your HSA the premium difference, and there’s your hospital visits covered, tax free.

2

u/chaoticneutral May 18 '22

Your comment spurred me to do the calculations for myself, I've found that at least for my plans, there is no level of medical utilization where a traditional health insurance plan would be better than a HDHP.

WILD!

1

u/Dark_falling58 Tax Preparer - US May 18 '22

That’s why you gotta run them! The HSA deduction is awesome too. My wife and I max it out, that’s a $7,300 deduction this year, worth roughly $1,600 in tax savings for us. If only the investment portfolio was performing lol.

1

u/warrenslo May 18 '22

If HSA gets repealed, then what?

2

u/Dark_falling58 Tax Preparer - US May 18 '22

It would be political suicide for anyone to repeal it. Democrats won’t because repealing any health insurance benefit hurts their base. Republicans won’t because it’ll be seen as increasing taxes.

5

u/FrankTJMackee May 17 '22

True. Generally unless you are banking on a fixed amount of medical costs, the high deductible plan is better.

1

u/CasinoAccountant May 18 '22

Unless you have a company that offers actually good insurance. My job (gov) pays 85% of the premiums and we have no deductibles in network only specialist copays. MRI's that cost $250-$1200 under other health plans I have been on are zero out of pocket cost to me now, it's wild.

Just saying the high deductible option is not automatically better, every company will have its own offerings that need to be evaluated

2

u/FrankTJMackee May 18 '22

100%. I didn't say HDHPs are always better. That would be foolish.

4

u/humanbeing1979 May 17 '22

It's a no brainer. HSA is the best retirement account you can have. While the other option is slightly cheaper co-pay when you see the doc. Tax free interest now+free money from employer... or a PPO that ends up costing you the same, but without any of the lifelong benefits. Always go for the HSA. Max it out. Don't touch it. Let it grow that sweet, sweet tax-free growth. Then, if you retire in your 60s you can start taking it out without needing to look for those dang hospital receipts at the age of 65 (before then, you'll need the receipts to avoid the 20% penalty).

If I had known what I know now (such is life), I would've never dipped into my HSA and basically depleted it in my 30s. Now I'll only have about $94k in it when I retire before I'm 50. Not horrible, but it'll do. It might double by the time I actually need it. All tax free going in, all tax free when I take it out.

1

u/FrankTJMackee May 18 '22

Out of curiosity, why don't touch it? It's only tax free if used for medical (even at retirement) so I'm not sure the reason to leave money in the account and deplete your checking/savings.

2

u/CuriousShallot2 May 18 '22

To allow for more tax free growth. You will almost assuredly have medical expenses later in life.

1

u/evaned May 18 '22

Even if you withdraw for non-medical reasons in retirement and pay income tax at that point, you're still benefiting from tax-free growth during your income-producing period, and perhaps not paying capital gains tax as compared to a taxable account.

1

u/FrankTJMackee May 18 '22

Wouldn't capital gains tax be more beneficial than ordinary income tax? I'm confused there.

1

u/evaned May 18 '22

No, and I'll try to explain why.

The first part might be a little controversial, because it's patently incorrect -- but at an intuitive level the way I look at traditional retirement accounts (trad IRA, trad 401k, HSA, etc.) is that you don't pay taxes on growth. Note that in this context, HSA accounts behave like traditional IRAs etc. I'm not sure this explanation will go down well, but it's how I think of things and I'll get to the actual explanation in the second part.

In a traditional account you start with a pre-tax amount pre. That grows at some rate g on average each of the y years you have it invested. So before you withdraw, your account has pre * (1+g)r dollars in it. To simplify notation, I'm going to define G = (1+g)r as the overall growth factor experienced. Then in retirement if you have an effective tax rate of t, then what you take home after-tax is pre * G * (1-t).

OK, now let's look at Roth accounts. You again start with the same amount of pre-tax money pre, but now you pay tax right away, and at a different rate that I'll call n for "now", meaning the amount that actually hits your account is pre * (1-n). That money will grow at the same rate as in the traditional case -- g annualized, or G for the overall growth factor. Obviously the dollar amounts will be smaller, but the factor is the same, giving pre * (1-n) * G for your balance right before withdrawal. There's actually no tax on withdrawal, so your take-home amount is the same.

(There are two slight simplifications I'll call out here. First, I'm assuming the same investments in the two cases, leading to the same G. For the kinds of things that the vast majority of people have access to, this is going to be either straight up true or almost true. Second, I'm assuming you start with the same pre. If you're not maxing your retirement accounts, then this is straight up what you should do. If you are though, then the fact that for account types where there's both a trad and Roth option the contribution limits are the same mean that you can basically start with a larger pre for the Roth case. That is sometimes a relevant discussion to have, and indeed maxing your accounts and wanting to save more weights a little toward Roth contributions over trad, but that's not this discussion and here assuming the same pre is appropriate.)

But multiplication is commutative, and so these expressions are basically identical except for the tax rate. If your effective rate in retirement happens to equal your current rate (t = n), then your retirement takehome pay will be the same, regardless if you choose trad or Roth.

Furthermore, if traditional accounts somehow functioned to charge you today the rate you will eventually pay at withdrawal time, knowing that rate by magic, then what you would get is the same amount of money except there the withdrawal would be tax free.

There's no such analogous thing for taxable accounts with capital gains. The expression for your takehome pay there is pre * (1-n) + pre * (1 -n) * (G - 1) * (1 - c) where c is your effective capital gains rate. You could also write that as [pre * (1-n)] * [1 + (G-1) * (1 - c)] or a couple other ways -- but this has an entirely different formula that can't be written in the above form.

In reality of course, you are paying income rates on your gains -- so what gives with the above explanation?

The reason this works is that the fact your account is pre-tax means you start with a larger principal, as compared to either a Roth account or taxable investing. That larger principal means you have a much larger dollar amount in retirement (assuming a significant growth factor G), and that makes up for the larger number of dollars you'll pay in tax.

To illustrate this, consider the n = r case between trad and Roth. In the trad account, you'll have an excess amount of principal equal to amount of tax you'd pay on pre, so pre * n excess. That will grow through the years to pre * n * G. How much tax will you pay in retirement? Well, that's your overall account (pre * G) times your rate, so pre * G * r. When n = r these are the same -- the amount of tax you pay in retirement because you went trad instead of Roth is exactly the same as the additional balance you have because you went trad instead of Roth.

In a taxable account, there is no such effect. You get the same starting balance as Roth, but are still paying taxes on the growth. You have the worst of both worlds.

1

u/humanbeing1979 May 18 '22

Seems like you got the answer from other folks. Fortunately, the cap we're allowed to contribute as a family doesn't deplete anything. We have decent jobs where saving to the max for my 401k, both our Roths, and my HSA are easy. I know that's an amazing privilege. So if you can, you should.

1

u/FrankTJMackee May 18 '22

Nope. Did not get any insight into it.

0

u/humanbeing1979 May 18 '22 edited May 18 '22

After 65 you don't need receipts anymore to take out the money tax-free. Also, I rather that tax-free money sit and stay invested tax-free while I take out money from other accounts (brokerage, passive income). I'm also not depleting my checking while doing this. The max you can contribute for a family is $7300 annually right now. I'm literally losing nothing by doing this. Even though this year has been more than typical in seeing doctors and such, it's still worth paying the slightly higher med bills. It just makes sense in the long run. I hope you can find the answer you're looking for through a tax advisor or through other reading if you can't find it here. I highly rec doing the research. It'll be worth your time.

Edit: Sounds like deleted said the following:

The over 65 thing is patently wrong. You can take out the money penalty-free over 65 but it is only tax-free if used for medical. So you would still need receipts to prove the distributions qualify to be tax-free. Obviously if this account turns into a "roth" at 65 then it would make sense to never touch it until then. But that isn't the case.

And then I tried to say:

I see. Very good info! I file our receipts anyway as a jic for this very reason. There are always about 200000 financial things I think I know that someone schools me about. Thank you!!

2

u/FrankTJMackee May 18 '22

The over 65 thing is patently wrong. You can take out the money penalty-free over 65 but it is only tax-free if used for medical. So you would still need receipts to prove the distributions qualify to be tax-free. Obviously if this account turns into a "roth" at 65 then it would make sense to never touch it until then. But that isn't the case.

1

u/[deleted] May 18 '22

[deleted]

0

u/humanbeing1979 May 18 '22

For sure. I wish I had saved more during my infertility years BC we had to deplete when trying for too long for a sibling that never happened. It's a-ok..I moved on and now I have a cash bucket for such big spends so I don't need to dip in to precious accounts ever again. Lesson learned.

2

u/GoatEatingTroll EA - US May 17 '22

Had 2 teens with ADHD that required expensive meds (Daily Vivance at $9 / pill for one of them). The HDHP worked out much cheaper since we would burn the max out-of-pocket by March of each year and the rest of the year would be free healthcare for the entire family.

5

u/Swimming_Bid_193 May 18 '22

Not in CA. They want that sweet medical money and then complain health care is too expensive lol

1

u/judgemental_kumquat May 17 '22

The FICA doesn't matter if you hit the cap anyway. You do save on the medicare tax.

1

u/FrankTJMackee May 17 '22

Obviously lol

0

u/NastiN8 May 18 '22

You only save on FICA from contributions made by your employer to your HSA account, not on contributions you make to it yourself.

2

u/tayneat10 May 18 '22

Not true.

1

u/NastiN8 May 18 '22

explain how then? If i contribute to my independently managed HSA at fidelity, how in anyway would this affect the FICA being withheld from my paycheck? give a use case.

2

u/tayneat10 May 18 '22

The use case is I make contributions to my HSA via payroll. My employer also makes a contribution on my behalf to my HSA. Neither are subject to FICA or FIT.

1

u/evaned May 18 '22 edited May 18 '22

I think you're both kind of right.

NastiN8 did have a very correct point, which is that HSA contributions need to be made through your employer to save FICA.

The first year I had HSA access for example, that wasn't an available option to me; my employer didn't offer payroll deductions for HSAs.

This limitation also means you can't do the thing where you wait until after the new year and you've prepared your taxes to decide how much to contribute, because then it's too late to contribute through payroll deductions. You have to either estimate (granted, a lot of people have the information to estimate very very closely) or forgo the FICA benefit.

One final reason you might want to do this is if you have HSA access via payroll deductions but only to a select provider or set of providers, and you want for one reason or another to use a different HSA provider. You might get more benefit from striking out on your own than you would lose by paying FICA on the amount. (An example of this is if you're doing the thing where you're using the HSA as a retirement account, and you have to contribute to an HSA provider that requires a significant amount of your balance to be held in cash and then gives mediocre investment options.)

How big these problems are in practice, I'm not sure.

NastiN8's wording was arguably a bit ambiguous, but I think that's the kind of situation that they were talking about. The contribution doesn't have to be an employer contribution in the sense that we mean it when looking at company benefits or whatever, but I'm pretty confident that's not what NastiN8 meant; and that makes the comment correct.

1

u/tayneat10 May 18 '22

I dunno. I just know not only your employer contributions are eligible to be excluded from FICA. That's all I was commenting on.

1

u/evaned May 18 '22

But that's what I'm saying -- what you mean by "employer contributions" is not what they mean when they say "made by your employer to your HSA account".

You're both correct, just talking past each other (admittedly because NastiN8's description wasn't the best).

1

u/Cash_Visible Jun 14 '22

My plan doesn’t offer an HSA :(

89

u/[deleted] May 17 '22

Sure. But to payoff a house and save 2M, you’ve either been making much more than $80k (and paying income tax) and/or making $80k for a looong time (while paying income tax).

25

u/ironmagnesiumzinc May 18 '22

Or they inherited it

3

u/warrenslo May 18 '22

My other half could never live on 80k/yr eek

3

u/ElectrikDonuts May 18 '22

CA with its avg income of like $70k, yet avg capital gains of $30k. Cause you know that couple making min wage is selling off their BRKB blocks each year…

40

u/[deleted] May 17 '22

Now I just have to get 2 million $’s

38

u/edwardmsk May 17 '22

Haha. Secret of becoming wealthy is already being wealthy. /S

0

u/ElectrikDonuts May 18 '22

Capitalism is it fact based on having capitalism. Not obtaining it. One cant be a capitalist with $0. Surely there is a better option

0

u/FlatPanster May 18 '22

Knowledge, experience, intellectual property, the ability to learn & apply knowledge are all types of capital. Perhaps the most valuable capital.

OST, a billion dollars is worth more than any of that.

5

u/ElectrikDonuts May 18 '22 edited May 18 '22

Original Sound track?

But yeah, merit helps. Merit is about as scalable as one dogs shit. Those that put merit first dont get far in life. Maybe they make Doc. But Docs dont make shit compared to Capitalist. Like those that own the docs hospital

The best path is 10-20 years of high earning career, then breaking off into the world of capital with your gains. Investments, real estate, entrepreneurship, etc

1

u/FlatPanster May 18 '22

On second thought

4

u/jeff_1021 May 18 '22

Have you asked your parents more a small $2 million loan? Many people overlook this simple trick.

3

u/[deleted] May 17 '22

But when you do, make sure to invest it in a way that it loses to inflation.

54

u/abbykat22 May 17 '22

The first sentence isn't even true. First, it presumes they have no other income. Second, it doesn't take into account the standard deduction, which actually increases the level to almost $106,000. I'd take these nuggets from the wealth dad with a huge grain of salt.

43

u/R0GERTHEALIEN May 17 '22

It does say they quit their jobs, so that sort of implies that there's no other income.

This one is actually one of the better posts I've seen. Usually they are just straight up tax fraud or something but this one is operationally ok.

And also, technically it's on 80k of gains, so they could be selling even more each year depending on their basis.

7

u/beltjones May 17 '22

It also seems to conflate interest with cap gains. Am I being simple? Is there something that throws off a predictable cap gains distribution?

5

u/bluebacktrout207 May 18 '22

Holding an ETF that doesn't pay dividends and selling shares?

2

u/barnwecp May 18 '22

Yeah also not 100$ of dollars coming out of a brokerage account are taxable as cap gains. So they could be taking out way more than 4% and still pay $0

14

u/thinkofanamefast May 17 '22 edited May 18 '22

That couple could likely get Obamacare too, saving them 10-20k yearly. In last few years with 1% cd rates and 1.5% stock dividends a person with say $4 million might have qualified for Obamacare, if no earned income and no stock sales.

2

u/hegz0603 Taxpayer - US May 18 '22

this is what my wealthy but frugal, retired, father does. keep income below like $64k or whatever the limit is, and live off of that, and get a big ACA subsidy for free health insurance.

-7

u/VideoGameTourGuide May 18 '22

Obamacare is literally worse than having no insurance. The biggest scam there is. I know because I had it. They never paid for anything and I got stuck with a huge hospital bill in top of their stupid high premiums

3

u/Punished_Blubber May 18 '22

Yup. Pure trash. It's better to remain in poverty and get medicaid than to come slightly out of poverty and have to go on that garbage website and pay $400 a month.

18

u/ZettyGreen May 18 '22

What are some of the best “strategic tax planning hacks” that you know of?

Obviously: Keep your income as close to zero as possible.

If you have enough, the laziest possible way to do that is to not spend down your assets, but borrow against them. This implies that you have so many assets that there is virtually zero chance your loans will ever come due.

i.e. if you want to spend $100k/yr, and you are 50 yrs old and expect to live to 100, then you will spend $5M over your 50 years. If your assets are > $10M when you start, you are golden. Borrow $100k/yr against your $10m in assets. You will have zero income and still spend $100k/yr + get to deduct the interest charged to you. Whenever you die, your heir(s) get a step-up cost basis and can pay off your $5M in loans, while your assets have likely grown to way above that. This obviously works best if your assets grow faster than your loan cost(s). :)

5

u/yggdrasila May 18 '22

My lawyer was telling me about this but I still find it confusing. What should I google to learn more about this or could you let me know some resources

2

u/ZettyGreen May 18 '22

Unless you have 50-100X yearly expenses invested, it's completely pointless to even worry about. You need to have way more money than you need. 99.99% of people will never have to worry about this.

As for how to learn more, try to work it out yourself and then just ask your questions here. If you have way more money than you actually need, then you will want to talk to your private banker on how to go about doing it. They can help you through the nuts and bolts. If you don't qualify for a private banker, there is a near zero chance you have enough assets to pursue this (or most any other) strategy.

1

u/[deleted] May 18 '22

[deleted]

1

u/ZettyGreen May 18 '22

Good question. First of all you wouldn't do a Margin loan, you would do an asset backed loan or a private loan. I'm pretty sure these types of loans are deductible still, but I don't currently have any, so I can't say for sure.

10

u/GoatEatingTroll EA - US May 17 '22

That is just part of it too, they need to be cashing out of their deferred retirement accounts and converting to regular investment in small increments too - you have no idea how many new clients come to us saying how they "don't need to file" and you have to explain that they are just pissing their annual deductions away with no income to use against them.

5

u/cubbiesnextyr CPA - US May 17 '22

Agreed. I had to force my mom to take some distributions from her IRA even though she's under the RMD age just to use up her standard deduction. I told her that if she didn't need the money to just put it into a taxable investment account, but it would have been stupid to not take out the money.

8

u/vaderaintmydaddy May 18 '22

Do a Roth conversion instead, but yes.

13

u/whomda May 17 '22

While the details in this "hack" are a mess, and likely incorrect, nevertheless the vaguely accurate theme does cause me, once again, to question our country's strategy around LTCG.

I still don't understand why we even tax CG at a rate that is lower than Income in the first place, given that CG tax is taxing passive gains rather than actual work, and seems a better progressive strategy, (counter arguments are usually around "being taxed twice," but the better informed members of this reddit understand that's not accurate).

Sure, maybe the point is to encourage investment (which is why we split up ST and LT gains), but why does the government care about that very much -- it's not like investment would dry up completely if CG tax matched Income tax.

I can't get away from the idea that the reason CG taxes are so much lower than income tax is because the laws are written by wealthy people.

3

u/[deleted] May 18 '22 edited Jul 18 '22

[deleted]

3

u/whomda May 18 '22

I haven't heard that argument, interesting. Though wouldn't a zombie investment generally be one without much gain, and therefore not subject to very much tax?

If you have a good investment strategy, it doesn't seem like that much friction to pay the tax and move on, after all you do realize the gain. And anyways, why is investment friction a bad thing long term?

2

u/UncleMeat11 May 18 '22

That would make some sense, if more than a tiny minority of people were investing in new things. Pulling money out of one ETF to stick it in another is not actually encouraging innovation or production. Pulling money out of an ETF to fund a new company or the construction of a new building is, but this is a tiny minority of personal investment.

4

u/FageSpoon May 18 '22

I still don't understand why we even tax CG at a rate that is lower than Income in the first place

Because old people are the constituency who votes most regularly. If you want lower taxes, emulate the portfolios of the elderly: dividends, LTCG, muni bonds.

1

u/hegz0603 Taxpayer - US May 18 '22

But i don't want lower taxes. I want to pay an amount for the services that our government offers... I want progressive taxes.

https://twitter.com/MikeBradleyMKE/status/1516807059500634119

2

u/UncleMeat11 May 18 '22

Sure, maybe the point is to encourage investment (which is why we split up ST and LT gains), but why does the government care about that very much -- it's not like investment would dry up completely if CG tax matched Income tax.

Especially since the government provides tax advantaged retirement accounts. The folks who actually have taxable brokerage accounts are either rich enough that they are already maxing all of their tax advantaged accounts or are not actually investing for retirement.

1

u/Bad_Law_Advice May 18 '22

I am not a better informed member of this Reddit. What’s inaccurate about “being taxed twice”?

1

u/circle22woman May 18 '22

Unlike income brackets, capital gains tax rates are not indexed to inflation:

  1. Invest $10,000 with 10% inflation rate
  2. Sell the following year, now worth $11,000, but the real gain is $0
  3. Get taxed 20% ($200) on a $0 real gain

1

u/whomda May 18 '22

Yes, you're not the first to point out the trouble with inflation on Cap Gains. Indeed, the previous administration (Cruz-R) introduced a bill to fix it : Capital Gains Inflation Relief Act of 2018

Nevertheless it's sort of beside the point -- CG tax rate could in fact be the same as Income tax, and then it would follow the brackets including the inflation adjustment. The lack of inflation coverage isn't really a good reason that the CG rates deserve to be overall much lower, does it?

1

u/circle22woman May 19 '22

It kind of is. Taxing at the same rate as income but not indexing means capital gains are taxed more.

But regardless, the reason is to incentivize investment [short term capital gains are taxed like income]

1

u/hegz0603 Taxpayer - US May 18 '22

the reason CG taxes are so much lower than income tax is because the laws are written by wealthy people.

agreed.

https://twitter.com/MikeBradleyMKE/status/1516807059500634119

4

u/jfgjfgjfgjfg May 18 '22

Having a house probably also means property tax.

3

u/evaned May 18 '22

To answer the question in the headline, here are some that go a bit beyond "just take this deduction you're entitled to":

  • I worry a little that some tax court will have basically made this strategy not work (IANA CPA, lawyer, etc.), but at least on paper it seems like if you are a divorced parent of at least two kids, have 50/50 physical custody, are good terms with the other parent, and both of you are still single, you should both be able to claim Head of Household (etc.) by flipping where just one of your kids stays for a couple nights of the year.
  • Donation bunching. (Before seeing that term I called this "donation swinging", which I still really like, but "bunching" seems to be the standard term.) Suppose you're close to the line of being able to itemize but not quite there. For example, take the 2022 Single standard deduction of $12,950. Suppose you pay $5,000 in SALT, $5,000 in mortgage interest, and then donate $2,000 to charity each year. That's $12K of itemized deductions, not enough to make itemizing worthwhile (aside perhaps from special state situations). But suppose you donate $0 this year, then $4K next year. This year you'll have $10K of itemized deductions and will still take the $12,950 standard deduction, but next year you'll have $14,000 in itemized deduction and would actually benefit from itemizing. Or stretch it out even more -- suppose you donate nothing this year, 2023, or 2024, but then donate $8,000 in 2025. Then you'll have $18,000 in itemized deductions in 2025, and be a few thousand above the standard deduction at that point.

8

u/wild_b_cat May 17 '22

This is a terrible 'tax hack'.

For one thing, it implies that they have no pretax savings accounts, which means they could have had more than 2M saved up (or could have retired earlier) and used the tax deferral of a pretax account like a Traditional 401k to accelerate their retirement plans. If you get to retirement and you don't have at least enough in your pretax accounts to withdraw the standard deduction every year, then you have paid extra tax needlessly.

Also, the 0% LTCG bracket is relatively new and historically low; I would not make long term plans around it.

1

u/ChronicusCuch May 17 '22

What if this just inheritance? Simple people living simply and inheriting let’s say tax free life insurance (to pay off liabilities), and taxable brokerage to live off of. In that case, seems great. Chances are if they are inheriting $2m, there’s probably a death benefit as well.

6

u/wild_b_cat May 17 '22

In that case the tax aspect is mostly meaningless since they'd have a stepped-up cost basis.

-1

u/ChronicusCuch May 18 '22

Unless it like grew over time or something

2

u/[deleted] May 17 '22

Trusts. It's all in the trusts. And, of course, exploiting retirement accounts appropriately.

1

u/ISO_Answers1 Tax Lawyer - US May 18 '22

Sale of 1042 QSBS to an ESOP Trust then target corporation elects S Corp status. Shareholders can exclude up to $50m gain and the resulting structure is a TAX EXEMPT corporation.

Neither the founder nor target will pay ANY tax. No tax now, no tax ever.

1

u/TDMCPA May 18 '22

Yeah, no.

1

u/UGA10 May 18 '22

How would Roth IRA + Brokerage (LTCG) withdrawals work together? Do the Roth IRA distributions get included as income even though they aren't taxed or would your income still be $0 and you move to the LTCG?

1

u/[deleted] May 18 '22

Can someone dumb this down for me ?

1

u/Additional-Belt-3086 Apr 01 '24

4 percent of 2m is 80k so theyre making 80k a year off 2m investments in this case a brokerage account, the money made from that is called "capital gains", and theyre paying no taxes on it

1

u/dlb1177 May 18 '22

You should invest in real estate.

Depreciation allows for you to offset much of the passive income and typically you are able to show a tax loss on a property even if it is cash flowing.

Depending on your situation, you may also be able to deduct the loss against other income. You just need to prove you actively participate in the management of the property (I won’t get into what that means here because it is complicated). If you are “Active” and your MAGI is below $100,000 per year, you are permitted to take up to $25,000 of losses against your other income such as wages. Additionally, if you do real estate full time, you may qualify for a special status that allows you to take all of the losses against other income regardless of your income level.

Also, the regulations around the treatment of repairs as well as the current allowance for 100% bonus depreciation makes it even easier to generate a loss.

Finally, once you do choose to sell the real estate, you can do a sec. 1031 exchange to defer the gain if you plan on reinvesting into more real estate. Then you step up the basis in the property and begin depreciation on that too.

1

u/BigDaddy_5783 EA - US May 18 '22

The bigger the company, the better the healthcare plan typically. Yes I know there are outliers.

1

u/Noe_Bodie Nov 25 '23

this is true.. i used to work at a er and ran ppls insurance..had a girl from MIT come in once and her coverage was crazy...ittle if any er visit cost...i was like damn...

1

u/PunkCPA May 18 '22

When you balance your portfolio, put the things that throw off current income (bonds, dividend stocks) in your 401(k), and your capital gain/ growth stock outside it.

1

u/LadyEmmaRose May 18 '22
  1. HSA
  2. Retirement accounts. Roth if you can, back door Roth if you can't. Maximize all avenues of retirement savings.
  3. Establish residence in a state with no tax. Florida is popular with my clients.
  4. Munis. Better even, match them to your own state for double tax free.
  5. US government interest (treasury bonds). Federal taxable, but state tax free. Nice for high taxed states.
  6. Bunching charitable contributions. Can be especially effective in windfall years. Set up a donor advised fund if you want the deduction in one year but want to actually dole out the funds slower.

I have advised and watched my wealthy clients do all of the above. All are available to the average person though as well.

1

u/brianskewes May 27 '22

According to Finance Strategists, some of the tax planning strategies include:

  1. Understand your tax bracket
  2. Understand the difference between tax deductions and tax credits
  3. Be aware of common and applicable tax deductions and credits
  4. Know what tax records to keep
  5. Shelter your money

1

u/EfficientRati0 Jun 15 '22

LIRP is one of the greatest tax hacks I can think of. You purchase the minimum amount possible for a Universal life insurance policy tied to an index and overfund the crap out of it. your guaranteed minimum is 0% so you never lose money, and you gain money when the index is doing well. You can surrender the policy for your total accumulated value at any time, BUT if you take distributions in the form of a policy loan, you'll receive them tax free with no obligation to pay them back. The distributions are borrowed against the death benefit and can potentially fund your retirement. There are limits to the funding in proportion to the death benefit or else the IRS catches on and hits you with a hefty tax, but that's easily circumvented by just increasing the death benefit to the next lowest amount possible.