Taxes
Hi guys, getting sick of giving half my hard earned money to the IRS year after year...
So my tax rate (combined federal/state/ss/medicare) is ~47% for income between $1M-2M, I live NY state but outside NYC, single filer pretty standard W2 earner with not much return complexities. If I ever move back to the city my tax rate would cross over 50% which I humbly think is insane!
I'm wondering what the normal all-in tax rate is and whether I'm being stupid and overpaying. Never checked with an accountant and always did it myself.
Is anybody else on the planet paying that much tax?
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There isn't that much planning you can do as an employee. Max out retirement plans, HSA. Charitable gifting will reduce the tax, although you're not going to come out ahead economically.
You can look at a 529 plan or similar if you might go to back to school, or expect to have kids. 30k can be rolled over to a Roth now if you aren't going to use it (way down the line)
With a W2 Income, there is not much you can do. Max out 401k. If you buy a house that will likely be enough to itemize Mortgage Interest (up to $750k of Mortgage) and perhaps property taxes up to $10K.
Things that would make a sizeable reduction 1) Move to a No State Income Tax State (Prob not possible with your $1-2M Income). 2) Get Married (Not really Tax advice) 3) Start buying rental properties (Would not do this solely for Tax purposes.
Your taxes are actually incredibly simple compared to most, you are not overpaying, you just live in one of the highest Tax cities in the US and something like 70% of your income is in the highest possible tax bracket.
How does marriage help? It seems like if you have a spouse earning even close to your income, you’re pretty much coming out even
Well yeah but 99.9% of spouses dont earn $1-2M lol
If you reduce your income you pay less tax
Not much you can do with W2 income, I just checked my ytd and am ~53% (federal, state, and local) in a similar boat to you (but live in the city). Really only things at this level that help are mortgage interest deduction and investing in tax advantaged instruments if you can (and if they yield enough). Other than that, the only things I really do are work with an advisor on a trust for my family and how to make sure I protects assets in a way that is tax advantaged.
Can more be done with a K1? My accountant says no....but maybe she needs to get fired.
This is actually the most informative comment here!
Most of the planning has to be done at the business level. If you describe your situation, I'll give you a couple general items to discuss with a professional but anything specific is beyond the scope of WSO
Getting married will get your tax rate down and/or moving to FL (at least 6 months of the year).
One less known legal 'loophole' is buying a rental property and taking bonus depreciation up-front. Can write-off ~25% off the price of a residential property year 1 if you manage it actively as an AirBnB. You can convert to a more passive long-term rental in year 2 after you take the depreciation charge in year 1. So a $1M property can generate a $250K loss in your first year that you can deduct against W-2 income.
D
According to paragraph 3 of this article linked below, short-term rental properties have a longer useful life than long-term rentals, and should therefore have smaller depreciation deductions, not larger. I'm curious to learn more about what you're talking about and to verify it as factually correct, so could you direct us to literature verifying and elaborating on the accelerated depreciation benefits you're mentioning?
https://www.fuoco.cpa/depreciation-for-summer-short-term-rental-ownership/
Look up cost segregation study and bonus depreciation.
Offering so much tax alfa here. Should be charging for this advice
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