Tax saving strategies for W2 employees
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Bring your income ( after deductions) up to the highest number of a bracketed range.
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Make sure that tax withholding is accurate.
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Salary deferrals are funds taken from your regular paycheck and put into a retirement savings plan, such as a 401(k). They are most often made from pre-tax income, which allows savers to reduce the amount of their income that's considered taxable by the Internal Revenue Service.
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Defined-Benefit Plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company is responsible for managing the plan's investments and risk. Typically an employee cannot just withdraw funds as with a 401(k) plan. Rather they become eligible to take their benefit as a lifetime annuity or in some cases as a lump-sum at an age defined by the plan's rules.
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Get 401 k and employer matching. Catchup after a specific age. Tax deffered savings.
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403b if applicable
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457 if applicable
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Maximum contribution for HSA. If feasible, do not use HSA money as contributions and growth are tax free and this asset can be used in retirement for medical expenses.
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FSA- dependent care, medical, and vision
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College accounts, 529- Growth is tax free
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IRA's Roth IRA is after tax deposit but free growth.
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Backdoor Roth IRA
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Charitable organizations donations
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Optimal money in Bussiness expense reimbursement program
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Live in a state with minimal or no income tax
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House mortgage
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Optimize tax savings
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Figure out which insurances you really need and wether you need high deductabe or high premiums.
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Real estate depreciation which allows you to carry forward passive losses from real estate. If you or your spouse achieve REPS status, you can use your losses to offset your active (W2) income. Full-time W2 people can qualify for this as it depends on the nature of real estate work and not anyone's status as W2. RE losses and REPS status usually only applies if there is only one W2 spouse and the other is not. You won’t see a major benefit if both are full-time w2 employees in the household. They can both be W2 but one needs to be able to claim REP by meeting the IRS tests and it helps to have depreciating assets to make it functional.
Real estate has a lot of tax advantages. If you work over 750 hours a year on real estate activities and don’t have a job that you put more time into than you do real estate, you can qualify as a ‘real estate professional’. This is an IRS tax status that allows you to use passive tax write-offs against your active income.... this is why many well-to-do families have a spouse who is a fairly inactive ‘real estate agent’. The ability to write off your active income with passive investments leads to huge savings.
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Tax-loss harvesting is a strategy that can help investors minimize any taxes they may owe on capital gains or their regular income. It can also improve overall investment returns. As a strategy, tax-loss harvesting involves selling an investment that has lost value, replacing it with reasonably similar investment, and then using the investment sold at a loss to offset any realized gains. Tax-loss harvesting is where you sell your stocks, mutual funds, or ETFs at a loss and then write those losses off your income, even W2 earnings. You do have to be careful to not just buy back the same thing until 30 days later but what is commonly done is to immediately buy something quite similar but not identical to what you sold. You can deduct $3000 of losses per year and bank those losses to use in future years
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A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity, like Fidelity Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity. When you give, you want your charitable donations to be as effective as possible. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.
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Change to 1099 or have a side business 1099--write off all expenses and car, food, clothes, travel, shoes, beauty, salons, etc.
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Self Directed Solo 401k or eQRP ( Enhanced Qualified Retirement Plan)
For those just starting out in their careers:
· Choose a career with a higher starting salary
· Negotiate your starting salary
· Ask for raises
If you are already working in your field, follow these 7 steps to earn yearly raises and grow your career.
- Perform as well as possible
Know what your employer’s expectations and paths for growth - Set quantifiable goals
Get your employer’s buy-in on what crushing the goals would be - Be likable and pleasant
Be nice and considerate to be rewarded with salary increases - Network
Engage people honestly
Be a team player
Help those around you to succeed - Dress for success
Look sharp and confident to make a good impression - Continue developing your skills
Learn to communicate your ideas well
Build your talent stack with new skills - Manage yourself
Learn how to navigate life and company politics
Create a system to get your job done
Be reliable and do the things you say you’re going to do
Find a mentor
Market yourself
Be sure your superiors are aware of your accomplishments
Make yourself know in your professional communities
If you can make yourself indispensable and a top performer in your company, negotiating raises puts you in a position of power.
Ways to save/grow money:
- Minimize expenses
- Fixed deposits
- Tax-advantaged investments-Bonds- Gov. bonds, corporate bonds, bond mutual funds, Bond ETFs; UITs; Annuities; ETFs
- Equities-- Single stocks, Equity mutual funds, Equity ETF's. Explore 'Dollar Cost Averaging' strategy.
- Stocks, Preferred stocks, Dividend stocks
- Mutual funds--Created by companies e.g. Vanguard, Fidelity; Passive mutual funds
- Index funds
- Real estate
- Gold
- Silver
- Give loan and get interest
- Life insurance
- Rental property
- Side businesses
- UTMA/UGMA--Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to save on behalf of a child for education or any other purpose that benefits the child (other than parental obligations such as food, clothing, and shelter). You can contribute as much as you want, but amounts above $15,000 per year ($30,000 for a married couple filing jointly) will incur federal gift tax. Anyone can open or contribute on behalf of a child. There is no penalty if account assets aren't used for college.
Ways to become wealthy:
- Inherit money
- Find money--winning lottery, finding treasure, get donation, rich spouse
- Business
- Grow existing money
Passive income:
- High yield saving account
- Investment
- Buy through cash back portals- Ebates, Ibotta, etc.
- Make your car a moving ad- Wrapify
- Rent your car, home, parking spot, clothes, bikes, equipments, etc.
- Use reward credit card
- Sell your pictures, videos, or art work- Etsy store
- Write a book or blog
- Start a youtube channel
- Open a food, drink, business e.g. lemonade stand
Financial Independence:
How can you possibly know how big your investment portfolio needs to be?
This calculation isn’t particularly difficult. All you need to have is a projection of what your annual expenses in retirement are expected to be. That figure needs to account for everything, housing, food, transportation, taxes, healthcare, travel, etc. Then multiply it by 25. Why 25? It is the inverse of the 4% rule. 100% divided by 4% = 25.
4% rule-- each year, 4% can be withdrawn from investment portfolios as an “income stream” in order to meet annual expenses and be reasonably confident that the principle and interest earned on the remaining balance will continue to meet those annual expenses for the rest of your life.
E.g. if your monthly expense is $10,000/ yearly expenses are 120,000. Multiply 120,000 by 25= 3,000,000 is the number you need in investment.
You can withdraw 4% of this or $120,000 every year.
This does not take into account the inflation and the chances that you may outlive this investment.
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Bharti Raizada