Hey, guys Toby Mathis here. And today we're going to talk about high income earners and what you can do
to reduce your tax liability. Specifically, we're going to be talking
about using charitable organizations to lower your tax liability. And here's why. First off,
who do I mean by high income earners? If so, you might be surprised
at how little money it takes to be in the top 10%. U.S. Census Bureau for a household,
since it's about $201,000 a year, would put you in the top 10% Now, you want to go up higher. About the 1% is going to be about 500,000. And again,
we're just talking about averages here. But we're talking about
in the United States. So it doesn't take much
to be in the top 10%. So we're talking about top 10% of wage
earners. This is household. So this is you
know, could be a joint return. We're getting into some pretty high
taxation, like you're getting close
to the highest bracket if you're single, if you are married,
you're still getting into the pain zone. I always see that like anything above 24%,
you're in the pain zone, right? It really, really starts to stick. And that's federal. You also have the state on top of it. So let me explain
kind of two baskets of people, and then I'm going to be addressing
one of the two baskets are people that are independent
they work for themselves or they work for an employer
where they have quite a bit of say. And then there's the people that are just
W-2 and they don't really have much say what type of plans are out there
that they could have access to in that first bucket. If you're the business owner,
you might go out and seek certain types of tax
reduction techniques inside the business. Buying extra equipment
to reduce your tax liability, you know, owning the
the building that you're conducting your businesses
and grouping those two activities. Maybe you can use some extra depreciation
to lower our tax liability. Maybe you're doing something
like a defined benefit plan where you're putting aside in some cases,
hundreds of thousands of dollars. We have some people that are north
of $700,000 a year in a retirement plan, but you have to be in control of the organization or be
in an organization that is really focused in on benefiting its executives
to have access to those types of things. If you are a W-2 wage
earner for a business that you do not own, sometimes
you'll have access to that DB plan. And by the way, DB plan is a fancy way
of saying a defined benefit as opposed to defining the contribution
defined contribution. Where I'll use two for K,
how much can I put in? I can put in $20,500
for my employee in my pay. Plus my employer can match up to 25%
a maximum of $61,000 a year. We're defining the contribution
in a defined benefit plan. We're saying,
how much do you make last five? Let's say the last three years of it
making $200,000 a year. All right. When you retire, how much needs to be
in that plan to kick out $200,000 a year? So you started doing some math and you realize,
oh, boy, it's millions of dollars in order to get that type of money. Let's just say it's the rule of 4%. So in order to kick out
$200,000, we're going to need my. What would that be? $200,000? See if I could actually do the attorney
math. If I if I'm going to kick out something like that,
I'm talking about five, 5 million bucks. I need to have a lot in that plan. And I may have a short
period of time to do it. So I might be able to put in to that plan
to 50, 300, 400, $500,000 a year. But you know what my ages and how
many years I have to fill up that plan. So that's kind of our basket number one. And I'm going to assume
that if you're sitting here, you probably don't have access to those tools, or
if you do, it's not getting the job done. So you're sitting in basket number two
or you just have this W-2 hitting you, and all the accounts are walking around
saying There's nothing we can do for you, there's just nothing there for you. And I'll tell you why that is. First off, they're incorrect But the reason they're doing it
is because they have been trained for the middle of the road. Average American average American
household makes about $97,000 a year. So right around $100,000 mark. So they're just sitting there wringing their hands going,
oh, there's nothing really there for you. Just pay your tax. Be a good citizen. Just pay it
You're saying what you're saying. If I'm making a million bucks, there's a good chance
I'm living off of a fraction of that. Maybe 200,000 of it, right? So I have $800,000
that I am profiting that I do not need. And you're telling me just lay down and in some cases
pay as high as 50% on that money. Now it is a progressive system. The more you make, the more they take. So you get it by over half a million bucks
you made filing jointly. You're definitely in the top bracket
plus you're getting your state. In some states
you could be as high as 50%. That doesn't feel good. I'm paying a tax bill now of three
or 400,000 bucks. Not really feeling it. And I don't necessarily need the money, but I'm going to get hit with that
tax bill just the same. So what are you to do? Well, I say, how do we keep it within your realm? And when I say realm means
within your sphere of control. So you may not own it. You may have to give it up
to another organization or to an entity or something
that will give you a deduction or to an investment
that will give you a deduction. But you still on the investment
or you still control the entity, but it's still within your control. A lot of people will get retirement plans. Classic example you put it into an IRA,
you put it into a four and K, put it in a DB plan. It's no longer your money. You're still in control of it. But there's a ramification
if you get access to it. But there's other vehicles that work
well that work just as well. So let's kind of lay this out. I'm going to use my white screen. So just deal with me for a second. There we go. So if I am making let's just put up here $1,000,000 a year and I feel that tax pain, realistically, what I'm looking at
is anything that I do not need to live, that's not going to be really
in an emergency realm. So I'm probably looking at a minimum of $500,000 that's rolling around in a tax appetite that I would like to see cut
if I could get half a million dollars off. So I'm only paying tax and $500,000, I'm
probably going to be in the twenties as far as total percentage of of tax
that probably be okay with that, but it's going to be really
hard to get to that 500,000. A lot of people immediately say, well,
what about the standard deduction? I heard that
you get the standard deduction or let me go over that real quick. Let's say you're married, filing jointly and it's 20, 21 and you would get a $25,100 deduction
which is going to get us off for the million,
not going to get us there. So we start looking at this it's like -25. 100. That stinks. Not good enough,
not going to get us there in 2022 by the way that would be 25,900
not getting us where we want to be. Right.
We're not feeling it. That's, that's barely going to put a dent. So that standard
deduction isn't really going to work. What you realize is that when you,
when you look at a standard deduction, you are going standard versus itemized So our first step is defining
what are in those itemized deductions. And you realize pretty quickly
that it's not all it's cracked up to be. You have medical expenses to the extent
that they are greater than 7.5% of your adjusted gross income so in your case, your million dollars is pretty much going
to be pretty darn close unless you have some retirement plans,
which you're really not going to put much into student interest again. I mean, you might be looking even at phase outs and things like that
that would restrict it. You're probably going to be pretty close
to that million. So you're going to say, all right,
what's my medical I have to exceed $75,000 to get to write off a dollar. So medical not that great What's the other one? Mortgage. Okay, I can write off my mortgage, but it's only on mortgages that are less
than Let me see if I can do that. Right.
Get less than $750,000 or in three tax cut jobs act world 1 million. That's the interest on it. That's not the amount. So you have to have
a, you know, 750 or $1,000,000 liability. Okay. So what's the interest on that? Well, it's 4%. You probably look at it less than $40,000. Still not going to get us anywhere
that we need to be right. So we're like, okay, we have some of that
medical usually ends up being zero because you know, you're not spending
$75,000 a year unless you have serious medical issues for yourself,
your loved ones, people that you care for. The third level is really charity and this is where it gets interesting. So I'm going to put a little heart
next to it because charity is not that charity can go as high from where
we're at right now. I'm not going to touch on the way it was
it was 100% during the COVID, but it's 60% of your AGI with cash 30% of AGI for capital assets. I'll just call it a in. That's if these are public charities
and we'll go over what that means. Private foundations. It's 30, 20, but I'm not going to
really get into all of those The last one is the SALT deduction,
state and local taxes, which is capped at $10,000. So again, here we go. I can get my $10,000 for state
and local taxes I had to pay a whole bunch my mortgage. I might get that 40,000 my medical,
I got zero. And then the charity is a big question mark and I don't know
like I could literally give away up to $600,000. So if I have cash I could say up to 600 k not too bad. I could like boom, this, this starts
to stand out obviously compared to everything
or make it a little bit bigger for you. Up to 600,000 So we could get the job done with a 501 C three and you could give it to other people's
charities like you could get yourself down here
pretty quick, you know 60% of AGI, so you could have a 650
so you could get your down to self down to $450,000 of income. You're subject to AMT, but I don't think
we haven't seen AMT really hit anybody in a long time. Just the way they kind of fixed it. So that looks very, very promising is, hey, this charitable stuff
and then you immediately say, But I don't want to give away
all my assets, okay? You don't have to give away
all your assets. Here's the beautiful part This can be your charity now let's just talk about things
that you could do with your charity. You could set up something
called a charity remainder unit trust and make your charity the beneficiary and you could put assets into that. Correct. And you get a percentage deduction the future value of that,
of that beneficial interest. So if you have a credit
that might be a 20 year annuity trust or something like that,
you might get as high as 30%. So if I put it, let's just say
half a million dollars in here, I might get a $150,000
deduction if I'm lucky. Not getting us where we want to be. So, you know, the other thing
you could possibly do is let's say you have appreciated assets then that might work here. So we have something, let's say
that I bought something for 100,000 and here I put that out and it's, you know, so basis is 100,000, but it's fair market value, if I had it appraised right now
would be $1 million. Okay, now we're talking
maybe I could get probably closer to 10% deduction on that, but somewhere
so it might be 10%. All right. So we're going to be $100,000
deduction ish. That's
still not going to get us where we are. Maybe that's a component of it. I'm just going to touch on it
because the charitable stuff does pop up from time to time. I'm just going to say, probably not that
CRT is not going to get us where we want. What else could we do? Well, there's something called in. It's not going to be with your charity
at this point. You have conservation easements you just have to be really careful
with these and use reputable companies
that are using a low ratio because we had conservation easement companies
running all over the place doing 15 times. You know, you put a dollar,
you get a $15 deduction. That's silly. That doesn't work. What we see is usually you know, 2.5
to 4.5 is right around the sweet spot. Good companies. And what you're doing
is you're giving you're basically buying into a syndication where the syndication
is going to turn it into a conservation is going to give it away to two
to charity, Ducks Unlimited or whatnot. And they're going to give mineral rights
air rights, whatever it is. But if I put it in a dollar, I might get a, let's just say $2.5 deduction and that's going to come over. So like if I gave $500,000 or I wouldn't do that,
let's say that I gave $100,000, I would get a $250,000 deduction, but it cost me a hundred. How much is that going to save me? Maybe it saves me 125,000. So my net gain is 25,000. So, you know, obviously
if it gets up to that 4.5 ratio, you're going to get a 450,000, right? So maybe then it's
maybe then it starts getting worthwhile. But you have to be really charitably
motivated to do that. So I'm not going to say that those are
going to work either, which is good. It's going to leave us to the straight
deductions, probably to your charity. You could set up a 501 C3, for example, low to moderate income housing,
if you like, Section eight housing if you like veterans housing,
single mother housing, elder housing,
if you're willing to to buy into housing that's doing a public service in its
section eight qualified about 70% of it you're going to be in this
nice little safe harbor which allows you to operate
as a 51 C three. Now you could do normal 501 C 32
amateur sports 444 educate Asian religious organizations, amateur sports all those things
can be a charitable activity, but it needs to be a public charity
and qualify under 501 C three. We teach full on classes about that. Plus there's plenty of videos
on this channel where you can look at what we do on the charity side,
but you could give assets to your charity. Now, remember I said cash was the 60 capital assets was 30. But here's where it gets really,
really interesting. Cash, obviously, if I did a, let's say I had $1,000,000 of W2
and I'm just using this round number, it could be whatever the number is,
half a million, 200,000, whatever. And I gave $50,000 to charity. That means my taxable income
is now moved to $950,000. I'm going to save $50,000 that 50,000
might be in my own, I have a one C three sitting there which now I can use
for all the good things I want to do. Maybe I am running a sports league,
maybe I am doing moderate, you know, housing or whatever. In addition though,
I say, you know what, I have an old house I've had this house for 20 years. Let's say that I bought it for $100,000. Let's say that you're one of our folks
that works in our infinity side, and you bought this and its properties
now probably worth half a million. You don't have to sell it. This is the basis this is the fair market value. You could literally give that asset to the charity and your deduction is a half million
dollars limited to 30%
of your adjusted gross income. So first off, we look at it and say,
what's our adjusted gross income under this example, it's
just sitting at a million bucks, so you could take another $300,000 off a million. So you're going to get 30%. So you could take a maximum of $300,000. Now we're getting somewhere,
now we're getting somewhere, right? We just lowered our taxable income
considerably. We just saved ourselves about $121,000
without even looking at state taxes. I doing that. And now the charity is sitting there
with a nice asset in it that's going to be used for that benefit. What happens to the additional $200,000? There's 200,000 because we had a $500,000 minus the 300 that we used in 20,
let's say there's going to be for 20, 22. Then we have two 200,000
excuse me, 200,000. That's
going to be available to carry forward and we can carry it for three years. For five years excuse me, five years. We have 200,000 that we carry forward So
this is starting to look attractive to us. We got ourselves down to $650,000 and we still have
what is amounts to $550,000 sitting in our charity what can I do with it. Use it for your charitable purpose. In conjunction with that
you could get paid a reasonable salary and it could be you your kids or whoever's
working for this, but you can get paid a reasonable salary and you're saying, well, that defeats
the purpose, I don't want a salary. Okay, then defer it The rules for deferral
are actually pretty simple. I can, as long as I give you more
than what you're entitled to in, there's risk of loss and there's a
few other little requirements I can defer reasonable compensation so let's say this guy is, Hey, I'm going to pay me $50,000 a year and maybe it's going to pay my kids
who's helping me, maybe it's going to pay them
$10,000 a year, which by the way, what if we paid your children $10,000
a year? Let's say they were in college
and they were doing all the social media. They were soliciting for the,
for the organization. They were trying to get charitable
donations and stuff and you paid them the 10,000
you know what your tax rate on that is 0%. You know, they could put 6000 of that
right into a Roth IRA and never pay tax again on that money. That's how these things work. Now, what about you? You could say,
Hey, it's going to pay me 50, but it's going to defer it
and when it does pay me out, it's going to pay me $62,500
when I leave service. So leave service or set time when I'm when I turn 70 years old and it just sits there and waits for you and I say, Okay, well,
what if I don't want to get paid? Great. Then violate the terms of the compensation
and forfeit it. Go compete with say I don't want it. But the point is,
is that you're entitled to receive that you will pay tax on that amount at 60. Let's say you start taking it out
when you get older. But what happens generally speaking is the older
you get, the less tax you are paying your your income goes down. You're not going to be
making the million dollars a year if you're not working at your job. Right. So they're looking at this going, oh, but,
but what can I do? I'm going to be making so much money. Well, okay, when you're 65,
you go into retirement or whatever, you're going to realize that,
wait a second, that employer's not going to pay me
a million bucks anymore. I'm not doing anything. So maybe it drops down to a hundred,
whatever it is. Maybe you have a bunch of other assets
and you're still make it 200. Okay, well, we're dumping the 60
25 every year on that as opposed to being taxed
at a million bucks this year. And because we kept it separate we had $550,000 that continued to grow. It was protected. It's not part of your estate. There's so many good things that come out of this and you're doing
something good for society. All this stuff comes in right back
over here with that little charity and it becomes something that you could
really use to lower your big old income. You're just like,
Man, I'm just getting crushed in my taxes. And so I like this little charity
I'm going to make it even a better heart. Now, what else could I use in there is something else
that high income earners do use and that's called oil and gas. And why do they do that? Well, it goes like this. If I have ordinary
non passive business losses. So I run a sole proprietorship,
or I set up my own S-Corp and I give it a bunch of money
and I lose that money. I have losses from the year. I can take that loss against my income tax, I can take it against my taxable income Oil and gas works the same way,
so I don't have to do anything. I just have to have a working interest
in it. And it's what's called intangible drilling
costs, the intangible drilling costs. What they do is it's the cost of basically
digging a hole and it lets it be ordinary non passive loss so let's say that I put $100,000 investment into oil
and gas. I might get an $80,000 deduction in year one
and it comes over here. And again, it would be something
where I could literally take another, you know, 80,000. It's not, it's not,
it doesn't generally usually equal 100%. It's whatever the intangible drilling
costs are, but you have to be a working interest in that and that allows you
to have this extra loss. And so we start adding
all these things up right so again, here we go, it's coming down here we so we have our investment, we have
the loss that comes over here actually we have all of our charitable stuff. What do we have
is our charitable donation over here. We did 50, 550,000. So you start seeing how this works and
the next thing you know, what do we have? We have six 30, six 76 80. So we have a total of $680,000
of deductions, which leaves us with taxable income of what, 320,000 which means I'm going to be so happy,
I'm not going to get killed in taxes. I did have to invest my money and I did have to set up a charity
and put it away. But now I'm actually seeing some major movement on my taxable income now. I've never understood, never understood why accountants
don't talk to their clients this way. The only reason I can think of it
is because it's so nuanced. If people aren't doing this
and by the way, I do this, I have a couple of charities
that I've set up that I love to give to. There's other people's charities
I love to get to. You still have to meet
the public support test by six, by the year, by year six,
which means if you are just
dumping your own money into this you have a certain number of years
that you can do that and then it stops. You're six, you're done,
you have to do another one, or you need to meet the public
support test, which means you're going out and getting somebody else
to contribute to your charity. The beautiful part about people
that are high income earners is they tend to hang around
other high income earners, and you guys are supporting
each other's organizations or you're working together
or, you know, blah, blah, blah. If you do not meet
the public support test, it doesn't mean your charity blows up. It means it becomes a private foundation. But the rules get a little stricter. You could still accomplish
what you're trying to accomplish with the deferred compensation. You could still do things,
but you have to start giving away a percentage, usually 5% of your income or of your assets
at the beginning of the year. You have to give away 5% of those assets
by the end of the year to other qualified 5013, you get people that make good money quite often. They have other people
that make good money. And guess what they start doing? They start giving to each other, Hey, I'll take care of yours. They are two years Nothing wrong with it. You guys could absolutely do that. I would prefer that you stay in the realm of the public charity
and operate and do something good. I like housing
I like amateur sports quite a bit. I have folks and friends that run leagues. One does a whole built a whole facility for a volleyball
and runs a volleyball team. I do the United States
Muay Thai Association out here in Nevada. I run a bunch of judges and officials
and help officiate things like that. But this becomes a nice area
for you to push money into, where you get quite a bit of tax relief
and you get the reason that more accountants don't know about
this is because it's really only relevant
to the top 10%, 5%. Really, the people that get
the biggest bang out of it are the top 1%. And most accountants are trained
for that middle of the area. The around $100,000 mark. They're not trained for the 500,000. The way they learn is they have to do it. I'm just telling you straight up
that there's nothing wrong with anybody. In fact, quite often it might be an area
that they would love to explore. It's just there's not that many taxpayers
that need this type of planning. If you're watching this video, the chances are
you are one such taxpayer. Now, there is another way that you can get massive tax relief and this is dealing with four 69 and there's a little exception called C7. And this is what are called pals passive activity loss rules. If you are investing in real estate,
you probably realize that there are massive paper deductions. The problem is the code four 69. I'll put the little code sign,
but it's 26 USC four 69 does not allow you to use passive activity losses
against other income. So all they do is stack up
and but you can use it against other passive activities
with there's two exceptions. Number one is active participation in rental activity in number two is real estate professional status. If you are a real estate pro, then all of your passive losses
get released as ordinary non passive. Now I have plenty of videos on real estate pro status and how you use it. Knowledge rules. I'm just saying that
if you want to get massive tax relief, make sure you or spouse can meet the test the test real simple is somebody has to spend seven or 50 hours
a year on real estate. Plus it's more than 50%
of their personal service time. So if you have a W-2 job
and you're working full time, it's not you, it's your spouse. And they have to materially participate in your rental activities. And you can treat all of your rental
activities as one activity. You hit those, all your real estate losses get unlocked if you're grouping
all your activities together. I should just put a little nuance there
in case you're an accountant here. I'm to put this over here
in case you're an accountant. So you have active participation. We're not going to worry about
because it phases out. It's $25,000 a year you can deduct, but when you get to $100,000 plus it goes away,
it starts to phase out at 150. It's gone completely. So if you're you really have to be making less than $100,000, otherwise
you're not going to get a benefit. So real estate pro is the one that could potentially help you
if you are a high income earner. So if you're making a bunch of money,
you have high W-2 having a spouse that qualifies
as a real estate pro will unlock, will unlock
lots of real estate depreciation. How much am I talking do you have a half
million dollar property? Good. Good chance it's going to be north
of $100,000 deduction in year one. And that's because we use something
called a cost segregation. And bonus depreciation. Don't try to remember all this. I have lots of other videos on these
topics where we create real estate losses. I'm just saying that
if you are a W-2 wage earner and you have high income and you run across an accountant
who says you cannot do anything they're wrong. You absolutely can do something. Whatever you do is getting what's going
to require some effort on your part, but it could be massively beneficial
to you and your family. And I'll just plant the seed
if you're making that type of money chances
are you're going to be exceeding the federal estate tax exclusion,
which right now what are we at 12 to close to 12 million. We're over for a married filing jointly. You're probably close to 25, 25 million. If you get north of that
you're getting killed with taxes, right? We don't want
all of your estate to be taxable. So you move it into these types of realms
where you're in a Bible and see three. Not only is it not yours,
not only can nobody take it away from you, but your kids could continue to operate it
when you're gone. And it's not part of your estate. It doesn't need to be probated, it's
not part of your estate for state taxes. They just continue to control it and now
they're in control of all these assets. So we put 550,000,
it could just sit there, the kicking out rental year after year,
if you're using the other money to do good things or buy more properties and you get it just keeps growing,
growing and growing, growing, growing. And you got this nice tax deduction
for putting it in there. That's your reward for being such a good citizen
and you're doing good things for people. We need affordable
housing this gives you something to do and your kids can continue
to draw a salary out of it. So are they going to buy a Lamborghini
with that money? No. But could they be receiving reasonable compensation
for the rest of their life? Yes. And then, yes,
your grandkids could step in your great grandkids, your great, great, great,
great, great, great grandkids, your lineal descent descendants
could continue to serve on the board and continue to do good works
that you helped set up and create. That's an ancillary benefit to all this. So that's it. You've now been made aware
that there's lots of options for you, even if you're a high income wage earner. Yes, they're a deduction
just waiting for you to take it. All you have to know
is how to create the deduction, where to look,
what the rules are, and have a good guide if you like this type of information,
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