Tax Reduction Strategies For High Income Individuals in 2021

it's 2021 and your w-2 says that you just made 500 000 you want to be excited about it but then you look down and you see on the federal income tax statement that you have paid over a hundred and fifty thousand dollars in federal taxes to the government that money can never be recruited and as a taxpayer you're reluctant to make more money because you know that that's more money going to the government that doesn't help you make the money so what do you do my name is carlton dennis and in today's video we're going to go over how you can leverage the tax code as a high w-2 income earner to reduce your tax bill and come up with solutions so you can avoid overpaying uncle sam strategically let's dive in hey guys now i'm going to cut right to the chase this video is not for anyone who has a sensitive or light heart because i'm going to be very transparent and very real with you on why you are not receiving tax savings and it's up to you to decide what you're going to do with this information at the end of the day when you're playing poker you're dealt a certain amount of cards and it's up to you to play your hand and i'm just going to tell you guys what hand you're dealt you can choose to reshuffle the deck if you want to and i'm going to show you how you can but before we go into how you can reshuffle the deck the first thing that we're going to do is we're going to get the obvious deductions out of the way the deductions you already should know about as a w-2 taxpayer that probably bothers you the deductions that show up on your tax return you're like geez is there anything else i can take other than these deductions so let's get these ones out of the way really quick and then we'll dive into the deductions that will actually help save you money on your taxes let's dive in alright guys so the first thing i'm going to talk about standard deductions i know i know i know carlton you've talked about this in other videos but you may be new to my videos and you have to understand the deductions that are automatically given to you if you're a taxpayer with a pulse and you make some money okay so let's just get the basic deductions out of the way sd sd stands for standard deduction if i'm a single filer i have to take the standard deduction if i don't have itemized deductions so the standard deduction for me is 12 thousand five hundred and fifty dollars cool got it understood now if i'm married the deduction becomes twenty five thousand five hundred and ten dollars okay these are my standard deduction amounts if i'm single or if i'm married if i'm a qualifying widower i'm still going to get 25 510 the only person that really is impacted is the person that's head of household you get 18 650. okay so we cover that these are the deductions that are given to you by the government if you the taxpayer do not have items that extend exceed these amounts items include medical and dental we're going to get this out of the way guys just bear with me medical and dental expenses which let's be honest how many taxpayers are blowing up medical and dental these days not a whole lot you have your property taxes you have to own a property to write off property taxes right property taxes your property taxes include salt salt stands for state and local tax what does that mean well you pay an estate taxes don't you if you're in a state that taxes you get a tax deduction for it government only limits you to ten thousand dollars between state and local tax and property taxes so we have a ten thousand dollar limitation okay cool so we already got two itemized deductions out of the way medical and dental property taxes and salt tax then we have our mortgage interest deduction which the government tells us that we can take a deduction based on the interest on the loan only up to 750 000 of a loan so we get mortgage interest deduction cool but the last deduction we get is charitable giving okay charitable donations cool cool cool cool so our itemized deductions are these medical and dental expenses property tax and salt taxes mortgage interest reduction charitable donations the cool thing that we need to know is if we have more than the standard deduction in these expenses then we can take these expenses over the standard deduction these are called our itemized deductions you cannot get both you do not receive both it's either standard deduction or it's itemized deduction who typically never itemize their deductions probably people who don't have homes if you don't have a home you're not writing off property taxes if you don't have a home you're not writing off mortgage interest so the only thing that you're writing off are medical and dental expenses state taxes and charitable donations if you itemized your deductions okay so that you have to pay over the standard amount to even need to itemize your deductions okay the basic deductions have been covered i'm sorry that you had to battle through that with me but i needed to get through that you should already know these ones you should as are as a taxpayer already know your standard deduction and itemized deduction limits you should already know these guys these are your basic deductions the deductions that when you have a pulse and you go file your tax return turbo tax will ask you hey did you spend money on medical and dental expenses hey did you own a home hey did you have a mortgage hey did you give money to charity or a qualifying 501 c 3 turbo tax asks us all these questions these are your basic deductions right if you don't have any of that then the one thing pops up that says okay you're taking the standard deduction are you married are you single at the end of the year boom now you fall into the category you take the deduction that's given to you okay boom we got the standard and the itemized deductions out of the way our basic deductions have been covered now here are the deductions that the cpa tells us to take i'm talking about the cpa that you show up to and you're like dude is there anything i can do to avoid paying such high taxes he's gonna tell you to do this 401k plus traditional ira okay now if you're someone that's a w-2 income earner you don't have to go to a cpa to know that you should be maxing out your 401k it's not rocket science that the money you put inside your 401k is going to grow and you get a tax deduction for most taxpayers understand that but most taxpayers are bothered by the fact that the 401k only gives you 19 in a contribution 19 500 carlton i make half a million dollars a year what is a 19 500 deduction gonna do for me not a whole lot and if you watched my video that i just did before this one you understand tax deductions now so really 19 500 times your marginal tax rate may only end up in a couple of thousand dollars in actual tax savings for you so am i really having a huge impact on your tax bill by just telling you to put money into a 401k or just telling you to put money into a traditional ira right the traditional ira only gives you up to six thousand dollars so our cpa tells us to put money into our 401k carlton i already put 19 he told me the traditional ira carlton already put six thousand dollars into a traditional ira now we're at a place where we already done the obvious things we already took the retirement contribution we already set up a traditional ira and maxed that out next thing we did was an hsa dang i looked up hsa i found out that i can contribute up to 3 500 into my hsa okay do you see how small these amounts are 19 500 into a 401k plan by the way you can't touch that money until you're 59 and a half hsa plan can't touch that money either traditional ira can't touch that money either these are tax deductions that you can receive but they're not big enough for you as a taxpayer so this is when we have to get creative this is when we have to think outside of the box we're either going to give this money to the government or we're going to come up with solution now sometimes it might make sense for us to go down the charitable solution route so let's talk about how you can be philanthropic and avoid giving taxes to the government pff pff stands for private family foundation i have a lot of clients with these now i used to think it was only reserved for the wealthy pffs are now reserved for anyone who needs a big tax deduction what does it mean though to have a private family foundation it's not a 501c3 it's different it's underneath the 501c3 regulation but it's categorized differently it's a private family foundation not a non-profit organization it's for non-profit but it's your own private family foundation well what does that mean carlton you have control over the money and where the funds go to after you've made a contribution into your own pff let me explain so let's just say joe schmoe over here the taxpayer had that half a million dollar income w-2 for the year and he decided to set up his own pff well if you're establishing a pff you're creating an entity structure that you can move money over into the government will give you a tax deduction the government says that if you have a private family foundation that you can roll over 30 of your adjusted gross income so if my adjusted gross income was half a million dollars i can roll over 150k into my pff and receive a 150 000 tax deduction on my w2 psi dropping my taxable income to 350k now the cool thing about pffs is that pffs are your philanthropic entity to control which means that you can control who you hire inside of your private family foundation you can choose where you wish the monies to go inside of your private family foundation and you can choose the expenses associated with your private family foundation carlton it sounds like i'm running a business you are when you have a foundation it's truly an entity structure that files tax returns on a yearly basis so let's say we moved 150 k into this pff well what do we have to do now the rule of the pfs states that 5 of pf's value at the end of the year has to go to another qualified 501 c 3 organization okay okay cool got it got it got it so let's do some math five percent of a hundred thousand dollars is five thousand dollars so if i add another 50 grand i got another 2500 you mean to tell me carlton that by rolling over 150 000 into my own pff that i have to dish out 7 500 to another 501 c 3 to receive 150 000 tax deduction maybe you were going to be philanthropic already maybe you were going to give money already away knowing that you're a high income earner here's an avenue how about we set up our own private family foundation roll over 30 percent of our adjusted gross income into an entity structure that we have control over where we can now disperse the five percent yearly to qualifying charities that we wish to not to mention if you establish a pff before december 31st before the end of the year you can make contributions into the pdf and receive a tax deduction in that current year but you can also choose to do this every single year a private family foundation is meant to last in perpetuity it's meant to be passed on to your family members and what a lot of wealthy individuals will do is they will actually run these foundations and utilize them which allows for them to hire children and other members inside of the foundation to work the foundation legitimately now doesn't that sound like a nice tax deduction 150 000 for only having to dish out 7 500 to another qualifying 501 c3 nice this is a strategy that you have in your back pocket being a high w2 income earner so know that you can utilize this but it does require you to be philanthropic you are donating money to your own foundation yes you have control over it but it's in the foundation getting money out is a little bit tricky then you need to speak with the tax strategist now the next strategy we're going to talk about is the crt crsd is crt is short for charitable remainder trust and this is another type of philanthropic entity that high income earners establish the crt is a little bit different than the private family foundation in the fact that you can establish a way for you to get paid back out of the charitable remainder trust so you can get a tax deduction for putting money in but then get paid back out of that let's talk a little bit more about it so let's just say we had joe again and he was making some significant income let's just say he was making 1 million a year w-2 and joe ran into a tax accountant and was told that he can set up a charitable remainder trust so joe decides to set up this irrevocable trust and he decides to make a contribution to it well when you make a contribution to a crt you're able just like a private family foundation to receive a tax deduction based on the money that you're rolling over into the crt typically the tax deduction is 30 percent of your agi however once the money is sitting inside of the crt if we were making a million dollars that could be a 300 000 tax deduction that we just received so let's just say we rolled over that 300k into the crt so we have 300k sitting inside of the crt the crt that we formulated can establish an annuity that pays us back for perpetuity which means until we die now the cool part is is that when you establish the annuity you're not getting paid the entire 300 coming back to you which means you would be in the high tax bracket you would have been if you just had that million dollars come to you the annuity can be established to pay you around eight to nine percent yearly based on the money that you have moved over into the crt the amounts left over will go to charity when you die and that's how the crt works charitable remainder trusts the remaining amounts left in the trust go to the charity of your designation but while you're here alive you get to receive some of that income taxed at lower income tax brackets while also being able to make a contribution into your own charitable remainder trust for a big sizable tax deduction guys these types of strategies don't typically come up in your tax person's office when you're sitting there at april 15th with a big tax bill wondering how you could have avoided it setting up a crt and setting up a private family foundation have to be done in the year that you're earning income because you need to be able to make contributions prior to filing the tax return in an entity structure that was established in that current year so this isn't something that you do research on and just say okay i'll get around to it this is something that you proactively talk to a professional about to determine if it makes sense implement now i start off this video saying that this video is not for the light heart someone that's sensitive and part of the reason why is because of what i'm about to share with you maybe you watched over this video and you're like all those these are good recommendations i still don't want to put money into a 401k traditional iron i don't feel like giving money to charity maybe that's you as a taxpayer and that's okay but you have to understand what type of taxpayer you are if you fall into this bucket that i've just described then you're technically considered an unsophisticated taxpayer i'm not trying to point you out but i am an unsophisticated taxpayer is a taxpayer that just has w2 income okay you're going to be limited to some of the deductions that i've shared with you already but as soon as you become a sophisticated taxpayer you have the ability to open up the 82 452 tax pages that i have already looked at and i want you to be able to have access to that but you have to understand what makes a sophisticated taxpayer versus an unsophisticated taxpayer the difference between an unsophisticated taxpayer and a sophisticated taxpayer is the type of income a sophisticated taxpayer makes a sophisticated taxpayer has passive and portfolio income outside of just earned w-2 income what this allows for us to do is allows for us to utilize tax codes that the government has created around passive and portfolio income to help you reduce your taxable income i am all about transparency and many taxpayers want to know well how does having passive income actually help me reduce my tax bill if you have partnered with the government then you are now in a place where the government wants to give you tax incentives partnering with the government's as simple as buying an investment property and renting it back out when you decide to rent out your property you're creating new tax dollars in the world and the government's going to give you an incentive for creating new tax dollars the incentive is called depreciation and depreciation happens to be the number one tax deduction that taxpayers take depreciation is taken for real estate investors on your entire building but when you buy an investment property you're buying land as well when you decide to write off your building you get to take it over the course of 27 and a half years or you get to take the depreciation over 39 years but one thing is for certain taking depreciation over long periods of time doesn't necessarily always help you so you might as a savvy taxpayer choose to accelerate depreciation on your investment property now you might be saying carlton i'm earning rental income right aren't i going to pay taxes on the rental income depreciation protects you from paying taxes on the rental income because depreciation is an expense it's a deduction and at the end of the day when you have this deduction you end up with a loss on your tax returns these losses can go to offset your w-2 income if you can pass some rules the government has created what's called the real estate professional status when you qualify as a real estate professional you can use the losses that you earned from real estate to offset your w2 income guys if you're buying an investment property that pays you money that you don't pay taxes on and then you have losses from that investment that offset your w2 income you're in a place where you're avoiding taxes while still earning really good income and this is the part that i want you to get to i want you to be okay making a lot of money but also being okay not having to write checks to the government the only way we're gonna do that is if we show on paper that you're not making a lot of income but the only way we're gonna show you're not making a lot of income but you still having cash flow is by leveraging depreciation but when we leverage depreciation it doesn't mean that everyone gets to have it only those who qualify as real estate professionals can use the depreciation to offset their w-2 income because the government's created some rules the rules are is if you have over a hundred and fifty thousand dollars adjusted gross income any losses that you have from passive investments have to roll over to the next year to offset new passive income a majority of the taxpayers i work with make over a hundred and fifty thousand dollars adjust the gross income so they don't get to utilize the losses that they earn from real estate they just roll over and roll over and roll over the only way they'll be able to utilize those losses is that they were to sell their investment properties or if they qualify as a real estate professional then they can start utilizing their losses moving forward the only other way that we can utilize losses to offset our w-2 income from rental real estate is by running a short-term rental business when you have tenants living in your property for seven days or less and you materially participated in your real property trader business then you can categorize your passive losses as active losses active losses is exactly what you're looking for as a taxpayer because if i have active losses my active losses can go to offset my active income that i'm earning now my active income is my w2 500 to million dollar salary that i have that i got to figure out how i'm going to offset but one thing is for certain if i just keep putting money into my 401k and you know i'm just only writing all my property taxes and i'm just only writing off my mortgage interest then i'm always going to be giving money to the government i'm always going to be in this situation where i'm overpaying and if i work even harder the more money is going to go to the government yes i can utilize the charitable remainder strategy yes i can utilize the pff but now i'm in the place of being philanthropic so one way in which you can continue to make money without always having to give up the money is by investing into real estate and having the right level of participation in your real estate so you can utilize the losses my name is carlton dennis and i've really enjoyed teaching you guys about real estate deductions and how to avoid taxes strategically as a high w-2 income earner it is upon you to become a sophisticated taxpayer it is upon me to help you get there my name is carlton and if you like this video like comment subscribe i'll see you guys on the next one [Music] you

Channel: Karlton Dennis

Views: 85,730

Keywords: income tax, limited liability company, llc, how to form an llc, taxes, independent contractor, understanding your deductions, taxes made simple, tax strategy, tax expert, karlton dennis, taxes made simple karlton dennis, deductions in taxes, tax deductions, tax planning, tax tips, taxes made easy, taxes explained simply, small business, how to start an llc, what is an llc, tax write offs, Tax Reduction Strategies For High Income Individuals In 2021

Id: PbAbfd-lKdE

Length: 21min 50sec (1310 seconds)

Published: Fri Nov 05 2021