15 Individual Tax Strategies to Avoid W2 Taxes [100% Legal]

Summary

This video offers 15 legal tax strategies to reduce W-2 income tax, ranging from establishing an emergency fund and contributing to retirement accounts, HSAs, and 529 plans, to more advanced moves like investing in real estate, businesses, and oil and gas. The host emphasizes the importance of timing and staying updated with tax law changes to leverage the tax code effectively, providing a comprehensive guide for taxpayers looking to optimize their financial health.

Takeaways

• 💼 The video discusses 15 legal tax strategies to reduce W-2 income taxes for individuals.
• 🔢 For a single person with $100,000 W-2 income, standard deductions reduce taxable income to $87,050, resulting in a 16.97% effective tax rate.
• 🚑 Strategy 0: Establish an emergency fund of at least six months' expenses to cover income drops and avoid reversing tax strategies.
• 🏦 Strategy 1: Contribute to retirement accounts like 401(k) or IRAs to defer taxes on contributions and growth.
• 💊 Strategy 2: Use Health Savings Accounts (HSAs) to save for medical expenses with pre-tax income.
• 🎓 Strategy 3: Invest in a 529 plan for education expenses, which allows tax-free growth and doesn't affect financial aid eligibility.
• 💏 Strategy 4: Married couples may benefit from filing separately if one spouse has significantly higher itemized deductions.
• 🤝 Strategy 5: Contribute to a Donor Advised Fund (DAF) for immediate tax deductions on charitable donations that can grow tax-free.
• 🏠 Strategy 6: Buying a home offers tax deductions for mortgage interest, insurance, property taxes, and potential 1031 exchanges.
• 💼 Strategy 7: Opt for deferred compensation plans or employee stock options to defer income and potentially grow assets tax-free.
• 🔄 Strategy 8: Starting a side hustle can lead to tax deductions from initial business losses.
• 📉 Strategy 9: Dump stocks with unrealized losses to offset taxable income, a practice known as tax loss harvesting.
• 🛌 Strategy 10: Long-term care insurance premiums are partially tax-deductible when itemizing on Schedule A.
• 🏢 Strategy 11: Invest in real estate to leverage tax benefits like passive loss deductions and depreciation.
• 📈 Strategy 12: Invest in businesses to grow assets tax-free or intentionally operate at a loss for tax deductions.
• 🛢️ Strategy 13: Oil and gas investments offer significant tax benefits but require accredited investor status.
• ⏰ Strategy 14: The timing of financial actions can impact taxes, with actions before December 31st affecting the current tax year.
• 📰 Strategy 15: Keeping up with tax law changes ensures leveraging the tax code to one's advantage.

Q & A

What is the standard deduction amount for an individual with W-2 income in 2022 according to the script?

The standard deduction amount for an individual with W-2 income in 2022 is twelve thousand, nine hundred and fifty dollars ($12,950).

What is the effective tax rate if someone earns $100,000 in W-2 income and takes the standard deduction?

The effective tax rate would be 16.97%, resulting in total taxes of fourteen thousand seven hundred and seventy-four dollars ($14,774) on a hundred thousand dollar income.

Why is establishing an emergency fund considered as strategy zero in tax planning?

Establishing an emergency fund is considered strategy zero because it provides a safety net to cover unexpected expenses or income drops, preventing the reversal of tax strategies or loss of tax savings.

What are some of the retirement accounts mentioned in the script that can be used to defer income and reduce taxable income?

The retirement accounts mentioned include traditional IRAs, traditional 401(k)s, SEP IRA, and SIMPLE IRA and SIMPLE 401(k).

How does a Health Savings Account (HSA) work in terms of tax benefits?

An HSA allows individuals with high-deductible health insurance plans to save pre-tax income for future medical expenses, which can include doctor visits, prescriptions, and other qualified medical costs.

What is a 529 plan and how does it provide tax benefits?

A 529 plan is an investment account that allows pre-tax income to be used for qualified education expenses for a designated beneficiary, including college tuition, K-12 private school tuition, and student loan repayments.

Why might a married couple choose to file taxes separately?

A married couple might choose to file separately if one spouse has significantly higher itemized deductions, such as medical expenses, that would not be deductible if they filed jointly.

What is a Donor Advised Fund (DAF) and how does it provide tax benefits?

A Donor Advised Fund (DAF) is a philanthropic vehicle that allows for immediate tax deductions on contributions, with the funds invested and growing tax-free until donated to a chosen charity.

What tax benefits can one gain from buying a home?

Buying a home can provide tax benefits such as deductions for mortgage interest, insurance premiums, and property taxes, as well as potential benefits from a 1031 exchange or home office deduction.

What is the concept of deferred compensation and how can it be used as a tax strategy?

Deferred compensation is an agreement to receive income at a future date rather than immediately. It can be used as a tax strategy by deferring income, often in the form of company stock, to reduce current taxable income.

What is the tax benefit of investing in oil and gas wells according to the script?

Investing in oil and gas wells can provide tax benefits as the tax code allows for all net losses from these investments to be considered active income, which can offset ordinary income on W-2 wages.

Why is it important to keep up with tax law changes as a part of tax strategy?

Keeping up with tax law changes is important because it allows individuals to leverage the tax code in a way that benefits their financial situation, taking advantage of new tax credits, deductions, or other changes that could reduce their tax liability.