High income-How to minimize taxes?

[Escaping9to5]

Hi fellow MMM'ers, I was hoping some of you could help me out or point me in the right direction. 

I am fortunate to be a high income earner (~$500k in income this year), but am getting killed with taxes.  I have been following MMM for about 6 months now and have taken to heart a lot of his sound advice.  Here is my current situation, any advice on where I should park my income to avoid paying as much in taxes?

I sold my 2012 Toyota Tundra this year  and bought a used hybrid car (2014 Ford Fusion Energi PHEV), stopped buying useless crap, and am paying down my mortgage. Currently my house has $166k owed on it and we are paying down about $11k per month, (house is valued at $450k). 

We have 9 rental properties currently in an LLC, with mortgages on 2 of them.  (Roughly $130k in debt combined).

My wife and I's plan is to pay off our home mortgage over the next 16 months, and then pay off our rental mortgages.  Is there anywhere we should be parking our income to help avoid taxes and still getting good returns? 

Any help and advice in general is appreciated!

[Escaping9to5]

I guess it would help if I gave more details as well, I am a W-2 employee & max out my company 401k as well.  Should I be putting money into a traditional IRA?  I hesitate to do this only because it is my goal to retire the 9 to 5 in 8 years or less, and I am 34 years old currently. 

I currently have $250k in my company 401k, but am not counting on this for when I retire as I will be too young to withdraw without penalty.  My current plan is to buy 20 rental houses, pay them off, and live off the income these generate. 

Am I missing something that could significantly lower the taxes I am paying?  We donate to charity (admittedly not near as much as I want to), but get killed with AMT on our taxes.

Should I be investing in tax free bonds once our house is paid off?  Or focus instead on in the stock market since those seasoned investments are taxed at 15%?  I am a little wary about the stock market since it is at all time highs right now.....

Thanks for any advice you all may have! 

[Metric Mouse]

Yeesh. I looked up the tax brackets for that income range.

I guess the first thing I would do is take a step back and look at the big picture; what is your effective tax rate.  I just plopped $500K into the calculator and came out with $141 k in taxes without massaging any deductions. On the grand scheme of things that's a 28% tax rate; is that really so terrible?  I mean, it's a hell of a lot of money, but at your income you're a ways above most of the tax-deferred IRA options.  What are your total expenses right now? If I were you, I would not be plowing money into the primary residence; I'd be socking away any extra in the market while looking for my next rental.  (Actually, I would be socking everything into the market, sell the rentals and retire next year, but that's almost certainly not helpful advice)

[seattlecyclone]

Keep maxing out the 401(k). See this thread for more information about how to withdraw from this account early without penalties. Not that it matters much for you...at your income level you should be doing the bulk of your savings outside of the retirement accounts even if you do max them out.

You make too much money to do deductible traditional IRA contributions and even Roth IRA contributions. You would be eligible for the backdoor Roth if you have no current pre-tax IRA balance, or if your 401(k) accepts rollovers from IRAs. Do take advantage of this if you can. Look elsewhere for more information about this option.

Consider contributing a large sum to a donor advised fund. These funds let you deduct the entire amount of your contribution as a donation that year, while allowing you to spread out the actual distribution of funds to charities over many years. If you have any charitable ambitions at all, this can be much better tax-wise than waiting until a low-income year to donate.

I agree with Metric Mouse that prioritizing low-interest debt is likely sub-optimal. There's nothing wrong with having a paid-off house (or 10 paid-off houses, for that matter!). It's just that having a low-rate mortgage plus some money invested in the market is likely to turn out better.

After you've done all that, the standard advice for lowering taxes applies:

1. Contribute max to 401(k) and self-employed retirement plans.
2. Contribute to Roth IRAs (only reduces future taxes, not today's taxes)
3. Invest tax efficiently (only reduces future taxes)
4. Give your money away to charity
5. Buy biggest house in world and pay huge property taxes
6. Have huge mortgage on that house and pay huge amount of interest
7. Get married and have lots of kids
8. Be sure to lose money in the stock market since $3000 of losses are deductible each year against ordinary income.
9. Move to a state with high income taxes because state income taxes are deductible.
10. Have severe health issues that you pay for out of your own pocket as you can deduct health care expenses above 7.5% of AGI
11. Grow old, you get more exemptions for being old
12. Go blind, you get more exemptions for being blind
13. Buy property and rent it out at a loss. The more losses the better.
14. Quit your jobs. With no earned income, it's not surprising that your taxes drop.
15. Avoid investments that create taxable income. You want losers to reduce your taxes.
16. Etc.

The point is not to pay attention to taxes, but not worry too much about them. There are only so many ways to reduce them without doing other things that are likely to have a bigger impact on your bottom line than taxes ever will.

[The Happy Philosopher]

There is no place in the tax code to hide with 500k of W2 income. You could set up an HSA if you are eligible. Help your company set up a defined benefit/cash balance plan. Live in a state with low income taxes. Harvest capital losses. When you retire try and push income from a high earning year forward into a lower earning year (if applicable).

[doneby35]

Oh my goodness, with 500k income, i could retire in 2 years! i would just keep my expenses low and save as much as possible.

[woopwoop]

Check out whitecoatinvestor.com  It's doctor-focused but still has some great tips for high income earners.

[Escaping9to5]

Thank you everyone for all of the tips!

[Drifterrider]

To the OP.  If I made that much money and had that many properties I'd also have a CPA on retainer.

Were I you, I'd start there.

[Goldielocks]

Any way you could quit your job, provide contract work to the same (plus other) companies, work that is paid into the LLC?

Then you could pay yourself a smaller salary, and maybe your wife, too, or just pay your wife a small amount as healthcare benefits for work she does to manage the accounting, etc.,

Shelter the remaining income until future years when you are ready to slowly take it out?

If you think you can get paid other than as a W-2, check with a CPA about how to set it up.

[fredbear]

Pard, you're reaching relatively rarefied levels here, where the financial oxygen gets thin.   I second Drifterrider's suggestion that you need a high-end CPA.  You're probably - I didn't add it all up and you didn't give numbers for the rentals, but I think the income alone qualifies you - an accredited investor at this point.  This opens some possibilities for buying into syndicates that provide tax credits for providing subsidized housing.  If you think that's doing good, this offers a chance to do good with your money.  A credit of $25K offsets $75 - 100K of income.  Some limited partnerships in real estate can offer a substantial monthly income which is pretty much completely offset by depreciation.  That piper will be paid eventually.  These are not like the limited partnerships (such as oil drilling partnerships) that offer a tax loss - people that offer you a "tax" loss are almost always handing you a real loss, while these tax credit deals will generally get your money back to you.  Eventually.  Like, years and years from now.  If you guess that I am easing out of such things because the lack of liquidity bugs me, you guess right.   

You are probably also a sufficiently valuable employee that

-- if your CPA presents a solid plan for deferring a substantial fraction of your compensation years down the road, your company might well listen, and if it stays in business or the CPA proposes an escrow for the deferred compensation, might even do it.  That deferred comp disappears from this year's income, reappears for taxation years later when you are not employed the way you are now.

-- you might be able to talk your company into a 200% match to 401(k).  You put away 18K, they match with 37K (which would require a diminution of your salary), to build your retirement at close to the 55K annual max.  This would affect all employees.  My son got this implemented where he works and it has been a huge boon to the employees, has enhanced the recruiting of very smart financially-conservative new employees, and has cut back on corporate taxes because it lowers the bottom line.

Keep in mind that until you reach the stratosphere and are in it commercially, once you quit getting a salary your access to real estate loans can get pretty restricted.  Get into the next 10 properties while you still "have a job." 

Buy a farm.  A real farm.  Hobby farms don't count.  It better quack like a duck and shit like a duck, because if the IRS thinks it's a hobby farm, things go badly for you.  But assuming it's real, I can't believe, you can't believe, ain't nobody can believe, how much you can write off with a farm.   (Need an ag CPA for this.)

[DavidAnnArbor]

If you do a side business, like becoming a blogger for example, then you can deduct business costs from your total income, even the W-2 portion of it. I believe gocurrycracker has a blog post about business deductions that would be very helpful.

http://www.gocurrycracker.com/depreciation-for-side-hustlers/