Please don't say - pay the damn tax, as I have been and I am going to. This is not about tax evasion but tax avoidance (google it) With that said, first time in my life I reached 32% tax bracket this year (I was able to save myself last year by doing a lot of charity, but can't this or next year). With stock appreciation and rsu vesting this year, I will fall into 35% even after maxing my basic traditional 401k ($23k * 2, married filling jointly) in next year filling 1. What other mechanisms can I take to reduce my taxes? 2. Can you suggest good tax advisors in US? 3. Can you explain mega backdoor 401k if I were 5yr old? I just want to know if it can help me 4. I plan to switch to Roth 401k after my tax bracket goes down, but for now only doing traditional #personal finance TC: $200-$500k
Sharing tax brackets https://www.irs.gov/filing/federal-income-tax-rates-and-brackets Hopefully you already know that the 35% only applies to income above 231K Mega backdoor need to be allowed by your company 401K plan for you to use that. Not all companies support it. Checkout Donor Advised fund. You can make lump sum contributions to that that will immediately reduce your taxable income for current year and then donate from that fund to charity for many years after that. Basically front load your tax benefit for donations into current year. The best thing is you can donate the highest appreciated stock from your brokerage account and get that tax deduction for the full current price of the stock and you do not have to pay any capital gains tax on the gains of that stock since you aren’t selling it.
You don’t need mega backdoor to do Roth backdoor. You can do it yourself, the mega backdoor is just a convenience some companies provide. I stand corrected, MBR has another advantage of being higher limit
The money that you put in DAF can only be used for donation, so you can’t really use the money for personal purposes
Get married if not.
Have many kids too
tax avoidance has a very different meaning not what you are thinking.
It seems you, like many people, are confused by how tax brackets work. Everyone has the same federal tax rate on each incremental amount of income. If you “hit 35%”, you are only paying that % on income between $231k-$578k. The first $11k you earn is only taxed at 10%. Just like everyone else. So on and so forth. You should still minimize your taxable income but don’t make the mistake of thinking that reaching higher income levels will subject you to a greater rate across your entire earnings.
This is the way. Buying a house is not gonna save you on taxes. You are capped at 10k unless you have a huge loan paying a crazy amount in interest then you can write that off but it's not really saving money since you would need to have a huge mortgage. Otherwise that the standard deduction
Buy home
How come buying a house is going to reduce his taxes?
mortgage interest and property tax is deductible, rent is not
You can quit your W2 job and earn less money.
buy a house
I don't know why people think their marginal is that important at the bottom of a bracket. I'm at marginal 37, but the effective is still just 30ish
The vast majority of people don’t understand this, it’s scary. They really think by making $1 more into the next bracket means they’re somehow at a way bigger tax liability for the year.
1. What other mechanisms can I take to reduce my taxes? I will share what I do. It’s pretty plain vanilla. So will let others chime in here. - I do the $23k pre-tax which reduces my taxable income by that amount from top marginal tax bracket - I do the $4k HSA which also reduces my taxable income - I avoid selling stocks that have short term gains. Those gains get added to your taxable income. - I take advantage of the mega ($35k) and mini ($7k) Backdoor Roths. By housing money in these accounts, I avoid the annual dividend income tax breakage. - Set up and utilize 529 plan if you have kids. I like the Utah one for its investment options. 2. Can you suggest good tax advisors in US? My situation has been pretty plain vanilla. So I’ve managed myself. I self-taught via Reddit Personal Finance / Bogleheads. 4. I plan to switch to Roth 401k after my tax bracket goes down, but for now only doing traditional I would generally recommend against Roth 401k for the basic $23K 401k contribution limit. Generally speaking, the following holds: - It’s better to reduce your high marginal tax dollars during your core working careers - You have ability to recognize the income during lower earnings years (e.g. a sabbatical year) when you can rollover the pre-tax 401k to a Roth IRA. - In retirement, you recognize income in the lowest tax brackets first (vs. deducting from highest marginal tax brackets during your core working years) - You could relocate to an income tax-free state to recognize income at a lower rate in retirement or via a rollover to a Roth IRA in the middle of your life - You might be filing single now with a lower standard deduction vs. joint married in retirement with a larger standard deduction. The standard deduction is essentially a 0% tax bracket. (Edited to remove one suggestion in point 1 for tax efficient allocation across accounts thanks to Google/ntxi48’s comment below. Thanks to them.)
Excellent breakdown
Tax efficient asset allocation can have unintended consequences since tax deferred dollars are not the same as taxed ones. So maintaining the same stock/bond allocation would be difficult. Would suggest just doing the same allocation across all accounts.
Have you considered starting a foundation?
Would you care to donate to the Make A Rich Foundation?
Start a nonprofit and then convert it into a for profit.