Tax Strategies: Income Tax

Income Tax

1. Get Another 401(k): If you're moonlighting or have a side gig, you could potentially get a second 401(k), because you can have a separate 401(k) for every unrelated employer, all with a $60K total potential contribution. It could look like having a 401(k) where you're an employee and you put in your “employee” contribution and your employer includes a match, and also having an individual 401(k) for your side gig, where you can contribute 20% of your profits as an “employer” contribution.
   
   ‍External Guide: https://www.whitecoatinvestor.com/multiple-401k-rules/

2. Max out your retirement contributions: The biggest tax deduction available to most high earners is to simply save for retirement in tax-deferred retirement accounts like 401(k)s and 403(b)s which allow you to save money at your currently high marginal tax rate, protect those investments from taxes and creditors as they grow, and use account withdrawals in retirement to fill the lower tax brackets.
   
   ‍External Guide: https://www.kitces.com/blog/coordinating-contributions-multiple-employer-sponsored-defined-contribution-plans-401k-defined-benefit/

3. Maximize tax-deferred & tax-exempt savings: Maximize tax-deferred and tax-exempt savings by adding income tax flexibility in retirement through tools like Roth IRAs and 401(k)s.
   
   ‍External Guide: https://www.kiplinger.com/taxes/tax-planning/604687/are-you-maximizing-your-tax-exempt-bucket

4. Dependent Care FSA: Contribute to a Dependent Care FSA through your employer to receive tax advantages for childcare expenses.
   
   External Guide: https://www.thebalance.com/guide-to-dependent-care-fsas-5206670
   Steward Blog Post: https://www.oursteward.com/blog/under-the-radar-tax-break-for-working-parents

5. Contribute to Roth IRAs: All the money earned in a Roth IRA, so long as it is withdrawn in retirement, is never taxed.
   
   External Guide: https://www.whitecoatinvestor.com/why-i-love-the-roth-ira-back-to-basics/

6. Make Roth 401(k)/403(b)/457 contributions in your lower income years: Switch to a Roth contribution for your 401(k), 403(b), or 457 if you're in a relatively lower income year in your overall career trajectory. All the money earned in a Roth account, so long as it is withdrawn in retirement, is never taxed.
   
   External Guide: https://www.kiplinger.com/article/investing/t001-c000-s002-invest-in-a-roth-401k-if-you-can.html

7. Utilize a Backdoor Roth IRA: A way to contribute to a Roth IRA, even if you're above the typical income limits. It's a "two-step" (1) Making an after-tax IRA contribution, and then (2) subsequently converting it to a Roth account, where it can grow sheltered from any future capital gains taxes. Note: if your 401(k) offers low-cost mutual funds, your traditional IRA can be rolled into the plan to avoid the pro-rata rule for backdoor Roth IRA conversions.
   
   External Guide: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
   Video Guide: https://www.youtube.com/watch?v=iD-M5Bxjv00
   Steward Blog Post: https://www.oursteward.com/blog/the-01-s-favorite-tax-planning-strategies-ultimate-guide-to-the-backdoor-roth-ira

8. Mega-Backdoor Roth: The "mega" version of a Backdoor Roth IRA allows you to put even more money into a Roth IRA, but you need a 401(k) plan at work to utilize the method.
   
   External Guide: https://www.nerdwallet.com/article/investing/mega-backdoor-roths-work

9. Deferred Compensation / 457(b) plans: Some employers offer plans that allow you to defer your compensations for years or even decades (e.g., 457(b) plans). Like a 401(k), you get to choose and control the investments, but unlike the 401(k), it is still your employer's money and subject to your employer's creditors, so caution advised.
   
   External Guide: https://www.bankrate.com/retirement/perks-of-a-government-457-retirement-plan/

10. Right-size your refund: If you received a very large refund last year, check into your withholding to ensure you're not giving too big a "free loan" to Uncle Sam.
    
    External Guide: https://www.gobankingrates.com/taxes/refunds/why-getting-a-large-tax-refund-is-bad/

11. Hire Someone to Care for Your Children (Dependent Care Tax Credit): Do you pay a nanny or babysitter to take care of your kid or do you use a daycare service? If the answer's yes, then that qualifies you for a tax credit (even better than a deduction) of up to 35% of $3,000 (one kid under 12) or $6,000 (more than one kid under 12) spent on childcare.
    
    External Guide: https://www.kiplinger.com/taxes/602508/child-care-tax-credit-expanded-for-2021

12. Child Tax Credit: Have kids? Then you qualify for a tax credit of $2,000 per dependent under age 17, but there are income thresholds of $400,000 for married couples and $200,000 for all other filers. Additionally, this credit might get a boost if the Build Back Better Bill passes, so stay tuned for updates.
    
    External Guide: https://www.bankrate.com/taxes/child-tax-credit-2022-what-to-know/

13. Utilizing tax refunds effectively: Use your tax refund wisely by paying down credit card debt or you have the option to apply up to $5,000 of that refund to purchase Series I Savings Bonds if you file Form 8888 with your Form 1040.
    
    External Guide: https://www.kiplinger.com/personal-finance/604536/how-to-make-the-most-of-your-tax-refund-in-2022
    Video Guide: https://www.youtube.com/watch?v=AJlspY8tmQ0

14. Establish your tax domicile in a beneficial state: Many wealthy take steps to carefully establish their "domicile" with minimal or no taxes; places like: Puerto Rico (income tax is only 4%) and states with no income tax or state capital gains tax (e.g., Texas, Florida, Alaska, Nevada, Tennessee, Texas, Washington, South Dakota, and Wyoming as of 2020). To establish your "domicile" it will require (at least!) buying property there, shifting your family there, and setting up wills there.
    
    External Guide: https://www.kiplinger.com/article/real-estate/t007-c032-s015-financial-matters-when-moving-to-a-new-state.html

15. Low-Income-Years: Tax gain harvesting—Take advantage of your natural lower income years (student, early retiree, minor) to lower future tax bills. Lower income earners don't pay taxes on long term capital gains (or qualified dividends for that matter), so taxable investing accounts can be very tax-efficient for these folks.
    
    External Guide: https://www.schwab.com/learn/story/how-to-save-money-with-tax-gain-harvesting

16. Low-income years: Roth Conversions—Take the one-time tax hit, and shift your IRA or 401(k) accounts to Roth accounts where the money could grow unchecked; particularly helpful in low-income years (when in school).
    
    External Guide: https://www.nerdwallet.com/article/investing/roth-ira-conversion

17. Clumping charitable contributions: Stack your itemized deductions (e.g., charitable giving) into a one year burst, to clear the threshold where an itemized tax deduction makes sense by “clumping” charitable contributions with a donor-advised fund.
    
    External Guide: https://www.kitces.com/blog/itemized-deductions-after-tcja-sustaining-intermittent-add-on-standard-deduction-threshold/

Other Tax Strategy Guides:

Tax Efficient Portfolio Management
Homeowner / Real Estate
Gifting / Charitable Donations
Self-Employed / Business Owner
Estate Tax

Ready to implement these strategies, but don’t know how to execute the plan? 

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We are often asked for recommendations for tax preparation (actually doing the forms) to complement the work we do with families on tax strategizing (planning in advance to lower future tax bills.) We were frustrated that no "Yelp" existed for accountants/CPAs/tax preparers, despite the fact that wealth advisors so often traded recommendations amongst themselves!  So we put together this list based on recommendations from various advisors. Check it out here.

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