How I Make Over $250K and Pay Less Than 10% in Tax.
How to Use Tax law to Keep More of Your Money.
How the rich pay less in taxes then office workers.
Tax links used:
tax brackets:
401K and IRA limits:
Spousal IRA:
Limits on having a 401K and IRA:
Child Tax Credit limitations:
Energy Tax Credits:
How Deductions and Credits work:
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As a successful professional, one of the most important aspects of managing your finances is understanding how to use tax law to your advantage. Many high earners are able to significantly reduce their tax burden by taking advantage of various legal strategies and loopholes. In this article, I will share how I make over $250K and pay less than 10% in tax, and provide some tips on how you can use tax law to keep more of your hard-earned money.
The first step in minimizing your tax liability is to take advantage of all available deductions and credits. This may include deductions for charitable contributions, business expenses, and retirement contributions. By carefully tracking and documenting these expenses throughout the year, you can significantly reduce your taxable income.
Another important strategy is to take advantage of tax-advantaged accounts such as IRAs, 401(k)s, and Health Savings Accounts. Contributions to these accounts are typically tax-deductible, and the earnings within the accounts grow tax-free. By maximizing your contributions to these accounts, you can keep more of your money out of the reach of the IRS.
Investing in tax-efficient investments is also a key part of reducing your tax liability. This may include investing in municipal bonds, which are typically tax-free, or utilizing tax-advantaged investment vehicles such as ETFs and index funds, which tend to generate fewer taxable events.
One of the most effective yet often overlooked strategies for high earners is to take advantage of the tax benefits of entrepreneurship. By starting a side business or investing in real estate, you can take advantage of numerous tax deductions and benefits. This may include deductions for home office expenses, travel and entertainment, and depreciation of assets.
For those with substantial income, it may also be beneficial to explore tax-deferred and tax-free income strategies. This may include utilizing tax-deferred annuities or life insurance products, which can provide a source of tax-free income in retirement.
Finally, working with a knowledgeable tax professional can be invaluable in identifying and implementing the most effective tax strategies. A qualified accountant or tax attorney can help you navigate the complexities of the tax code and ensure that you are taking advantage of all available benefits and opportunities.
In conclusion, by leveraging various tax strategies and taking advantage of the opportunities available in the tax code, high earners can significantly reduce their tax burden and keep more of their money. With careful planning and the guidance of a tax professional, it is possible to make over $250K and pay less than 10% in tax, allowing you to achieve your financial goals and secure your future.
The $80K and the $22.5K are now locked in a vault until age 59.5, at which point you will have to pay taxes on them (or pay heavy penalties to access those funds)! So when you are 60+ you are going to be right back into the ~15.3% tax bracket on the left. And when you hit the magical age where RMDs are required by the gov't, you will have no choice but to pay those taxes (and you'll probably have mild dementia at this point and not care what your tax bill is). As an added government bonus, you are potentially going to have penalties for withdrawing over the medicare income limits. Also this is why CFP's make all these retiree's convert to roth before RMDs kick in…to lower the taxable net worth burden, but also steal your money via "management fees". Again, you will have mild dementia, so you financial planner will have shown you this immensely complex software presentation with all this monte carlo simulations on stock returns vs withdrawal rates to convince you that you will never run out of money thanks to them. you will brag to all your other boomer friends on how much money you have and how you will live forever. Then you have a stroke, and all your money goes to end of life care, but hey, at least you avoided 25K on your tax return in 2023! The left hand side is never taxable again…..and no penalties for early withdrawal. The value of that liquidity is worth something in the calculation.
If you understood taxes for your tax rate you should have contributed to Roth 401k or Backdoor Roth.
But to realize a gain from that 401k account (~80k), I'm assuming the individual sold some of their shares and withdrew that amount. Wouldn't they incur a penalty on that early withdrawal
You didn’t account the 80k in the joe shmo side on the left, is that assuming the individual never invested the money right into a 401k/IRA and instead chose to invest in ETFs kinda thing?
Pay your fair share