Ep. 198 | W-2 Employees $100K or Less: Top Tax Strategies
Download MP3Everybody, and welcome back to the Strategic Associates studio here on the Teaching Tax Flow Podcast. We are on episode 198. We're looking at a very special topic for those that fall into this, we'll say, category, if we will, of W-two earners. That's right. If you know what that is, awesome.
John Tripolsky:If not, you're about to find out as well. But we're taking that $100,000 or less in annual income. So why we say that, right? Because strategies are different amongst people with different income categories. We're not gonna say brackets.
John Tripolsky:We're gonna say something else here too that we always do here on the podcast. But as always, Chris Picciurro, welcome back to your own show, sir. I know we have some top strategies here we're gonna talk about for these individuals making a 100,000 or less in annual income. Correct?
Chris Picciurro, CPA:Yes. We are. And for those that are earning a $100,000 or less of w two wages, we're also assuming that they don't have a spouse or any other businesses or rental properties, which is the vast, vast majority of taxpayers in The United States. And someone asked me, just last week, when we were taught or met somebody new and, and the person said, well, why, why did you create Teaching Tax Flow? And one of the main reasons is that we feel that tax planning and strategy is important to all households.
Chris Picciurro, CPA:I truly believe that lower to moderate income households need this. They don't have access on a daily basis to tons of CPAs, estate planning attorneys, certified financial planners. And that's just kind of where it is right now, especially with people not coming into our profession. So we want to be able to serve the entire taxpayer community. The vast majority are gonna be those households at a $100,000 or less in our W-two wage earners.
Chris Picciurro, CPA:So when we think about in the teaching tax flow system, if you are a $100,000 or less W-two wage earner and you are going to be what we call a green diagnosis in our system. Green means marginal, you nailed a marginal tax rate of lower than 25%. Now, even if you're in a state that has a tax, typically the state taxes are graduated and you're going to most likely not be in a really high marginal tax rate for the state. If we just look at someone, let's say, that has $80,000 of W-two wages or a household with $80,000 worth of W-two wages, if it is a married filing joint couple, their taxable income without any deductions or credits or dependents is going to be with the standard deduction about 68,000 to $69,000 That means their marginal tax rate's 12% on the federal return. That's again, credits.
Chris Picciurro, CPA:If they're single at $80,000 they're gonna get a standard deduction of $16. The point is they are in the 22% marginal tax bracket, but just barely. So think about this, a 100,000 or less household income. You're in a green diagnosis. You're in a lower marginal tax rate.
Chris Picciurro, CPA:That doesn't mean a $100,000 is not a lot of money. That is a lot of money. That is a good wage. That it's just for purposes of tax planning, it's a green diagnosis. Before we jump into what my five top tax planning implementations are for, these type of taxpayers, we have to remember that your marginal tax rate.
Chris Picciurro, CPA:So if you said, well, I'm, I'm paying 22% tax, I'm single, I'm making $95,000 Remember that there are other things at play and there are a lot of there are a lot of credits and deductions available to people in this situation. I'm not just, you know, if you have dependents, you even if you don't have dependents, you could be eligible for the earned income tax credit. If you have dependents, you could be eligible for the child tax credit, the child independent day care credit. If you have dependents or you have you're paying, higher education expenses, American Opportunity Credit, lifetime learning credit, the LLC, not the limited liability company, the retirement savers credit, which is actually an amazing credit. We have a full episode on that where the government gives you a four zero one ks match basically for free.
Chris Picciurro, CPA:They're giving you a credit for you putting money into your retirement account. And that includes, even if you put into a Roth, which is a, which is after tax. And then there's the premium tax credit as well. So there's tons of credits available to folks. Also people in this situation with the OB3, one big beautiful bill act, even if you have W-two wages.
Chris Picciurro, CPA:I mean, John, let's say you are a let's say you have a W-two wages of $90,000 you have a spouse that stays at home as a homemaker, and you have a dependent, But $25,000 of that was earned as overtime. This could easily happen. Someone in a trade union, a pipe fitter, a plumber, a carpenter, you know Bartender in Vegas. Bart or they could be getting tips. Right?
Chris Picciurro, CPA:Mhmm. So for many of the people in this income threshold, they'll that schedule one a, we have another whole episode on that, but that schedule all those schedule one a deductions come into play. The the the deduction for some tips not being taxable, overtime not being taxable. And over if if you're a mature age and you're still working, 65 or older, there was senior deduction. Or you bought a new vehicle.
Chris Picciurro, CPA:I don't know if I'm in this situation, if I'm taking my assets and buying a new vehicle, but interest under new vehicle is deductible. So my point is this, as we say all the time, marginal tax rate's important. Tax brackets lie to us. And not only are all the credits available to us, but all those other deductions are available to people in the situation. So just putting our mind there that you could be making $90,000 a year and a W-two, that person working your butt off, dollars 30,000 is overtime.
Chris Picciurro, CPA:Very you know, where we're from, John, and outside Detroit, this is a very common fact pattern, right? $30,000 is overtime. Dependent. Spouse is a homemaker. So right off the top, a lot of those W-two wages are not going to be taxable due to schedule 1A.
Chris Picciurro, CPA:You have the child tax credit. You have a big standard deduction. You could be paying, no joke, like a thousand dollars worth of tax on all So of that what should you be doing then? Right? What, how do you take advantage of this situation?
Chris Picciurro, CPA:Because you might be working at an employer that's putting money into a pension plan. Chances are your marginal tax rate when you retire in the in the little example that I just made, maybe we'll make it. And if we ever do defeating taxes part two of the book, we'll put a case study in there like this, or we'll create some more content with some cool case studies. What should you be doing and how do you take advantage of that? Because, there are there are opportunities.
John Tripolsky:And before we before we get into a lot of your favorite ones specifically, right? I I think this one's really important. So even, you know, if somebody's I'm I'm just making assumption. If somebody's say making 80,000 say they're making 60,000 a year. Know, they're they're under the 100, which we're talking about here.
John Tripolsky:They might be saying, alright. Well, I'm gonna tune off. I'm gonna, you know, turn this off. This has nothing to do with me. I don't need to tax plan anything.
John Tripolsky:I don't pay a whole lot. You will one day, hopefully. And when it comes time to that, I would almost say, and Chris, tell me if you agree with this or not, one of the best components or cog in the wheel of tax planning is just even knowing what's out there, Right? And not saying, hey, your first step needs to be call up and, you know, get out, get an advisor, get all these people if you don't have one yet. Just being aware of things that are going on and that you can be in control today, tomorrow, whenever.
John Tripolsky:And honestly, I mean, not to plug ourselves, but to plug ourselves, shameless plugs. We have discussed all the stuff. So even if somebody's saying, I'm not ready for any of this, literally, like, flip on our podcast and go clean your house. I mean, go listen to these episodes, and it just helps kinda change that mindset. So if that time comes, that you're really ready to dive head first into tax planning and working with somebody.
John Tripolsky:Again, you know what that concept's all about. Right? Is that a good way of saying that?
Chris Picciurro, CPA:Absolutely. You could be you could be in a situation where you're in your early fifties, maybe mid forties to let's say early sixties. And you're kind of in your peak earning years.
Ad Read:This episode is sponsored by wealth builders mortgage group powered by movement mortgage, one of the top mortgage teams in the nation and a powerhouse in the real estate investing world. With over $1,100,000,000 in closed mortgage volume and more than 3,000 investor deals under their belt. They don't just talk the talk, they walk it. Their team specializes in helping short term and long term rental investors scale smart with customized lending strategies. They offer all STR loan products, including second home, investment, non QM, bank statement, asset based, and HELOCs.
Ad Read:They also offer all primary home loan products too. Whether you're just starting out or expanding an existing portfolio, their unique path of 10 strategy is designed to help you move from a nine to five job to financial independence. If you're looking for a lending partner who truly understands the investor mindset, visit wealthbuildersmortgagegroup.com and start building your roadmap today.
Chris Picciurro, CPA:A lot of those people have children that are entering the workforce. A lot of my friends have children that just graduated from college and they are making 60,070 thousand $80,000 a year, and they've never made that much money because they've been bussing tables and driving Uber and all these other crazy things, or just being a student. And they're like, what should I do? You know, anticipate, hopefully my children, you know, when they enter the workforce, be that after college or, you know, or after high school, whatever their path whatever their path is, they they're gonna be in this situation. Right?
Chris Picciurro, CPA:You know, unless, unless yeah. I mean, 99 unless you become some type of world famous athlete or entertainer, you're gonna be in this situation when you start. And so yeah. So what would I tell them? Right?
Chris Picciurro, CPA:What would I tell my own kids? And that's kind of how we think about things at teaching tax law. We we really believe that, you know, especially, I mean, in in giving advice for twenty five years now, I I look at everyone's situation like, what would I tell my cousin? What would I tell my parents? And
John Tripolsky:Well, shoot. You've been you've been giving me advice for twenty something years. So there you go. There's case in post
Chris Picciurro, CPA:got you. You're on this podcast now. It's a it's a minor miracle.
John Tripolsky:I see that. If if you can give advice to somebody that then has enough knowledge to get on a podcast to do this with you, I think you think you know your stuff.
Chris Picciurro, CPA:Hey. That's not too bad.
John Tripolsky:Yeah. I'm doing alright.
Chris Picciurro, CPA:Well, alright. So let's talk let's talk about the top five. Top five things I should do. Some of them might surprise you act I would that would surprise So first one is going to be my TriStar because I reside proudly in the state of Tennessee. TriStar tax strategy, meaning tax, tax deduction, tax regrowth, and tax redistribution is a health savings account.
Chris Picciurro, CPA:Now you might say, well, wait a second. I'm that's a I'm in a low marginal tax rate. Do I really need a tax deduction? The tax deduction is important with the health savings account, but what it's also providing you is that it's giving you a savings for medical expenses. So if you're in this situation, it's going to be really tough to save money.
Chris Picciurro, CPA:It allows the money to grow tax free and you're probably, you might be just entering the workforce down the road that, like, I wish we had this health savings accounts when I was thirty years ago. Right? Even though I didn't have children, I wasn't married yet. What would have a couple thousand thrown in an account done? Now, you know, now when I kids need surgery and not, you know, my daughter unfortunately needs tore MCL and ACL playing volleyball, and it's going to be an expensive endeavor.
Chris Picciurro, CPA:So, but but the reason the HSA works well for these type taxpayers is this. You're probably at this income level not itemizing your deductions. Even if you have a mortgage, it's probably not a ton of mortgage interest where you're, that's going be higher than the very generous standard deduction. So since you're not itemizing your deductions, you're probably not getting any type of tax benefit for your medical expenses. So you might as well put some money into your health savings account and sock it away and let that grow tax free.
Chris Picciurro, CPA:So health savings account, lot a of times you have an employer that puts some money in there for you, but I would put some money in your health savings account at this point.
John Tripolsky:And if somebody doesn't have an employer, anybody that does it for them, there's a a ton of different avenues. I mean, in full transparency, I think ours is with maybe Fidelity. It took me all about six minutes to set it up. Mhmm. So it's people can do things easy.
Chris Picciurro, CPA:Absolutely. Most bank I mean, almost every bank or credit union, at least banks will have you could set up that health savings account. All right. What's number two and three? So the second one is going to be making Roth contributions.
Chris Picciurro, CPA:So that could be either through your employer or it could be outside of your employer. Why? Because we don't need the tax deduction today. We want that money to grow tax free. Now, if it's an employer sponsored plan, the vast majority of employers will allow you to put you, the employees, so your portion of the contribution into a Roth component of your retirement plan, and then your employer matches outside of the Roth.
Chris Picciurro, CPA:Okay, so they're going to go, so you're still going to have those pretax dollars, but it's not, they're not your dollars. And that's something that we talk about all the time with, you know, with new, with people in this situation. So I highly, highly recommend when you're green diagnosis, Roth contributions, either through your employer or outside of your employer in a Roth IRA. My third one is actually Roth related also, Roth conversions. So if you're in this situation and you have money in your pre tax accounts, these are the years where you might want to convert that from a traditional IRA or a four zero one ks into a Roth.
Chris Picciurro, CPA:We're gonna pay the tax on it this year, but no penalty. So for, I mean, this is age agnostic, John. I can't tell you, like there are people I know, and I'm, I'm, it's funny. I've met some people recently. They are actually very wealthy.
Chris Picciurro, CPA:They're working either at a golf club as a starter. They're in a retirement job, having fun, maybe working $2,030,000, you know, making $2,030,000 a year. They haven't turned on social security yet. They have millions of dollars in their 401ks. They don't necessarily need all that right now, but they know they're gonna have to pay tax on that in the future.
Chris Picciurro, CPA:And especially if they are working, you know, as a, somewhere where they're getting tips, the point is they're not paying much tax on their current income. They're green diagnosis. They're mature, more mature aged. They might even be getting the senior deduction. Let's do some Roth conversions now and start taking that money out of your pretax accounts and convert.
Chris Picciurro, CPA:Or if maybe you're in a younger stage of life, or if you have younger, you know, if you have a family and let's look at our guy, the $90,000 guy and now or girl, you know, and their spout and their spouse is a homemaker. Now they could say, well, wait a second. I'm in the 5% marginal tax bracket. I I put money in a way in my four zero one k the last two years. I probably shouldn't have.
Chris Picciurro, CPA:I probably should have went into the Roth portion. Guess what? There's a get out of jail free card. Let's convert that money at this point. So definitely talk to your tax professional or use something, you know, like a tax hacker or something like that, which is a which is an amazing amazing resource.
Chris Picciurro, CPA:I know recently we had the founder on the podcast, Bill Park, talking about about this, and that's exactly, okay. Maybe I should do some Roth conversions, and and it's worth it to sit down or talk to a tax professional to figure that out because we know that rule of 72. If we can convert a couple thousand dollars now and you're young, that could be tens and tens of thousands of dollars in the future tax free. So I
John Tripolsky:think the most important things that you say a lot, and this is perfectly for this audience, is tax free income and growth. Like, the and growth part is very important.
Chris Picciurro, CPA:So that's something
John Tripolsky:to remember. And you mentioned that, you know, it's it's it's way more beneficial in most cases that somebody pays the tax upfront and lets it grow and grow, and then it's theirs versus deferring that little bit, quote, air quotes, little bit of tax now and then having to pay it later on a much larger portion. So
Chris Picciurro, CPA:Absolutely. Absolutely. And and and so those are things you need to consider. The, the number four and number five are gonna be capital gain harvesting. So there are people that have money in their, let's say they have high digital assets, right?
Chris Picciurro, CPA:Maybe they're, maybe they're horsing around. I shouldn't have the horsing around, but maybe they invested in digital assets that have gone up. If you have something and you have capital gain, this, and you're in a lower marginal tax rate, This is the, these are the years to harvest those gains. That means sell the asset. Even if you wanna keep the asset, sell it and reset your basis now at a very low tax amount.
Chris Picciurro, CPA:So let's say I bought a piece of digital currency at a thousand dollars and it's worth 5,000 now. And my, I think my earnings are going to continue to increase. I might be able to sell that for the 5,000 and have a $4,000 capital gain and pay no tax on it because I'm in a lower marginal tax rate and I'm in the 0% capital gain rate. And then I'm just resetting the basis up to five. And if it goes up to 8 later and you sell it, now you're only paying tax on that difference.
Chris Picciurro, CPA:So point is capital gain harvesting. Really think about that. And then my fifth one is to take a long look. And this is for anybody in this situation that is under the age of 40. Take a look at life insurance.
Chris Picciurro, CPA:Okay. I know if you're over 40, it doesn't mean you shouldn't take a look at life insurance, but take a look at it. Why? Because a lot of times people in this income threshold, they are getting started. They don't have a lot of retirement.
Chris Picciurro, CPA:If they have a spouse or a dependent, they are going to need them financially. And if something happens prematurely to them, they're in trouble. Now you could look at, I'm not even, I'm saying talk to a trusted advisor about there's this vein term and permanent and convertible. I'm just saying take a look at it because, you know, in general, you're going be in pretty good health at this point in general. It's a modest amount of your income, but it preserves the, and gives you, you know, preserves your family's financial foundation, really, if you're in that, you know, because ultimately, if you're in these, this W-two aging bracket and you're younger, you probably don't have a ton of assets that you've accumulated.
Chris Picciurro, CPA:So you want to hedge that bet, and it might be temporarily to protect your family and loved ones. And those are my top five. I'd say, you know, again, HSAs, Roth contributions, Roth conversions, capital gain harvesting, and taking a look at life insurance.
John Tripolsky:Awesome. So, hopefully, anybody that's listening to this, you didn't know I wouldn't say hopefully. Hope most likely and probably hopefully that you didn't know all of those that even existed nor did you get all the information for every single one of them here from Chris the way you described it. Right? Like, we kinda hit the tip of the iceberg.
John Tripolsky:However, in reality, you just got and this is for anybody listening in or watching, you just got the bulk of what they are. I mean, sure. There there's little tactics, strategies, all this stuff that bundles around these, and they wrap, and you can do multiple things at one time. It's not always you have to pick one or the other. Check them out, Chris.
John Tripolsky:I know you mentioned. Just talk to somebody. Figure it out if you're ready for that. And, again, honestly, I didn't even know a lot of this existed, Chris, until we've did you know, done podcasts on these topics in the past. So if somebody's thinking, oh, man, I didn't know about this.
John Tripolsky:You know, I I missed the boat. I was in the same boat as you. So don't think that you're the only one out there. But, yeah, everybody check this check this out. Check out the other podcasts that we've done on these topics.
John Tripolsky:Really, wherever you listen to these, just do a search, and you'll see it's literally right in the topic. I I'm sorry, in the episode title of what we're talking about, so it's pretty easy to find them. Easiest one's obviously gonna be on YouTube. Just go on our channel and search for it. You're gonna find more than just the podcast episodes.
John Tripolsky:You're gonna find all kinds of clips and reels and everything on there. And then last thing, last but not least, go to defeatingtaxes.com. I'll put the link here in the show notes for us when we edit this out. Click on that, and that really is your gateway to all teaching tax flow resources. So haven't said this in a while, but don't be lazy.
John Tripolsky:It's right here in front of you. Check it out and have a great week. We'll see everybody back here again next week on the Teaching Tax Flow Podcast. And here's a teaser. Now we're going to look at similar situations, but for those higher earner, higher income earners.
John Tripolsky:So, again, have a great week, everybody. We'll see you soon.
Disclosure:The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.
Disclosure:Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment Chris Picciurro is a registered representative of Cabin Securities and an investment advisor representative with Cabin Advisors LLC, teaching Tax Flow as an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.
