← Tax Smart Real Estate Investors Podcast
Tax Smart Real Estate Investors Podcast
347. W-2 Tax Strategies in 2025: What's Actually Working
00:39:08
In this episode of the Tax Smart REI Podcast, hos…
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You're now listening to the Tax Smart REI Podcast, the number one tax podcast.
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For real estate investors.
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Your source for all things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Hey everyone. Thanks for tuning into this week's episode.
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Of the Tax Smart REI Podcast.
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Today we'll be talking about a topic that everybody loves and that's going to.
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Be W2 tax strategies. So we've been getting a lot of questions lately about what your options are and we really want to have a thoughtful conversation around, like really leaving no stone unturned. We'll cover the real estate and business strategies, we'll cover charitable deductions, and we'll also be covering some of the more boring strategies that you probably heard from online searches or, or maybe even your own traditional cpa. But it's something you're not going to want to miss. We're going to be diving to all of that in just one minute after.
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Talking with clients and fellow real estate investors. One thing was clear. There wasn't a newsletter that delivered real market insights, concise decision making info and relevant tax strategy all in one place.
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So we created it.
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REI Daily delivers real estate news that won't put you to sleep, real and concise market insights that aid in your decision making, legislative updates that actually impact your investments and and tax strategies sprinkled in because the IRS does not need a tip. If you're a real estate investor who wants to stay sharp without sifting through all of the clickbait or fluff, this is for you. And celebrate the launch. You'll have a chance to win a free one on one tax strategy call with one of our top real estate experts. No pitch, just strategy. Subscribe now by visiting ww.therealestatecpa.com subscribe again. You could subscribe now by visiting www.therealestatecpa.com. subscribe. We'll see you in the inbox. But now, right back to the show.
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B
All right, and we're back. You know, it's not the first time we cover W2 taxes here on the show. This is a, you know, a topic we do every so often, but with the one big beautiful bill kind of renewing 100% bonus depreciation, kind of getting more of a spotlight onto tax planning for a lot of Investors and high income earners. This has kind of just been a topic that we've been getting a lot of questions about. So we're going to dive into how the mechanics of all this works. Strategies really leaving no stone unturned for you guys today. So we're going to start off with an overview of W2 taxation. So if you're brand new to the show, you're just tuning in, you've never done tax planning. Hopefully this is eye opening. And for those of you who've been tuning in for a long time already know the game, hopefully this is a good refresher. So, Ryan, would you mind just kind of starting us off with kind of a quick overview of how W2 earnings are typically taxed?
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D
Yep. Maybe obvious statement at the beginning. Why do we call it W2 earnings? Because when you're an employee, you receive a form W2 at the end of the year to show your income. Right. Kind of. Box one. Hey, here's the kind of net income that we have given you as an employee. And that's kind of why we call it W2. Now, the taxation of that, you know, that's going to be taxed at ordinary income tax brackets. Right. We've got basically the top 37% marginal tax bracket. Obviously the tax brackets change a little bit every single year. But you're going to have some federal, which everyone has to pay and then potentially in what state you're in, you're going to have some state income tax as well.
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But.
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D
But that's the extremely short version. It's just a very typical W2. But one of the nuances that we'll kind of dive into is you can't really easily offset that W2 income. That's kind of why we're having this show. It's not like a business owner can say, hey, let me go get some, you know, extra expenses by prepaying for things and get a vehicle or something, computer equipment or technology stuff that you need. This is a bit more unique in that we don't have expenses that we can write off compared to a business owner. So we'll start going through that.
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B
Yeah, absolutely. W2 income, bottom line is it's highly taxed but often a necessary form of income for many. So you're up to 37% at the federal in the federal tax bracket. And then you have state taxes up to 13.3% if you live in a state like California. So highly taxed. And then also you have FICA taxes in there as well, which is another 7.6, 5%. Those are just something you have to watch out for. Just, just know it's highly taxed. Let's start breaking down one of the first issues with being able to reduce taxes on your W2 income. All right, so there's something called the passive activity loss rules or the passive activity limits. It's under section 469 of the Tax Code and was introduced in the Tax Reform act of 1986. And with the Tax Reform act, one of the many things the Tax Reform act of 1986 did when they introduced these rules that say all losses from rental real estate are passive by default. And that means that your rental losses can only offset your other passive income, such as rental income or other income you might have from a passive trader business that you might be operating in. All right. They also said that all businesses are either passive or non passive, depending on whether or not you materially participate. And we went through these tests in the past. We may or may not recap that here in today's episode as we go, but just know that these rules made it very difficult to easily shelter it. And these rules were put in place because what happened was back in the day, people used to just buy high income earners, physicians, lawyers, so on and so forth, would buy up these rental properties, not do much work, and also invest in tax shelters which are limited partnership interests that were designed specifically to offset taxes. So the combination of these two things became very controversial. So the irs, or rather Congress, came in and patched it, if you will, with section 469 and made all these rental losses passive. One last thing, I'll say if you are new and you're just tuning in, you might say, hey, Tom Ryan, why do we want to even have losses? Right? We don't want losses, we want to make money. And of course, absolutely you want to make money. But the unique thing about real estate and some other types of business assets is that you can use depreciation to generate non cash losses. And this means you could be potentially making positive cash flow, putting money in your pocket, despite the fact that you're telling the irs, hey, I lost money and you're not paying taxes on that rental income. So that is kind of the first barrier that we have to deal with. Now. One quick side note before we move on. If you are investing in rental real estate or whether directly you're buying these properties yourself or you're investing as a limited partner in a syndicate or fund and you are generating positive cash flow and you're getting rental income, you're typically not going to be taxed on this, which is going to reduce your effective tax rate. So you are effectively reducing your taxes or over time, but not directly offsetting your W2 in most cases. So that's kind of the first barrier. Now we'll be talking about in just a few minutes here how you can max out your quote unquote business losses. Okay. And that could be real estate, small business, so on and so forth. We'll get into that. But there is a cap that you are capped on called the excess business loss limitations, which limits the amount of losses, business losses you could take against your W2 income. Ryan, do you want to share a little bit more on that?
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D
Yeah. And I think this isn't necessarily like a brand new thing that's come out. This has come out a few years ago, I believe it was really like how it is now came out with the Tax Cuts and Jobs Act. I think that was the act that, that really came out and spelled some of this out. And it's, it's the loss limitation has kind of creeped up a little bit every single year. But in today 2025 is when we're releasing this for married couples, it's $626,000 of losses and for single is 313. So half of that that you can use. And basically, yeah, we're going to walk through like some examples and kind of explain that. But ultimately just maybe give an example like the numbers of how this would work. So let's say that you're a high income earner and you're going to make say I'll try to keep the numbers really simple for myself because 626 is the number. Let's say you make $726,000 from your W2 job. Okay. If you go do some of these strategies that we're going to get into short term rentals, real estate, professional status, oil and gas, whatever it is, let's say short term rental, we'll take one of them and it produces a $700,000 loss. Okay. What you can do is of the 700, you can use 626,000 of that to offset your W2. So now instead of paying tax at the full 726 in income, now you're only paying tax at 100,000 because you had a $626,000 loss. To offset the remaining balance though, there's that 700,000 of total loss from the short term rental minus the 626 you can use today in 2025 whatever that 74,000 or whatever is, that is going to get carried forward to 2026 in our example, as a net operating loss. So you don't lose it. You do get capped in how much you can use in a current year. But it does get carried forward. But the whole point of walking through that is just to say you've got these limitations. I have talked to people and I'm sure Tom has or even had clients in the past where they've said, hey, I'm trying to offset a million dollars in loss as a W2. Well, you can't. You can't take a million dollar loss right, in the first year, in the current year. Because I've had people try to do that. And so that's why I'm kind of explaining this. If you're a really high income earner in that really high income, it's not something that you can say, hey, I'll just take as much loss as I want to offset all of my income. That there are limitations. So that's what we're walking through.
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B
Yeah, yeah. So yeah, we got the passive activity rules and we'll talk about how to get around those in just a second there. But then we have the EBL which says, okay, you can only take up to $626,000 of against your W2, and that's where you're capped at. Beyond that, you're going to have things like charitable deductions and other things and we're going to get into those in this episode too. So stay tuned. But let's just kind of look at the business side of things. Right? Business losses. As we kind of said with the passive activity rules, businesses are passive or non passive. Right. And real estate is passive by default. So how do you get around? If we were just looking at the real estate for a second, how do you get around these passive activity rules? So the first one is going to be the real estate professional status. We'll dive into that. We have an entire series on the real estate professional stats be scripted. Scroll down the feed back in 2021. You'll see a bunch of entries on the feed called Reps, you know, capital R, E, P S and then the episode title. And that's a series. So you could always dive deeper into this if you want. But long story short, the real estate professional status says that if you work 750 hours and more than half your total working time in a real property trader business, that the losses on your rental activities, which are typically long term and midterm Rentals are can be non passive and can offset your W2 income where it's really your non passive income. But your W2 is included in that. Now this is one way to do it. Now the challenge is when you have a W2 job. The IRS considers a full time W2 job to be roughly 2000 hours per year. And that means to spend more than 50% of your total working time in real estate, you need to spend an additional 281 hours or more in real estate. So you're working 81 hours a week roughly for the entire year. Very, very challenging to do. And if you're trying to claim this for yourself and you're working a full time W2 job, you're most likely going to lose under audit. And if you ever do make it a task, you're going to lose there too. Most likely. There's people lose audits on this all the time and the task court case, case law on this, littered with people trying and failing to do this. So it's pretty objective that if you're trying to do this with a full time W2 job, probably not going to happen. Now there is one way around this and that is if you are married and your spouse can qualify for the real estate professional status and meets all the requirements. Again, we're really not going to dive deep into that today. We have series on that. We've talked about this ad nauseam here on the show. But if you can meet those requirements, then you both benefit if you file a married filing joint return. So real estate professional status is one way to get around it. Say you qualify as a real estate professional, you have your long term portfolio and you do cross segregation studies, you get all these losses, you, you're still going to be capped at that 626,000. We have to remember this, we got around the passive activity rules with reps, but then we are still capped at 626,000, which for a lot of people is not an issue. But if you're making 700, 800, a million, 2 million, 3 million a year, W2 income, whatever the case may be, you just have to be aware of that limitation. And again, we'll talk more about other strategies too, but just be aware of that next one is going to be short term rentals, which is the way if you can't qualify for reps, short term rentals is another way to has a lower barrier to hit. Ryan, do you want to give a brief recap on short term rentals, how that works?
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D
Yeah, does a very similar Thing in terms of what it does as a real estate professional status, moving instead of long term rentals and midterm rentals moving short term rentals to be considered non passive. So that's one of the main differences. The requirements are different, Right. Number one, average day less than seven. And then the second is that material participation which like you said, Tom, we've spoken about ad nauseam and we had a whole series that you guys did years ago right around the real estate professional status if people want to dive into that and we've even talked about that recently. But again, similar thing where we're taking a bunch of losses that would traditionally by default be passive and actually now making them non passive. Are we talking about this? Because if it's non passive and your W2 is non passive, they could offset each other. But again, back to my example from just a few minutes ago, if you've got that, you know, several hundred thousand dollars loss, you're still capped at that excess business loss limitation of that 626 if you're married. So that's another one. But primarily short term rentals compared to midterm or long term rentals.
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Yeah. And short term rental is just to recap the requirements here for everybody, it's typically an average day of seven days or less for the year. And then you're materially participating, typically by meeting one of three of the most popular tests. And the most popular one of that is spending more than a hundred hours. And no one else spends more time than you. So much lighter barrier of entry than reps. You don't have to be working full time. You could do in real estate, you could do this part time. So we see a lot of people opting for this path. And if you are looking to use real estate to max out like this business loss category, what real asset exists.
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That 95% of real estate investors know virtually nothing about?
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It's right under your feet and can.
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Perform just as well or better than traditional real estate. We're talking about oil and gas. Mineral rights are unique. It's a deeded real asset that qualifies for 1031 exchanges and can be held in a self directed IRA and generates monthly royalty income without the headaches of tenants or property management. And for high income earners, working interests offer something rare. 100% first year tax deductions against W2 or 1099 income. Eckert Enterprises has helped accredited investors build wealth in US energy for over 40 years. Their assets are deeded, titled and directly owned in perpetuity. Many are passed down for generations. To learn more about how oil and gas can support your tax strategy and long term income goals, visit www.ecker enterprises.com taxsmart rei. Again, that's www.eckert enterprises taxmart, rei. That's it for now. We'll dive right back into today's episode.
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Now, two other things going to mention here. One of them is active participation in a business, right? So this could be a partnership that you run with a partner. It could be a side business or side hustle that you have. I know one of my friends has a vending machine business. He has a side hustle where he is actively involved, he is materially participating and he's able to write off the vending machines as five year property and use a hundred percent bonus depreciation to generate losses which you can use to offset his other business income. So you can run an active business. And if you have losses from the active business, because maybe they have assets, other businesses, they're like this, perhaps Laundromats. The list goes on. Anything that's going to fix assets, sometimes you have toro car companies. If you're able to be actively involved, meeting one of the seven material participation tests, very clear. It's not passive. You have to be actively involved. Then that's another route to go. In addition to real estate. Last one here that we'll mention, and we've also done a bunch of podcasts on this with Troy Eckerd. We talked about this at the tax and legal summit that just recently occurred is oil and gas. And oil and gas is you're making an investment into an oil and gas partnership. You're usually taking a general partnership position. It's a working interest. So there's some legal and liability risk there. You can go listen to those episodes if you want more on that. But this is like the really only investment that you can make where you don't have to be actively investing involved. And there's a specific carve out within section 469 itself. And it's been around for a very long time that if you invest in oil and gas working interest that the losses that come from the oil and gas working interest they are non passive and you don't have to be actively involved. And this is one of the few invest pretty much maybe the only one that you can make that you don't actually have to do anything besides make the investment and get the losses. These other ones we mentioned, there is some level of active involvement. Right. So just keep that in mind. But these are the typical ways that we'll see you being able to max out that business loss bucket. And that's one way to offset W2 income is by generating business losses. And we conclude real estate in that bucket. So we will be covering the more traditional strategies so we don't leave any stone uncovered here. I want to touch on something that people sometimes mention to us and ask us about. So we're going to uncover some of the options here. It's going to be charitable deduction strategies. Okay. There's going to be different strategies you can use to give to charity and get a deduction. And this is not in the business bucket. Okay. So you can max out your business losses. If, say you're making a million bucks a year, you can max it out 626,000 with the methods we just mentioned. And you could also stack charitable deductions on top of that. So let me start with the kind of a general overview of charitable deductions. Okay. Typically when you're giving away stuff to charity, whether it's cash or appreciated assets, you will get a deduction when you donate it. So that's one of the benefits. You will get a tax deduction. You will be donating to a worthy cause that you believe in, as long as it qualifies as a charity and you're able to get the deduction. That's one of the benefits. Right. The benefits are you get a deduction and you get to donate to a worthy cause. However, the downside to this is typically this is not going to help you build your wealth with short term rentals or long term rentals or active participation of business, oil and gas, you're at least making an investment in something that's going to benefit you beyond just the taxes. If you operate and make the right investment decisions, you operate these assets correctly, there's an opportunity to earn a return on your investment. You eventually sell it, the money comes back to you. Right? Charitable deductions, you're giving it away to somebody else and you're typically not getting much benefit outside of the tax deductions. Right. And the warm and fuzzy feeling you get by giving away to charity, okay? So it's kind of the overall playing field. So let me just start. You have a straight up chat. Roll contribution, right? If you give $50,000 to the, you know, give $50,000 to St. Jude's just throwing out an example there. You'll get a $50,000 deduction on your tax return and you just won't pay taxes on that $50,000. Now, there's limits on this as well. Brian, do you want to share some of the limits that exist on charitable deductions just in general?
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D
Yeah, in general, when it comes to like cash donations, that's the most common one that we typically see. That's going to be up AGI that you can deduct and for non cash. So think like appreciated assets, like stock, something like that. That's something we see. It's a lot less common that we see. It's a 30% maximum deduction that you can get from your AGI again. Now, one thing I just want to make sure that kind of Tom and I are making clear is that when you're doing a charitable deduction, this is coming off of your itemized deductions, right? So when you're doing your deductions and all that, keep in mind you've either got the standard deduction, which is a flat amount based on whether you're married or single or whatever, otherwise you're using your itemized deductions and typically you're just going to take whichever is higher, Right? That's the default. You're going to take that. So if you're looking to get more than just the standard, you're saying, hey, what can I do to increase my itemized deductions? Because there's this long list of medical expenses, charitable deductions, interest, expense on your home, things like that. If you're getting this huge influx into the itemized deductions of your charitable donations now you're going to use your itemized deductions because that's way higher. Right. But what's unique about kind of the charitable donations and doing something like using a donor advised fund or something like that is you're basically bunching your charitable donations maybe from say it's $50,000 a year that you give and that's just kind of your, you know, normal amount. Instead of doing $50,000 in 2025 and $50,000 next year in 2026, you might say, hey, actually if I push all 50 from next year and I've got the cash to do this right, you need cash. There's, you've got $50,000 to do that and push it all into 2025 now we've got $100,000, right, of charitable donations. So itemized deductions on top of your other mortgage interest and other things that you've got there that you're going to have. So as you typically look then over a two year period over itemized versus standard you're actually going to have more over that 20, 25, 20, 26 in deductions than if you had kind of spread out the fifty thousand and fifty thousand. Because by free, like it's all free for you to get the standard deduction, you don't have to have any sort of investment. Right. So that's kind of the main why people do this charitable bunching. Like Tom said, it's not an investment. Right. Maybe it's an investment for you in the terms of like that's what you do. You like that you give to your organization, your church, whatever it is, and you're doing that, that's part of who you are and that's great. But as far as the deductions themselves, this is something where if you're looking over a two year period, you're getting more over that two year period instead of trying to spread this out.
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B
Exactly. So I'll cover some of the more sophisticated strategies here. Just start with the donor advice fund. Right. Kind of to recap that. So donor advised fund. We get asked a lot about this and I rarely see people actually move forward with this or any of the other more complex strategies, especially when they're in the wealth accumulation mode. So if you're in your 30s, 40s, maybe even 50s, and you're still building a lot of wealth, you're still in kind of that asset accumulation growth phase, you're typically not going to want to actually take money out of your estate, you know, out of your, out of your, your personal wealth bucket and give it away. That's typically what I see now. That's in general, however, you know, you might come into a large capital event, maybe you sell business, maybe you sell highly appreciated property, maybe you come into inheritance, whatever the case may be, where you may be willing to start parting away with some of this money earlier, but that's just not typically what I say. It happens. It exists with these large capital events, but I'm just saying it sounds sometimes sexier than people. Like once you uncover what it actually the stuff is, it starts to make less and less sense to people. But I still want to make you aware that this exists. Okay. And how it works from a high level. So donor advised fund, like Ryan said, you kind of bunch up your charitable deductions all into one year or the amount you want to give and you give it away to, you contribute it to this donor advised fund. And over time you can make decisions, the donor advised fund, you know, you can make decisions on where you want that money to go. Over time. So rather than saying, hey, I'm going to donate $100,000 to St. Jude's today and that's it, I'm going to put my money in the donor advised funds and over time I'll recommend the donor advised fund to make grants to these various charities that I want. But I'll have taken the deduction today. Okay, so that's kind of the donor advised fund and that's kind of the extent of the benefits is you just get to spread out your distribution of those charitable deductions over time. That's high level.
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A
Hey, real quick, if you've been a long time listen to this show, then.
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B
You know we give everything away for free from how to use the real.
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A
Estate professionals to status and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes, including the potential return of 100% bonus depreciation. We don't hold anything back. And the only way we're able to help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.
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B
Next, we're going to move into Charitable Remainder trusts and clts, which are charitable lead trusts. These kind of go into the estate planning tool belt, if you will. But there's some other advantages of it too. So there's something called a Charitable Remainder Unit trust or a crut. And there's something called a Charitable Remainder annuity trust called a crat. Okay, so basically what you will do is you will transfer the cash or the assets into a trust and over time that trust will pay you a percentage of those assets on an annual basis. And there's some nuances here between the difference between cruts and kratts, but that's basically what happens. So what you do is you put this money in there, they pay you over time so you receive an income stream or your beneficiaries receive an income stream so you are benefiting from something, but then the remainder inevitably goes to the charity. Okay, so it's like say I put, just keep things simple. Let's say I put a million dollars worth of Apple stock into the chatter Roar remainder trust. I'm going to get my deduction today. The deduction I received today will be the present value of the amount that will remain at the end of the term. And there's all these valuations and things that have to go into determining what that is. We're not going to go into the details, but basically put it in there. You get a deduction for the present value of the remainder. You'll receive an annuity, effectively an annual payment from that, and then the charity will ultimately eventually get the assets that are remaining in that trust. That is one strategy, and it can benefit you. We do often see this stuff used in estate planning for various reasons. But I did want to let you guys know these more advanced strategies are available, if that's something you'd want to explore. There's one more here I'll cover today. A few more things on the charitable bucket here. Actually, we're going to be covering charitable lead trusts, which are kind of the opposite of a charitable remainder trust. And that's where the charity starts to receive the annual payments from first. Okay. So you invest in this trust, the charity receives the annual payments from the assets, let's say either from the sale or from the dividends from, say, Apple. I'm just picking on Apple. Could be any asset. And then the remainder goes back to the beneficiaries or the original founder. Okay. And the deduction on this depends. If you do a grantor clt, a grantor charitable leach trust, you get an upfront deduction based on the payments that are actually made to the charity. Okay. So that's how that works. The charity basically gets a payment, and then the assets are eventually revert back to you or your beneficiary. So this is kind of like. I just want to let you guys know these advanced strategies exist. And there's one more here in charitable deductions, which we don't recommend, but I do want to list it here just so you guys don't think that we're leaving no stone unturned. It's called a land conservation easement. Very controversial over the last few years. We currently do not recommend these to clients, especially syndicated land conservation easements. They come under a lot of IRS scrutiny. Many of them are being audited. Currently, that happened in yesteryear. So while you may have heard of these, this is not something we typically recommend. It's a lot of risk for you to be investing these. They can be audited. And there's some, like, basically some really strict rules that have to be followed on everybody's end. So that's out there. I would not recommend those. You could check out other strategies, but this is in total kind of what your options are from the charitable giving side. So we got one more Thing we'll cover here today. And that is the usual, the traditional strategies that you hear about for W2. And Ryan, you want to kick that one off?
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D
Yeah. The first one that most people know is already thinking about retirement contributions. So kind of coming back to our W2 people, right, you've got your 401k, right. Most likely if you're at a nonprofit, you've got your 403bs, whatever those are. That is kind of the easy, pretty default way that people are looking for tax savings on their income. And some people just have the mindset of maximizing the amount that their employer is going to contribute. That's fine if that's kind of your M.O. and you want to invest the rest of that elsewhere. But if you are looking for maximum kind of simple, I like to say simple because it's literally just changing a form with your employer to say, hey, I want to, you know, give more to my 401k, that's another option. So 401ks, things like that, depending on your income, you could be looking at like an IRA potentially. Obviously there's limits on income. Once you make a certain amount, I can't remember those off the top of my head, then you can't do that. You can't get a deduction. But yeah, the retirement contribution solo, or if you're a business owner, we could talk about solo 401ks. But this is primarily for those W2 people. You're thinking kind of the 401k contributions, right?
- [27:30]
B
And that max in 2025 under current, you know, for this year is going to be 23,500 on the employee side. So you can make that contribution and take that full deduction. Now if you are self employed, which is outside of the scope of this, the deduction is higher, but it is 23,500 if you are under 50 and if you are over 50, you can make an additional contribution of 7,500 for a total of 34,750. So that's the deduction you can get. The benefit there is you get the tax deduction today and then you get to contribute towards your retirement. Whether or not that makes sense for you, that it depends on your goals, your circumstances, your financial position. But that is one way to easily make it. Now there's also IRAs, but there are some phase outs there. And if you are a high income earner, you are most likely phased out from being able to get the deduction from the ira. So we're not going to go into the details on that one, for the sake of time here you could always google that and you can find out quite quickly what those limitations are. Another one we have Here is a $3,000 capital loss deduction. So if you have a capital loss, say you sell a stock or an ETF or what have you at a loss, you can deduct up to $3,000 of capital losses against your regular income, your ordinary income like your W2. That's one option. Not too big of a deduction, but it exists. And then there's a $25,000 special loss allowance. Again, this is not going to really impact you if you're over these thresholds. But if you're making under a hundred thousand dollars, you can take up to $25,000 in losses from your rental activities. These are usually your long term or your midterm rentals against your W2. If you're above a hundred thousand, this phases out $1 for every $2 above a hundred thousand to hit 150 where you are completely phased out. So for many high income earners this typically does not really apply to you. Unfortunately, this has never been adjusted for inflation since its inception. So we did an episode on that at one point and it would be much, much higher than it would be today to the point where almost for a lot of people reps wouldn't even be necessary. But unfortunately this won't look like that's going to change anytime soon. Pursuit. So I'm just going to blast through these real quick and then we're going to. We'll go ahead and wrap up these episodes. We have health savings accounts, HSAs. If you do have a high deductible healthcare plan and you are eligible for an hsa, you can make a contribution to your HSA and you can deduct that against your, your W2 income. There are no income limitations for the HSA. The max deduction for the max contributions, your HSA for 2025 will be $4,300 or 4,300 if you're an individual or about double that if you have a family. So those are some typical usual deductions you'll hear about. There's other itemized deductions that includes charitable contributions we went through. We're not going to go down to a deep teardown of itemized deductions. You can Google what are itemized deductions and you'll be able to find that relatively short order. Lastly, there's the salt cap. Ryan, do you want to take the salt cap one real quick?
- [30:14]
D
Yeah. So this also came about with the kind of tax Cuts and Jobs act back in 2017. But as of the new tax bill that just came out July 4, 2025, now it's up to $40,000 that we can take. If you're below $500,000 of income. If you're above that, it starts to phase out for how much you can deduct. But that is another thing that'll be new this year as far as the new tax bill. So that is something for you guys in the high income tax states like New York, California, Minnesota isn't too far behind all of those states. So if you're in one of those states, you've got a high state income tax. That is something that isn't like something that you try to like, play a game necessarily around this. It's just we are getting more of a deduction around that, which is great for those of us in that kind of state tax situation.
- [30:56]
B
Absolutely. So in all, these are the big one, the big legitimate tax strategies that you could use as a W2 earner. We covered the business, we covered the charity side, we covered the usual stuff. There's a few other things out there that people often talk about that are not so legit. I will give you a breakdown of those really quickly and then we're gonna, we'll wrap up today's episode, but we're looking at solar credits and panels and things like that. Usually there needs to be some level of involvement in it for you to be able to get those deductions against your W2 income. And there's some syndicators out there, sponsors that are peddling these investments, that there's ways for you to be actively involved. And we've tore these down before and it doesn't really hold water. So just watch out for those. Those most likely not legit. There's also equipment leasing businesses, which really fall under that business category that we spoke about before. But you have to be actively involved. Point blank, period. You have to meet one of those materialization tests. And there's a lot of sponsors out there, again, people who are, who are pushing these investments, misleading people to believe that you can do this passively. And again, you can't. There, there's no gotcha here. The point of this episode today is to kind of give you the playing field now when it comes to this playing field. Right. The value in working with a tax strategist, okay, is, is helping you piece together this puzzle in a way that's going to help you reduce your taxes and Achieve your goals based on your specific situation, including your financials, the amount of taxes you want to reduce, the amount of income that you have, what your goals are, what your lifestyle is like. So what a tax strategist will help you do is say here's the playing field and here's how we piece this all together to optimize your tax situation for your specific goals that involve scenarios, that involves what ifs, that involves thinking about what really makes sense for your situation.
- [32:39]
A
Does a donor advise fund really make.
- [32:41]
B
Sense for you right now? Yes, it sounds cool, it sounds sexy, it sounds sophisticated. But does that make sense for you? It may or may not. I can't answer that question right now.
- [32:49]
A
Here on this podcast, but that's something.
- [32:51]
B
A tax strategist will help you think through. Okay, how do we maximize this business bucket? That's usually what we want to look for because that's also going to help benefit you for the most part. If you are investing and operating these types of investments properly, that's typically going to yield investment benefits to you, not just tax benefits. Then we look at the charitable contribution side. A lot of this is tax driven is obviously there's CRTs and CLTs which have some additional benefits to and use cases mainly used in estate planning, but may have some opportunities for you depending on what your goals are. And that's something that tax strategists can help you figure out. So if you are interested in working with a tax strategist who can help you navigate these waters, we'd love to learn more about your situation and have a discussion how we can help. You can follow the link in the show notes to request a free discovery call with our team where we'll learn more about what you have going on and kind of see if we're a good fit to work together. And then if we are, we'd love to help you map out a plan that's tailored to what your specific goals and needs are. Any final words before we wrap up today, Ryan?
- [33:48]
D
A tech strategist is going to be a bit different than ChatGPT. I just feel like with ChatGPT coming out, I just wanted to say a 30 second comment on that attack strategist isn't just going to say here's some options. We have now done that for free. Okay, so for those of you kind of listening like, oh, can I have some options? Like here they are, right? Especially if you're a W2 earner. And that is the majority, I think, of our listeners would be my guess what Tom is Saying and where we really come into being a valuable asset and a partner with you is to really take your individual situation, help you identify, like Tom said, which of these make sense, why or why not? But also I would add it into that. It's also the nuances that come around with this because ChatGPT or whatever you're gonna use for your large language model, whatever, is just gonna spit out a bunch of these things and it's gonna give you generally a big overview. We wanna look through the details, we wanna be along there with you and actually be like a human thinking reasonably and rationally with you to help you dissect these things, make a good decision and really be there to support you along the way. Right. As you're moving forward with these things. So hopefully you just kind of understand that it's more than just giving you ideas. Yes, we help with that sometimes if there is a gap and you're not hearing things like this. But also it's helping you with the nuances of, oh well, we got to be careful of this little thing that's within this tax code that isn't really apparent on just a quick little search. Right. So that's another big part, I think, of the value in working with a strategist is a lot of these things can be complex and these aren't as simple as contribute to your 401k. Okay, that's simple. You probably don't need a tax strategist. Most WTNOs don't need a tax strategist just for that. If you're getting into more of these, I would say a little bit more advanced tax strategies. That is really, really, really where some of the value comes into play with working with a tax strategist. Right, right.
- [35:30]
B
No 100%. It's, you know, one thing is to understand what these strategies are. Another thing is to understand how to piece them together in a way that's strategic and fits your goals and do it correctly. You know, me and Ryan did do an episode on ChatGPT not too long ago and I, I continually find this, even when I use ChatGPT now, is that it does not connect all the details together for you. It often lacks it. Just if you ask it about short term rentals, they'll give you a very good overview, short term rentals, but it'll lack the details, it doesn't connect the dots as well. And you know, Ryan was just on a call with somebody the other day that I, that I saw and the caller did not realize there's two things that need to be connected because ChatGPT didn't tell them and they said ChatGPT didn't tell me this. It's like, because that's ChatGPT is not sophisticated enough at this point in time to be able to piece together all these nuances. It's very good at a general overview, but it's not very good in the details. And when it comes down to tax planning, the devil is in the details. Not only in doing things correctly and in line with the irs, but also doing things in a way that connects strategically for your position. And what I found using ChatGPT for other things is that it's not very strict, it has its limitations, and you still at this point in time need to be able to use your critical thinking. And that's what Attack Strategist helps you do. Last thing I'll say for today's episode is yes, we do work with a lot of people who are W2 earners who are in this W2 space. But that's not the only clientele we work with. We get a lot of questions from people, listeners of this particular show. We also work with business owners. We have an entire sub niche basically dedicated to dentists and physicians. Essentially because of the amount of clients that we have, we do serve those those people at a deep level. We also work with a lot of business owners and we also work a lot of syndicators, fund managers and large scale operators. So we are working with some pretty sophisticated clients on that end too. But W2 just happens to be a repeat topic that we keep getting questions about. So hopefully this was helpful and kind of letting you know what the playing field looks like and gives you some food for thought for having a conversation with your own cpa. If you don't have one. Again, we'd love to have that conversation with you, but that's it for today's episode. Thanks again for tuning in. We'll catch you on next week's episode of the Tax Smart REI Podcast.
- [37:37]
A
The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or Show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.
- [38:25]
C
Thanks for listening to today's show. If you enjoyed the show, please find us on itunes and leave us a review. You can also email us at. Contact therealestatecpa.com with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client page@therealestatecpa.com and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.