By Dr. Jim Dahle, WCI Founder
How's that for a click-baity title? Yet this is a common thing you will see on TikTok, YouTube, and countless blog posts all over the internet. People think there are tax secrets the IRS doesn't want you to know. The problem is that there are people out there who believe they exist, and they just keep looking until they either end up engaging in tax evasion or they buy some product designed to be sold, not bought, because it promises to lower their taxes.
Let me give you an example. Not too long ago, a WCIer went looking for that “one weird tax trick” and posted on the WCI forum. After getting some good suggestions but finding out these tax secrets didn't really exist, he decided to try somewhere else—the Bogleheads forum—where the response was essentially the same. Here's that post:
“Next year will be the year to start putting a strategy in place to reduce my tax bill if at all possible. I'm wondering if there are others who may provide advice on strategies to help reduce my tax bill. Here are the high level details:
- All income is derived from an S-Corp. 100% active income. I have $0 in passive income.
- 1 employee which is me
- Solo 401(k) is maxed out each year
- R+D tax credit was used in 2019. No activities would allow for the R+D tax credit to be used this year
- Max contributions to 529
- No assets in the business like real estate that can provide depreciation.
I'm not really interested in starting another job where I become a landlord that may require large chunks of my time.
I have spoken with local CPAs and accountants, but most ideas are very small results that don't move the needle. Here are some examples:
- Buy a car for the business. This will require keeping a log book and I probably couldn't meet the 50% business use requirement.
- Buy a commercial building
- Put children on payroll
I feel like there is a lot of talk about tax strategies, but when you dive into the details most strategies fizzle out.
I'm looking for some big ideas from people with real experience.”
See what I mean? He's looking for that “one weird tax trick” that doesn't require him to change how he lives his financial life. But he somehow wants to file his taxes differently with the right accountant, so he can somehow dramatically reduce his $700,000 income tax bill.
The Truth About That 1 Weird Tax Trick
There actually are some examples of that “one weird tax trick,” but they mostly apply to estate taxes. For example, you can put rapidly appreciating assets/businesses into an Intentionally Defective Grantor Trust/Spousal Lifetime Access Trust and get them out of your estate. The earlier in your life and business career you do this, the lower your estate tax bill is likely to be. It's entirely possible to pass tens of millions or even hundreds of millions of dollars of assets to your kids' estate tax-free by doing this. There are downsides, including costs and complexity and the loss of the step up in basis at death (i.e., increasing income taxes in order to reduce estate taxes), but it can be worth it for lots of wealthy people.
But these sorts of things don't really exist when it comes to income taxes. For the most part, if you want a lower tax bill, you need to live your financial life differently. If someone is promising something that doesn't require you to significantly change how you live your financial life, you had better get a second opinion and make sure you're not engaging in tax evasion. A high tax bill sucks, but it beats jail.
More information here:
What Are Frivolous Tax Arguments?
Tax Avoidance vs. Tax Evasion — What’s the Difference?
Paying a Big Tax Bill Is a Real Rich Person Problem
Most people would actually love to swap situations with someone with a really high tax bill. The reason your taxes are high is because you make a lot of money, and most people would love to make a lot of money. From that perspective, you should be grateful to have a big tax bill. It's the ultimate humble brag. “Man, I hate the IRS. I had to pay $2 million in taxes last year!”
Best Tax-Saving Techniques for High-Income Professionals and Small Business Owners
Although there isn't one technique out there that “the IRS hates,” it's still worth learning about taxes and seeing if you want to live your financial life a little differently. Here are some of them that can make a big difference.
#1 Grow Your Family
If you get married, especially to a non-earner or a low earner, you now get to use the Married Filing Jointly tax brackets, which are much more lenient than the single ones. Obviously, there are benefits to marrying another high earner, but reducing your tax bill isn't one of them. For many, having some kids can lower your tax bill as well due to the child tax credit, but lots of high-income professionals are phased out of those sorts of things. Kids also bring plenty of expenses like child care, college savings, a need for a bigger house with a bigger tax-deductible mortgage and property tax bill, and similar expenses. Like a business expense, these can bring you deductions and credits, but you'll end up spending more than you're getting back on your taxes.
#2 Give More to Charity
There are lots of ways to give to charity—including giving directly, Donor Advised Funds, Charitable Trusts, charitable foundations, and giving appreciated shares owned for at least one year instead of cash. However, like a business expense, you will give more than you will get back from the Tax Man. Still, this has been one of our largest deductions for many years.
#3 Retirement and Other Tax-Advantaged Accounts
Putting money into a 401(k), Roth IRA, 529, or HSA allows those investments to grow in a tax-protected manner, reducing your investment-related taxable income and taxes. While each account works differently, they all help save on taxes compared to investing in a taxable account.
#4 Big Tax-Deferred Contributions
Tax-deferred accounts are often the largest deduction for high-income professionals like doctors. These include 401(k)s with profit-sharing plans ($69,000 contribution limit for those under 50 in 2024), 403(b)s, 457(b)s, SEP-IRAs, and even HSAs. Do you have multiple employers or one employer plus some moonlighting? You can get a second 401(k). Perhaps the biggest tax break in this area is a cash balance plan. Six-figure tax-deferred contributions to these accounts are entirely possible, especially for those in their 50s and 60s. That's pretty close to being a “one weird tax trick,” but I've never heard the IRS say it hates them.
#5 The 199A Deduction
While this one doesn't always work for high-income professionals, it's pretty awesome when the 199A deduction does work. It's only scheduled to last through 2025, but it has rivaled charitable contributions for our biggest deduction for each of the last few years. It was originally designed to put partnerships and S Corporations on equal footing with C Corporations after the Tax Cuts and Jobs Act that went into effect in 2018. Whether it did that, I don't know, but if there were anything in the tax code that would qualify as that “one weird trick,” this would be it.
#6 REPS Plus Bonus Depreciation
While bonus depreciation is starting to phase out [EDITOR'S NOTE: Update after publication: It has now been extended through 2026], acquiring Real Estate Professional Status (REPS) can allow passive losses to offset earned income, and those passive losses can be enlarged by doing cost segregation studies for bonus depreciation. A doctor married to a real estate professional can potentially pay nothing in federal income tax. It's a lot of work to get this one, though—at least 750 hours a year. If you're interested in running a short-term rental business, you don't even have to put in 750 hours to deduct passive losses against earned income.
#7 Business Expenses
Running things through your business can generate significant savings. Whatever expense you run through your business, however, must 1) be a justifiable business expense and 2) be something you want to buy anyway. But perhaps that annual $250,000 NetJets expense could at least be bought with pre-tax dollars. That could save you six figures in taxes.
#8a PTET
Many states objected to a provision of the TCJA of 2018 that limited the ability to deduct state income taxes on your federal tax return, so they put in place a Pass Through Entity Tax (PTET) that allows business owners to still deduct their state income taxes. This can be a substantial deduction if you have a big state income tax bill.
#8b Move to Puerto Rico
There are some pretty unique tax breaks available if you move your business to Puerto Rico. They could add up to be quite large for the right person. While we're talking about more exotic options, you might consider a captive insurance company or charitable conservation easements. But be aware that those sorts of things can be complex and expensive, and they are often abused and quickly turn into tax evasion.
#9 Adding up the Little Things
There are lots of other tax deductions out there that may be worth the hassle to get. Forming an S Corp can reduce your Medicare tax. Buying a car for your business or logging business miles can save a few bucks. You can rent your house to your business 14 days a year at the going rate and pay no taxes on the income. You can do tax-loss harvesting for $3,000 a year against your ordinary income, plus unlimited amounts against capital gains. Investing intelligently in taxable accounts can ensure the taxes you do pay are at qualified dividend and long-term capital gains rates. You can start 529s for nieces and nephews and deduct those contributions from your state income taxes in many states.
More information here:
Tax Deductions for a Home Office
3 Big Tax Deductions for Doctors
While I like to reduce my taxes as much as the next guy, I'm also aware there isn't “one weird tax trick out there that the IRS hates”—no matter how often that line shows up in my Facebook feed.
What do you think? What's your favorite tax break? What's your biggest tax break? Do you think there's something else you can or should be finding?
This thought: “Most people would actually love to swap situations with someone with a really high tax bill. The reason your taxes are high is because you make a lot of money, and most people would love to make a lot of money. From that perspective, you should be grateful to have a big tax bill. It’s the ultimate humble brag. “Man, I hate the IRS. I had to pay $2 million in taxes last year!”
It’s similar to what I say to my tax accountant when I notice I’m complaining about my tax bill. It’s a good problem to have!
I’d have to say my decision to do a personal defined benefit plan was my best tax saving decision ever. As a 1099 doc, I’m deducting yearly 6 figures from my income while building a substantial deferred nest egg. I use Schwab and highly recommend if you’re in that situation. It does reduce your employer contribution to your individual 401k but the benefits far outweigh that limitation.
Your click-bait title worked on me.
I earn a lot and still hate paying income taxes; however, I am only interested in things that are black and white and that are allowed in the tax code. Legal opinions are great, but they must be “more likely than not” and the concept needs to be simple.
When the IRS gets involved with some of the concepts it’s because people got too aggressive with them. A good example is a captive insurance company. If it is run properly, it’s a good strategy but premiums should be $500,000 or more to make sense due to the set-up cost and annual administration. There are smaller pools with others, but you need to see who you are swimming with.
Cash balance plans also are a great strategy, but the stars need to line up based on age, income, and objective for contributions. Many of our clients use this strategy.
When you have an appreciated asset there are several tax strategies that are well withing the code. I personal used a charitable remained trust (CRT), which has turned out to be one of my best assets. It is creditor protected, I paid no tax on the sale of the asset and have enjoyed a life time income. I have had this for close to 18 years.
Another strategy is a charitable LLC, which has many of the CRT benefits. The benefit is tax free income.
The key to any of these strategies is to understand the pros and cons and spending time looking at worse case scenarios.
Finally, my experience with tax strategies takes a real tax expert, many times it’s not your CPA. Most CPAs are looking in the rearview mirror and not the windshield.
I use many of the above strategies (thanks to the extensive education the WCI world has given me!), including DBP, 401Ks, backdoor Roth, etc. But at the end of the day, we should also remember that there is a certain level of pride we should all feel in paying our taxes. What we are doing by paying them is making a contribution to the society that has given us such advantage. We are paying for the law enforcement that protects us while we sleep. We are paying for nice roads that don’t have potholes to mess up our tires on our way to work. We are paying towards the infrastructure of the power grid that gives us electricity so we can binge our Netflix after a long shift. Our taxes are going towards the high-quality public schools many of us keep our kids in. We should take pride in all this. Tax dollars support the military, which gave many of us financial support to go to college, and those same dollars provide that same military the ability to fight necessary wars and establish a peacetime presence in parts of the world where democracy struggles.
And paying our taxes simply makes us more valuable, contributing, useful members of society than those who don’t pay theirs. We should hold our heads high.
We should all try to “pay every cent that is owed, but not leave a tip,” as Dr. Dahle often says… but then allow ourselves the luxury of feeling good about ourselves for doing so (whether it was compulsory or not). Because one way or another, most of those dollars are making the world a better place.
I agree that having income that warrants taxation is a place of privilege. The alternative is unkind.
However, I sure don’t share as favorable (TOO optimistic) a take on where my tax money is going, and I certainly don’t think my tax money is making the world a better place. Far from it! I wish it was used wisely here in America to make all our neighbors better off.
It is possibly this tag of war between trying to do what is fair from a place of privilege and yet not wanting to fuel industrial complexes that have gone rogue that encourages a person to look for the one tax trick.
Donating to proven local charities (#2 above) has been a nice way to walk the talk and keep the tax man’s fingers out of the cookie jar.
Now I have to go and read more on San Juan.
So what percentage of what the government does do you actually disagree with? For reference:
22% Social Security
14% Health care
14% Defense
13% Interest
12% Medicare
10% Income Security
5% Veterans services
3% Education, training, employment, social services
You talk about war and industrial complexes. Well, defense is 14%. How much defense are you okay with paying for? 5%? So really you only think the government is screwing up 9% of the budget. You can still feel good about 91% of it, just like the poster you’re replying to.
I’m good with those percentages.
Or variations of them.
Doesn’t matter.
Because at the end of the day, politics or not, I more or less have to trust that the people in office know what they are doing with my money and how to spend it best for the greatest amount of good. That’s their job, not mine. And they’re professionals, like me. Just like they have to trust that I’m not ordering frivolous CT scans on their belly pains or shotgunning unnecessary labs.
It’s an honor to pay taxes (just no tip!), and I feel good about myself everytime I send in my quarterly estimates.
I can agree with ~ 55% of these allocations. I wish that was 91%.
No concerns about social security, income security, veteran services and education. Whether income security is reaching the right hands or why the richest nation needs to invest more on veterans than educating its youth is not clear. But fair enough.
13% on interest enriching Japan, China and Europe? And debt is getting larger for little benefit to Americans. If any individual was spending this much on paying debt “indefinitely”, I will cringe.
14% for defense? Defense should be about deterrence, not offense. 2.5 trillion in Afghanistan is not deterrence. Similar amount in the Gulf. Given US geographical defense and available technology, 1 – 2% of trillions is more than enough. Added bonus, in the long term, we will spare our youth for building our own nation and the expense for veterans will also come down.
~ 30% for Healthcare and Medicare. Like “defense”, this is an unsatiable industrial complex. ROI sucks. Let’s aim for an affordable, easily accessible system like Costa Rica that does it at 1/10th of America’s cost. A @#$% load of money is going somewhere but it is not to make our people healthier.
That’s the federal budget. Education comes out of state budgets.
Most of US debt is owned by Americans, not the Japanese, Chinese, and Europeans. And at 3-5%, it’s not exactly enriching them all.
https://www.linkedin.com/pulse/who-going-buy-all-us-debt-rod-khleif-gdete#
I wonder what the world would look like if we only spent 1% on defense. Could be very different. Certainly there would be no independent Ukraine at this point.
Physicians have already had their pay cut in real terms per RVU by like over 30% by Medicare over the last 20 years. How much is enough for you?
Super insightful. Just as I am not fully aware of the complex tax code I realize I am not fully aware of where federal spending dollars get spent. I thought FICA/payroll tax went specifically into those entities (social security and Medicare). Can you reference this info as I’m curious how much these percentages vary year to year or based on current/prior administrations?
Not sure I’m any better at Googling than you are, but let’s see….
https://usafacts.org/articles/how-much-money-does-the-government-collect-per-person/#:~:
Says here that the government averages $4,510 per person in payroll taxes and $7,898 in income taxes. So a little over 1/3 is payroll taxes.
I’d challenge ‘sense of pride’ paying taxes if we didn’t optimize the loopholes to ‘not leave a tip’. I think the initial premise of the blog is based on the sense we may feel if we are leaving tax money on the table, meaning paying taxes that most other Americans pay that are not as financially sound or savy to take advantage of. Don’t get me wrong I am very grateful for the opportunity to optimize tax advantaged retirement plans including BDR. As higher earning employed W2 physician without side gig, real estate or business ownership, I do still feel sense of being a sucker that there is only so much more money without doing something to optimize taxes by depreciation. Beyond REITs is there other low hanging fruit to optimize further so I can fully feel the same ‘sense of price’ paying every cent of taxes? What is the optimal income to target (currently in 37% bracket) after optimizing retirement accounts if MFJ with stay at home spouse and 3 young kids while in accumulation phase of career? Tax bracket, low enough to collect child tax credit, etc?
Optimal income? You mean there is some income amount at which you would rather NOT have more income if it meant an increased tax bill? There isn’t one for me. Now there might be an optimal amount of work beyond which you don’t feel like it’s worth working for additional income given how much of it goes to the tax man, but if you can make $5 million in your first 10 hours of work a year, wouldn’t you take it? Or would you say, “I don’t want any more than $4 million because that’s optimal.”
If I could wave a magic wand, thus lowering my taxable income coming off marginal tax bracket (by way of tax loophole (real estate depreciation, split dollar life insurance policy, or other), what would that amount be. For example if I made $700k but could depreciate $150k or $301k per year would it be more optimal to drop the taxable income not just out of 37% bracket but to below $400k to be eligible for child tax credit and stay off radar for other tax increases proposed at this $400k threshold?
I wouldn’t call either of those a magic wand.
https://www.whitecoatinvestor.com/depreciation/
https://www.whitecoatinvestor.com/split-dollar-life-insurance/
But sure if you could magically lower your taxable income without it affecting your financial life in some way why wouldn’t you do it? But while we’re wishing for a genie to come by, why stop at $400K? Why not get your income down to $20K?
Dr. D,
What’s your opinion on older parents setting up a trust, which I think is mainly best suited as a revocable trust, to keep privacy and give real estate or other assets to inheritors? Do you plan to do this?
Thanks,
Thickie
We have a revocable trust and two irrevocable trusts. So I guess the answer is yes.
But the main purpose of a revocable trust is to avoid the public, expensive, and time consuming process of probate. If that isn’t a big deal for that person in that state, then it may not be worth a revocable trust. The attorney didn’t think it was worth it for my parents for instance. Nothing really to hide there and apparently probate isn’t too bad in Alaska.
WCI ,
I have a lot of respect for your knowledge when it comes to finance, but your knowledge of international geopolitics is sorely anemic ( lest we fall in the logical fallacy of appealing to your authority on such matters ) . Please stick to medicine and finance .
Hilarious. You are coming to a free blog, and commanding the author what to write.
You could consider:
a) Just read the parts that you find interesting/informative, and ignore the parts you don’t enjoy
b) Read all of the other thoroughly comprehensive physician investing websites that cover all this info for free that don’t include the occasional opinion you don’t agree with
c) become an expert yourself, and write all the financial stuff PLUS the “correct” geopolitical views
I’m totally lost. I have no idea what you’re referring to with this comment. I don’t think I spend a lot of time blogging or podcasting about international geopolitics but I hardly think my knowledge of it is “anemic” in general. What do you think I got wrong exactly?
Thank you for the article! Your explanation of 199A deduction provoked me to recheck my 2020 tax return. I had stopped when the IRS instructions became convoluted but it turns out I appear to qualify for this deduction.
My pleasure.