(upbeat music) - Hello, and welcome to another episode of All The Hacks, a show about upgrading your life, money, and travel. I'm your host, Chris Hutchins, and today we're gonna help you save money on taxes. Now, I think we can all agree that taxes are an important part of our society, but with the tax code currently at over 4 million words, which by the way is about four times longer than all seven Harry Potter books combined, it is no surprise that finding all the completely legal ways to optimize and lower our taxes is no easy feat.

So I wanted to invite my friend Ankur Nagpal, the founder and CEO of Cary, to join me because I've been scouring the internet for the best content on 2023 tax optimization, and I kept landing on workshops he's done. We're gonna cover ways that anyone can offset their W-2 income, maximize their deductions, save taxes on investments, and so much more.

At the end, we'll also cover tax savings for business owners, and my goal is for you to find at least one tax strategy in this episode that you can use yourself. So let's get into it right after this. Did you know that electrolyte deficiency or imbalance can cause headaches, cramps, fatigue, brain fog, and weakness?

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- So you and I now, from the workshops I've watched, from the conversations we've had, share a passion for optimizing our finances. We both started companies in the space. Congratulations, yours is still in existence. - Yeah, I mean, if you had told me, you know, 10 years ago, this is what I'd be doing, I'd be shocked.

I mean, it kind of takes like learning from your mistakes to get to this point. But yeah, I've spent the last year and a half diving deep into this world and now it's something I quite enjoy. - So I've seen you do a couple workshops on saving money on taxes as a business owner, as a just normal person who doesn't own a business, and lots of things.

I wanna dive down all these rabbit holes and have this episode, for people listening, really be about all the different ways that you can take advantage, not of like breaking the law, but actually finding ways that other people are optimizing their taxes so you can do it too. I think you share a belief that like, we should pay our taxes.

- Yeah, absolutely. I mean, it's so funny, right? Every time I do these workshops, we have two types of people. One type of person is like, dude, just pay your taxes. And my response to that is, if you think about the wealthiest people in this country and like who pays their fair share, there's a percentage of people that can afford the most expensive lawyers and accountants and all these people to figure it out for them.

And our goal is like, can we just democratize this information and give it to everyone? And then you decide what you want to do with that. That's one group. The other group wants to straight up tax fraud. They come up with the most like crazy schemes. They're like, yeah, but how will the IRS know?

And we're like, the goal is not to be fraudulent. It's like, let us give you all the information and the knowledge 'cause the tax code is so complicated. And then you decide what you want to do with that. - And just to be clear, it's probably worth clarifying, neither of us are CPAs.

This is not tax advice or investment advice or anything of the sort. - This is for informational and educational purposes only. This is not tax advice, legal advice, investment advice. You know the drill. - And I think one of the interesting things that I said, I did an episode last year about kind of money moves to make at the end of the year.

I'll defer people to there if they want to go beyond taxes. There's some other stuff there. I went down a few more rabbit holes. But one of the frameworks that I really liked was whenever we think about taxes, the goal is first try to avoid it, then try to defer it.

And kind of then later in some future year, repeat this in case the tax code changes. And if you can't do either, try to minimize it. I think we're gonna hit on all three of those. Are there any other starting points that you want people listening to just kind of have some broad context when it comes to thinking about taxes?

- Yeah, so a few like concepts to ground in that I think are really important. One is, I think people should know what their effective tax rate is, which roughly is just like how much you pay in taxes divided by your income. In itself, it's not that useful a number, but it's good to see for people in similar income brackets what that number is and how to reduce that.

The other thing to touch on, 'cause you just said the best thing is to like avoid it, or if not that, defer it. In some rare cases, I do think it makes sense to front load it. And the reason for that is, I also think it's important to think about your lifetime tax rate.

Like sometimes there will be cases where it makes sense to pay slightly more in taxes now to pay substantially less later. And a good example is like Roth accounts, right? Sometimes it can make a lot of sense to take a little bit of tax now, let that money grow and compound, but then over your lifetime, you're paying substantially less in taxes.

I think those are important concepts. Also love telling people like, don't get too carried away with this. Like taxes are a part of life. I mean, the expression that people refer to is don't let the tax tail wag the dog. As an example is, your business can make no money and you'll have no taxes, but you know, that's besides the point.

At the end of the day, like, you know, you don't want to live somewhere just to save money on taxes. Like you live the life you want and you know, figure out your tax strategy in response to that. - Two other things. One, on that point, I did meet someone and I kind of want to do a deeper dive on this.

We're not going to go into it, but someone who basically ran their business to the point that it made no money and they were doing reselling and all this stuff. And so by lowering their margins, they had the best prices, volume went up and they were doing, I want to say more than $10 million a year of sales on a business that net income went to zero.

But they were putting $10 million on a credit card. So all of the points in cash back created tax-free income. And by their math, they would have made less money by raising the margins and making more because they would have had income, but it would have been all taxable.

So they like played the volume game and won on cash back. - I would love to see the analysis there. 'Cause I mean, with tax back, you get what, like 2%? It's very, very hard for me to see how that is the best outcome. But again, I still think, yeah, don't let the tax tail wag the dog.

Live the life you want and then figure out your tax strategy in response to that. - And you've talked about return on hassle before. So like some things in tax planning and tax optimization can be a lot of work. And if it's really just going to save you a few hundred dollars make sure you know what you're getting into.

- Yeah, like again, like I know some people who are, you know, want to make sure that they don't miss a single $14 expense or whatever. And again, I think if you're organized it's worth keeping track of all of that, but it's better to focus your energy on the few things that make a really big difference versus trying to do every single thing and burning yourself out.

- Okay, so the way I think we're going to break this down, we'll start with all kinds of things that apply to a broad audience. People who have general W-2 income, things that apply to people in every circumstance. We'll move in not to retirement and tax advantage at accounts, which I know you've talked a lot about because if you go back a couple of weeks, I did an entire episode with Katie from Money With Katie.

We went through every single element of tax advantage accounts. So we're actually going to skip over that and jump into investments. And there's a lot of ways that you can use the style of investing and the way you take capital gains and roll them over to be efficient with taxes.

And then we'll end talking about things that apply to business owners, including ways that someone who might not be a business owner yet might want us to think about it. I think that's a good plan. So if we start with regular people, I think one thing that it's important to help people understand is not all income is taxed the same way.

And so let's talk about capital gains 'cause it's a totally different type of income. But one other common thing that I just thought of that I often realize some people don't quite understand is marginal versus effective tax rates. So I hear some people say, I'm in the 39% tax bracket, I'm at the top.

The way the tax code works for anyone not familiar is that it's progressive. So the first tranche of your income is at the lowest tax rate, and then it goes up and up and up, at least with income tax. Capital gains tax, similar, but it actually pushes you into a new bucket for everything.

So just to be clear, your effective tax rate could be 28%, but your marginal tax rate could be 33% or more. And if you're in that circumstance, that actually means that the amount of money you'll save by reducing your taxable income is higher than what your effective tax rate is.

And so it can be really valuable. But a common misconception with some people is if you're in the 39% tax bracket, and you reduce your income to be in the next lower tax bracket, it doesn't affect all your income. It only affects that marginal amount of your income. - Yep, that's a really good point.

Yeah, there's so many people who are like, oh, let me go $1 under a certain bracket because it affects all my income. But no, it's only income above that threshold that gets taxed at the higher rate. - Okay, so let's talk about capital gains. - All right, so again, I think the way to think about this is, I said I was actually an economics major in college.

So we actually remember learning this quite a while back, but like basic economics, ultimately people make income either through their labor, which is your salary or whatever, or through capital, which is when you invest in something and that asset grows in value. Don't ask me why. A lot of people can argue that, you know, labor should be taxed at a lower rate, capital should be taxed at a higher rate, but the way it works in America and most other countries is capital gains are not only taxed at a lower rate, there's just a lot more strategies you have to either defer or negate capital gains taxes.

So as an example, the highest tier for long-term capital gains, which is when you hold an investment, a security, anything for over a year, is 20%, as opposed to the highest rate on your income is, I don't know, 35%, a little bit more than that. So in general, capital gains when held for a year are much more efficient, but you can also offset them with other capital losses to create this idea of no net capital gain, which reduces the amount of taxes.

- So I think for people listening, it's important to know that not all types of income are taxed the same. So capital gains, obviously lower. At a certain level of income, I don't know the threshold, there's no capital gains tax. It's like, it's under $100,000 and under, then it goes to 15 and then 20.

And then at the highest end, there's this net investment income tax, which adds on a few more percent after that. - Yeah, the other thing worth noting with capital gains taxes is like these preferential rates only apply when you hold onto a capital for any investment for over a year.

If you're under a year, it counts as short-term capital gains, which is typically taxed at the ordinary income rate. But if you have short-term capital gains, you can still use other capital losses to try and offset them. So what I tell a lot of people is try and avoid short-term capital gains, because it means you could either find ways of canceling them out with losses or potentially holding the investment a little bit longer.

But the fact that short-term capital gains are taxed the same as income means they're quite inefficient. And if possible, you wanna try and avoid paying that. - Obviously, you don't wanna necessarily hold onto an asset for an extra seven months that you don't feel great about. But if you were at 360 days and you could hold it for five more days, the benefit there is gonna be really high.

But when it comes to the end of the year, I think one important thing to cover is tax-loss harvesting. Like you said, if you have capital losses, they can offset capital gains. And if you have $3,000 of capital losses, you can even offset your regular W-2 employment income. So towards the end of the year, if you're not already using some robo-investing platform that will automate this, I feel like it's something everyone should be doing.

- Yep, so here's what I'd normally do. I'm not gonna do it this year because I had enough in losses last year that I'm not worried about paying capital gains taxes this year. But what I would normally do is at the start of December every year, I would open my brokerage accounts, wherever they are, and I would basically try and see what my net capital gain or loss is for the year.

And if it makes sense, try and make the numbers line up. Again, we don't wanna do irrational things. Don't let the tax tail wag the dog. But if you're gonna be at a point where you're paying a little bit in capital gains, but there's a losing position you would otherwise wanna take, it may make sense to do that.

This was a hard lesson for me a year or two ago when I was using Robinhood as my primary brokerage and realized it's actually not very well suited to doing any of this 'cause you can't analyze specific tax slots, you can't sell specific tax slots, you couldn't even see your net capital gain or loss, but any of the adult grownup brokerages will let you do that.

And it's a worthy exercise to figure out what capital gains taxes you will have. If you're in a position like me where I had so much in capital losses last year 'cause it was a brutal year, you can actually carry forward those indefinitely. So my gains this year will be offset with the carry forward capital losses from last year, but it's a worthy exercise doing otherwise.

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Go to allthehacks.com/shopify to take your business to the next level today. allthehacks.com/shopify. Let's talk about some of the ways that people can start to chip away at their income, 'cause ultimately the way the tax code works and your filing is you have your income, then you have a bunch of things you subtract and adjust it with.

And then that final amount is your adjusted income, AGI, adjusted gross income, and that's what you pay taxes on. So one of those things is itemizing your deductions. Let's talk a little bit about how you can kind of optimize this and whether you should. - So in general, the government kind of gives us a choice.

We can either just take their deduction called a standard deduction and apply it. And I think that is 27,000 roughly if you're married, about half that if you're single. And funnily enough, I think something like 85 to 90% of people just take the standard deduction. If you don't, if you choose to take itemized deductions, which is you turn down the standard deduction, you can take deductions for a lot of other things.

A big one that we'll talk a lot about is charitable contributions, which you can't deduct unless you're choosing to take itemized deductions. But aside from that, things like student loan interest, mortgage interest, large medical expenses that I think are more than 7.5% of income, some random stuff like the cost of doing your taxes.

I was actually amused to find out you can deduct gambling losses if you itemize your deductions. But there's a bunch of good stuff there. Oh, state and local taxes is a big one, even though that's limited to $10,000 unless you're a business owner. But I tend to think if you either are charitably minded or your taxes are somewhat complicated, itemized deductions usually work out to be a better deal.

But for everyone else, you can just take an automatic, you know, standard $27,000 deduction. Mortgage interest being one of the ones that often is the biggest. But you mentioned state and local taxes, which I can't remember what year it was at this point, but a handful of years ago got limited.

2017, so what happened in 2017 is you had the Trump Jobs Act, which basically, it kind of reiterated the way the American tax code works. And the way the American tax code works is it benefits two groups of people above everyone else, business owners and real estate developers. And if you're a real estate business owner, even more so.

And it gave a bunch of benefits to business owners, but to make the math work out, it created legislation to cap state and local taxes, the amount that could be deducted from your federal return to $10,000. What's worse is if you're married, the limit is still $10,000. So it's actually worse if you're married because you don't get like a collectively higher number with the idea of being this hurts states with higher state taxes, which typically tend to be Democrat states.

But either way, we'll talk about that more in the business owner section, because as a business owner, you can actually work around it. But for everyone else, if you live in California and pay 100,000 in state taxes, you can only deduct $10,000 from your federal return, which is a bummer.

- Yeah, absolutely. And one strategy I've heard, we'll talk about charitable donations and way to optimize that, but you don't have to make this decision forever. So I know some people who choose to make all their charitable contributions in alternating years, pay a few extra mortgage payments in alternating years so that in one year, they can deduct as much as possible.

And then in the next year, they can go back to the standard deduction. So I think thinking about if you're on the cusp and you're looking at all your itemized deductions and you're like, wow, you're kind of near 27, then it might be wise to have a strategy of putting everything in odd years or even years and then swapping each year.

- Yep, absolutely. It's on a year by year basis. So you can always sort of change. My guess is more people will start itemizing deductions slowly as interest rates go up, mortgage rate, mortgage interest. I think part of the reason standard deductions made sense for a lot of people is mortgage interests were so low for so long.

And as that climbs up, I think more people will end up itemizing. - Okay, that's itemizing standard. One of those big ones you mentioned is charitable deductions. We did talk about donor advised funds in general in the tax advantaged accounts, but let's talk more broadly about charitable donations and how powerful that deduction is.

- Yeah, I think it's one of the few things that you have the opportunity to do good in this world and get rewarded for it, right? Like I think the government is quite generous because a dollar donated to charity reduces your taxable income by a dollar. Super fair, very generous, and can be used to offset a lot of income.

One of the things to note is if you donate cash, you can offset up to 60% of your income. If you donate appreciated assets, you can only offset 30% of your income. A lot of people read that and are like, "Oh wow, I should donate a lot of cash." But funnily enough, it's actually much more efficient to donate appreciated assets because you're getting a double tax break in a way because you're getting the deduction for donating the asset, but you're also getting the benefit of what would have been the gain you would pay if you sold that asset and donated cash.

So if you donate appreciated shares, for instance, you get the tax deduction for the entire amount. But if you sell those shares, you'd have to pay taxes on that and only donate the net of tax amount. So donating appreciated assets, in my opinion, is something that is almost always better than donating cash.

And you can donate all sorts of assets. I mean, public equities are a very common one, but based on how fancy you want to get, I know people who will donate art to a museum where they'll try and buy art very cheaply. And if they have a good eye, have it independently appraised, it's now worth 10 times more and they get a 10 times larger deduction.

One other interesting thing is, I would maybe say you could extend this to everyone if you factor in the fact that there's no wash sale rule on charitable donations. And so if you're thinking, "I want to make a $500 donation to a charity," if you hold any stock worth $500 that you bought for less than $500, forgetting the return on hassle here, 'cause maybe at $500, it's not worth it, but donating that stock is going to save you capital gains and you will not save it if you donate cash.

- Oh, that's actually fascinating. I never thought about that. - So if you wanted to do that, you could use that $500 to immediately just rebuy whatever you donated and step up your cost basis. - Yeah, for free. - For free, exactly. Maybe the only argument against this is if you're very, very old and you're planning on passing these assets down, one other great thing about the tax code is that you get a step up in your cost basis when you pass stocks down to your children so that capital gains tax ends up being zero.

So maybe in that rare case, you could argue that it's equal, but yeah. And another way to avoid a lot of the hassle here, which I've heard you talk about, is with donor-advised funds. And we talked in this example about $500. It would be a pain for every $100, $200, $300 donation you wanna make to call the charity and coordinate a stock transfer and work with your brokerage firm.

So in general, I think donating, you can open up a donor-advised fund, which we talked about a couple of weeks ago, and donate all of those securities once. And this really helps with that alternating strategy, right? You could make your donation and then have a pool of funds that you could both invest so it grows, but then donate from whenever.

And you can kind of separate the donating from the giving. - Yeah, super useful, right? Like again, let's say there's a year you wanna take itemized deductions in, you can front load your entire donation. You can basically do the tax planning part of it in isolation from the giving part of it.

And the fact that once money's in a donor-advised fund, it's invested and is growing also means like charity will get more money in the future. So it's not like you're taking money away from charity. You're putting money into this pool of funds that you're marked for charity. It can be invested, it can grow, and then you can give it whenever is appropriate.

- If some charities don't accept stocks or don't accept crypto or have high minimums, this kind of avoids that. I think anyone who's listened to this show for a while knows that we partner with Daffy. It's a donor-advised fund. It's the one I use. I think of the options that the average person can just sign up for personally, I like it the most if you're an average consumer.

And so you can go to allthehacks.com/daffy and get a free $25 if you want. - Sweet. I mean, in general, charitable donations is something that I think makes a ton of sense, again, just 'cause it has a benefit of doing good in the world while also helping in taxes.

- And it doesn't have to be money or stock or crypto. You can donate up to, I think, $5,000 of items absent kind of appraisals and anything. - Clothes, electronics, like all kinds of things. - There are a lot of different ways you can choose to value them, but that's up to you.

But definitely something if you're thinking at the end of the year, I have a bunch of stuff in my house to get rid of, great time to go donate it if you'll be itemizing this year. And again, falls in line with that alternating strategy of, okay, this is the year we're gonna donate everything in our donor-advised fund, give everything away, make some extra mortgage payments, and then next year we'll donate from our DAF the whole year.

Cool, so that is charitable donations. There's a couple other things I'll touch on on energy. Thanks to the Inflation Reduction Act, which we'll get to a bit more when we talk about solar, they increased the cap for lifetime cap on energy efficient improvements to your home. So things like heat pumps and upgrading windows or insulation and furnaces, I think it's a $1,200 limit now.

So if there's any changes you make there, definitely look into it 'cause there's a bunch of stipulations on different items and how much you can get, but that's one. Also in energy, solar at your home. So when you install solar stuff, any company that's selling you solar knows this.

And so I'm not gonna try to go through the details, but if you go to any website to buy solar anything, whether it's a Tesla Powerwall or solar roof or anything from another local vendor, there's that. And then also the EV tax credit, you get $7,500, but there is a salary cap to that tax credit.

- Is December 31st a deadline for all of this, for anyone listening? - I believe all of the energy efficiency improvements apply based on a calendar basis. But a lot of the Inflation Reduction Act benefits were through 2033, I believe. And so some of these things, it's not a take it or leave it, right?

If you don't get your energy efficient stuff done this year, you can aim for it next year. And I think that's gonna be a theme throughout this episode. There's a lot of ways that you can limit your taxes and we're recording this at the end of November. That doesn't mean that, you know, you're gonna be able to do all of them this year, but this is a long game.

- Yep, absolutely. But for a lot of it, December 31st is a very important date. So the things that can be implemented quickly, it's totally worth looking into. - Yeah, the charitable donations, I can't remember the percent, but like the highest percent of charitable donations, I think on a given day in the year is December 31st.

And I was talking to one of the people on the Daffy team and they said like up until 1157, people were donating crypto because it's like an instant donation or people were donating, you know, for their donor advised fund and putting on a credit card like right before midnight.

So that's one of the few ways to reduce your taxable income. But just to be clear, you are donating money. Like it's not a give $1,000 and somehow make back 1200, it's give 1,000, create a lot of impact for other organizations and get back a few hundred. But for those of us who are charitably inclined, it's definitely a win for both sides.

- If there's time at the end of the episode, we can talk a little bit about charitable remainder trust. Those are weird instruments, but those can sometimes, for people who have very large capital gains, literally be like you give money to charity, but also end up with more money yourself.

I did an episode, I think you've done an interview with Manny from Valor also, and he and I did a whole episode and we went through all these charitable remainder trusts and grants and all this stuff. We'll touch on it at a high level too. On kids, is there anything other than 529s for people with parents to be thinking about?

- One of the strategies that I think could make sense, and maybe this is more of a business owner thing, is I've seen a lot of business owners hire their children for, again, legitimate jobs, right? Like this, you don't wanna have tax fraud, but you have a 13, 14, 15 year old helping you with social media.

You can hire them, pay them, and outside of having them get some income and if they're under the standard deduction, being able to keep that income, what is also cool is it makes them eligible to start a Roth IRA. 'Cause for a Roth IRA, you have to have earned income.

So if you are able to have children pretty young, 13, 14, 15, start a Roth IRA, it starts a compounding a lot earlier. So I think that's something kind of cool that could make sense for people that are business owners and wanna have their children involved in the business.

- And even if you don't, if you have a 13 or 14 year old child, you could encourage them to get a job and put that money away in a Roth IRA. If you wanted to encourage that savings, they could get a job, put it in their Roth IRA, and you could gift them some spending money.

So like a way to backdoor into your kid's Roth IRA would be to make them get a job, invest the money, and then kind of replace their money that they probably as a 13 year old would rather keep and spend. - And you look at the math, right? Putting dollars into a Roth at 13 versus 25, 27, the amount of compounds, it's totally different.

- I'm already, with a one and a three year old, we're already like, how do we try to max this Roth out as quickly as possible? So definitely thinking about that. There's a bunch of other tax advantage to count stuff that you can do before the end of the year.

If you haven't put money in a Roth IRA or done a backdoor Roth or contributed your 401k, I guess in that case, you probably only have whatever comes in your 1231 paycheck. - HSAs, FSAs. - But like I said, we've covered a lot of those. The one thing I will flag that I've heard you say that I didn't realize, also on the note of kids, is that 529s don't necessarily have the most tax savings benefits in the year you contribute, though some states do have some perks to donating.

California is not one. I didn't realize that it matters which state you pick for how you use your funds. - It absolutely does. Like different states have different rules. What that means is different states have different rules on what you can spend money on, different states have different investment options, and you absolutely are under no obligation to pick the 529 from your state.

If your state gives you a tax benefit, you probably should, but for everyone else, just go pick a state with the best plan. I've heard some people do Utah, Nevada. Those are generally good ones. Do some research and pick the best state if you're not getting a tax break.

- And 'cause I've heard they passed IRS legislation, I believe that, and maybe it wasn't even the IRS, but that you can use your 529 for K-12 education, but not in every state. And so the good news is I believe that if you have a 529 in a state that wouldn't let you, I believe you can transfer and roll it into a 529 in a state that would.

So you're not really restricted that much. And if you're in a tax break state that doesn't allow it, well, donate or contribute, get the tax break, and then later, if you need it for K-12 education and your plan doesn't allow it, move it to another state. - Another thing I never realized until quite recently is if you're in a state that gives you a tax break for donating to 529, you could literally do it right away.

If you're paying for college tomorrow, you could put money into the 529 right now and pay it out immediately just to get the tax break. There's no sort of minimum holding period or anything. - I believe you can also do the same with an HSA. Not that we talked about all the amazing tax benefits of an HSA and you should probably hold onto it forever, but if you don't have the funds to invest in an HSA, but you're eligible and you have medical expenses, you might as well just put the money in the HSA and take it out the next day if the alternative is not putting it in at all.

- Yep, makes a ton of sense. - You all already heard me talk about our sponsor, Daffy, in this episode. And if you've listened for a while, then you know I'm a huge fan of them and their mission to help people be more generous more often, especially during the end of the year when I'm trying to make sure I dial in all my tax optimizations.

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So please consider supporting those who support us. - One thing that I know you talk about for kind of W-2 employees is non-qualified deferred comp plans. - And QDCs. - And it's something I tried at Google and worked out, but can you talk a little bit more about this?

- Yeah, absolutely. So in my opinion, the people that pay the most in taxes are like truly high W-2 earners. Like people earning high hundreds of thousands or even more in W-2, they're basically got the highest effective tax rate of anyone right there. There's billionaires that have a lower effective tax rate than someone making $500,000 in their job.

So what if that is you? What if you're again, net in a very privileged position, you have a great life, you're earning five, six, $700,000 in salary, what do you do then? Chances are, if you live in California, New York, you're paying almost half of it in taxes. So you're probably looking for alternatives.

One of the alternatives you can do is something called a non-qualified deferred compensation plan or an NQDC for short, 'cause it's a bit of a mouthful. What that does is it lets you bifurcate your income into money you receive today and money you put away for the future. And the money you defer to the future, the entire pre-tax amount gets invested and you then get paid out that money at a later point, potentially in retirement when you may be in a lower tax bracket or something.

And this has two big benefits. One, in the years where your marginal tax rate is higher, that income is not taxed that higher marginal tax rate, it moves to a future year where you may have a lower tax rate. The other benefit is the entire pre-tax amount gets invested.

So compounding starts working on a larger base, potentially leaving you with more money when it's time to pay you out. Both of these sound great. Also, what's great is they're not subject to discrimination testing the way, you know, like 401k plans and stuff are very limited because they can't treat different employees differently.

But an NQDC can be set up on a per employee basis. So a lot of people can talk to their company about it. The one downside to bring up is the NQ part. Like, why is it called non-qualified? What does that mean? What it means is in case the company is going bankrupt or creditors are coming after the assets, your plan is not safe, which is very different from a 401k or stuff where your plan assets are protected.

So my advice would be, if you are considering an NQDC, think about who your employer is. Like getting an NQDC from Microsoft, I'd feel pretty good. Getting an NQDC from like a six person company that may not be around in 10 years, I probably wouldn't. But definitely worth considering if you're a truly high W-2 earner.

- When I was at Google, I did this. And one of the things they made very clear, and maybe this is plan dependent, is like, if you change your mind next year and want the money, like they had a minimum. It was like three years or I think it was like six months if you leave the company.

So like, this is money you aren't going to likely have access to, so keep that in mind. But in my case, while I was at Google, I had a much higher salary than when I started as a company. And so I actually deferred a bunch of my income and then I quit Google.

My salary dropped to like $30,000 a year. And like six months later, I got all of this money that I had earned three years before and it was great. And at Google, I trusted that they weren't gonna go bankrupt in three years, so great option. So that's a really interesting- - After a high W-2, very often you can negotiate this and a lot of companies, especially big tech employers, do these quite often.

- Is it a lot of administrative work for the company to do this? - Yeah, but anyone that's like a Fortune 500 type company that has tons of people, they all do it 'cause it's kind of a big win and it helps them from a recruiting perspective. - Any other big things outside of investments, real estate and all that, that we'll get to next that W-2 employees should be thinking about?

- We'll come to a lot of it in the business owner section, but I've also seen people in some cases who have a high W-2 getting the company to bifurcate it and also hire them as a consultant. So they are both a W-2 employee and provide consulting services and they can do a lot more planning with the consulting side.

Again, it doesn't work always. - If you're making 250,000 and your employer can pay you 150 and then give you 100,000 as a consulting job, it's actually probably gonna save them money in terms of employment taxes. So it could be pitched as a benefit to them. And then, the last part of this conversation is gonna be all about saving money as a business owner.

You now go from not business owner to business owner, which as you said, is like what the tax code is designed to benefit. - Absolutely, and we'll talk a lot about that. But really, the more you look at the tax code, you just realize this country favors entrepreneurship so much.

So my sort of parting advice to W-2 people always is think about the side hustle, think about freelance and think about sort of expanding your horizons. And if there's a business you may want to start in the future. - One that I didn't even treat like a business, though I should, and obviously clear this with your company, is there are a bunch of these networks out there, GLG, GuidePoint, where as someone who has expertise in an area, I'll put a link to a few of the ones I've done in the past in the show notes, but like they will just reach out to you and say, "Hey, we're doing a study where we wanna talk to people about their expertise in industry X." And they might tell you it's $100 an hour, but I've found that you could tell them, "Nah, 600, 900," like whatever.

And all of a sudden you're driving this number up significantly. If you do five or 10 of those a year and you make five to a hundred to a thousand bucks each, that could be some business income that you can offset. So we'll get to that. But when it comes to side hustles, that's one that I've found, the likelihood of you being a highly paid W-2 employee and having expertise that other people from a research standpoint might want to pay you to tap into, obviously without giving away any kind of proprietary information or breaking any NBAs you've signed with your employer.

That's one way also to get business income. The two slight notes that I'll share. One, I learned from talking to my tax advisor, just in general, the IRS statistically, returns that are signed by a CPA have a lower audit percentage. So I guess one big question here is, when do you think people should consider working with a CPA versus doing this on their own and using something like TurboTax?

- I think as soon as you have some degree of complication. So I would say, if you have your, if you're a business owner that makes six figures, you probably want someone looking through it just because you'll save more than it is. I think TurboTax is fine if you have the simplest financial life ever, which is like, which I did for a while, right?

I have a W-2 income and that's really it. And then you hit a couple of buttons and let TurboTax kind of do it for you. But if you're a business owner, if you have real estate investments, if you're doing anything kind of interesting, I think it's absolutely worth having a CPA.

You also ideally want to, I know this is hard because almost no one is happy with their CPA, finding someone good, because there's a lot of CPAs out there that are trying to process the highest quantity of returns. And you want someone who kind of is up to date.

Like, again, we talk a lot about taxes, but there've been so many people who listen to something we say, go to their CPA and then their CPA's, "Oh yeah, actually we should do that." So you want to find someone good, but as a business owner, ideally you want to be working with your CPA.

But again, there's always benefit to listening to stuff like what we're talking about and knowing what to ask your CPA, because even the best CPAs will say it's a partnership. It's not like a go figure this out for me. It's a partnership between you and them. - But I will say the big thing that a CPA will do for you that TurboTax won't.

I talked about that kind of like alternating strategy. A TurboTax is just going to take in all your inputs and give you the answer. And they'll fill out the forms and they'll ask you the questions to make sure they don't mix anything, but they're probably not going to bring out the strategy of, "Oh, if you do this thing now versus later, it's going to be better or worse for your situation." So I think that's one.

And then I've often told the story of the CPA I work with was a company called Gelt. And they went back and reviewed past returns and found mistakes that actually netted me like a significant amount of money that I was pretty disappointed in my prior CPA. So I would say, if you're a business owner or kind of a high income earner, that makes sense.

If you want to support me, allthehacks.com/Gelt, G-E-L-T is their URL. And after we used them, I was like, "Can you guys please be a partner with us? 'Cause you guys have been great." So I've been a fan of them. - It's shocking how many tax returns are messed up, especially since we built a tool to analyze tax returns.

I ran mine through and like, despite being in this space, I found my CPA. I'm not going to name them and publicly shame them, but there was a year I made $100,000 charitable contribution to my donor advised fund. They skipped it and took the standard deduction. So just like really bad stuff.

- The firm that I used that made a mistake was a very reputable firm and they just made a mistake. And I've actually talked- - We'll talk offline. Mine is a reputable firm too, maybe it's the same one. - And funny enough, I've talked to a few people that have very complicated tax situations who make a lot of money.

And they actually hire two firms to prepare their taxes each year and compare notes. Because it's just, even with the best firms, people make mistakes. - Like we built a really simple tool that literally you just upload your tax return and it shows you like all the numbers in a nice format.

And that's how I found it. 'Cause like, who's going to look through a tax return? - Yeah, so I played with this tool. It's at decode.tax. Can you touch on the privacy side of it? 'Cause I know one thing that when I first used it, I was like, God, do I really want to upload a return with my name, social address, and all my personal financial details?

- So, I mean, a few different things. One, you can always like remove your name and all of that from the return itself. Like the tech, basically it's OCR. It scans for the important numbers and pulls them. But beyond that, a few different things. One, you can delete your data at any point.

So what a lot of people do is they'll like upload it and then just immediately delete it. Two, even if you don't delete it, like we don't share that data with absolutely anyone. Like it's literally just stored in our database. Third is like no identifying information is stored as we're storing that data.

You know, we're just like pulling the numbers and storing that part. But yeah, a lot of people just end up deleting it right after. 'Cause obviously privacy and stuff is super important here. - What I did was the Preview app on Mac has a really good redacting tool. And so I just pulled it up, redacted, redacted, redacted, and ran through, so.

- It would still work totally fine, yep. - I got all the numbers out of it. So I'll link to that tool in the show notes. And we mentioned CPAs. One stat I learned recently was that, 'cause the IRS publishes a lot of stats, that returns signed by a CPA end up having a lower audit risk.

So I would just say, if your tax situation is very complicated, just another one in the corner of go with the CPA. And then this is a bit of a strange note, but recently I was trying to kind of model out a couple alternatives of what to do for taxes.

And I found while I wouldn't have them prepare a tax return or write anything for you, ChatGPT is really good at tax questions. Like really, really good. And so I had a question around S-Corp elections and whether it made sense and how it would affect my future social security benefits.

And it took my verbal input, built out a model, explained it. So I would say, if you're listening to any of this and you have questions, don't replace your CPA with AI, but absolutely ask ChatGPT questions and the results are pretty good. - Again, I do want to caveat though, they're pretty good.

Like we, for instance, when we built our tax tool, we actually first loaded a lot of it into GPT. We got a lot of good data, but at the end of the day, every once in a while, could be one in a hundred, one in a thousand, AI does kind of hallucinate right now.

So don't let that be the be-all and end-all of advice. Absolutely use ChatGPT as one data point, but it can't be the sort of sole deciding factor in any sort of strategy you do. And again, so we actually ended up pulling out the AI component for now. It just needs to be kind of tightly leashed a little bit because once in a while, it would just kind of do bad things.

- If you're asking a question like, how does capital gains tax work? And you want someone to explain it to you, where previously it was like find a friend or pay your accountant, you know, a high hourly fee to explain things to you. I think that's where it's becoming pretty big handy with me.

- Yep, absolutely. But don't tell it like, what should I do for taxes? And then blindly follow its advice without, you know, kind of double checking with the CPA or whatever. - Absolutely. Okay, so another big area is investments. And I think a lot of the things in this area apply broadly to everyone.

You don't need to be a business owner for many of them. So maybe let's jump in and start with kind of the one you highlighted is who the tax code is for. And it's people that are involved in real estate. - Yeah, so two big categories of people that like the tax code benefits, like as an asset class, I think real estate is amongst the most tax advantaged asset class out there.

The one other thing that may compete is like startups, especially with the new sort of QSBS rules. But those categories are just like tax advantaged asset classes that have all these benefits built into them. Should we dive into real estate? - Yeah, let's do it. - Cool, let's talk about owning your own home.

Even that is something that the government clearly wants us to do. For instance, you can take not a lot of money, but $10,000 out from any retirement account at any time to buy your first home. Like it doesn't matter if you're 25 years old, 35 years old, 45 years old, you don't have to wait for retirement to do that.

When you sell your home or a home you've lived in for two out of the last five years, you pay no taxes and up to half a million dollars if you're married on the gain for that home. Even the way mortgages kind of work, right? It gives you the ability to lock in a predetermined interest rate, protecting you from rising interest rates in the future.

The interest rates fall, you can always refinance it, all while mortgage interest in turn is tax deductible. So all of these things have been created to like really get Americans to buy a home. And as a result, I think something like 50% of people in this country own their home, which is a staggering number compared to the rest of the world.

And that's just for your own home. When you get into commercial, there's a whole other bunch of benefits. The one thing that I find, you know, obviously as I explain it, you have to be in a fortunate financial position, but that $750,000 limit. So for people who don't know, you can deduct your home mortgage interest up to $750,000.

However, there is a tactic that I've learned from a lot of people who have significant savings, where one of the other things that is deductible in the itemized deductions is investment interest. And so that would be if you take out a margin loan and invest that money, the interest you pay to borrow money for the purpose of investing is deductible.

Well, one thing that a lot of people have been doing, especially in California, where there's a lot of cash buyers, is if you buy a home in cash and then you do a mortgage after the fact, the money doesn't actually go to the seller because you already bought the home.

So what happens is if you bought a $2 million home, then you refinance it, which is kind of technically what's happening 'cause you've already bought it. Let's say you keep 500,000 in as equity, you're gonna get a $1.5 million wire into your bank account. And if you take that $1.5 million, and one thing that's very important is that you need to be able to trace the path of it.

But if you take that $1.5 million and go invest it, put it in a brokerage account, put it in treasury bills, whatever it is, now to the IRS, you can classify the interest you're paying to the bank as investment interest because it is a loan that you invested the proceeds of.

And that's one tactic to increase the interest deduction limit of 750,000 on real estate. - That's genius. That's another thing I never knew. That's awesome. - So the other way that's gonna be really relevant to people as homes appreciate, especially if your home appreciates and the interest rates drop, is this doesn't have to be, I can buy the whole house with cash.

Let's say you buy a home and you buy it for $500,000 and it goes up because if I remember correctly, the $750,000 limit is locked in at the price when you first get the mortgage. And so if your home appreciates, you can do what's called a cash out refinance, which lets you take equity out of the home and refinance your mortgage.

Very few people are gonna be doing that right now because interest rates for almost everyone are higher today than they were when they got their home. But in the future, interest rates drop and now you have really low interest rates again and your home has appreciated, or even you've paid it off enough that there's a lot of equity value.

When you do that refinance and you get that money out, it's gonna be hard in many cases to claim your new mortgage interest as deductible to the full extent because it's higher than it was when you bought your home. But if you take that cash out and you invest it, similarly, if you work with a CPA, you can validate this and make sure you're doing it correctly, but you can classify the cash you took out and that portion of your mortgage as investment interest and it qualifies as an itemized deduction.

The big important caveat is you have to follow what's called interest tracing guidelines. I'll try to link in the show notes to a couple articles about this tactic and interest tracing, but you really wanna be able to show here's the money, it went into this other bank account that I opened separately, it didn't get commingled with my expenses and all of my personal finances, and then it went directly into an investment.

So in the future, when interest rates are lower, you may wanna cash out refinance, that's a tactic. But for people right now who have a lot of cash and are buying a home and are scared about these interest rates and their mortgage is gonna be over $750,000, you could potentially, if you're at the highest tax bracket, kind of cut the mortgage rate in half if you can make it deductible beyond 750,000.

- That's awesome. Is there a cap on the maximum amount of investment interest, income interest costs that you can deduct? - Yeah, so you need, and again, not a CPA, but my understanding is that you need to deduct that investment interest expense from investment income. So the cap would be how much income did the investment generate.

Generally, and the advice I got from a CPA was that it's not just the income from that investment, it's all of your investment income. But typically, if you figure interest rates are usually not that far off from your investment returns, so as long as this isn't all of your investments, you are likely to have more investment income.

- Got it. But presumably your investment income is like what's been realized, right? Like you could theoretically-- - Yes, yeah, so it'd have to be interest paid out or dividends or realized capital gains or anything like that. But I would imagine that for most people who are buying a home where the mortgage interest is above 750,000, they are probably in a situation where, and they have the cash to buy a home using this tactic, they probably also have investments that are spitting off investment income to deduct from.

- Makes a ton of sense. All right, let's pivot to commercial real estate. So again, if you look at some of the wealthiest people in America, you'll find that a lot of them eventually end up buying real estate. Some of them start with it, but a lot of them eventually end up buying real estate.

And that's 'cause commercial real estate just also gives you a ton of benefits. - And just to be clear, when you say commercial real estate, you don't necessarily mean buy an office building, you mean buying real estate as a business-- - As a business activity, you're right. That's a very good clarification.

And yeah, I should, by that I mean not your primary home, but real estate you invest in as an investment. That's probably a better word. - Or a rental property. - Yep, basically any real estate that you're buying for the purpose of making an income rather than living in it yourself.

So a few different things that are important to touch on. One is, we could have covered this in the capital gain section as well, but if you have a capital gain, you can actually defer paying taxes on that capital gain till 2026 by investing in an opportunity zone. I don't know if you've covered that in previous episodes.

- That is one where if we did, it was briefly. So let's touch on that and then talk about kind of more broad real estate investing. - Oh yeah, we'll talk about opportunity zones real quick. The way they work is the government wanted to incentivize investments in certain underdeveloped areas.

And you can basically take dollars from any capital gain, short-term or long-term, and within 180 days, invest it in what's called a qualified opportunity zone fund, which is a fund to develop properties in these qualified opportunity zones. What's fascinating about these opportunity zones is, at least in New York, I don't know how it works in other cities, is a lot of them have happened to be in very trendy areas because they're based on 20-year-old census data.

So like I live in Williamsburg, which is a trendy neighborhood in New York now, it wasn't so much 20 years ago, but a lot of parts around here are characterized as an opportunity zone. So I know a lot of people that have set up qualified opportunity zone funds themselves and are buying these properties and this gives you two big benefits.

One, you can defer paying capital gains till 2026, but more than that, if you hold on to that investment for 10 years, you get an automatic step up in basis. What that means is 10 years from now, whatever the property is worth, that's your new cost price, or if you were to sell at that price, there's no taxes.

So it's kind of a cool strategy if you end up at a point where you have a large capital gain and you are interested in commercial real estate, as well as all the other tax benefits we're going to talk about that can be combined with opportunity zones. - Okay, so that means like if I bought Tesla stock and I'm now sitting on a big amount of Tesla stock that's up 10X, but I don't want to hold it anymore, I can sell it, invest those proceeds in an opportunity zone, hold it for 10 years and kind of avoid all of those taxes.

- Yeah, yeah, and you get an automatic step up in basis, which we talked about happens at death, but otherwise it's very rare to get an automatic step up in basis. And you do that and you get that with opportunity zones. Again, I wouldn't do this unless you're interested in real estate and would be investing in real estate already, because again, this does take time.

But otherwise, if you are interested, it's absolutely worth thinking about, at least looking up, what are the opportunity zones in your city? You can always Google the name of your city opportunity zones, see a map, like the one in New York is very favorable. So I know a lot of people that have been doing it.

But cool, that's opportunity zones. Outside of that, let's talk about some of the bigger benefits of investing in real estate for income. Two very big ones that are super important. One is this idea of a 1031 exchange. And what that means is if you buy a property as an investment, and then sell that property, you have the opportunity to take the entire pre-tax proceeds.

So whatever you'd make from selling this, the entire amount into a bigger and more expensive property without paying any taxes. What's cool is you can kind of do it an unlimited number of times. You can start with a $100,000 property, then a $200,000 property, and kind of keep buying bigger and better properties while continually deferring taxes.

- And the other thing is you can keep doing that. And someone might think, well, what if I need the money? But a lot of these properties are gonna be spitting off money throughout the year. So it's not that you don't have a way to make money from your real estate.

It's just that you can avoid the taxes on buying and selling. - Absolutely, makes a huge difference. The other big category of why people invest in real estate is this idea of depreciation. Some people go far enough to call it the eighth wonder of the world. But the way depreciation works is when you buy any physical asset, let's say you buy a building, it loses value over time, right?

Depreciation refers to the loss of value over time. And some people call it a phantom loss because it's not taking money from your pocket, but this building has lost some value year over year because it's older and worthless. And you can claim that as a loss either against your real estate income, if you're just doing this as something on the side, or if you somehow can classify yourself as a real estate professional, you can use that depreciation to actually offset other income as well.

- Okay, so we get depreciate. I believe there are some things, if you do a cost segregation study, you not only can depreciate over the life, but you can actually accelerate certain items and take it all up front or 80% of it up front. And I think I heard you say in another thing that in certain cases, you can depreciate 20 to 25% of the entire value in the first year.

- Correct, so again, back to Trump, 2017 Jobs Act, right, that Trump did. Again, I mean, who is Trump? Like, who is he trying to favor? Real estate developers is a big part of it. So what he did is you can take any property. Let's say we have a building.

I can get what's called a cost segregation study. And what that is, it's a study, it'll cost a few thousand dollars. Someone will come look at my building. They'll be like, one, this is the cost of your land. Land can never be depreciated. Everything else gets depreciated to zero, but land does not lose value.

But everything else, they'll come up with like, oh, your windows are worth X dollars. Your HVAC is worth Y dollars. And anything that has a schedule of less than 15 years, like all of these things typically have different schedules. Anything less than 15 years, 80% of it can be depreciated year one out of 2023.

Next year, it drops to 60%. But the upshot of all of this is very often you can buy a property and get almost 20% of the purchase price as a year one deduction, which is very relevant 'cause sometimes your cash down payment is also 20%, right? So it's a very, very efficient way of building wealth for people that are interested in it.

- And the income from this, or the lack of income 'cause you've deducted all of it, is that only from your real estate taxes or can it also go off your primary income? - So this is where it gets a little bit tricky, right? So in general, for most people, let's say you're a W-2 employee, this will help offset your real estate income.

But let's imagine you wanted to offset your other non-real estate income. There's a few sort of ways it can happen. I say this facetiously, but like when people with a high W-2 salary ask me like, "Okay, what should I do to save money in taxes?" I'm like, "Marry a real estate professional." But very often that does work very well 'cause if you or your spouse are a real estate professional, you can offset all your income with depreciation.

But being a real estate professional is hard. It takes 750 hours a year and you have to show that this is your primary job. So it's very, very unlikely you can qualify if you have a high W-2 to also qualify as a real estate professional, which is why having a spouse that's a real estate professional can be a very potent combination, right?

Someone who has a high-paying tech job, for instance, pairing with a real estate professional, y'all can buy investment properties and use that depreciation to not pay any taxes on the other spouse's Facebook salary, for instance. So super effective combination. - And are there any other ways to be able to do it?

- There's another way, which is if you use the property for primarily short-term rentals and you're somewhat involved in running that process, the IRS takes the stance that that's an active business and as a result, you can offset regular income. So it's a little tricky, but I have seen people pull it off where let's say they own a building, they're staying in one of the floors, another floor is an Airbnb and they're using that depreciation.

So the short-term rental loophole also exists. We could talk about it a little bit in the business owner section, but I've also seen people buy real estate with their business. So if they have an office, buying the office building, if they have a storefront, buying that physical asset and using that depreciation against their business owner income, even if it's not connected to real estate.

- And if you needed one more reason to know that we're favoring real estate, I believe if you have a side hustle that is freelance work, you have to pay self-employment taxes. But if you have a side hustle that's a rental property, you don't, is that right? - Yep, it's crazy.

But yeah, no self-employment taxes on rental income. - It's crazy. Okay, so that's real estate. One that I think a lot of people here haven't heard talked about on the show that is relatively new, but really, really interesting is solar. - Commercial solar. Again, this goes back to Biden's Inflation Reduction Act.

There were a ton of incentives created for solar investing. And as it stands today, I still think of solar as like it's a subset of real estate. It's still sort of a type of real estate, but commercial solar, in addition to depreciation, also gives you tax credits. And sometimes tax credits can be up to 40% of your investment.

And worth noting, a tax credit is not the same as a tax deduction. A tax deduction reduces your taxable income. So you save your tax rate into the tax deduction. A tax credit is a dollar for dollar reduction in taxes paid. So it's super, super powerful where, let's say you invest a million dollars and get a $400,000 tax credit, that directly reduces your taxes by $400,000.

That can be applied moving forward. It can also go back a couple of years. Super, super powerful, because when you combine that with depreciation, and typically commercial solar also spins off income, very often, you're getting 70 to 80% of the money back in tax savings right away with the income then coming in and compounding on top.

- Yeah, so if you're a high W-2 earner or a business owner with a lot of income, I have not seen a strategy for reducing your taxes that is better than solar. - It's wild how big the effect is. And again, just to like quickly break it down, you get the tax credit, you get the depreciation.

A lot of it can be, the depreciation can be front-loaded and bonus depreciated as well. And then typically these projects will pay like 5% or so of your investment every year based on the energy generated from the solar projects for 20 years. So you kind of get that back as well.

And a more advanced tactic I've seen people do is you can take that income and put that back into a tax advantage account and not even pay taxes on the income itself. So lots of levels to this. - But does it need some amount of solar professional similar to real estate?

- Yeah, so if you wanna offset your active income, which most people would want to, you wanna ideally be classified as a solar professional, but the advantage is being a solar professional is maybe 10 times easier than your real estate professional because a solar professional, you need 100 hours a year, which is about eight hours a month, which is not that much.

I mean, you probably have to tour the site a couple of times, go to a solar conference. It's a lot easier to hit a solar professional status. Real estate professional is really, really hard. You can't half-ass it. Solar can kind of be the side hustle that you do and hit solar professional status.

- And where do you find these projects? Like commercial solar projects, is there an easy way to find them? - We've been partnering a bunch with Valure, and I know you had Mani on your podcast as well. They have a bunch of solar projects that have been doing that so I've been working a lot with them and other providers.

- Okay, we'll link to that in the show notes. But you said earlier investing in startups is pretty lucrative. So let's run through that a little. - Yeah, absolutely. So there's probably the most generous tax break by just raw size is something called QSBS or Qualified Small Business Stock.

And that allows anyone who either invests in a startup, works for a startup, or starts a startup, and there's a few rules. It has to be a qualifying startup. It has to have less than 50 million in assets when you invest or buy shares. What you can get is no taxes and up to $10 million when you sell that stake as long as you hold your shares for five years, which is, it's just massive.

And it's something that I personally benefited from when I sold my last company. But interestingly, it also applies to people who invest in these startups. So it's something that I've seen awareness has spread so more people are doing this, but it's a $10 million break from federal taxes and in 42 states, no state taxes as well.

So super, super effective. And there's actually even strategies that you can use to multiply that benefit from $10 million to 20, 30, or $40 million. So if you are inclined to work with or invest in startups, again, you need a startup to be successful, which the odds aren't great, but if it happens, you get to keep almost all of the money.

- And I'll just clarify. Oftentimes, I think of startups as like tech companies. It's really any business, right? It doesn't have to be a venture-backed tech company. - It has to be a C corporation, and that's sort of the main rule. And very often, people who set up C corporations are those that raise external capital or plan to go public in the future, but it does not have to be a tech company at all.

But it's not possible with an LLC or an S corporation. For the first time, I'm seeing some people set up C corporations just for the benefit 'cause the size of benefit is so large here. - And a couple other caveats. One, I know that, let's say you invest in one of these companies and it does really well, but it's only in three years.

You can actually roll over those gains into, I think they're like QSBS rollover funds or new companies, and similar to a 1031 exchange, you can extend that runway until it gets to five years, and then you can take your money out tax-free. - You could do it in a company you start as well.

Like you could literally be like, "Oh, this investment is going to hit, and I can start my own C corp because I wanna start my own startup," and immediately roll that pre-tax dollar amount in. So super effective. The other cool thing about QSBS is the limit is per company per taxpayer.

So if you invest in 10 companies, each of these companies will have their own $10 million limit. The other thing is it's per taxpayer. So what I did with this company, for instance, is I gave some shares to my mom, some shares to my dad, some shares to my brother, and now each of us have our own $10 million theoretical limit.

As a household, it can be a 30 or $40 million limit. - But like you said, this is not a strategy without risk, right? Most startups fail. Both the startups I worked for and started are not around, actually all three of them. And so I still, my advice is, if you wanna invest in startups, it's a losing game, but you can win big, but keep it to a small single-digit percentage of your net worth.

- Absolutely. - Because the odds are not in your favor. But I believe if you do lose money, you can also write it off as a startup investment. - The actionable thing here is I think more for startup founders where what I have done this time, and I would encourage other founders if they're listening to, is be conscious of the five-year clock and try and make sure your employees participate in it.

And I'll give you an example. At my last company, we gave our early team stock options. So a lot of them didn't exercise it until year one or year two. And as a result, they weren't at the five-year mark, even though it had been six years since we sold the company.

This time around, I'm giving everyone shares they can buy up front and get the QSPS clock started sooner for them. That's something actionable. - Yeah, if you work at a company, and it's not the valuation, it's the assets. But if you work at a company, my wife worked at Lyft.

And by the time we realized this, the company had already raised more than $50 million and it was too late. So if you're just an employee of a company that's assets are worth less than 50 million, that's a good time to think about exercising your stock. But one investment tax break around exercising stock is if you work for a company and you hold incentive stock options or ISOs, a lot of the challenges around taxes and where you might wanna work with a CPA is that when you exercise that stock, you can trigger something called AMT, which is the alternative minimum tax.

But there's usually a threshold every year where you could exercise some of your stock without triggering additional taxes. And so that's a way that early on in the life cycle of a company, if you're holding incentive stock options, you can start to slowly exercise them without any additional taxes.

- Yep, you said everything I need to there, so. - A couple of quick other ones that I'll share in the investment space. So one, there are a lot of government securities that save you money on state and local taxes with high interest rate environment. One thing I didn't talk about in the past 'cause that wasn't the case, investing in treasury bills or funds that invest in treasury bills or state muni bonds can save you taxes on the gains.

Obviously, those come with some risks depending on what state you're in and what type of investment, but that is one way to limit your investment taxes. - That's a really good point, especially because some people will look at a high yield checking account offering 5% or whatever, buying the equivalent yield or more in let's say a mutual fund that only invests in treasuries.

And if you live in California, New York, you're saving an additional 10% by going with the treasury mutual fund versus your high interest checking account because of not paying state taxes. - And that's not 10%, like five plus 10, 15%, but boost that return. So like divide the number by 0.9 if you're in the highest tax bracket.

- Up your knees. - If you're getting 5% on your treasury bill fund, it's like you're getting 5.5% or similar in the high yield savings account. Another one for someone who has a lot of stock in an individual company, there's these things called exchange funds. So there's one that I recently came across called the usecash.com.

I don't have any affiliation with them. They basically pool together investors who have large positions in companies that are in the tech sector. They let you contribute your Facebook, Microsoft, Amazon, Netflix, whatever stock to a fund. And in return, you get shares of that fund without triggering any taxable situation.

So if you are really, really heavy on a tech stock from an employment or an investment, and you want to diversify, but you don't wanna realize capital gains right now, you can use a company like Cash or any other exchange fund and find a way to push out the capital gains, but also diversify.

- Do you know what their fees are? I love exchange funds, but most of them I've seen just have such high fees. So similar to, I think, what you guys are doing with Cary, what we did at Wealthfront, it's leveraging technology to bring down the cost of a lot of these things.

And so in the past, I can't remember what their fees are, but I'm looking on the site, 0.4 to 0.8% management fee based on contribution. No performance fee, no sales fee. - Okay, cool. That's, yeah, that's definitely much, much better 'cause yeah, the products I've seen pitched are 1% to 2%, which are so high.

0.8 is still probably a tad higher than I'd like, but yeah, it's definitely moving the right direction. - And then last, we talked about trusts. I think we'll skip over all the different types of trusts you can use to offset capital gain, to move stock places so you get access to money.

Go back and listen to the episode I did with Manny from Valor. I'll link to it in the show notes. And I think that's it for everything non-business owner. So we talked a bunch earlier about ways to generate business income if you're not already starting a side hustle, getting into real estate, even asking your employer to help you out by making some of your income, 1099 income, consulting income instead of just W-2 salary.

And then obviously there's start a business. So let's talk about things for people who've started those businesses or want to in the future and why that's really valuable. Let's start with the benefits of the QBI deduction. - Yeah, so I mean, again, if you ever want proof that the tax code is like rigged for business owners, consider like two things.

Again, both are from the 2017 Trump Jobs Act or whatever. One is the QBI deduction where they basically decided to give a bunch of business owners a free 20% deduction just because there's some rules around it for high income earners specifically and how you optimize that. But for most people, it's an automatic, up to 20% deduction right there just for being a business owner.

The other one that we talked about a little bit before is if you're not a business owner, you actually can't deduct more than $10,000 worth of state and local taxes. But in response to that, a lot of states created legislation that let you pay an elective tax from your business entity whereby you can pay the entire state tax amount through your business entity and thereby bypass the $10,000 limit and get a deduction for the entire amount of state taxes paid.

- That's a pass through exemption, I believe, right? If someone's looking to kind of Google and search up more. - Every state has structured it a little bit differently. Like the rules vary a little bit by state, but yeah, in a lot of cases, it's an elective tax. So if you're in California, if you are in New York, if you're in a high income state and most of your income is business owner income, make sure your CPA is doing that or make sure you're thinking about that because in a lot of cases, it's an elective tax.

So if you don't know, you're not gonna do it and you may miss out. - This is another great place where TurboTax is not gonna say, "Hey, do you wanna do this other thing?" It's gonna say, "Hey, did you do this thing?" Can they pass on property tax or is it only state income tax?

- I think it's primarily state income tax or anything attributable to the business. So my guess is if it's something, property under the business is probably fine, but not if it's under you individually. Also, some states are fine with LLC, some states require S-Corps, so it depends a little bit on that.

While we're on the topic of QBI, which we briefly talked about, if you're a high income earner, which I think is 160,000 single, 320,000 as a couple, your QBI is also limited by 50% of the wages paid. And if you have an S-Corp, for instance, we didn't talk a lot about, maybe we will later, there may be a temptation to pay yourself the lowest W-2 salary possible.

But because of QBI, sometimes you would wanna pay yourself a slightly higher W-2 salary to maximize the amount of taxes you save on. So my recommendation overall is if you're a high income earner, have an accountant, have someone qualified, run the calculation on what is the precise amount you should pay yourself.

'Cause there's one specific dollar number in salary that will reduce your taxes because you have to balance self-employment taxes and QBI to find the perfect number that results in the lowest amount of taxes. - The team I was working with at Gelt, I have a spreadsheet that we just went through and the result was the amount of money I should pay myself as a salary was higher than I had expected.

- Correct, and that's what happened because of QBI, exactly. And again, if someone's like, "Okay, what do I really need a CPA for?" This is a great example. Getting that one number correct is so important. - Yes, and just to be clear, I love this stuff and we've been talking about it for over an hour and I still looked at that spreadsheet and said, "I am so glad someone else was preparing this for me." - And again, if people are curious, I mean, we, for instance, are releasing online resources to self-calculate it just so people are curious.

But the idea is just like, use this as a guide, have a professional actually run the numbers. You don't want to do it yourself. - But we talked about S-Corps and this is a decision I was making recently. But one of the things is when you have self-employment income as a business owner, you are subject to pay your self-employment taxes entirely yourself.

And that's your social security, your Medicare, which your employer usually picks up half of. And so the advantages of making sure you're electing for an S-Corp election are that you split your net income into salary and owner distribution. And the salary is subject to those self-employment taxes, but the distribution isn't.

How important is that? How much savings could that be? - It depends a lot on how much you earn. For me, $100,000 in net income is when it sort of enters no-brainer territory. I know some CPAs or people will do it at 70, 80K, but to me, it goes back to return on hassle.

And an S-Corp is undoubtedly more hassle than an LLC and payroll costs, all of those, your CPA will charge a little bit more, could be maybe $1,000 a year. So to me, $100,000 a year is the point at which it sort of makes sense. And then as you get higher and higher, it just scales further up from there.

And that's $100,000 in net income. The one caveat I should add, not relevant to most of the universe, but in our universe, very relevant, is New York City has a higher tax on S-Corps. It's about 8.8%, so it wipes out a lot of savings. So I know a few people that have listened to these podcasts in New York City, signed up for an S-Corp, and ended up with higher taxes.

So for New York City S-Corps, maybe chill, your thresholds are a little bit different, but for everyone else, about $100,000 in net income is where it makes sense. - I ran the math on this. This is actually the model I built with ChatGBT, but one other factor I never hear anyone mention is that by lowering your salary, you are reducing the amount of Social Security credits you earn.

So the way Social Security is calculated in the US is actually much more complicated than I thought, but it basically looks at your top 30 earning years, and you get credits for how often you've earned and how high you are in that peak. I believe right now it's somewhere around like 190,000, but don't quote me on that number.

And so if you reduce your income to 100,000, you are going to get less Social Security benefits in retirement, if Social Security benefits. TVD on the future of the entire program, but just know that that is one implication of pairing yourself a lower salary through an S-Corp is that you will earn lower Social Security benefit in retirement.

However, I built an entire model to factor precisely this in, and at the end of the day, the savings you get if you turn and invest that and earn a modest return would outweigh the Delta of your Social Security benefit, unless you live to like 130 or 140, which there are people trying, but I'm not planning on.

- That's a breakeven point. The other thing worth pointing out while you're on that topic is same with solo 401(k) contributions. We'll talk a little bit about solo 401(k) soon, but that is limited by how much you pay yourself in W-2 as an S-Corp, which is another reason you wanna have someone find the perfect number for you.

- For me, the math was, if you pay yourself at least 66,000, you can through a combination of pre-tax employer contribution and after-tax mega backdoor Roth rollover, you can make sure you get that. But if you don't pay yourself at least the threshold, there's not a way to max it out.

- Exactly. - So that's S-Corp. Another big thing and something that I think every non-business owner is always jealous of is business owners are walking around saying, "Oh, I got all these business expenses." Let's talk about some of your favorites. - Yeah, so big, easy one, right? Let's imagine two people.

One is a W-2 employee that works from home. The other person is a business owner that works from home. Guess what? The business owner can deduct the pro rata square footage of their home office, which the W-2 employee who also uses their home office as much cannot. So pro rata rent or mortgage can be deducted, which is pretty substantial, right?

Like some people's home office, especially in New York, can be 15, 20% of their overall square footage. You can deduct 15, 20% of rent, mortgage, utilities, cleaning, all kinds of miscellaneous things there. I've also seen some homeowners actually rent their home to their company, potentially for a meeting or an offsite or whatever.

What you can do then is you can actually pay yourself rent from your company. And if you do it for up to 14 days a year or less, pay no taxes on the gate. 14 days, you can rent your home even not to your business and pay no taxes.

But as a business owner, you also have the benefit of money from one hand into another. - And one thing that I learned from my accounting firm is that you do not have to use square footage as the calculator. So I looked it up and it said- - There's two methods, there's two methods.

- There might even be more. I read the code right before we got on. It said you can use square feet or any other reasonable method if it accurately figures your business percentage. And the one that sometimes does a better job is percentage of rooms. So if you have five rooms in your house and they're of roughly equal size, then it can be one fifth.

That's potentially a way that you could increase your home office deduction, especially if your home office is on the smaller side of the other rooms in your house. It might give you a slight edge there. - Yeah, and outside of that, you can deduct all the other things that you need to run your business, like phone, internet, conferences, travel to and from conferences, software.

One of the things we always saw at my last company is towards the end of the year, a lot of business owners would email us and ask us if they could buy annual plans and pre-pay for the next year, or sometimes more, the software, because they could then pre-buy it, reduce their taxable income for the year while pre-paying their expenses for the next year.

So as a business owner, you can deduct all these things to the degree I actually have some people that have either expensive hobbies or things they're interested in now conspiring to start businesses around it, because then those things can start becoming tax-deductible. Like I have a friend who's a travel blogger who can write off all his trips because he legitimately makes money by teaching other people how to travel and things like that.

- A few other fun things, health insurance. If you provide health insurance for your family, that's a business expense. And then because we like credit card points on all the hacks, if it's related to your business, the annual fees on those credit cards is a fair business expense. And then deducted from your business income can be the employer contributions, correct?

Any employer contributions to your retirement account. - Yeah, I mean, basically you can choose whether to make them pre-tax or post-tax, but both employer and employee contributions can be pre-tax if you choose. - And then you said the pre-paid expenses for next year. I would even go as far as to say there are some companies where if you reached out and said, hey, we've all seen those calculators buying something online that say, here's the monthly price, here's the annual price.

As an individual, it's like, maybe you do it for the savings, but as a business, you could do it for the savings and the deduction. - And one way of looking at it is like, okay, cool. I can pay for this with my business and this is a business expense and I save money there.

Another way of thinking about this is, wow, you can now choose the best benefits in the game. You can kind of pick the exact health insurance you want. You can customize the best retirement plan you want. You can pick and choose like literally and set everything up just the way you want to, which I also think is a really cool benefit that you wouldn't have at a corporation where you have to pick their retirement plan, their health plans, and all of that.

And a lot of cases, often the same for your family. - Exactly, and so just to clarify so everyone knows, Ankur, you didn't pay me to do this episode, right? Like this is not an ad for Carry that you guys said, hey, we'll give you some money if you do an episode about taxes, right?

- No, absolutely. I mean, it's a match made in heaven, but the fact is you've been using the platform now for a bit and it's been great to onboard you there. But yeah, I started this company because I was trying to set up a solo 401k, which in my opinion is the best retirement plan in America.

And I honestly wanted to find a good provider and they all kind of sucked. And we had to then build a platform, but that was not the goal. It just sort of happened after searching the internet high and wide for something that did exactly what we wanted it to.

Couldn't find it, so built it ourselves. - So the reason I clarified that is 'cause I will share, like I had actually opened up a solo 401k with another provider. I'd paid them the fee to set it all up. And they sent me like all these documents. I had to go to a fidelity office, like an actual branch with papers.

We got it all opened up. And right before I funded it, I got connected with Cary and I was like, "Whoa, this is exactly what I was looking for." I never ended up getting them to give me back any of the funds for starting up, but I did open a Cary account.

I've now since rolled all of the 401ks that my wife Amy and I have had at Google and other employers into my Cary 401k. And I think their product's great. Cary is not a sponsor of the podcast, though I will be hitting up Ankur for the indefinite future to try to see if we can make that happen.

But as a member of Cary, they have a bunch of content and you guys have been putting out all these workshops on tax savings for business owners, on even some stuff on credit card points and all kinds of stuff. And when I saw all the content you were putting together, I was like, "Wow, I wanna do an episode on end of the year, kind of tax savings and everything.

Why not have you on?" So I'm really glad you've been putting out that content because I've appreciated it. And I'll link to some of the things that people can watch and some of the workshops they can sign up for. And we'll absolutely link to Cary. I think if you use allthehacks.com/cary, there's a good deal on the pro plan right now, which gets you a handful more perks over the base plan.

But I don't know, I just really like the platform. Like it's become my solo 401k, both for pre-tax, Roth, everything. - Nope. I mean, again, that makes us so happy to hear that, right? We've been working on this for a year and wanted to build something that like kind of leveled up the game.

I mean, if you had actually gone through with the Fidelity plan, I don't know if you realize they would want you to deposit paper checks still for whatever reason. - I literally have three paper checks from Fidelity in my hand right now, three checkbooks they sent me because they were like, if you want to do anything, here's how you do it.

And it was just so ridiculous. - Yeah, it's super old school. In terms of the content and education, frankly, look, I've been learning this stuff myself over the last year, 18 months and teaching it, sharing it, coming on this podcast, talking about it is kind of reinforcing my learning as well.

So it's been cool to be able to like learn this. And every once in a while, I'll read about something in the tax code and I'll either like tweet it or something like, wow, do you know it works this way? And it's honestly just been great for me and a bunch of people to like get smart about these things and get educated.

- Well, in the spirit of learning, I've got one more really cool thing that we didn't talk about related to QSBS that you may or may not know. But again, if anyone's interested, they can find everything you guys are doing on the website, which I will redirect to a special deal at allthehacks.com/carry, C-A-R-R-Y.

But on QSBS, which was the last thing on this talking point list I had, we already talked about it as an investor. You briefly touched on it as a business owner. But the thing that you didn't mention is that you get the greater of $10 million or 10X your investment.

And that rarely comes into play for most people because 10 times the investment to beat 10 million, you'd have to put a million in. Very rarely is an individual investing a million dollars in a company that isn't already past that $50 million of asset level. So it's not often talked that way.

But as a business owner, the ultimate strategy is to start an LLC, assign all of your IP to that LLC, and then at the point that you end up raising money and converting to a C-Corp, which is, as you said earlier, absolutely a requirement, if that happens at a point where that value of the stock from the LLC is worth, let's say as close to $50 million as possible, but definitely under.

Price is right for olds, right? You don't want to go over. You do not want to go over. Then your cost basis of your investment, which you contributed not as dollars from your bank account, but as shares in your LLC becomes the cost basis. So it's possible to get right under 50 million if you owned the company outright yourself, which means that you would actually get $500 million tax-free.

Or if you and your co-founder were able to do this and split it up, you could see how that would go higher or if someone else in your family had those shares. So that would mean that it is possible to use QSBS to get a tax-free $500 million or slightly under.

Yep, it's crazy. I mean, the things to be careful of there is you don't want to go over 50 at all. So if it means 40, 45, that's totally fine. You also have to be relatively confident in a good exit because the benefit would only kick in after your cost basis.

So if you actually end up selling the company for $50 million, you actually won't get any QSBS benefit at all. So you have to be pretty confident and the company is going to do really, really well. I highlight it not as the strategy that might make the most sense for everyone, but that there is a way to get right up close.

If you play your cards right, this particular tax benefit could generate half a billion dollars of tax gains or slightly under 'cause it's 10 times a number that has to be less than 50, but it's pretty wild what the tax code can do if you just understand it. And I'm really appreciative of you being here to help me explain a bunch of these things to people so that they can take advantage of it and not be in the vast majority of people who don't learn these things because we haven't grown up millionaire who've had access to all of these resources our whole lives.

- No, absolutely. Look, that's the mission, right? I'm a first generation immigrant here. I learned about all this literally while selling my company and I'm like, wow, there is so much stuff here. We need to make this available and accessible to everyone or at least the people who care enough to kind of read and follow this.

So yeah, thanks for having me. It's been a blast. - Yeah, thanks for joining. (upbeat music) If you couldn't tell from my voice, I was so excited to be doing this episode. I love thinking about ways to optimize taxes and I'm so glad Ankur was able to join us.

I really hope you found some practical and tactical ways that you can apply this to your own life and your own tax situation. So thank you so much for joining me. If there's one final favor I have for anyone during the holiday season, if you wanna go ahead and leave us a five-star rating and review in either the Apple Podcasts app or Spotify, it would be so awesome.

I really appreciate it. Other than that, thank you so much for joining and listening. I will see you next week. (upbeat music) (birds chirping) (birds chirping)