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Tax Reduction Tips for W2 family

My family is located in Santa Clara County, California. We are 100% W2 family, but can open a business.  Our W2 income is over $200K and makes us ineligible or disqualifies us for most of not all deductions and credits. 

Do you have  any recommendations for us to reduce our state or federal taxes owed?

 

Thank you,

 

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2 Replies
Sean Enrolled Agent
Employee Tax Expert

Tax Reduction Tips for W2 family

@SerranoSin ,

Great question!

I can give you a few ideas on what you might want to look into.
However, you may want to speak to a local financial planer for more advice that is out of the "tax help" type of advice we are allowed to give.

Feel free to review the following TurboTax website for 7 Best Tips to Lower Your Tax Bill:

https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/7-best-tips-to-lower-your-tax-bill-f...

If you have capital investments, this is my favorite tip:

Reporting losses on capital investments can also reduce your tax bill. “Loss harvesting” is considered to be a key year-end strategy. This is when you sell your investments to “realize” a loss(the act of selling at a loss). These losses can be used to offset capital gains taxes, dollar for dollar, reducing your overall tax liability.

  • When you have more losses than gains, you can use up to $3,000 of excess losses to offset ordinary income.
  • The remainder of the losses (in excess of the $3,000 allowed each year) can be carried forward year after year.
  • Keep in mind that the IRS doesn't allow use of losses from a “wash sale"; when you purchase the same or “substantially similar” investment within 30 days before or after the loss.


I hope these 7 tips help!

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MariaDG1
Employee Tax Expert

Tax Reduction Tips for W2 family

Those were some great tips and that article is definitely worth checking out.  I just wanted to add a couple of things. 

      The first and biggest option for you is to ensure you are maxing out every available retirement option.  If your employer has a matching plan (401k etc) be sure to take full advantage of it.  Every dollar you contribute lowers your taxable income this year, and every dollar your employer matches is free money.  You can contribute up to $22,500 in 2023.  And you can still contribute to an IRA as well.  The limit for that is $6500 per spouse ($7500 if you are over age 50). 

      Also check at work and see if you have any tax deferred savings accounts available to you.  Even if you don't have a high deductible health plan/ health savings account option, there may be a flexible spending account option for medical expenses (including deductibles and premiums), health insurance premiums, vision/dental expenses, child care expenses, etc.   Anything that can be paid with pre-tax dollars should be. 

    If you have a second/vacation home, or if you are away from your primary home for any significant periods of time, you may be able to take advantage of some extra tax-free income.  Any home rentals totaling 14 days or less for the year do not have to be reported as income.  If you do decide to open your own business, you can rent a portion of your home out to your own business for a business meeting, and deduct the rent you pay yourself as an expense. 

     If you're considering opening a business you may want to take some business courses to prepare yourself.  Be sure to take deductions or credits for education expenses on your tax return.  If you have children or plan to go back to school yourself, open a 529 plan for college savings. While there is no federal or CA tax break for contributions, the investment grows tax free.  All withdrawals, regardless of the amount of growth, are nontaxable so long as they are used for qualified education purposes. You can even use a portion of it to repay existing student loans.  

     If you are itemizing your expenses, be sure to keep track of all your charitable contributions, and consider volunteering for charitable organizations.  You can deduct mileage, supplies, and other expenses for charity work. 

     Finally, look into the newly expanded federal tax credits for energy efficiency updates.  Homeowners can claim credits for certain improvements such as installing heat pumps, energy efficient windows and doors, insulation and similar upgrades. A separate credit is offered for the installation of solar panels, wind energy and geothermal systems as well as battery storage.

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