Minimizing taxes on high wage income

[Koolau]

We're pretty tightly banded as a company, but this was a pretty unique scenario.

We were starting a new business unit and I had just moved across the country to get it going. With cost of living and taxes in the new location, I had actually taken a de facto pay cut for the promotion into the role to help start the unit. I was betting on the come that the business would work out and good things would happen.

Six months later, I'm doing three jobs while they try to build out the team. The new VP of Sales joins the company and promptly asks me if I participate in the Deferred Comp plan and should he join it.

It took me about 10 minutes to realize that he made enough money to access to the plan and I didn't. I was not amused.

But I waited to deal with it. I had my boss over a barrel because so much of what we were doing was wired into me at that point. If I had gone in and asked for the raise then, it would have felt like I was leveraging him.

Instead I waited six months until his team was built, things had settled a bit, and we had a longer relationship. I gently put the issue to him and pointed out that I had waited to bring this up. He said he would look into it.

My boss was (and is) a great person. Two months later I asked him about it and he said "You don't need to worry about that." Um, OK.

When raise time came next year he got me the bump into the right pay band + some more.

We've had a great relationship for 15 years and the risks I took for the company (those above and others) have more than worked out.

That is fantastic.

Megacorp had 20K people so one staffer who felt "worth" more than he was being paid was offered the door or the usual compensation track. Not that the money was bad, but there were no quantum leaps available no matter the contribution. Better performers moved up faster, but never jumped beyond the published pay scales. I say published, because THAT was a major leap forward. When I started, no one was allowed to see the pay scales. Perhaps 15 years in, that was changed for some reason. YMMV

 

[friar1610]

I have not read the entire thread (not applicable to me) so this may have been suggested already. If she’s not familiar with it, your daughter may want to check out this web site (and the accompanying podcasts: https://www.whitecoatinvestor.com/

It’s targeted to doctors, dentists and other high income professionals. I’m none of the above but I sometimes listen to the podcasts on more general topics.

 

[Time2]

I have not read the entire thread (not applicable to me) so this may have been suggested already. If she’s not familiar with it, your daughter may want to check out this web site (and the accompanying podcasts: https://www.whitecoatinvestor.com/

It’s targeted to doctors, dentists and other high income professionals. I’m none of the above but I sometimes listen to the podcasts on more general topics.

Thanks, I have mentioned that site to her a few times over the last couple years.

 

[SecretlyFI]

I’m in this boat and in addition to the advice above, I would add that for their taxable investments, choose funds with little to no capital gain distributions. You don’t want those December surprises. Typically that means avoid managed funds, but to have more certainty, review the Vanguard or Fidelity annual fund distribution lists published every December. You won’t be able to avoid dividends & paying tax on them but at least avoid CG distributions.

This is helpful to know early on, when you’re choosing funds, because you don’t want to wait until they grow alot and then in order to switch to more tax-friendly funds, you’d have to sell and incur even more taxable CG’s.

 

[mwilson]

Dentist daughter may want to open her own practice after a few years - so she should learn and use tax advantages for self-employed/pass-through entities. For example, by setting up profit sharing she may be able to defer up to $58k pre-tax to 401k. QBI deduction. If subject to QBI limit, she may be able to structure business to avoid some of that. SALT cap workaround in applicable states. etc.

 

[Closet_Gamer]

That is fantastic.

I've been blessed to work with, and for, some really great people in my career, but working for this specific person for the bulk of my career has been a boon.

I think he would agree that it's been a fantastic partnership. I drove a lot of the strategy and innovation, allowing him to maintain focus on go-to-market and selling.

We argued -- a lot at times -- and there were stretches where I felt like he wasn't listening to me. But it always normalized and when big topics hit the table I was back in the center of it. New leaders in the business would invariably tell me within a few months that I was the person he listened to the most ... he just had the savvy to never make it look like that in public.

While there were MANY other senior leaders in the business who made massive contributions to its development, I think a lot of people in the company would say that he and I were the long-term driving forces.

Beyond the financial rewards, my partnership with him allowed me to be in a position where I can say with a straight face that I influenced how the industry developed over the last 15 years.

 

[DawgMan]

I quickly skimmed the responses and here are my ideas...

1) Everything everyone else suggested which is pretty much maximizing all the standard tax deferral and HSA plans;

2) See if you can negotiate with the practice to go 1099/set up an LLC and be a contractor. If so, you can set up a defined benefit plan and stash away allot more dough. There are some catches to these plans and generally you need to be somewhat liquid and willing to commit larger sums of dollars annually, but they work great. Go a step further and "employ" your spouse and you can double down. That said, these plans work better when your gross income is over say $500K;

3) Consider conservation easements and/or like type products. The older versions of these products have gotten a bad rap and they are watched by the IRS, but you can find some properly underwritten options out there, but you need to vet out the sources. Just know there are some risks. These typically offer around a 4 multiple on a deduction.

I have done all of the above during my working years and they have all helped to minimize taxes. All this said, I think 2) & 3) are better tools once their income is $500+, otherwise, stay with 1).

 

[isisdave]

Is there any way either of them could set up some self-employment side gig? These offer a wider variety of tax advantage, for example, paid insurance and medical expenses for the only "employee."

Also, it would permit them to employ their child. There has to be actual work and reasonable pay. We started ours as a janitor at age 12. He got to keep what he earned, but we contributed the amount he earned into a Roth IRA. He was shocked to find that at 28 he had $30,000 to help buy a house. It's deductible to them, child will make too little to pay much if any tax, and until 18 it's even exempt from SS and in some states worker's comp.

 

[Htown Harry]

Although I'm not medical professional, I've followed the White Coat Investor web site for quite a while. The high-earner investment and spending principles the author follows are solid, and there is quite a bit of industry-specific discussion that might apply to your daughter.

https://www.whitecoatinvestor.com/

 

[imnontrad]

She needs to set things up for long term. Also, because it is an occupational hazard, make sure she has disability insurance.
To start, get her the book - https://www.amazon.com/Stacked-Super-Serious-Guide-Modern-Management/dp/B093MNYKLP

 

[Owenliruna]

I'm trying to get my newly graduated Dentist daughter educated on how to minimize taxes and maximize savings. I expect between her and he husband they will gross $250k a year and it will increase. I was never in that ballpark and all I know are using IRAs and maximizing her HSA. They have 12 year old so could do some type of tax deductible educational account, but I only see a maximum of $2,000 a year can be invested.

So my question is, Are there any methods a couple with high wage income can minimize taxes?

Getting a good accountants will be the best, getting the idea of who it will able to manage that will be a real problem [emoji3544] but I think I have a suggestion on who can handle that

 

[perinova]

The best tax shelter I know is to put put money toward retirement in a plan such as a Keogh or SE-401k. The 'employer' match is not taxed until it is taken out and the maximum match used to be 400pct of the 'employee' contribution, that would be about $80k shelter if the law remains the same.
Of course that is for self employed people, only, but there is no need to incorporate to use these accounts.