Avoid taxes after pay rise

Question

Background:

I received a substantial pay raise which puts me in the next tax bracket for income tax. After tax, I would still have more net income than before the raise (in fact, more than 80% of the income earners in the US would ever earn gross, and certainly more money than I need), but I don't like the fact that I now subsidise other people's education and welfare even more than before.

Question:

How can I avoid income tax to the maximum possible? Would gifting or donating work? Or should I start employing negative gearing?

(Please no "don't do that" answers. Apple and Google are doing this, so why not I? Also, this sort of question seems to be ok to ask here. (Note that that was Canada, I'm US-based.))

Is your ultimate goal to pay as little tax as possible, at any expense? That has a different (and very easy) answer compared to trying to maximize the portion of your income that you, personally, keep. — dwizum, Sep 19 '19 at 16:39
If you donated all of your new income (and you're already itemizing for other reasons, and your itemized deductions aren't limited or if these additional gifts don't put you over the limit) it would avoid paying new taxes. — The Photon, Sep 19 '19 at 16:41
By the way, do you have health insurance? Why, if you don't like subsidizing the welfare of others? — The Photon, Sep 19 '19 at 16:43
Some ballpark numbers would help. So would knowing if you are single or married? kids? what tax related things you are doing now? Do you know that only the income above the bracket floor is taxed at that level? — mhoran_psprep, Sep 19 '19 at 16:44
@The Photon: Because 1) most employers provide health insurance as a benefit, whether you want it or not; and 2) under current law, if you don't have health insurance, you pay a substantial penalty? — jamesqf, Sep 19 '19 at 16:50
@ThePhoton: (True) insurance does not subsidize the welfare of others. It shares risk. — Ben Voigt, Sep 19 '19 at 16:50
Don't compare yourself to Apple or Google (both of which DO pay corporate income tax). Corporate income tax is a whole different ballgame, and many make capital investments to earn tax credits. An analog for you would be spending thousands of dollars on an electric car to avoid spending hundreds of dollars in income tax. — D Stanley, Sep 19 '19 at 16:51
@BenVoight And there's no risk that you might someday need support from government benefits? — The Photon, Sep 19 '19 at 16:57
"How to reduce my taxes" is too broad to be answerable without details. I also find the tone distasteful, but that's why I downvoted, not why I voted to close. — Grade 'Eh' Bacon, Sep 19 '19 at 17:04
LOL Who downvoted this? These questions are great. If only this person included how they typically vote. Did you vote for the things you're trying to avoid now that you have to pay for them? — quid, Sep 19 '19 at 17:04
I don't think this site is going to give you any better answers than hundreds of other sites would give: contribute to a retirement account, HSA, or education savings account, or donate to charity. Because of that I'm voting to close for being too broad. — D Stanley, Sep 19 '19 at 17:10
@quid, the question is about income tax, not social security. — The Photon, Sep 19 '19 at 17:15
You mentioned government benefits. Social security is a government benefit. (one that's slated to run out of money by 2035 and with a proposal being considered in congress now to increase the fees and expand benefits to further shift resources away from current workers) — quid, Sep 19 '19 at 17:16
@quid, I mentioned government benefits in the context of a discussion of income tax, which OP objects to for subsidizing "education and welfare". — The Photon, Sep 19 '19 at 17:44
Social security is not a welfare program now? At any rate, this whole conversation is hilarious to me. — quid, Sep 19 '19 at 17:47
@ThePhoton The term "income tax" includes all taxes that are based on income. Taxes are most commonly categorized based on what determines how much tax you pay (such as "gas tax", "sales tax", and so on) and almost never based on what the funds are (supposedly) used for (since money is fungible). Social security is funded out of an additional tax on income. — David Schwartz, Sep 19 '19 at 20:56
@DavidSchwartz, in this case, OP says they're in a fairly high income bracket, which likely means they've capped out their SS taxes, and their increased income is not increasing their SS contributions. So again, SS is not what's being asked about here. — The Photon, Sep 19 '19 at 23:10
@quid, social security is a welfare program, but social security tax is usually not (despite what another comment said) considered part of income tax. — The Photon, Sep 19 '19 at 23:13
@ThePhoton, I'd beg to differ since it's due as a function of income. But potato potatoe. — quid, Sep 19 '19 at 23:13
@quid, in any case, read my reply to David. Social security tax caps out for high income earners, so it's not relevant to OP's question about how to minimize tax at high income. — The Photon, Sep 19 '19 at 23:14
Again, I'm here because this is hilarious. I don't care one bit about the details. This program that program income tax other tax due as a function of income, whatever. It is hilarious to me when people open their eyes to taxes once they have to pay them. — quid, Sep 19 '19 at 23:20
@ThePhoton $85,000 per year puts you in the top 20% of income earners and with some income taxed at 24%. The FICA cap is over $100,000. — David Schwartz, Sep 19 '19 at 23:58
@quid "Who downvoted this?" I wonder, too. It was perfectly acceptable to ask how to harm others in this question. — No Tax Man, Sep 20 '19 at 02:02

Hart CO · Answer 1 · 2019-09-19T18:16:26.090

After tax, I would still have more net income than before the raise...

This is almost always true, because only the portion of your income above the threshold for the higher bracket is taxed at the higher rate. The exceptions typically involve edge cases where additional income disallows some tax credit/deduction that isn't phased out.

How can I avoid income tax to the maximum possible?

Deductible/pre-tax retirement contributions, HSA, charitable giving, solar/ev tax credits, 529 plans in some states. Lots of resources on these, so wanted to focus on the other two points more.

Would gifting or donating work?

Gifting is not deductible. Charitable donations (to qualifying charities) are deductible. If you already itemize, then your federal tax saving is your marginal rate applied to the donated amount. If you're at 28%, then you give $1000 and pay $280 less income tax. This deduction caps at 50% of your adjusted gross income, less in some situations (related to nature of donations).

Or should I start employing negative gearing?

You could certainly do this, invest in some rental property that will generate paper losses thereby offsetting income tax burden. This is mostly kicking the tax-can down the road since depreciation will be recaptured, but it could work out nicely. There's always the risk of future tax-law changes so can't bank on long-term benefit, but short-term it can reduce income tax burden.

If you can buy a property that earns you more money, that seems better than losing money just to avoid taxes. In my opinion any scheme that results in losing money just to minimize income tax burden doesn't make sense when you could instead take the money you would have lost and given it to a charity. Charitable giving seems the best way to choose how your excess money gets used while reducing income tax burden.

score 4 · Answer 2 · answered Sep 19 '19 at 17:36

Your best bet is to actually receive some education about taxes. "Jumping to a new tax bracket" does not mean your entire salary will be taxed at the new rate. How tax rates work are answered here.

The numbers you cite are not all that high. It depends on if you compare yourself with households or individuals. For individuals according to this site you are at about 60K. For households you are at about 130K. Taxes for both those income are just not that much.

For tax avoidance strategies see this question.

The money left over, after paying taxes, is far more enjoyable than not having it. Sure it is a wonderful thing to give to others, but doing so only to avoid taxes misses the point.

Avoid taxes after pay rise

2 Answers2