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How to Pay Less Taxes on $150K Income?
Understanding how different types of income are taxed can help you maximize your earnings and minimize tax liability. If you make $150,000 per year, the amount you owe to the IRS can vary significantly depending on whether that income comes from a traditional job, investments, or real estate. Let's break down the numbers.
Scenario 1: Earning $150K as a W-2 Employee
A traditional salaried employee earning $150,000 will face multiple tax burdens:
Total tax liability: $36,722
Scenario 2: Earning $150K in Capital Gains from Stocks
If you earn $150,000 through long-term capital gains, you pay a much lower tax rate:
- 0% on first $47,025
- 15% on income between $47,025 - $518,900
- $150,000 falls under 15% bracket
Total tax liability: $12,998 (about 8.6% of income)
Scenario 3: Earning $150K in Rental Income
Investing in rental properties can generate significant income, but it also comes with tax advantages that can drastically reduce your taxable income. Here’s a breakdown of how depreciation and cost segregation can lower your tax liability on $150,000 in annual rental income.
Step 1: Deduct Standard Operating Expenses
Before accounting for depreciation, landlords can deduct standard operating expenses such as:
After deducting these expenses, the Net Operating Income (NOI) drops to $44,500.
Step 2: Apply Standard Depreciation
The IRS allows property owners to depreciate the building portion of a rental property over 27.5 years. Land value is excluded from depreciation.
Depreciation Calculation:
- Property value: $1,000,000
- Land value: $200,000 (not depreciable)
- Depreciable building value: $800,000
- Annual depreciation: $800,000 ÷ 27.5 years = $29,091 deduction
After applying standard depreciation, the new taxable income is:
$44,500 (NOI) - $29,091 (Depreciation) = $15,409 taxable income
Step 3: Accelerate Depreciation with a Cost Segregation Study
A Cost Segregation Study (CSS) allows property owners to break down components of the building and depreciate them over shorter lifespans.
Standard depreciation focuses on the property.
While Cost Segregation + Bonus Depreciation focuses on stuff within the property.
These assets qualify for bonus depreciation, allowing investors to accelerate deductions rather than waiting years to claim them.
With cost segregation, let’s assume an additional $60,000 in first-year depreciation deductions. On the lifetime of smaller components.
Step 4: Final Taxable Income Calculation
Now, applying both standard and accelerated depreciation:
$15,409 (taxable income) - $60,000 (bonus depreciation) = $0 taxable income (the remaining will write off the other income)
Not only does this eliminate taxes on the rental income, but the remaining deductions can be used to offset other sources of income, reducing your overall tax burden.
With these deductions, taxable income is much lower, and real estate investors often pay little to no tax on their rental income.
Key Takeaways
- W-2 income is taxed the highest due to payroll taxes.
- Capital gains taxes are much lower, making investments a tax-efficient strategy.
- Rental income, when leveraged correctly, can significantly reduce taxable income through deductions and depreciation.
By understanding these differences, you can strategically allocate your income sources to minimize taxes and maximize wealth-building opportunities.
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