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I feel that $90k in taxes is a lot! I'm curious if in the ideal situation, what would be the best possible way to reduce taxes, properly donating it to charities you actually care about etc?

Some other questions - if it's for 2018, can donations be made retroactively (now)?

(Clarification - this is a question I'm asking on behalf of a friend. He does his own taxes, even though he complains he is paying close to 6 figures in taxes!)

ina
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    Yes, that's unusual, but only because the income required to have a tax bill like that is unusual. – quid Feb 12 '19 at 21:03
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    Impossible to answer a tax question knowing (a) nothing about the jurisdiction and (b) nothing about the individual's financial circumstances (income, etc.). – Grade 'Eh' Bacon Feb 12 '19 at 21:08
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    If your taxable income is $100,000 then it’s unusual. If your taxable income is $300,000 then it’s not unusual. – Mike Scott Feb 12 '19 at 21:15
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    Reducing your taxes costs you money (your savings is the tax bracket amount not the amount of your contribution). the more tax that I have to pay, the happier I am (due to higher income not higher taxes :-). – Bob Baerker Feb 12 '19 at 21:21
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    I should edit my comment, it's not that the income required is "unusual', it's "uncommon". – quid Feb 12 '19 at 21:22
  • Related: How can I achieve a 13% U.S. Federal tax rate? – Ben Miller Feb 12 '19 at 22:33
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    @ina I'm getting the impression from your question history that you have a potentially very complicated tax situation and you've been trying to sort it out by asking advice from fairly random sources like venture capitalists you work with, and this Stackexchange. I'd suggest that you really need to talk to a tax professional, preferably one that has a fiduciary duty to you. The folks here generally are smart and have good intentions, but we're getting only a scattershot picture of your full situation. – Charles E. Grant Feb 12 '19 at 22:49
  • As others have noted, if you're paying $90,000 in income taxes, your income must be $300,000 or more. If that's the case, I'd suggest contacting a qualified tax accountant for advice, someone who can study your particular situation and who knows the law, rather than asking random people on the internet. Surely you can afford that. – Jay Feb 12 '19 at 23:19
  • Just a note that this is a question I'm asking on behalf of a friend - though i am curious what the answer is too. In tech, if your startup is acquired by a big company, this is common (even if you are just an employee at the startup). – ina Feb 13 '19 at 00:03
  • Problem with being able to afford stuff is what's liquid right now. After exiting, people who like making stuff like to work on another startup - in which case, cash flow is usually super tight. – ina Feb 13 '19 at 00:04
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    @ina considering that the consequences of getting this wrong are substantial monetary penalties, and in extreme cases, even jail time, it may be vital to set aside money for professional assistance. See Sir "Kids, pay your taxes" Mix-a-lot. I always do my own taxes using retail software - except for the year the start-up I was in was bought out, and then I hired a CPA. Taxes are always about the details, so there is no way anyone can offer advice simply on the basis of "my friend pays nearly six figures in taxes" – Charles E. Grant Feb 13 '19 at 00:20
  • Look up a tax calculator; here is one source. This calculator shows that the US Federal Income Tax on TAXABLE income of $300,000 for a single filer is about $81,000. So yes, $90,000 tax on total ordinary income of $300,000 before deductions is high, unless your friend has enough income from investments so that the 3.8% investment tax is substantial. If any of this income is capital gains, it would be lower the taxes. And no, you cannot donate to charity or otherwise get deductions retroactively. What's done for 2018 is done. – ab2 Feb 13 '19 at 00:43
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    Reading between the comments, does this scenario involve the exercise of incentive stock options and the Alternative Minimum Tax? (This is famously a scenario that created liquidity traps for the employees of startups the late 1990s dotcom boom). If so, this could be a detailed, answerable question. – user662852 Feb 13 '19 at 03:39
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    @ab2 You can contribute to an IRA or HSA retroactively and those both give deductions. – Vality Feb 13 '19 at 22:54

2 Answers2

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If you owe that much in tax, you had somewhere around $300k to $400k in income. This significantly limits your options at this point.

So you are single, have a very high income, and little to no deductions or reductions. There really is not much you can do at this point.

If you had an MAGI (Modified Adjusted Gross Income) of less than $120k single then you could retroactively put money in an IRA, but if you owe $90k you are well above that in income.

One option for you for next year is to max out things like 401k on your income. You could also take out a mortgage instead of renting, mortgage interest is tax deductible up to a pretty high limit, and in many places mortgage will be less than rent. Property taxes will likely not be deductible due to the new limit on state taxes, at your income you already likely pay more than $10k in state taxes, unless you live in Texas, FL or another state that does not have state income tax.

You don't mention the source of your income, but if this was due to day trading etc, you could slow that down a bit, holding investments over 2 years results in capital gains tax vs. income tax, which might help you.

The reality is you make a lot of money so you owe a lot of taxes. Make sure you are planning for that and having enough withheld or making sufficient estimated payments. Underpaying will result in penalties on top of tax owed.

Bill Leeper
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    TCJA reduced the maximum principal on which you can deduct residential mortgage interest to $750k for mortgages after Dec. 2017; at 4-5% that's about $35k/yr max. The charity deduction limit was actually increased (to 60% AGI from 50%), but that only helps if you are willing to give away your money. – dave_thompson_085 Feb 13 '19 at 17:00
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People with high taxes might be able to make themselves sub-contractors instead of employees. As a sub-contractor they can be a LLC company and take extensive business expenses. For example a car lease could be a business expense.

But now the federal tax rate for a C-corporation is 21% . So there is a comparison of being an LLC at the tax rates of an individual versus a C-corp at 21% tax but along with taking an additionally taxed dividend from the C-corp.

Also, the new laws and rules as to which type of LLC can get tax rates similar to a C-corp are very difficult.

S Spring
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