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Ask HN: W2 income exceed 1M but taxed at 51% after IPO

2 points by tech_taxpayer ↗ HN
I will have a few years of high W2, mostly RSU equity comps. It's a good problem to have yes. But it still sucks, while I know some will disagree, that more than half of that will be taken away.

As W2 income, there's also very little tax mitigating strategies, now that I talked to an army of tax advisors. More than I'd otherwise need in a lifetime.

The W2 income spike is not steady and all peak next year (due to lockup period deferring this year's income to next year), so I want to preserve / defer as much as possible.

For those who've been through those tech IPOs, what would you recommend?

These are what I know that could work in today's tax code:

1) Go the real-estate professional route to offset non-passive income, and even if I do, putting down several multifamily units next year, it won't be enough depreciation to offset my 1M+ W2 income.

2) There're a few other aggressive tax strategies far less well known that I got exposed to recently, mainly those in Family Office for the wealth. Those will 100x the audit risk for sure.

3) Maybe I should just stop worrying about this, and learn the lesson of never overstaying this 'W2 slave' stage and should shift to business and capital income sooner.

Thoughts?

14 comments

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garmaine
Donate half of it to a Schwab donor advised fund. Or better yet, donate shares with unrealized capital gains. Then look for ways to do good in the world with that tax-write off charitable balance.
tech_taxpayer
I like the idea of doing good. These probably have 1:1 write-off ratio though, while the land easement shit has a larger multipler on the write-offs.
garmaine
It is 1:1, although depending on how you count donating shares with unrealized capital gains can be higher, since you get the full write off without experiencing the capital gains at all.

So if your IPO shares are founder’s shares an 83(b) election so effectively $0 cost basis, then donating $100k shares gets you a $100k tax write off without any capital gains.

tech_taxpayer
Not founder's share I was granted equity award pre-IPO, and these are also RSUs so not even possible to do 83(b) at grant time I believe.

So these all show up as W2 regular income, and on that note, it might be hard to do charitable, given the 'tax election' is set to 'sell shares to cover tax' which is the only option my employer set in the tax plan. So that amount that could be donated is not even available to me but is withheld and sent straight to IRS.

I'd have to put my own money in to get the refund. Will be a big cashflow challenge given I'll do RE investments as well.

garmaine
Why real estate? Unless that is something you really want to be involved with, I suggest looking elsewhere (like broad index equity funds).

You might find https://reddit.com/r/financialindependence relevant to your needs.

tech_taxpayer
It's mainly because the tax code has much better treatment (or more remaining loop holes intentionally unpatched) for RE in particular, due to its depreciation and interest expense write-offs.

Stock market in general has a slower avg return (if diversified) and much higher risk if undiversified. Tax loss harvesting would help generating write-off in these case, but wash sale is a constant stress to manage as well.

Appreciate the subredit recommendation. Will check that out for sure.

garmaine
I think you’ve been misinformed. The stock market has had a consistently better return than real estate income on a broad basis since the Great Depression. Look at the performance of REIT vs. a total market index.

Real estate is full of success stories because some people are fortunate enough buy specific housing complexes in winning areas. But that’s like picking stocks—there’s a lot more variability and you just hear about the success stories. If you diversify real estate you end up with something like a REIT, which as I said underperforms (by a large amount) a broad equities index.

The tax arguments don’t really make sense. You get write-offs for losing money—whether it is depreciating structures or repair costs. There is no cost to stock ownership. Just buy and hold long enough to get the long-term capital gains rate.

tech_taxpayer
Yeah i think that makes a lot of sense - the main benefit on RE though is in the tax shield if you invest DIRECTLY so the tax benefits can pass through, vs. a REIT. The depreciation recapture can be avoided if you handle it in the correct way, e.g. 1031 exchange or hold.

But I agree there's more risk and it's hard to be consistently on the winning side.

On the stock market front, what's your current approach allocating things? e.g. Do you do more like a wealthfront / betterment type of portfolio, or something more sophisticated? Would like to learn more on that front for sure.

garmaine
But you’re not really gaining anything! Those purported tax benefits mostly aren’t. It’s more like “tax trade offs”.

When an asset depreciates, yes you can write off the loss. However that lowers the cost basis, so you then pay taxes on it again when you sell.

In the end you are getting to offset some current income taxes with future capital gains taxes. There is some benefit due to the differing tax rates, but that is offset by various costs along the way. It’s hardly a clear win. (And AFAIK REITs have the exact same tax situation, so it is comparable. Holding the REIT doesn’t let you pass through the tax benefit, but they are realized by the REIT and reflected in share price.)

tech_taxpayer
yeah so two points on that, first the gain at sale can be avoided through 1031 sec of tax code, effectively providing tax shelter, similar to how unrealized gain in stock but even more flexible as it allows you to switch asset classes (like kind swap).

Tax aside, there's also the leverage. I can put down 5% and loan 95% to get 100% of the return of investment with exceedingly low interest the federal banking system subsidized for housing as a necessity, vs. commercial loans, but essentially doing this as business endeavor. By the end of all that, I can even offset income with the interest expense, the only loophole on interest expense remained in tax code. So folks are doing this all day long.

You can't really do that with stock, or you face the ridiculous rate in margin trade.

The leverage plus tax benefit allows wealth accumulation over time.

garmaine
You seem to know what you want to do, so good luck to you.
nkjoep
as I am not very familiar with the U.S.A. tax system, there may be parts of your message I don't fully understand.

may I ask you what are you complaining about exactly?

51% of taxes over a multi millionaire income sounds not too bad to me.

tech_taxpayer
It's all relative. If another guy next to me who has the exact income but are 'passive income' i.e. from stocks, real estate, etc. then there's a multitude of ways to pay little to no tax. That's probably what I should have complainted about instead.
deanmoriarty
I really think #3 is the way to go.

I’ve been in the same camp, making $1M+ from W2 and being taxed like crazy, a few times also with premature AMT due to ISO exercise (though I later took advantage of long term capital gains on disposition, but still an incredible gamble to avoid golden handcuffs).

I am thinking of actually quitting my current job since it’s all W2 (finance, bonus heavy) and it’s not worth the stress considering what remains after taxes, it’s personally demotivating having to work 80 hours a week and have 50%+ go down the drain. I think getting a less paid 40h/week job with an effective 25-30% tax rate might be better.

Also, I’d suggest to shove all your take-home in index funds, and enjoy the low taxes on the dividends and capital gains. If you have a $5M portfolio, it will throw significant dividends and capital appreciation, that will likely continue to be taxed very favorably in the future.