5 Powerful Tax Strategies you’ve Probably Never Heard

Taxes are the biggest bill you pay in life. They hinder your wealth growth and desired financial impact on the world. A well-synergized wealth and tax strategy can significantly impact you, your family, and the generations that come after you. 

Here are five powerful tax strategies many of our new members and their tax preparers miss:

1. Discounted Rollover for Retirement Accounts
By integrating the tax strategy with the investment strategy, you can roll over an investment from a Traditional (Pre-Tax) Retirement Account to a ROTH (Post-Tax) Retirement Account at a significant discount (20-80%).

Here are two examples: (over-simplified for comprehension of the concept)

1. A retirement account beneficiary (“investor”) purchases $100K of Google stock within a Traditional Acct. Google stock, for whatever reason, drops 40% in value, as determined by the publicly traded stock market. The investor, believing the drop in value is temporary, rolls the stock, not cash, from a Traditional Acct to a Roth Acct at a $60K valuation ($100K X 40% market discount). The investor pays tax on $60K for the rollover. Years later, the stock recovers and is worth $200K within the ROTH Acct. The investor never pays taxes on distributions from the ROTH account and benefits from a favorable investment in the ROTH.

2. A retirement account beneficiary (“investor”) invests $100K from a Traditional Acct into a fund used to purchase an apartment complex. An unrelated 3rd party syndicator operates the fund. The Apartment Complex, at purchase, has an 80% tenant occupancy. Three months into the project, the occupancy dropped to 60% due to the removal of non-performing tenants and the rehab of vacant units. The Net Operating Income (NOI) has dropped in half. At this moment, the risk of investment failure is highest. Apartments are valued based on the NOI. The investor, believing the drop in value is temporary, rolls shares in the apartment fund, not cash, from a Traditional Acct to a Roth Acct at a $50K valuation ($100K X 50% market discount). The investor pays tax on $50K for the rollover. Years later, the apartment complex recovers and is worth $200K within the ROTH Acct. The investor never pays taxes on distributions from the ROTH account and benefits from a favorable investment in the ROTH.

Our last discounted rollover resulted in a 51% rollover discount for our participating Financial Journey community.

This strategy makes the most sense when there’s an UNREALIZED devaluation in the property value. 

Here’s a quick video explaining what a Discounted Rollover is and how it works. 

While traditional rollovers to ROTH accounts make less sense the older you get, they often make sense when there’s a big discount. While you will pay some tax this year with the rollover, you’ll never pay taxes again on the withdrawal from a ROTH account. Under current tax law, these ROTH funds will never be taxed again.

Well-executed use of Discounted Rollovers has the potential to provide significant tax savings and wealth growth in someone’s life. The opportunity to transfer significant value to a Roth Acct at a discount and then never pay taxes on the distribution could greatly alter the possibilities, including lifestyle in retirement.

2. SALT Limit Loophole

Do you own a business in a state with income tax? Is your tax preparer telling you that you can’t deduct state income taxes in excess of $10K?

In recent years, most states with income tax have passed rules allowing the pass-through entity (LLC taxed as a partnership, S-Corp, or Schedule C.) to deduct the state income tax as federal business expense.

The rules vary from state to state, but you typically start by making an election for “PTET” (Pass-Through Entity Taxes” at the entity level allowing the deduction. Then business pays tax at the entity level reducing net-income on Federal K-1. You then receive a credit on your personal state tax return.

3. Special Allocation of Sales Price for the Sale of Real Estate or Businesses
Did you do a cost segregation study? Have you benefited from bonus depreciation? Did you sell a bunch of assets? Did you sell a business?

If you answer yes to any of those, you’re likely only executing the first half of the tax strategy.

If you’re tax savvy, you’ve likely heard of depreciation recapture.

Depreciation is a tax deferral, not a tax deduction. You have to recapture it at sale, up to a 37% federal tax rate. 

Unless the tax preparer specially allocates the sales price. It’ll probably cost you a little extra in tax preparation costs but will likely save you 10-100X on the increased tax preparer fees.

How does it work? When you acquire an apartment complex, it often includes a bunch of assets that can benefit from bonus depreciation or accelerated depreciation yielding a major write-off in the year of acquisition.

In this example, your real estate acquisition included a new dishwasher valued at $500. Five years later, you sell the apartment complex and double the value of the property. Congrats!

You’re typical CPA is going to spread that “doubling” over all your assets within your apartment complex. While this might make sense from a high-level perspective, it doesn’t make sense when you look closer.

The IRS Instructions for Form 4797—Sale of Assets explicitly state that the sales price should be allocated based on the fair market value of the assets.
A $500 used dishwasher doesn’t appreciate to $1,000 with 5 years of use. Instead, it’s worth maybe $50. 

If, on the sales allocations on the tax return, we assign a $50 sales price for that particular dishwasher; it’ll limit depreciation recapture of 37% to just that $50, and the remaining $950 gain on sale would be taxed at long-term capital gains at 15-20%. That cuts your tax rate in half!

Now imagine we’re cutting your tax rate in half on most of the things you would otherwise have depreciation recapture on. As a CPA who’s prepared tax returns for large multi-family entities with hundreds of investors, this can save six to seven figures in taxes on a large asset sale.

How does the tax preparer justify the sales allocations? Typically, you either get another asset review like your first cost segregation study, or the tax preparer takes a conservative approach to allocating the sales price. For example, after five years of ownership, maybe the sales price is limited to 30% of the asset value on all 5-year assets, 40% to 7-year assets, and 60% to 15-year assets. If the IRS disagrees with the allocation, then you work on a thorough review of assets to ensure a reasonable assignment of sales price.

4. Investing through a Donor Advised Fund
A Donor-Advised Fund (DAF) is a philanthropic vehicle administered by a public charity that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. DAFs are particularly appealing to those looking for an efficient way to manage their charitable giving, consolidate their donations, and engage in strategic philanthropy without the complexities and costs of establishing a private foundation.

Families will often start when achieving a big exit like the sale of a business or real estate. They often want to give $250-$500K+ but don’t have the time or energy in immediately after an exit to deploy the capital well. Instead, the contribute the money to a Donor Advised Fund and receive an immediate charitable deduction to offset the taxes from the sale of the assets.

This is one of several tools to wipe out ordinary income tax for the year. If there is no ordinary income tax, then the capital gains are recognized more tax efficiently.

When there’s no ordinary income tax, the first ~$94K (2024) of capital gains is recognized at a 0% tax rate. Then you max out the 15% tax rate before going to 20%.

Your donor-advised fund can contribute to impact-oriented investments and receive a profit on those investments. Examples include micro-loans in Africa or certain low-income housing in the USA. The Impact Foundation helps coordinate these opportunities. 

5. Write-off your Kids

Hiring your child in your business can offer significant tax benefits, serving as a strategic way to shift income and maximize family wealth. When you employ your child, the wages you pay them is deductible as a business expense, effectively lowering your business’s taxable income. The child doesn’t need to file a tax return or pay income taxes if wages fall below the standard deduction ($14,600 in 2024). 

Parents can avoid paying all payroll taxes up to age 18 if the child’s compensation is structured correctly. The business must be owned by the parents and structured as a sole proprietorship, partnership, or LLC. If you’re entity is taxed as an S-Corp, consider setting up a family management company on Schedule C.

This means the child’s wages are tax-free, and parents get a tax deduction.

Treat the child like a real employee with a written job description, time tracking, and reasonable wages, and file all required payroll forms, including a W-2. 

I know you believe your child is the most beautiful thing in the world, and you want to pay them exactly $14,600 (max tax-free income) to model a photoshoot for an image you will use to market your business. This will be tough to justify in an audit. Typically, most kids get paid $500 – $1,500 from third parties for acting in a commercial or a photo shoot. Keep your arrangement reasonable and justifiable. Age 7 is the lowest age upheld by the tax courts with this kind of arrangement. Then money truly need to be deposited to a bank account with the child name on it, not just back to the parent.

Be creative in brainstorming tasks your child could do. Ideally, this would provide a “real-world” experience that helps your child grow and develop.

You can also be creative with what your child does with their earnings. They could pay for expenses like sports camps, extraordinary clothing, and other interests beyond the base level of support a parent must provide. They could also invest that money into a Traditional IRA or ROTH IRA, which, with compounding, guarantees financial freedom by age 60. Those ROTH IRA funds could also act as a fund to pay for college or pay for a down payment on a first house. Your child could invest in stocks and other public securities. Your child could also buy a rental house and rehab it with the support of their parents. The opportunities are endless, and you’ll open your child to the world of investing in a very real way.

With these strategies and more, you can significantly cut what you legally have to pay to the government.

Disclaimer: This is for educational purposes only and is not to be construed as legal, investment, tax, or other professional advice. The information is oversimplified for comprehension. A competent professional’s services should be sought if one needs expert assistance in areas that include investment, legal, and accounting advice. While Keith is still licensed as a CPA, he is no longer in the tax preparation business.

Financial Journey provides tax strategy implementation resources to members and refers tax strategists to our community of members who want help executing these tax strategies.