Dr. Harold Wong

If you were a highly-paid person today, the CPA field basically gives three suggestions. Let’s examine why these strategies don’t achieve big tax-savings.

Buy a Bigger Primary House with a Bigger Mortgage. You can’t deduct interest on a mortgage loan bigger than $750,000. Today’s price of homes is much greater than five years ago. Mortgage interest rates have doubled from 3% three years ago to over 6% today.

Maximize Deductions to Your IRA or 401(k) Retirement Plan. The 2024 contribution limits to an IRA is $7,000 or $23,000 to a 401(k). If you are age 50 or older, the IRA limit is $8,000 and the 401(k) limit is $30,500. Let’s suppose at age 35, you deduct $10,000 annually to your 401(k) and do this for 30 years. If you average a 25% tax rate, you save $2,500 of annual income tax. After 30 years, your $300,000 of total contributions saved you $75,000 of tax.

Assume that your 401(k) is now worth $1 million. If you and your spouse die in a car crash, that $1 million is taxed as ordinary income. If you have one child, $1 million is added to their normal taxable income and if total federal and state tax is 40%, that’s $400,000. You saved $75,000 of tax and your kid will have to pay $400,000. The IRS set a tax trap as your 401(k) is a ticking tax time bomb!

Invest in Real Estate. To buy a modest small rental house today in a nice area would cost you at least $500,000. To get a good interest rate on a mortgage, you would have to put 25% down or $125,000. If there are $6,000 of closing costs and $14,000 of fix-up expense, you have to spend $145,000. The typical allocation to the building is $400,000 and land is not depreciable. The allowed depreciation rate is 27.5 years and so if you rent the house out for the entire year, your annual depreciation is $14,545. If you are in the 25% tax bracket, you save $3,636 of annual income tax but had to pay $145,000 to buy that rental house and now have to deal with tenants, trash, and toilets.

In contrast, there’s an advanced tax-saving strategy where clients can reduce 2024 federal income tax to $0 and recover all federal tax paid in the last three years!

Attend my free live seminars on Tuesday, Feb. 20 or Thursday Feb. 22 starting at 6 p.m. at Hyatt Place, 3535 W. Chandler Blvd., Chandler, AZ 85226. The seminars are followed by a free catered meal. The topic is “Advanced Tax Strategies, Including How to Do Big Roth IRA Conversions and Not Pay Income Tax!”

To RSVP for the seminars or schedule a free consultation, please contact Dr. Harold Wong at 480-706-0177 or [email protected]. His website is www.drharoldwong.com.

Dr. Wong earned his Ph.D. in Economics at University of California/Berkeley and has appeared on over 400 TV/radio programs.