Beyond the Basics: Tax strategies for High Income Earners

Jenni: Welcome to the Modern Family Finance Podcast, where we talk about career, money, and life.

I'm Jenny and I'm a San Francisco Bay Area financial planner serving women and LGBT professionals. Today, we are talking about tax saving tips for high income earners with Gio Bartolotta. Gio co- founded Gojo Accountants and is building a tech -savvy tax advisory firm. What I find most interesting about Gio is that he is not your typical CPA. He has done an amazing job building his practice to combine with his lifestyle and his passion for traveling around in his RV with his wife. So Gio, actually tell me how does this work?

Where are you right now?

Gio: we're currently in Salt Lake City, Utah, and we're in an Airbnb and we just oscillate between living out of our small fiberglass trailer at like campgrounds, national parks, state parks, whatever have you. And then when we're working hard, going to Airbnbs. And just parking the camper off to the side and just grinding and getting things done.

Jenni: That's awesome. Okay. I love that you are doing tax from your RV around the world. Well, we have a lot to talk about. Gio's got a lot of strategies and He certainly helped folks that I've worked with too in this. So tell me like to start with, you know, if you're, if you're talking to a high income earner maybe it's a W2 earner and maybe has some stock stuff.

What are some of the most effective tax planning strategies for your general?

Gio: Yeah. So you want to hit the base hits and the base hits are maximizing your IRA contributions. for most high earners, there'll be non deductible contributions that you can do a backdoor Roth on, which would be. tax efficient in the long run because earnings in Roth IRA is when distributed be tax free.

So that's always something easy to do. Another thing is maximizing pre tax 401k contributions or 403b 457. Plans if you have access to those. And If you have a 457 plan and a 401k, because you have multiple employers, you can actually max your elective contributions and both of those plans.

Another thing you can do is maximize HSA contribution. If you have access to a high deductible health plan, and that's great because you get a tax deferral front. And then you also get tax free distributions have applied for qualified health expenses, and then also functions as a secondary investment retirement arrangement.

Those are a few of some of the base hits that we see with our clients.

Jenni: And then the speaking of back to Ross was also like that mega backdoor Roth. Tell me about that one.

Gio: Yeah. So we do want to make a distinction. So the backdoor Roth IRA is a bit different. That would be kind of a tax free Roth IRA conversion, but the mega backdoor Is an in plan service conversion. And what that means is let's say you have a 401k with a tech company, and let's say like Salesforce, right.

And they will have a 401k plan that allows an employee to actually make after tax contributions beyond what you'd be able to make on a pre tax basis. So typically with a 401k on an elective basis, you would contribute 22, 500, I believe 23, 000 for this year.

Your employer would provide any matching contributions or any non elective contributions depending on the employer, but certain companies will have, we'll take it a step further and offer that mega backdoor option, which is you're going to funnel. Actually beyond that 23, 000 up to 66, 000.

And you can do that after tax and in the same plan convert that over to a Roth IRA.

Jenni: That's a strategy that I love for folks who have the cash flow to support extra savings and for folks who have access to this through their employer, which a lot of. Big tech companies do offer that. This is a great way to sock away more money and throw it to the Roth, because really, otherwise you're looking at only being able to do 7, 000 or, you know, that's what it is this year for like a regular Roth.

So cool. Well, I mean, you see a lot of tax returns that come through and tell me some of the common tax planning mistakes that you see made by folks.

Gio: Yeah, that's a great question. We see a bunch. So we've talked a little bit about the Roth conversion. And, you know, Jenny, something that we've been able to do just working together is collaborating and just being able to understand what are some of the key things that have happened during the during a client's lifetime, right?

Or lifetime during that particular tax year. So with that, being able to communicate, Hey, Hey, My client did this, contributed to this IRA and actually did a Roth conversion. That's something that is a level of communication prevents lots of these tax preparation mistakes. We will see clients over a period of many years where let's say they didn't have that communication

didn't report the Roth conversion. And so what happens is you went through all this legwork administratively, but there's no way to prove on your tax return from a statute of limitations standpoint, from the IRS's point of view, that you actually have. Roth balances that are generating tax free earnings.

So it's very important to just every year that when these are happening, that just that simple form is being reported correctly.

Another mistake is not deducting any failed startup that a founder had invested in up to a certain point. Not knowing that you can take an ordinary loss deduction, ordinary loss, meaning you can take that amount and deduct it against your W2 wages.

And you only have three years to fix that because of the statute of limitations on claiming a refund back from the IRS. So losing out on these these, these opportunities is, is huge.

Jenni: Do you ever see people with missed basis reporting and end up looking like it looks like they have a ton of gains. Yeah.

Gio: That's with equity compensation. When you see like restricted stock units, right? Like, so typically with a restricted stock unit, you would either have the basis reported by the employer or they just report nothing. And typically like things are getting better from reporting standpoint, because employers are understanding that.

All their employees are overpaying an income tax because they're not making it easy for them to prepare their own tax returns, but yeah, you'll see a 0 basis for a lot of instances with restricted stock units that have vested. And yeah, you're just going to take a 10 99 and plug it into, into it.

But next thing you know, you're triple paying tax because your basis went from zero, zero to being what it was, which was probably no gain to even a loss because most taxpayers, they sell their RFCs as soon as they best, because that's a form of compensation and cashflow, they need that cashflow. So you sell, you shouldn't, in most cases, you shouldn't even have a gain.

Jenni: Yeah. So yeah, those are good great things to Pay attention to. The tax laws always changing. Are there any things that either have changed or are being looked at that would be relevant for your high income earner?

Gio: Yeah. So what's. Essentially what's happening right now is that in 2026, a lot of the tax cuts that were implemented starting 2017. And that Americans have enjoyed for the past almost decade. They're set to expire many of them.

So for example, let's say you live in a state like California or New York or Massachusetts. We're paying a ton state income tax. You're probably paying a ton in local income tax. In the case of a New York city resident.

And you're paying a ton in property taxes in the case of a homeowner. So with the salt cap, the salt cap being the state and local tax deduction cap has been a 10, 000. So everyone in the U S has been limited to 10, 000 as far as how much you conduct and your total aggregated state and local income tax and property tax, but that's going to flip and the cap may revert to 50, 000 practitioners are unsure of where it's going to land.

Exactly. But that's another 40, 000 in itemized deductions that may appear overnight starting in 2026 and 2027. So that's something to really

Jenni: big benefit for California taxpayers, for sure. Tell me about the estate tax exemption and the change that might happen, that we might see with the sunset.

Gio: Okay. Yeah. Great question. So for lifetime exemptions right now, Americans have also enjoyed. double the lifetime exemption that Americans were historically experiencing prior to 2017. So that means that if you're a millionaire, you have been sheltered from gift and estate tax, most likely. And that is ranging between 28 percent and 40 percent is the max tax rate.

And that's taxed on your wealth. So essentially right now, if you were to die and you were married, You would have up to 28 million in assets that would be sheltered from that, that estate tax, but that exemption, that 28 million is slated to potentially half to 14 million. So 7 million, six and a half million per individual is what practitioners are thinking right now.

And so if you have the ability to gift gifts and you're planning on gifting gifts. You definitely want to do that before 2026 hits because then you increase the likelihood that they will be taxable gifts, which are also subject to that same 28 to 40 percent tax that estates would be subject to.

Jenni: Yeah. And I think, you know, if you're in your forties or, you know, most of my clients are kind of between age 30 to 50 and you might think, Oh my gosh, these exemptions are huge. I'll never get there. But the reality is, if you're a high income earner and you're saving and you know, you have some money now, it is definitely very possible through the power of compounding and through hopefully a nice long life that you could end up at these higher values by the time you pass.

So it's definitely something to think about. Even if those values, you're not at those values yet. Yeah.

Gio: Yeah. Have you seen, NINGS, Nevada, incomplete non grantor trusts where you can essentially establish an irrevocable trust in a state with no income tax, And then transfer assets to that and then be able to generate investment cashflow without state income tax.

Jenni: I have heard of this but yeah, tell me, more. who would it be relevant for?

Gio: Yeah. So it would be relevant for, let's say somewhat like a taxpayer between 30 and 50, who's starting to think about their future, starting to think about their children, beneficiaries, and starting to think about, okay, is it more beneficial to have that income in, let's say, California, let's say where I, wherever that taxpayer resides.

And be assessed a higher income tax rate because, because obviously California has a roughly six to 9 percent marginal tax rate for high earners. If you're able to shift a lot of that investment activity to a state like Nevada or Washington, a state with no state income tax, you can set up an irrevocable trust, transfer assets, lock in today's gift. Before it actually appreciates

There's a benefit from an estate tax point of view. Plus you have the income tax benefit of not paying tax on the investment income. Over a long period of time and then combine that with the compounding effect that you just discussed can be quite lucrative for many taxpayers.

Jenni: Yeah. No, I mean, I think that's a great idea. I guess, what is the catch here is that if it is an irrevocable trust, that asset basically out of your control and in the, in the, in the hands of your, let's just say children.

Gio: Yes, they would not have access to change the terms, like materially change the terms of the trust or receive the assets back, it's not reversible, we would only advise that to a client who knows for a fact that they want to pass down these assets and are ready to do things in a tax efficient way.

Jenni: Yes, I think trust are a great way to transfer assets and manage the estate tax and potential income tax implications of wealth that has been accumulated. But the 1 catch to consider is like, are you ready to give away that money?

Because if you at 85 want it back, you're not getting it back. So, so that that would be the thing to consider.

Okay, cool. Kind of going back to, other things that may might've been missed. Like, are there any deductions or credits or things again, for the normal, for the typical person who might not have, you know, founder stock or anything like that, just the typical income W 2 income earner that folks should be aware of.

Gio: Yeah, so another Another area that you can look at is short term rentals definitely for someone that May be looking to get into real estate and is thinking Okay, I'm looking for something that might be more of a tax efficient way of doing something and I'm looking I have money to invest and I'm looking to diversify.

Right? That's an area that you can look at another area. And we'll talk more about real estate in a little little bit. Another area that you can look at is if you own a business. And you have, and you're looking to purchase an electric vehicle. And let's say you make too much, you make above 150, 000 in adjusted gross income.

If you're single or 300, 000 and modified adjusted gross income, if you're filing jointly, if you are, have been above those levels the past couple of years, chances are you can't claim the credit. If you're able to say, Hey, we can characterize a percentage of this asset. This mixed use business, personal electric vehicle you can actually get a prorated amount of that credit, which is as much as 7, 500.

So for example, let's say. You are, you are a business owner and you have a home office and you travel often to see clients locally, right? So any travel between your home office and the client site would be deductible business mileage, deductible travel. And you'd be able to take the miles that you spent traveling to the client site and back. You'd be able to take that as business miles relative to the total mileage of that particular veal vehicle and particular tax year. And then if that percentage is, let's say 75%, 70%, you can take 70 percent of the credit effectively. So 7, 500 non refundable credit would help you a lot as far as mitigating your tax from your W 2 job.

Jenni: Hmm. Interesting. Okay.

Gio: Or from your business as well.

 So, going beyond the common strategies let's take the case of someone who is holding on to some highly appreciated assets and that could be RSUs or, startup stock or real estate or some kind of assets appreciated that they want to diversify out of, but they're concerned about, like, say, capital gains, right? What are some strategies for that?

Gio: Yeah. So, there's a 10 31 exchange and then a 10 45 exchanges exchange. A 10 31 is for real estate and a 10 45 is for qualified small business stock. The idea is you contribute appreciated real estate or appreciated stock into a business. And by doing that, that contribution is actually a tax free contribution. And then in exchange, you'll receive an interest in that partnership.

And so it's a means to help diversify your portfolio. So if you have a highly concentrated position, you can diversify into whatever that particular partnership is investing in. It could be a portfolio of stock as well. It could be a portfolio of real estate holdings, commercial residential, anything of that nature.

So, yeah, so by doing that, you avoid the taxable event on the front end, and then you get the diversified cash flow throughout the life of holding it.

Jenni: Yeah. And you can do something similar to this. Like if it's not real estate and you're holding stocks that are appreciated, there's a similar idea that are called exchange funds where have stock a, you have stock B, we find a bunch of people, we pull it together.

And so we're not selling the stock, but by putting it all together and we each then get a share or a percentage ownership of that pooled fund then you can diversify without having to realize the capital gains.

Gio: And let's say you you have appreciated crypto or appreciated equity compensation or a rental property, and you're not looking to do a 1031 exchange to defer and buy another. You're done with real estate. You want to get out?

You can contribute that those assets into A charitable remainder trust. The donor of the asset is going to have the retained interest in that charitable remainder trust, and then a charity of their choosing will then be the remainder interest.

And you have to at least 10 percent of the, of the original of what was originally contributed, that appreciated asset has to be earmarked. On a present value basis for for the charity at the end. And essentially the main benefits are you can get the asset out of your state. It's beneficial from that point of view, but also it's an income tax deduction that gets reported on schedule.  So if you have high income, as well as this appreciated asset, you'll be able to have a high itemized deduction as a result of this charitable deduction.

And then you're, you're deferring the income on the appreciated asset. So what happens eventually is that you're going to take.

Payouts on a fixed basis and you'll have fixed income.

And that will be done over a fixed period of time, depending on the terms of the trust. And at the end, the rest of the balance goes into the charity, and that kind of closes the loop on the whole process.

Jenni: Yeah, I mean, I think this is a great strategy if someone is holding a large appreciated gain and who is charitably minded, right? So the idea, I think the benefit is You don't have to pay capital gains on that by putting it into this trust. You get to defer the capital gains. I mean, you eventually have to pay as it comes out.

And you put it into this trust and you still receive income from it. And only when it comes out, do you have to pay the tax. But what you're benefiting from is by putting in the full appreciated value into the trust, it's able to grow. You can still keep it invested in things and it's able to grow and you have more, more from which to compound.

So it should generate more for you. In terms of lifetime income received, as well as generate this asset that you will then donate to charity. So it's kind of a win win in both ways. So I think this is a great strategy for folks in that situation.

Okay, cool. So tell me about. strategies for folks who are, who own real estate as investments or thinking about that

Gio: there are, and I mentioned one before it's called a short term rental loophole. The real estate rental will get reported on schedule E, which is usually where your passive rentals get reported, but any losses that get recognized, which would come through, let's say depreciation deductions, you then can use against your W 2 income, your business income, your capital gains income.

But to take that a step further, you can actually have a cost segregation study done. It's a great way to accelerate depreciation deductions.

And let's say you want to do this in 2024 and you buy a short term rental in 2024 and you get this cost segregation study and you pair it with the a hundred hours and the less than seven days of turnover. You can get 60% of a pretty sizable chunk, that you'd be able to recognize in the current year against your other income, so that's a huge win. And the benefits of that are coming down though, because starting in 2025. Bonus depreciation is expected to come down to 40 percent and then in 2026 expected to come down to 20 percent and 0 percent in the year after that.

So unless there's any change in the tax law, there is a bit of a sense of urgency in the real estate community to do this sooner rather than later. So

Jenni: So this is a, yeah, this could be a great if you're facing a large ordinary income event, you have a very large bonus or you, you know, you have a huge payout this year for whatever reason. and you're willing to do some work, right?

This requires a bit of work, but you could offset a ton of that income. And if you're thinking ordinary income, if you're in a place like California, that's easily, you know, between federal and state, that's easily 50 percent plus. So it could be really worthwhile to look at doing this. But. The time is of the urgency because this 1 will go away, or at least not be as effective in the future.

Gio: Yeah. So we talked about the short term rental, that the other option in the real estate world is the real estate professional status. And if you have a W 2 or you're already engaged full time in a, in a business that you own, right. You may have a spouse that has more free time. Who has more of the ability to sort of help out and do things.

And the real estate professional status can be the non full time spouse so in that case, this would be a great opportunity to either take real estate that you have or acquire more real estate and.

You can have it all be long term rentals. And as long as, as long as the non working spouse beats two statutory definitions is materially participating in the activity, at least 750 hours. And at least 50 percent of all the material participation hours allocated to all of the hours that that particular taxpayer does throughout the year, , you are a real estate professional. And then You'd be able to do what's known as a, a dash nine G grouping election.

And so what you can do is you can actually group all of the real estate rentals together and treat it as one real estate rental for the purposes of determining that particular, the spouse or the non working spouses, either spouses, now material participation hours in the one rental activity, which could be one rental activity.

It could be five, it could be as many. Okay. And that's kind of the power is that you can do that. How, and then unlock depreciation deductions using cost segregation studies to unlock more cashflow today. And combined with time value of money can create a lot of benefits down the road.

Jenni: Got it. This one's not this one's not an easy one to understand. So if you are in a situation where this might apply, we should definitely talk to, definitely talk to Gio. But it could be very powerful because as a real estate professional, then you can take all these deductions and, you know, deduct off the working spouses, the W2 earner spouses income, right?

That's the whole benefit of it

Gio: So one of the most lucrative tax planning opportunities out there for small business owners is known as. Section 1202 qualified small business stock. A C corporation in which taxpayer is a founder, eventually once the business appreciates some value and the valuation grows and you're ready to sell, you're able to exclude the greater of 10 million in capital gains from the disposition of the, of the C corp shares, or 10 times the basis.

 So that's why this is such a, a very great and lucrative tax planning opportunity.

Jenni: I mean, this is huge, right? To get a 10 million gains exemption. So if you are, if you are a founder of startup, like this is definitely something to seriously consider, even if you're not sure what's going to happen to your company, and then that way, when you do go out and sell or sell a portion of your stocks, I've seen this firsthand save people a lot, a lot of money.

Gio: Awesome.

Jenni: what about if you're your typical small business owner, tell me, you know, you're not, you're not, you're not starting up a tech company. You are like a solo practitioner, maybe a therapist, maybe a, you know, accountant, whatever.

Gio: Yeah. So when you're looking at more of a service based business, you definitely want to look at S corporations for now. The reason for that being S corporations offer a pass through. Tax treatment. So there's no double taxation like there is in the C corporation. So any income earned by the escort at the federal level, it was passed, passed through to the individual and they would pay on their tax return right by K one.

Right now. And S corp is great because you get a qualified business income deduction, which is roughly 20 percent of the S corporations income, depending on certain other factors, right. And limitations, and depending on the amount of income an individual may have, but in addition to that, you're able to reduce the amount of self employment tax that you pay that you would otherwise pay if you're a sole proprietor, a single member LLC, or tax as a partnership where you'd be paying 15.

3%. up to 168, 000 in 2024. And then anything beyond 168, 000, you'd be subject to Medicare tax and additional Medicare tax, depending on what your individual income is.

And so there's a certain level where it makes a lot of sense, roughly 100, 000, 120, 000 in taxable business income after factoring in owner's compensation,

Jenni: yeah. And tell me also how can I save on state taxes cause in California paying lots of state income tax.

Gio: So for pass through entity tax, this is something that a lot of states have introduced. And the idea is that since an S corporation or a partnership to they're both pass through entities, they, they don't pay income tax at the federal level. Right now taxpayers can deduct a max of 10, 000 on schedule at the federal level. So to get around that. You can actually elect, have the business, whether it's a partnership or an S corporation, elect with the state to pay income tax at the state level, at the entity level, which then becomes a business deduction at the federal level for that particular partnership or S corporation.

So if you're in a position where You're paying 25, 000 in state income tax to California it may make a ton of sense to do this because instead of Being capped at 10, 000 on the amount in property taxes,you can actually deduct the full amount on your business return .

Jenni: Right. Awesome. There's a lot of a lot of techniques in here, and it depends on, your situation and what you have.

Switching the topic a little bit to tax residency. Again, if you're living in a state like California, New York, you are paying you know, you're potentially At least in California, 9. 3 ish range is what most people end up, right, at the marginal level. So you know, definitely you see high income folks, especially with the ability to live remote, trying to move to lower or no tax states. Or maybe moving abroad but what are the rules that decide where, you're a tax resident of?

Gio: Yeah, great question. So for state income tax, I mean, post COVID, this is a highly relevant area. So you're seeing all this and you're also seeing equity compensation following these folks, right?

So that's a, a huge consideration is understanding the state income tax ramifications and consequences of moving from A state like California, New York, or Massachusetts to another state .

 So usually, it's determined on a state by state basis, but most states are looking at 183 days as that threshold, as that nexus threshold. And what I mean by nexus threshold is, if you are in a state, and you're living in that state, Like right now I'm living in, I'm in Utah, but I've only been in Utah for a couple of weeks, right?

And I don't intend on being in Utah long term. My domicile state is New Jersey. That's the state where my address is, where my voter's registration is, where I, where all my, my family is, my friends, right? So that's my domicile state and New Jersey expects me to file a resident return with them. And in Utah.

If I were to be present and residing in Utah for a period of 183 days, I would be a double resident. I'd be a resident in that, in my home state where I'm domiciled, where New Jersey is expecting me to return where I'm expecting to return. And then I've been in Utah physically present and residing there for a sufficient period of time.

So usually it's that 183 day. period that you want to look at that would trigger, okay, I need to file a a resident tax return in that particular state. But going back to that example, let's say you didn't have a state back home, and you're traveling, right?

Your domicile state that the state that you always intend on moving back to the state where you're effectively connected to it's always your resident state. Even if you're there for a week. Even if you're there for a day, if you intend on returning to it, you have to file a resident return in that state and you are treated as a full time resident.

So that's, those are sort of kind of the nuances to, to that discussion.

Jenni: so to get to take an example, if your, if your domicile state is California and domicile being like typically proved by your voter registration, your address, where your stuff is right and where your family friends are Even if you left California and you were just shoving around the world in an RV for a year, like California would still say you're a resident and all your income has to be taxed by California.

So let's say you're like, I've had enough of this. I want to get out of California. How do you, and I'm moving to, you know, Washington what do I have to do to like, get my domicile out of a state?

Gio: For audit purposes, right? Yeah. Cause California is going to come knocking and they're going to be, Hey, we think that you've owed us 7. 2 percent of your income in the past three years. Where, where is it at? Right. So The first step really change all your addresses. Once you've effectively moved out of your residence, you move into Washington, move into that, change your your address on your brokerage accounts.

On your your checking account, savings accounts, pretty much everything. Make sure that your gym and you have statements receipts to show that your gym, if you work out at a gym locally, it's a gym in Washington, locally, not in California, right? Another example, voter registration is a low hanging fruit.

They're definitely changed that. You definitely want to also make sure that you're, that you're not returning back to California on a recurring basis, because that would show that you're trying to avoid state. resident stay income tax. So definitely break it up. Have a reason. Oh, I'm coming home to see family for the holidays.

I'm coming home to take care of some loose ends before I moved after I moved out or something of that nature. You definitely don't want to show have flights from Seattle, Washington to Los Angeles, you know, every weekend for two years, because I would show you're still effectively connected to that local area back in California.

Jenni: Yeah, my understanding, it's a bit of a gray zone, right? As in like, there's no hard and fast rules. It is a matter of proving that your true home is in the new state. And so everything that you can do, whether it's your gym, church, like your kids, obviously your kids schooling, you know, everything that you can do to prove that it is now your true home and your community and family is there, that will help your case.

And, and, you know, I think a lot of states too, you can't just leave California and New York and have nowhere else that you're establishing home and just say, I'm wandering around the world. You must actually establish domicile somewhere else. So you've got to choose a place and do it. Even if you're just nomadically traveling the world, you've got to choose a new domicile in order to exit an old domicile, right?

For tax residency

Gio: Exactly. Yeah. Because then you don't have clear and convincing evidence to the state tax authorities that you actually vacated and you're not benefiting from the state.

Jenni: Right. Exactly. So it's definitely a gray zone, but I think this is where it's good to get advice. You don't want to have a state auditor knocking at your door trying to recoup money from you.

So, okay, cool. We have talked about a lot. Who are the types of clients that you serve? And how can people find you?

Gio: Yeah. So we service many of the same types of clients, Jenny services folks in tech folks that looking for, income tax planning strategies and they're also just looking for a CPA to grow with. You know, we, we're big into communication and having that relationship with our clients.

Jenni: Awesome. Yeah. And I've really enjoyed collaborating with you on clients. You've been so responsive and helpful and creative in your strategy. So yeah. Awesome. If you're looking for a good CPA, talk to Gojo. But thank you so much for your time. This was awesome.

Gio: Thank you so much, Jenny. It's been a real pleasure being on your podcast.