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

#1

Post by tech_taxpayer » Thu, Nov 26, 2020, 7:56 AM UTC

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?

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

#2

Post by garmaine » Thu, Nov 26, 2020, 7:59 AM UTC

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.

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

#3

Post by nkjoep » Thu, Nov 26, 2020, 8:07 AM UTC

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.

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

#4

Post by tech_taxpayer » Thu, Nov 26, 2020, 8:14 AM UTC

garmaine wrote: post #2

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.

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.

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

#5

Post by tech_taxpayer » Thu, Nov 26, 2020, 8:15 AM UTC

nkjoep wrote: post #3

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.

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.

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

#6

Post by garmaine » Thu, Nov 26, 2020, 8:33 AM UTC

tech_taxpayer wrote: post #4

garmaine wrote: post #2

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.

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.

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.

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

#7

Post by tech_taxpayer » Thu, Nov 26, 2020, 8:42 AM UTC

garmaine wrote: post #6

tech_taxpayer wrote: post #4

Earlier quoted context omitted.

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.

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.

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.

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

#8

Post by garmaine » Thu, Nov 26, 2020, 12:12 PM UTC

tech_taxpayer wrote: post #7

garmaine wrote: post #6

Earlier quoted context omitted.

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.

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 b…

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.

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

#9

Post by tech_taxpayer » Thu, Nov 26, 2020, 7:20 PM UTC

garmaine wrote: post #8

tech_taxpayer wrote: post #7

Earlier quoted context omitted.

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 b…

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.

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.

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

#10

Post by garmaine » Thu, Nov 26, 2020, 9:04 PM UTC

tech_taxpayer wrote: post #9

garmaine wrote: post #8

Earlier quoted context omitted.

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.

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. Ap…

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.