How To Reduce Your Taxable Income - W-2 Employee Edition - YouTube

Yo what's going on everybody? My name is Ryan, I'm  a CPA, and today we're going to be talking about  

reducing your taxable income; primarily if you  work for somebody as an employee, a W-2 employee.  

And yeah, this is a, this is a fun topic because  it's you know, what a lot of people try to do.  

But first I would really appreciate it if  you'd subscribe to my channel and obviously,  

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So how to reduce your taxable income. Today it's  going to be mostly for people who are employed  

with an employer, who have a W-2 pay,  who might see benefits like 401Ks and  

health insurance and stuff. I'm going to be  talking about all the stuff and how it works  

with your taxes all right. The first obvious one  is the 401K or anything like it. There's a 403B,  

maybe your employer has simple IRA, a simple  IRA plan but this is just something that is  

like a retirement plan. So the most common one,  the most popular one obviously is the 401K.  

And obviously any contributions you make to the  401K plan is deductible from your income. And  

now it might not be super obvious because really  when you get your W2, it's your gross pay and it  

already has your 401K subtracted from your gross  pay so, it might not seem like it's doing anything  

but it is. Trust me, you are making contributions  of your own to a 401K plan or 413 plan  

and or I'm sorry 403B plan and that is reducing  your taxable income. And then the money in the  

401K or the retirement plan grows tax-free  until you know, you hit retirement age and  

that's when you pay taxes on it, when you withdraw  the money out. Now obviously you can withdraw the  

money out before then but then you're going to  pay penalties. The one important thing to note  

here is some companies offer a 401K option with a  401K Roth option. Now if you have the Roth option,  

that will actually not be deductible on your taxes  on you know, that won't reduce your income at all.  

That actually goes into your Roth account as  post-tax money and then it grows tax-free,  

and then when you withdraw at the end of the  term you know, when you retire or whatnot then  

there are no taxes paid at that time. So I really  like the 401K Roth option mainly because you know,  

a regular Roth IRA has such heavy limitations  on it. Like how much you can contribute if you  

have certain, if you make over a certain income  threshold then you can't contribute at all. So you  

know, usually when the 401, when the company has a  401K Roth option I usually tell my clients to just  

take that because you know, especially if the the  circumstances are right. Because you know, they're  

making a lot of money, they're not going to get  that option anywhere else. Next common benefit are  

dependent care benefits. Usually offered through  like an FSA which is a flexible spending account.  

Usually you have up to $2,500 bucks per person to  deduct from your pay but the catch is, you have to  

use it to pay for child dependent care expenses.  So, that means if you're married then you have,  

you can deduct up to $5,000 per married couple.  And again, you have to report your child dependent  

care expenses on your tax return so that you  basically prove to the IRS that you used that  

money to pay for child care. Now if you took the  deduction through your paycheck and you did not  

pay for child care then you should be claiming  that deduction back as income on your tax return.  

So that's how that works you know, if  you have that option at your company,  

you take the deduction, make  sure you pay child care.  

Now if for whatever reason you are married and you  and your spouse both have the option to do that,  

and let's say you both want to do that for some  reason, be sure to only take you know the $2,500  

each you know for each spouse, if you both take  the $5,000 then eventually you're going to have  

to pay that back. You know you're going to have  to claim it as income on your taxes for one of  

the spouses. If you, even if you use all of it  to pay for child care, because you are limited  

to just $5,000 per couple or $2,500 per person.  Insurance, health insurance, vision, dental,  

if your company offers this to you to as  an employee as a benefit, then you should  

probably take it if you need health insurance.  So there are two things that happen here,  

one is the company might offer it to you but  you have to pay for some or all of it. You know,  

maybe the company gets a reduced rate compared to  what you get in the marketplace. So if you have  

to pay for any portion of it, that gets reduced  from your gross pay and actually reduces your  

taxable income. That means that health insurance  through your company is paid with pre-tax money  

which is pretty good okay. And if you're getting  health insurance for cheaper than you would in  

the marketplace that's also good. Now if the  company happens to pay for everything for you,  

then that money actually does not become  taxable to you. You know, the insurance pays,  

or the company pays for all your health insurance  premiums, the company doesn't add it back to your  

gross pay, it's just basically a non-taxable  event for you which is also a really good thing.  

You know, the company gets the deduction and you  as the employee don't have to pay taxes on it.  

So basically if, if a company offers health  insurance, vision, and dental and you need it,  

or you don't have those plans already, you  should probably take it. And if you already have  

health, vision, or dental you might want to  reconsider you know, the plan that you have and  

going with the company plan because that usually  is more advantageous than anything you would  

find on the marketplace, you know for a similar  plan. What about an HSA, health savings accounts?  

Okay so first of all, an HSA is only valid  if you have a high deductible plan. You know,  

if you have an, if you have a low deductible  plan where your insurance company pays for  

everything and you only pay for co-pays, HSA is  not going to work. It's not technically legal. So,  

make sure you have a high deductible plan before  you open up an HSA okay. So the next thing is if  

your company has high deductible plan, you know  that you can enroll in, they might also have HSA  

banks or plans that you can enroll in as well.  Now if the company has this option, then you  

know typically you can contribute money from your  paycheck directly to the HSA bank and then it gets  

reduced from your gross pay. Or the company might  match or contribute some money for you as well.  

You know if you contribute some, the company  might match. So any contributions you make from  

your paycheck reduces your gross pay, therefore  reduces your taxable income. If the company  

matches anything to your HSA that does not you  know, get deducted from your pay obviously, and  

it's also not taxable to you. So that's you know,  the company matches with the 401K too. If there's  

any kind of match then you've got to take it, it's  just, it's common sense, it's free money there.  

So if the company does not have an HSA enrollment  program, and you have a high deductible plan,  

then you can go out on your own, open your own HSA  bank account. You know some banks offer, I think  

Fidelity, like Optum bank, you know just check  with your with your local banks. I'm sure they'll  

have an HSA option that you can open if you have  a high deductible plan. And if you just, you know,  

if you just contribute money to that outside plan,  you know after you get paid with your paycheck,  

and after you got taxes deducted and everything,  if you contribute to your HSA after the fact,  

it's still deductible because you can  you can report it on your tax return,  

and then reduce your taxable income that way. So  just because your employer does not sponsor any  

HSA plan doesn't mean that you lose out on  the benefits okay. You open it on your own,  

you still get the tax deduction as  long as you report it correctly.  

All right, so what about IRAs. IRAs are  basically retirement accounts that are  

similar to a 401K where your contributions are  deductible however, the contribution limits on  

IRAs are much lower than the 401K. And I'm  talking about traditional IRAs. You know,  

there's different kinds of IRAs. For this  purpose I'm going to talk about traditional IRAs.  

So if your employer does not have any kind  of retirement plan, like 401K or anything  

then you, and you want to reduce your taxable  income, then you probably would want to open an  

IRA so you can one, contribute to your retirement  and two, your contributions are tax deductible. So  

you will then you know, reduce your in  your income, pay lower taxes, all that,  

all that good stuff. Obviously with IRAs there's  a Roth option. Same thing with Roth 401K,  

the Roth IRA contributions are not deductible  now but they are also not taxable later on when  

you go and withdraw them. Now you've got to be  careful with IRAs if you, if your employer offers  

a retirement option at their job. Even if  they offer, if you don't, if you don't enroll  

in their retirement option, if you don't make  any contributions to their retirement options  

at work, but you contribute money to an IRA, then  your deductibility of the those contributions  

might actually be very limited  because the IRAs are meant for  

people primarily who don't have retirement options  at work. But if you do, the contributions you make  

to the IRA might not be deductible. So something  to watch out there for. A lot of people still,  

even if they maxed out their 401Ks at work, a  lot of people will still contribute to the IRA,  

and even, and they'll make non-deductible  contributions. You know, you're  

making contributions that are not deductible  but then when you go and withdraw the money  

down the road you actually have what's  called basis in your contributions.  

And so while the withdrawal won't be completely  tax-free, the taxes will be reduced when you  

go and make those withdrawals. So not quite the  same as a Roth, kind of like a Roth, tax, the tax  

treatment is different on the back end when you  go to withdraw but still worth it to some people  

to stow away money and have it grow tax-free,  and you know, in as many avenues as possible.  

All right the last thing I'm going to talk  about today in regards to reducing your income,  

and I know there's a lot more things that you can  do to it to reduce your income, I might make like  

another video on those. But the last thing I'm  talking about for today is the 529 plan. Now 529  

plans are contributions that you make to save for  a college education or for some kind of education  

that is approved by the 529 plan maker.  Now each state has their own 529 plan rules  

and 529 providers so check with your state  on this. But usually 529s are tax deductible  

on the state level. That means you know, you're  not saving any money on the federal taxes, you're  

reducing your income on the state level, which is  still something. You know if you are somebody who  

makes a lot of money, who has a bunch of kids who  want, who you want to go to college, you know in  

contributing to a 529 for each kid could be  a valuable option for you, you know to reduce  

your state taxes. Some states don't even have a  contribution limit on 529's or some states have a  

extremely high contribution limit like half  a million dollars or something per year.  

So you know, another option there, it's a good way  to save for retire, for a college education for  

your kids. It is growing tax free okay, and then  when you, when you spend the money on approved  

expenses like tuition and stuff, then that is also  done tax-free okay. So that's all the information  

I'm going to give you today. It's kind of a lot  but, I appreciate you joining me. And again,  

if you found this video helpful, please smash the  like button. And if you're new to the channel,  

please consider subscribing, I'd really appreciate  it. Take care for now and I'll see you next time.