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Tax Strategy Audit

Click your income type to see what tax advantages are available to you.

Work for pay Own the asset
E
Earned income · the top rates

The Employee quadrant

Taxed at the top rates, withheld before payday.

The W-2 quadrant has the fewest levers — but not zero. Everything here works with a paycheck, a brokerage account, and a home; no business required. The whole move is to fill every tax-advantaged container the code hands you, then use the entry-level investor tools that need no entity behind them.

Ordered the way you’d actually do them — each one assumes the ones above it.

Max your tax-advantaged accounts

Every dollar into a 401(k) or traditional IRA drops off this year’s taxable income; the Roth version flips it — pay tax now, never again on the growth. It’s the one deduction a pure employee earns simply for saving.

  • Typically worth$2,000–$10,000 a year
  • DifficultyEasy
  • You need firstA paycheck and a plan at work

The moveCapture the full employer match first — an instant, guaranteed return — then push toward the annual limit, leaning Roth whenever you’d rather settle the tax now and never see it again.

The HSA — the only triple-tax-free account

Money goes in untaxed, grows untaxed, and comes out untaxed for medical costs — no other account in the code does all three. Funded through payroll it skips the 7.65% FICA tax too, and after 65 it behaves like a normal IRA. The unlock is a single checkbox: an HSA-eligible high-deductible plan.

  • Typically worth$800–$2,500 a year
  • DifficultyEasy
  • You need firstAn HSA-eligible high-deductible plan

The moveAt open enrollment, price the HSA-eligible plan, invest the balance, and pay small medical bills from cash — the receipts stay reimbursable forever.

The backdoor Roth IRA

Over the income limits you can’t fund a Roth directly — but you can contribute to a non-deductible traditional IRA and convert it days later, a maneuver Congress has explicitly blessed. Decades of growth then escape tax entirely.

  • Typically worthSix figures of untaxed growth over a career
  • DifficultyModerate
  • You need firstIncome over the Roth limit, and no pre-tax IRA balance

The moveRoll old pre-tax IRAs into your 401(k) first to clear the pro-rata problem, then contribute-and-convert every January.

Tax-loss harvesting

Sell a losing position and immediately buy a similar — not identical — fund: you book a paper loss without ever leaving the market. Losses cancel gains dollar-for-dollar, then erase up to $3,000 of ordinary income a year, and the rest carries forward for life.

  • Typically worth$300–$1,500 a year
  • DifficultyEasy
  • You need firstA taxable brokerage account

The moveScan the red positions each December, or switch on your brokerage’s automatic harvesting — minding the 30-day wash-sale window on the identical security.

Harvest gains in the 0% bracket

Below roughly $97k of taxable income (married; ~$48k single), long-term capital gains are taxed at exactly zero. Sell winners, pay nothing, and buy them straight back — the wash-sale rule only restricts losses — resetting your cost basis higher forever.

  • Typically worth15% of every gain you reset
  • DifficultyModerate
  • You need firstTaxable income under the 0% ceiling

The moveEach December, project your taxable income and realize winners up to the top of the 0% window — not a dollar past it.

Give appreciated stock through a donor-advised fund

Donate shares held over a year and you deduct full market value while the embedded capital gain simply evaporates. A donor-advised fund fixes the timing — bunch two or three years of giving into one to clear the standard deduction, then grant to charities on their usual schedule.

  • Typically worth$1,000–$8,000 in the year you fund it
  • DifficultyModerate
  • You need firstAppreciated shares held over a year

The moveOpen a DAF at any major brokerage, fund it in your highest-income year with appreciated shares, and repurchase the stock with the cash you’d have donated.

The §121 home-sale exclusion

Sell a home you’ve owned and lived in for two of the last five years and up to $250k of gain ($500k married) is simply never taxed. The two-year line is the whole game — sell at month 23 and the entire gain becomes taxable.

  • Typically worthUp to $250k of gain, $500k married
  • DifficultyEasy
  • You need firstTwo of the last five years lived in the home

The moveBefore any sale, check the two-of-five-year calendar, and keep improvement receipts — they raise your basis and stretch the exclusion further.
S
Earned income · the top rates

The Self-Employed quadrant

Earned income plus self-employment tax — but the deductions begin.

The moment you have business profit, the code changes character in your favor. A side hustle or a solo practice is enough. These moves turn expenses you already have into deductions — and start chipping at the 15.3% self-employment tax, the toll every dollar you earn for yourself pays before income tax even starts.

Ordered the way you’d actually do them — each one assumes the ones above it.

Home office deduction

A space used regularly and exclusively for your business converts a slice of rent, utilities, insurance, and repairs into a deduction — and for sole proprietors it trims self-employment tax as well. The expense already exists; changing its character is what saves the tax.

  • Typically worth$500–$2,500 a year
  • DifficultyEasy
  • You need firstA space used only for the business

The moveMeasure the space, photograph it, keep the utility bills. Documented facts win audits; good intentions don’t.

The 20% pass-through (QBI) deduction

Owners of pass-through businesses deduct up to 20% of profit before tax is even calculated — no spending required. It was set to expire; the 2025 law made it permanent, and self-preparers still miss it.

  • Typically worth20% of profit, straight off the top
  • DifficultyEasy
  • You need firstPass-through profit, under the service-business limits

The moveCheck last year’s return for Form 8995. Had profit but no form? Amend — returns stay open three years.

Put your kids on the payroll

Wages paid to your child for real work move income from your bracket into theirs, where the standard deduction wipes out tax on roughly the first $16k. Paid by a parent’s sole proprietorship, a child under 18 owes no payroll tax either — and the wages can seed a Roth IRA with sixty years of runway.

  • Typically worth$2,000–$6,000 per child, a year
  • DifficultyModerate
  • You need firstReal work, a real rate, and a time log

The moveAssign real tasks, write a job description, keep a time log, and pay into the child’s own account — at a rate you’d pay a stranger.

The Augusta Rule — rent your home to your business

Any home can be rented out up to 14 days a year completely tax-free — §280A(g) never asks who the tenant is. So your business can rent your house at the going day-rate for planning days and offsites: the company deducts the rent, and you receive it tax-free.

  • Typically worth$1,500–$10,000 a year
  • DifficultyModerate
  • You need firstAn entity, and real meetings to hold

The moveCollect comparable venue quotes in writing, hold real meetings with minutes, and have the company pay by invoice. It holds up cleanest through an S-corp or partnership.

The S-corporation election

Your LLC can elect to be taxed as an S corporation with a single form. You then pay yourself a reasonable salary and take the rest of the profit as distributions — and distributions never pay the 15.3% self-employment tax. For most owners, employment tax takes more than income tax does.

  • Typically worth$3,000–$15,000 a year
  • DifficultyAdvanced
  • You need firstProfit past roughly $50k, and a CPA

The moveHave a CPA model a defensible salary; filed by March 15, the election can cover the current year. Set the salary too low and the IRS reclassifies it all back.

Solo 401(k) on business income

Self-employment income opens retirement space W-2 workers never see: up to ~$24,500 as “employee” plus ~20% of profit as “employer.” The honest caveat — a traditional deferral only postpones the bill, and you may retire into a higher bracket. The Roth version inside the same plan makes the growth permanently tax-free.

  • Typically worthUp to ~$70,000 sheltered a year
  • DifficultyModerate
  • You need firstSelf-employment income, and no employees

The moveSettle the entity question first, because the S-corp election changes how the employer half is calculated. Then open the plan and weigh the Roth election inside it — that’s how a deferral becomes real savings.
B
Business income · the incentives

The Business Owner quadrant

Operating costs become pre-tax expenses; credits appear.

This is where the code stops taxing and starts subsidizing. A real business — employees, structure, systems — turns nearly every cost of operating into a pre-tax expense, and adds credits and entity moves an individual can never touch. The first step toward bigger deductions is simply to become an entrepreneur.

Ordered the way you’d actually do them — each one assumes the ones above it.

Business expenses — the best deductions there are

Once a cost carries a genuine business purpose it comes out of pre-tax dollars — travel, equipment, meals, education, a share of the car and phone. The reframe: don’t chase deductions, run a real business and the deductions follow the activity.

  • Typically worth10–30% off what you already spend
  • DifficultyEasy
  • You need firstA real business purpose, written down as you go

The moveRoute legitimate costs through the business and document the business purpose as you go — pretend to document a deduction and you’ll get a pretend deduction.

Hire your family and your first employees

Wages are deductible, and wages to your children shift income into a near-zero bracket. As you add real employees, their pay, benefits, and training all become deductible costs of a growing enterprise.

  • Typically worth$3,000–$12,000 per family member, a year
  • DifficultyModerate
  • You need firstReal roles, and payroll on the books

The movePay real wages for real work, on the books, at defensible rates — and layer in benefit plans as the team grows.

Structure your entities as a system

The right container changes the tax: an S-corp cuts self-employment tax, a partnership lets income be allocated differently from how it’s owned, and a limited partnership lets you hand value to your children while keeping the controls. Stacked together, the containers do more than any one of them does alone.

  • Typically worth$10,000–$70,000 a year
  • DifficultyAdvanced
  • You need firstEnough profit to carry more than one set of filings

The moveStop asking which entity is best and start asking which set of entities fits the goals. Then build it once, with a CPA who’ll model the numbers.

Build the shield with the tax plan, not after it

A general partnership protects you from nothing — you’re personally on the hook for what you do, what your partner does, and what your employees do. A corporation is much better. An LLC is better still, because it also holds up when someone sues you personally instead of the company. The point is that the entity that shields you and the entity that saves you tax are the same choice, made once.

  • Typically worthEverything you’ve built so far
  • DifficultyAdvanced
  • You need firstAn attorney working alongside the CPA

The movePut the CPA and the attorney in the same conversation before you form anything. Rebuilding a structure later costs more than designing it right the first time.

Split ownership across brackets

It isn’t how much you own that matters, it’s how much you control. Spread ownership across a spouse and children and the same profit gets taxed in several low brackets instead of one high one. One family in the book ran $387,000 of profit through the household and had every dollar land at 12% or less. You can also leave earnings inside a C corporation, where they’re taxed at a flat 21%, or contract real work out to a separate entity you own.

  • Typically worth$10,000–$40,000 a year
  • DifficultyAdvanced
  • You need firstFamily members, and real economic substance

The moveGive shares, not paychecks, and keep control through the class of stock or the general-partner seat. Every transfer needs genuine economic substance behind it — a purpose beyond the lower rate.

Investment tax credits — R&D, hiring, equipment

A credit beats a deduction dollar-for-dollar. The code reserves its biggest credits for business owners: research and development, hiring from targeted groups, buying equipment, building low-income housing.

  • Typically worthOften five figures, dollar for dollar
  • DifficultyModerate
  • You need firstActivities that already qualify

The moveAsk your CPA which credits your ordinary activities already qualify for — most owners leave R&D and hiring credits on the table.

Employer retirement & benefit plans

A business can sponsor plans far larger than any IRA — a 401(k) with profit-sharing, or a defined-benefit / cash-balance plan that can shelter six figures a year for an older owner — while deducting the contributions.

  • Typically worth$50,000–$300,000 sheltered a year
  • DifficultyAdvanced
  • You need firstSteady profit, and an actuary to size it

The moveIf the business throws off more profit than you spend, have a plan actuary size a profit-sharing or cash-balance plan.

Get your sales tax reviewed before a state does

Sales and property tax carry as many exemptions as the income tax, and the dollars are bigger. The risk runs one direction: skip collecting sales tax on a sale, and when a state audits you three years later the bill lands on your business instead of on the customers who should have paid it.

  • Typically worthAvoids a five- or six-figure assessment
  • DifficultyModerate
  • You need firstA sales-tax pro, every few years

The moveCollect it unless you have clear proof none was due, and have a sales-tax pro review where you’re required to collect every few years. Selling online moves that line constantly.

Multi-state “nowhere income”

Do business across state lines and different rules can leave some income taxable in no state at all. An Arizona office with a Nevada warehouse can turn out-of-state sales into “nowhere” sales — perfectly legal, just a matter of knowing the rules.

  • Typically worth1–5% of revenue
  • DifficultyAdvanced
  • You need firstProperty, people, or an office in more than one state

The moveOnce you sell across states, have a state-tax pro review your footprint; the savings compound as you grow.
I
Passive income · the incentives

The Investor quadrant

The lowest rates in the code — dividends, rents, gains, sometimes zero.

The bottom-right corner is where a serious investor can get close to never paying tax at all. Not a stock-picker but an active investor buying for passive income — real estate above all, then energy. Depreciation, exchanges, and the step-up at death combine into shelters nothing else in the code can match.

Ordered the way you’d actually do them — each one assumes the ones above it.

Depreciation — the king of deductions

A rental building deducts a slice of its value every year — a paper loss while the property pays you real cash. And because tax basis includes borrowed money, you can put little down and still depreciate the full value.

  • Typically worth$4,000–$15,000 a year, per property
  • DifficultyModerate
  • You need firstA rental building, held in the right entity

The moveHold the property in the right entity and treat depreciation as the point of the investment, not a footnote.

Cost segregation + 100% bonus depreciation

An engineering study carves flooring, fixtures, and site work out of the 27.5-year schedule into 5- and 15-year property — and current law lets 100% of those pieces deduct in year one, even though the bank’s money paid for them.

  • Typically worth$20,000–$150,000 in year one
  • DifficultyAdvanced
  • You need firstAn engineering study, ordered the year you buy

The moveOrder the cost-seg study the year the property goes into service. The loss then needs somewhere to land — see the passive-loss key below.

Escape the passive-loss cage

Real estate losses are normally trapped as “passive,” useless against a paycheck. Two doors open them against ordinary income: a self-managed short-term rental (average stay ≤ 7 days), or qualifying as a real-estate professional by hours.

  • Typically worthUnlocks every loss above it
  • DifficultyAdvanced
  • You need firstGuest-stay logs, or real-estate-professional hours

The moveIf you want depreciation to offset W-2 income, log guest-stay averages and your hours from day one — the documentation is the strategy.

Protest the assessment on every property you own

Property tax gets charged whether or not you made a dime, and it’s a percentage of a number some assessor picked. That number is arguable. Show the building is worth less than the assessment with an appraisal or falling rents, or show that comparable properties nearby are carried lower.

  • Typically worth$400–$4,000 a year, per property
  • DifficultyEasy
  • You need firstAn appraisal or comps, filed before the deadline

The moveFind the protest deadline printed on the bill and put it in your calendar the day it arrives. Miss it and you’ve accepted the number for another year.

1031 like-kind exchanges

Roll the gain from one property straight into the next and the tax is deferred indefinitely. Start with single-family homes, exchange up into apartments, then into a triple-net-lease building — never triggering a bill.

  • Typically worth20–30% of the gain, deferred
  • DifficultyAdvanced
  • You need firstA replacement property and a qualified intermediary

The moveLine up the replacement property before you sell; the 1031 clock is short and strict.

Energy — oil, gas, and renewables

Back exploratory drilling and ~80% of the investment deducts in year one, plus a 15% depletion allowance for the well’s life. Renewables carry large credits, and equipment used in business is 100% deductible. Both are genuinely risky, and the tax break is never reason enough on its own.

  • Typically worth60–80% of the investment, deducted in year one
  • DifficultyAdvanced
  • You need firstAccredited-investor status and a specialist

The moveAccredited-investor territory and a conversation with a specialist — never a website checkout, and never for the tax benefit alone.

Step up at death; borrow, don’t sell

Hold appreciated property until death and the basis steps up to market value — every dollar of depreciation you took is forgiven, and your heirs sell tax-free. Need cash in the meantime? Borrow against it: debt is tax-free.

  • Typically worthThe entire embedded gain
  • DifficultyModerate
  • You need firstAssets you can hold, and borrow against

The moveBefore selling anything appreciated, ask whether a loan against it does the job instead — and keep the crown jewels for the step-up.

Title your assets into a trust

Probate is slow, expensive, and public — anyone can read what you owned and who got it. Anything titled to a living trust skips the whole process, so your family’s business stays your family’s business. The trust does the work; the will is just the backstop for whatever you forgot to move.

  • Typically worthProbate runs 3–8% of the estate
  • DifficultyEasy
  • You need firstAn estate attorney, and deeds you actually retitle

The moveWrite the trust, then actually retitle the deeds and the account registrations into it. An unfunded trust is a stack of paper that does nothing.

Give discounted shares while they’re still small

Hold assets in a limited partnership and you can sit in the general-partner seat with full control while your children hold the economic interest as limited partners. A limited share carries no control and no ready buyer, so it gets appraised below its arithmetic value — a 20% slice of a $500,000 business might be valued around $60,000. Gift it early and every dollar it grows after that grows outside your estate.

  • Typically worth30–40% off the taxable value
  • DifficultyAdvanced
  • You need firstA qualified appraisal and a partnership structure

The moveGet a qualified appraisal for each transfer and gift in small annual slices. If the asset is large and you want income from it too, a charitable remainder trust pays you for life, sends the remainder to charity, bypasses your estate, and deducts in the year you set it up.

Stacks

Everything above is an ingredient. These are the recipes — combinations the code rewards far more than the parts on their own.

E → I

The short-term rental stack

A high-earning employee who wants depreciation without quitting the job.

  1. Buy a property you’ll rent in short stays. The average guest stay across the year has to come in at seven days or less.
  2. Manage it yourself and log the hours — at least 100, and more than anyone else who touches the property.
  3. Order a cost segregation study the year it goes into service. Flooring, fixtures, appliances, and site work come out of the 27.5-year schedule into 5- and 15-year buckets.
  4. Take bonus depreciation on those pieces in year one, including on the share the bank paid for.
  5. Because the average stay is seven days or less, it isn’t a rental activity under the passive rules. Your participation makes the loss non-passive, and it lands against your salary.
What it’s worth

One mid-size property can throw off a six-figure first-year loss against a W-2 that had almost no deductions available to it. This is the only clean route from the top-left corner of the compass to the bottom-right one.

The tripwire

The seven-day average and the hour log are the entire strategy. Hire a property manager and you lose the participation. Let the average stay drift past seven days and the loss goes straight back in the cage. Keep the guest calendar and the hours from day one, not the following April.
I → B

PIGs and PALs

An investor sitting on real estate losses with nowhere to put them.

  1. Your rental depreciation piles up as passive activity losses — PALs — suspended and useless against a paycheck.
  2. Buy a piece of a business you don’t run. A minority stake in someone else’s operating company is a passive income generator: a PIG.
  3. The passive income and the passive losses meet on the same line of your return and cancel each other out.
What it’s worth

The book’s example: $10,000 of suspended real estate losses, a 5% slice of a friend’s S corporation that earns $100,000, and your $5,000 share comes through completely untaxed. You also stop wasting losses you already paid for.

The tripwire

You have to genuinely not run it. Start participating materially in the business and the income stops being passive, the losses stay caged, and you’ve bought a stake for nothing.
I

Buy, borrow, die

Anyone holding an asset that has gone up a lot.

  1. Buy the asset and hold it. No sale, no tax — appreciation isn’t income until you realize it.
  2. When you need cash, borrow against it instead of selling. Loan proceeds aren’t income, so nothing hits the return.
  3. The full position keeps compounding, and if the borrowed money goes into an investment or a business, the interest may be deductible too.
  4. At death the basis steps up to market value. Every dollar of gain, and every dollar of depreciation you took along the way, is forgiven.
What it’s worth

An asset that doubled twice can reach your heirs having never been taxed once, while still funding your life the whole time you held it.

The tripwire

Leverage cuts both directions. A margin call in a bad year forces exactly the sale you spent thirty years avoiding — and forces it at the worst price. Borrow well inside what the asset can carry.
E

The coordinated giving year

An employee with a bonus year, appreciated shares, and charities they already give to.

  1. Pick your highest-income year. A deduction is worth your top rate, so it’s worth the most in the year you earn the most.
  2. Open a donor-advised fund and fund it with shares held over a year. You deduct full market value and the embedded gain simply evaporates.
  3. Bunch two or three years of giving into that one deposit, so the total clears the standard deduction and the itemizing is actually worth something.
  4. Buy the same stock back with the cash you would have donated. Your position is unchanged and your basis is now higher.
  5. Grant the money out to charities on their normal schedule over the next few years.
What it’s worth

One year of real itemizing beats three years of the standard deduction, the capital gain never gets taxed, and the charities see no difference in their funding.

The tripwire

The deduction is gone the moment the money enters the fund, whether you ever grant it out or not — so fund it with what you truly mean to give. And if the asset is large and you also want income from it, a charitable remainder trust does more than a donor-advised fund can.
S → B

The partnership of S corporations

Two or more partners in one profitable business.

  1. Own the operating business in an LLC taxed as a partnership.
  2. Have each partner hold their interest through their own LLC, taxed as an S corporation.
  3. Because the operating business is a partnership, income can be allocated differently from how ownership is split — flexibility no corporate structure gives you.
  4. Each partner’s S corporation pays them a reasonable salary and passes the rest through as distributions, which never pay the 15.3% self-employment tax.
What it’s worth

The book’s worked example: two partners, identical profit, roughly $70,000 a year less tax between them. Design the asset protection in the same sitting and the structure does two jobs.

The tripwire

Both salaries have to stand on their own as reasonable — set either one too low and the IRS recharacterizes the distributions right back into wages. And the structure only pays if the profit is big enough to carry two more sets of returns and filing fees.

True in every quadrant

Eight rules that don’t care which corner you earn in.

Change your facts, change your tax

“All tax is based on your facts and circumstances. If you want to change your tax, change your facts.” Moving around the quadrant — an entity election, a documented office, a rental property — is exactly that. Same income, different facts, different bill.

A credit beats a deduction

A deduction shaves taxable income — worth your marginal rate on the dollar. A credit is a coupon against the tax itself: $1,000 off is $1,000 off, whatever your bracket. When both are on the table, take the credit first.

Permanent beats deferred

A deferral is a loan from the IRS that comes due in retirement — when your deductions are gone. Real planning makes the savings permanent, which is why the Roth version of an account usually beats the deferred one.

Documentation is the strategy

Pretend to document a deduction and you’ll get a pretend deduction. A log kept as you go — dates, amounts, business purpose — is what turns an aggressive-sounding move into a boring, defensible one.

Amend the last three years

Found a deduction you missed? Returns stay open for three years. An amended return is a refund check for facts you already had — the fastest money in tax planning.

Control beats ownership

It isn’t how much you own that matters, it’s how much you control. A general-partner seat, a class of shares without votes, a trust whose terms you wrote — each one parks the value in a lower bracket or outside your estate while the decisions stay with you.

Your shield and your tax plan are one design

The entity that lowers your tax and the entity that keeps a plaintiff away from your house are the same choice. Pick it once, with a CPA and an attorney in the same conversation. Bolting protection onto a structure built only for tax means paying to build the thing twice.

Never invest for the tax break alone

Every line on this page fails if the underlying deal is bad. Never put money in a project solely for the tax benefits — look at the profit first. The tax code rewards good investments; it can’t rescue bad ones.