A 36-year-old software engineer recently posted in the Salary subreddit a screenshot of his salary. His gross pay is $333.6k per year, but he’s paying more than $75k in taxes each year. In the end, he nets more than $250k per year.
Anyone who pays taxes wants to reduce their bill. While I will share my thoughts on how the Redditor can pay fewer taxes, it is good to speak with a financial advisor if you can.
Contribute to a Traditional IRA
The Redditor already puts $23k into his employer’s retirement account, but he can also open a traditional IRA. These accounts let you contribute up to $7,000 per year. You eventually have to pay taxes on it when you withdraw your funds, but the software engineer will likely have a lower income when he retires.
You can open a traditional IRA while contributing to an employer’s retirement account. However, the Redditor has to commit to a traditional IRA since Roth IRAs have income limits. If the Redditor desired, he could transfer funds from a traditional IRA to a Roth IRA, but this move would result in a big tax bill.
Invest in Real Estate
Buying real estate is one of the best ways to grow your wealth and lower your taxes at the same time. Investors can use depreciation to reduce their taxable income each year. However, if an investor qualifies, they can also use Section 179 of the tax code to accelerate a property’s depreciation. This strategy can potentially allow an investor to pay no taxes for a year if they depreciate the entire property.
Investors who use Section 179 (cost segregation) of the tax code can proceed to buy one property each year. If the property is worth more than the investor’s salary, it’s possible to depreciate the entire property’s value in one year and end up with no taxes.
The only catch with this strategy is that you have to stay on top of multiple properties. However, the software engineer seems to have a sufficient income to work with a property management team. He paid $75k in taxes in 2024, so following this strategy and buying a rental property each year for a decade can save the Redditor almost $1 million. That doesn’t even include appreciation and rental income.
Research Tax Credits and Deductions
Tax credits give you money for performing certain actions, such as owning an electric vehicle. They reduce how much you owe in taxes and are much better than tax deductions.
You can either research tax credits on your own or speak with a tax professional to make sure you are capitalizing on all available options.
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