The Best Methods For High Earners To Increase Their Income

A friend of mine has a household income north of $400,000 per year and lives in the highest tax state of California.  Her and her husband are in a marginal tax rate of 44%. She is looking to find the best way to add to their household income, but doesn’t want the majority of her time and effort going to taxes.  Currently she is a stay at home mom and he is the primary earner from his W2 job.

Option 1: W2 Job:

A W2 job would put her marginal rate immediately at over 50%.  This is because while her husband is past the maximum Social Security tax of $142,800, she is not, so any income she earns would be taxed at over 50%.  In addition to this, she would also have the high daycare cost of her area, which is around $1,800 per month, per kid for 2 kids.  She could effectively earn $120,000 from a W2 job and bring home under $20,000.  ($60K take home – $42K child care = $18K net).  If she maxed her 401K she would have some tax savings sure, but then her take home pay would also be almost nothing.    Most decent paying W2 jobs in this area also expect far greater than 40 hours in a work week, so effectively she could be earning 6 figures and netting less than minimum wage after accounting for child care.  A W2 job clearly is not a great option.

Option 2: Self Employment: 

Being self employed is another option.  If she could start her own business where she could work from home, she could potentially save on the daycare costs, although this would mean having less focus on work.  Self employment also comes with the need to pay double the Social Security taxes, so now her tax rate would be closer to 59%, ick. This is at least still better than a W2 job because as a self employed individual she has much more control over her schedule and her life and could avoid the daycare costs.

Option 3: Rental Real Estate:

You guys knew this is where I was going didn’t you? Real estate rental income is a great way to maximize cash flow.  With rental real estate you get to depreciate the building over 27.5 years, even though most likely the building is actually increasing in value.  Virtually all of your expenses are deductible, and you are building equity with every mortgage payment the tenants make.  Furthermore, it is mostly passive income.  Sure, some involvement is needed, but if you hire a property manager, your day to day requirements are extraordinarily limited.

Let’s look at an example of a Class A $400,000 home that rents for $4,000 a month

  • Purchase Price: $400,000 (30 year mortgage $100,000 down)
  • Rent: $48,000
  • Property management: -$4,800
  • Property taxes -$6,000
  • mortgage interest – $12,000
  • Insurance – $1,200
  • Maintenance -$250
  • Net before depreciation: $23,750
  • Principal Repay $5,000
  • Net Cash: $18,750

The total benefit so far is $18,750 cash in hand and $5,000 paid down on the mortgage. This is roughly a 24% cash on cash return for the $100,000 down payment.

Depreciation: Depreciation is done on the building value only and not the land.  Let’s say the land is worth 10%, $40,000, and the building is worth $360,000.  This allows for a $13,000 deduction against the buildings income.

She still has $18,750 of cash in her hands.  The mortgage was still paid down $5,000.  She still realized $23,750 in income that increased her net worth and cash flow, but only has to pay taxes on $10,750 thanks to the depreciation deduction.

Taxable income: $10,750.

What’s more is this income is not active income so no Social Security taxes or self employment taxes are owed.  This income would be taxed at her 44% combined Federal and State tax rate.  But Wait, there’s more!

Although our President has proposed limiting the Qualified Business Income Deduction for those earning over $400,000, this has not become law yet.  There is the possibility that the QBI at this income level would remain in place.  To qualify for the QBI it is required that you or people you hire spend 250 hours or more on the business.  If you can keep logs to attest to this in case you are audited, you can get a 20% deduction on business income.  Now instead of $10,750 being taxed, only $8,600 is being taxed. $8,600 at 44% is $3,784 in total taxes. It would be much easier to meet this 250 hour requirement if the rental was a short term rental vs. monthly.

Appreciation:  Now for the fun part.  Houses in the neighborhood this one is in have been appreciating at about 5% per year recently.  This means the value of the house should increase in just the first year from $400,000 to $420,000. This gives $20,000 of additional wealth built, without having to pay any taxes or do any work.

Total Benefits from this property:

  • $18,750 in cash
  • $5,000 mortgage pay down
  • $20,000 appreciation
  • $43,750 Yearly total benefit
  • $3,784 in total taxes
  • 14.7% effective tax rate (cashflow + mortgage paydown)

The next step is to repeat.  After 3 years the house has appreciated $60,000 in value and the loan has been paid down $15,000.  Spending $3,000 on a cash out refinance can bring in $56,000 towards the next down payment.  Of course if value add projects were completed when the house was purchased or in between tenants, the value could be forced higher, resulting in a larger and potentially quicker, cash out refinance.  This cash can be used for the down payment on the next house.

Option 4: Flipping Real Estate:

This friend has strong project management skills and although she has never managed a real estate flip I’m sure she would be well suited for the work given the other projects she has managed.  Buying a house, renovating it, then keeping it for over 1 year allows for long term capital gains, which in her tax bracket are only 15%.  That’s far better than the 35%+ federal tax rates for other options.  The best way to keep the house for 1 year is to after the renovation use it as a short term rental for a year or more.  Once it makes sense to sell versus rent based on realized income or other factors, then she would be free to sell it.

If she paid $200,000 for a house and did a $60,000 renovation that made the house worth $400,000 she could sell the house after a year of ownership for a $140,000 gain.  That gain would be taxed as a long term capital gain at 15% on the federal level plus 9% on the state level. 24% taxes on $140,000 is $35,000, leaving her with a net benefit of $105,000 plus her original investment.  Time to repeat.

Option 5: Make The Kids Work:

I honestly feel like I have come across the absolute best method to reduce taxation and maximize your family benefit.  I recently wrote about how I plan to employ my children in my Amazon reselling business this year.  In a nutshell, children can earn up to $12,550 in income before they have to pay federal taxes.  If they are under 18 and working in a business owned by their parent they are exempt from payroll taxes including Social Security, Medicare, and Unemployment.  Income earned working in their parents business is of course earned income and qualifies for Roth IRA contributions.  You see where I am going with this?

If my friend established a microbusiness that her kids were able to each contribute $6,000 worth of effort, the business would only need to have a gross profit of $12,000 a year to pay this.  Without employing the kids, if she started this business and did all the work herself, the $12,000 would go on Schedule C of her 1040 form, she would pay 15.2% self employment tax and her marginal rate of 44% on the earnings, resulting in only $7,104 in her pocket.  If she employed her kids in the business and paid them a fair wage for the work they did, and they each earned $6,000, then she would have a break even year, and her kids would only have to pay state income taxes on their wages. In California the first $8,900 is only taxed at 1%, so on $6,000 of income their only tax is $60. Rather than $7,104 in her pocket, she has $0 in her pocket but $11,880 into her children’s Roth IRAs.

Most likely the math wouldn’t be this clean.  Ideally as the business grows the kids could earn some more money and my friend could pocket a bit too to enjoy in the now.  Let’s say the business grew to making $30,000 in profit.  I would have each child earning $12,550 to maximize the standard deduction.  They would still pay no Federal income taxes, no payroll taxes, and under 1.5% combined State income taxes. They would have $6,000 to max their IRAs and another $6,000 and some change to split between putting in their bank accounts, spending, and investing in taxable brokerage accounts like Stockpile.  The left over $4,900 of income would be Mom’s self employment income and would be subject to a roughly 60% tax rate.  She would end up with about $2,000 after tax to do something fun with.

Setting up a custodial Roth IRA is relatively easy at any major brokerage firm such as Vanguard or Fidelity.  The account would grow from say age 6 to 18 with 10% returns to around $140,000.  If no money was ever added to it, her child would become a millionaire at 39 and have $12 million at 65. Most likely any child that builds a work ethic at this young age and saves 100% of her income will continue saving and investing.

Option 6: Reduce Expenses:

Although reducing expenses doesn’t affect the top line income, it does greatly increase the effectiveness of the top line income and increase disposable income.  Since their tax rate is 44%, every dollar of spending reduced is effectively producing a $1.80 benefit.

No matter what your income level the top 3 expenses are often housing, taxes, and vehicles, and these should be looked at first.


Refinance: Always be ready to refinance.  Housing in California, and especially the Bay area is extremely expensive. This makes it more reasonable to refinance when rates change a small amount.  Going from a 3.5% 30 year mortgage to a 3.0% 30 year mortgage saves $274 per month, or $3,288 per year.  The same interest rate movement on a $100,000 mortgage only saves $27 a month.  Having all the documents together for a refinance to streamline to process and jump on a rate drop is a big financial benefit.

House Hacking: Her home has an extra bedroom.  In her area a room in a single family house can rent for $1,200 a month.  This $14,400 of income would certainly be substantial, however extensive screening would be need for having someone else move into your home.

Property Taxes: Always protest your property tax valuation.  The worst they can say is no.  In Michigan I have won every attempt I have made at property tax reductions.  Appealing the valuation, especially while the market is soft is a great idea.

Insurance: Home owners insurance can vary substantially.  Shopping around and adjusting deductibles can result in saving over $1,000 a year.


Ensure that 401K, HSA, and any other tax deferred program contributions are being maximized.


Loans: Vehicle loans are often largely principal repayment.  Paying off a car loan greatly increases cash flow. With the median car payment in our country being $530 a month, getting rid of this payment is a big win for cash flow.  Moving down in car or accelerating the pay off will take car loans out of the equation.

Insurance: Car insurance is higher if you have a loan on it.  Just like with home owners insurance shopping around and going with a higher deductible can result in substantial cost savings.

Rent Out: Renting your car out is easy with services like Turo.  I personally haven’t tried this, since I live in a rural area and the demand for renting a 2001 Pontiac Montana is fairly low, despite how useful of a vehicle it is (seats 8 unlike most minivans and can fit a full sheet of plywood flat).  The average Turo user is earning over $700 a month renting out their car.


Meal planning can seriously cut down the grocery bill.  I’ve personally struggled with meal planning, but it is possible to do and many people save hundreds a month by purposefully writing out what each meal for the month will be and shopping accordingly.


Subscriptions build up on us over time like barnacles and periodically need to be scraped off. Subscription providers also routinely increase fees and the value proposition of their services drops. Cutting cable is of course the big subscription that people talk about, but there could be dozens more.  Are you actually going to that gym?  Are you getting value out of Youtube Premium? Disney+, Netflix, Spotify? Going through subscriptions and cutting loose the barnacles could save hundreds a month, every month.


Much like with subscriptions once we set up our investments we tend to let them sit and not think about them.  Taking a deep look at the fees charged by brokerage accounts and the mutual fund expense ratios that are being paid can make a substantial difference over the long term.  A managed fund may charge a 2% expense ratio, while an index fund might charge as little as .04%.  This difference in fees can add up to hundreds of thousands of dollars, even millions, over a lifetime. On a $500,000 portfolio 2% is $10,000 a year.

Desired asset allocation also drifts over time as more money concentrates in our winners and less in our losers.  Rebalancing should be done at least on a yearly basis.

What do you think is the best way for someone in a high tax bracket to increase their economic value without sacrificing the lions share in taxes?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

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