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End of Year Tax Optimization – How I Saved An Additional $27,000 This Year From Tax Optimization

It is that time of year to look back and reflect on how much money I saved (and earned) from my tax advantaged accounts. This year, I tried taking things to the next level with tax optimization. There are many things I am sure I can still optimize, but let’s take a look at what I took advantage of this year.

Before I go too much into detail, let me make my disclaimer here. I am by no means a tax professional and this is not tax advice. Phew. Now let’s jump in.

First Year Maxing Out 401k!

This was the first ever year I was able to max out my 401k! This was a huge accomplishment that I wish I would have done earlier in my professional career. Here are some of the benefits of maxing out my 401k:

  • My Adjusted Gross Income (AGI) decreased by $19,000. This is especially important when it comes to saving money on taxes!
  • The reduction in AGI by $19,000 will save me $6,080 in taxes!
  • My company matched $12,750! That is free cash in the bank! If you have a company match, don’t let it go to waste
  • The market did great this year and my 401k returned 25%

My strategy next year will be the same as the strategy from this year. I plan to contribute the largest amount I can on every paycheck at the beginning of the year till I hit $19,000. For me, I should be able to hit the $19,000 by my bonus paycheck. There are a few reasons I “frontload” my 401k.

First, front loading allows me to be even more frugal the first few months of the year. I love auto investing and not seeing the money hit my account. Second, my company will still finish their match no matter when I hit the max contribution. This is an important point with this strategy. Make sure your company will continue your match if you max out your 401k early. Most will, but check before you implement this strategy. Finally, once I hit the max contribution, my paycheck skyrockets! Think about it, if you are contributing 50% of your paycheck to your 401k. Once you hit the max contribution, your paycheck will begin looking nice and juicy!

First Year Having A Health Savings Account

The next of the firsts was switching over to a Health Savings Account. There are many articles detailing out why some think this is the most tax advantaged account. The high level overview for why HSA’s are so impactful are:

  • No income limitations to contribute for tax exemptions
  • Growth in the account is tax free!
  • Money in your account can be used for qualifying medical expenses at a later date. It isn’t a ‘Use it or lose it’ type account. The money will always rollover to future years if not spent.

Now let’s look at my HSA performance since investing in it!

  • My total contributions were $3,150 while my employer contributed $350 to max out the account! Again, free money! Don’t miss out on the free money from your employer if it is available.
  • My current value of the account is $3,969! The accounts investment has returned 21.5% this year. My HSA is currently allocated 100% to VIGIX (Vanguard Growth Index Institutional). I invested in this index fund because of its low expense ratio and because I like Vanguard!
  • Investing $3,500 will reduce my AGI and save me $1,120 in taxes!

There are a lot of factors you should consider before investing in a HSA account. Please make sure to do your research to ensure it is the right plan for you before switching!

Tax Loss Harvesting

Tax loss harvesting is another great thing to look into before the years end! Lucky for you, I wrote a very detailed article on how I did this last year. To read the full article, click this link.

Real Estate Tax Savings!

I won’t begin to think I am an expert in all the tax advantages of owning real estate, but I will share what I believe to be true.

I am sure I am missing a few other things, so I will share more on this once I am able to sit down with my CPA to review.

Last But Not Least, The Backdoor ROTH

Let me start by explaining why a Backdoor ROTH. The ROTH has certain income limits where you can no longer contribute to it. The income limit for 2019 is $122,000 for someone filing single and $193,000 for someone filing jointly. I have been fortunate enough to exceed the income limit this past year where I now have to perform a Backdoor ROTH.

The Backdoor ROTH is a loophole for high income earners to take advantage of this type of account. I will contribute to a Traditional IRA account and then convert that account to a ROTH IRA after the money is in. This task is pretty straightforward with Vanguard. After depositing the money, I called Vanguard and a representative on the phone did the conversion for me. This took about 5 minutes!

It has been a crazy year to say the least. I have tried taking a lot of action in many different areas of my life. Taxes definitely are one of the areas I have tried to optimize. All in all, these tax optimizations have added up to over $27,000 savings and growth! I hope you were able to learn a little bit from this post!

Key Takeaways:

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Tax Refunds – If You Receive A Tax Refund, The Government Just Made Money Off You!

Tax refunds! Are they good or bad?

Who doesn’t love a tax refund! I mean, are you going to pass up getting a check from the government. Almost everyone who receives a tax refund ends up bragging about the refund to friends!

Anytime the government wants to pay me, I will take the money. BUT, what if I told you receiving a tax refund is a bad thing? Would you believe me?

Why Tax Refunds Are Bad

Think about what it means to receive a tax refund. If you receive a refund from the government, it means you paid them too much throughout the course of the year. Let that sink in for a minute and let me state this a different way.

If you received a refund from the government, this means you paid the government money that was yours. The government had your money for some extended period of time that was yours.

What That Money Could Have Been Doing For You

What does that mean for you? This means that you could have used that money to invest instead of the government having it. Let’s say that you received a tax refund for $1,000 last year. If you were to take this money and invest it in something earning 7%, that $1,000 would be $1,070.

Does that change your perspective a little bit on getting a tax refund? Hopefully it helps you think of receiving a tax refund in a different manner.

What Should the Goal Be For Taxes

Ok, now that I have tried to change your mind on tax refunds, let me define what the goal should be. The goal for anyone should be to owe or receive as close to $0 as possible. I am not a tax professional and I am not comfortable giving specific advice on how to do this, but that’s the goal. There should be plenty of tax professionals who can help you understand how to try and do this.

The more complex your return gets, the more difficult this usually becomes. If you are a simple W2 earner, the calculation on how much you owe to the government in taxes should be straightforward. Doing a quick google search, you can use a site like this to determine how much you owe: https://smartasset.com/taxes/income-taxes

Where Most Go Wrong With Tax Refunds

Here is the most common problem with people receiving “unexpected” money. Typically, you will go out and immediately spend it! How do I know this? I work in the eCommerce industry and we see a spike in sales around tax refund time.

If you haven’t put a focus this year on optimizing your taxes, don’t spend the money on stuff! Use any refund as a start or continuation of your investing! Don’t make the most common mistake most do.

Key Takeaways

  • Receiving a tax refund from the government is not good! This means the government was holding onto your money!
  • Try to calculate how much money you should owe in taxes using the link above. Talk to a CPA for more specific help. Work to get the amount withheld from your checks to equal that amount.
  • If you do get a refund, don’t fall into the trap of immediately spending it on things you don’t need!

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Maximizing Airbnb Profits – Don’t Wait For Upgrades to Be Done Before Listing Property!

Time to pick back up on the my ‘Purchasing My First Airbnb Series’!

Going to pick back up where I left off. To see the first few parts, click the links below.

I had successfully had my property under contract and was set to close in two weeks. I had never been as excited, eager, and nervous at the same time. This was the largest adult decision I had made since my first home purchase. Yet, this was going to be a dedicated short term rental property. I was pumped to get going.

First things first. It was time to officially list the property on Airbnb. This is a critical step in having a successful listing that entices people to click on your place. I will write a specific blog post in the future about important things to do when you post your listing on Airbnb.

Don’t Wait For Repairs or Upgrades Before Listing

There is no reason to wait to do any of the remodeling you want to do before you list your property! This was a major takeaway from my experience. I knew the property had some work that I needed to get done. I was planning to paint the walls, update the decor, add new mattresses, and add some extra touches. I also had some things that needed to be addressed from the inspection report. Nothing crazy that would prevent a guest from having a great experience.

Your First Pictures Don’t Need to Be Perfect!

Don’t worry about your first pictures being perfect! The goal of the first month is to maximize the number of bookings and work to get reviews! This is going to be key for you to drive a better Search Engine Optimization (SEO) on Airbnb. SEO is a fancy way of saying a better way for your listing to get recognized.

With that in mind, get the best pictures you can from your phone! Yeah, that’s right. Your phone can take good enough pictures to start. Take pictures of all the areas in your home. Don’t forget any of the bedrooms and bathrooms! People want to see what all the rooms look like so they know it will meet their needs.

How I Managed Rehab of Property During the First Month

Like I have said before, the goal of the first month is to get bookings. As I had a few people book, I would schedule my general contractor and painters to come on unbooked days. During the first month, I required bookings to be 3 days out. This allowed me to know when I could schedule for certain pieces of work to get done.

If I had a guest book Monday to Wednesday of a week, I would schedule my painters to come in Thursday. This allowed me to slowly get the upgrades done within the home. The largest two tasks were repainting the home and updating all the decor. The decor in the home was…well…awful. I didn’t know how long it would take me to get things I liked for all the rooms, but I wasn’t going to have that prevent me from making money.

Be Transparent With Guests Who Book!

Another critical thing to keep in mind is transparency with guests. I made sure to let each of the guests who booked during the first month know I was working to remodel. I wanted to make sure they knew to not be surprised if something looked different than the pictures. All the upgrades were to make the home more modern looking and adding a Disney themed room!

All my guests were very appreciative of me letting them know before them arriving. That first month is about getting bookings and great reviews! All in all, the upgrades to the interior of the home ended up taking three weeks. By the fourth week I was able to bring in a professional photographer to get my final pictures taken!

Overall Outcome

From effectively using this approach, I was able to have 65% occupancy in my first month while completing all my renovations inside! Most would not list their property as available till everything was completed inside. You are more than welcome to do that and miss out on some cash flow!

Key Takeaways