How to Pay Less Taxes on $150K Income?

Understanding how different types of income are taxed can help you maximize your earnings and minimize tax liability. If you make $150,000 per year, the amount you owe to the IRS can vary significantly depending on whether that income comes from a traditional job, investments, or real estate. Let's break down the numbers.

‍

Scenario 1: Earning $150K as a W-2 Employee

A traditional salaried employee earning $150,000 will face multiple tax burdens:

Total tax liability: $36,722

‍

Debt Mutual Fund Information

Particulars	Amount
Standard Deduction	$14,600
Taxable Income	$134,000
Total Tax Burned (A)	$25,247
Social Security Tax (6.2% on earnings up to $168,600)	$9,300
Medicare Tax (1.45% on total earnings)	$2,175
Total Payroll Taxes (B)	$11,475
Total Taxes Paid (A+B)	$36,722

‍

Scenario 2: Earning $150K in Capital Gains from Stocks

If you earn $150,000 through long-term capital gains, you pay a much lower tax rate:

0% on first $47,025
15% on income between $47,025 - $518,900
$150,000 falls under 15% bracket

‍

Debt Mutual Fund Information

Particulars	Amount
Taxable Capital Gains (150,000 - 47,025) * 15%	$12,450
Net Investment Income Tax	$548
Total Tax	$12,998

Total tax liability: $12,998 (about 8.6% of income)

‍

Scenario 3: Earning $150K in Rental Income

Investing in rental properties can generate significant income, but it also comes with tax advantages that can drastically reduce your taxable income. Here’s a breakdown of how depreciation and cost segregation can lower your tax liability on $150,000 in annual rental income.

‍

Step 1: Deduct Standard Operating Expenses

Before accounting for depreciation, landlords can deduct standard operating expenses such as:

Debt Mutual Fund Information

Expense	Amount
Property Management Fees (8%)	$12,000
Property Taxes	$8,000
Mortgage Interest (Loan: $1M @ 6.5%)	$65,000
Maintenance & Repairs	$6,000
Insurance	$4,000
HOA Fees	$3,000
Utilities (Owner-Paid)	$2,000
Legal & Accounting Fees	$3,000
Travel (Property Visits)	$2,500
Total Operating Expenses	$105,500

After deducting these expenses, the Net Operating Income (NOI) drops to $44,500.

‍

Step 2: Apply Standard Depreciation

The IRS allows property owners to depreciate the building portion of a rental property over 27.5 years. Land value is excluded from depreciation.

Depreciation Calculation:

Property value: $1,000,000
Land value: $200,000 (not depreciable)
Depreciable building value: $800,000
Annual depreciation: $800,000 ÷ 27.5 years = $29,091 deduction

After applying standard depreciation, the new taxable income is:

$44,500 (NOI) - $29,091 (Depreciation) = $15,409 taxable income

‍

Step 3: Accelerate Depreciation with a Cost Segregation Study

A Cost Segregation Study (CSS) allows property owners to break down components of the building and depreciate them over shorter lifespans.

Standard depreciation focuses on the property.

While Cost Segregation + Bonus Depreciation focuses on stuff within the property.

Debt Mutual Fund Information

Expense	Amount
Property Management Fees (8%)	$12,000
Property Taxes	$8,000
Mortgage Interest (Loan: $1M @ 6.5%)	$65,000
Maintenance & Repairs	$6,000
Insurance	$4,000
HOA Fees	$3,000
Utilities (Owner-Paid)	$2,000
Legal & Accounting Fees	$3,000
Travel (Property Visits)	$2,500
Total Operating Expenses	$105,500

Asset Type	Depreciation Period
Structure (Walls, Roof, Foundation)	27.5 years (normal depreciation)
Personal Property (Cabinets, Appliances, Carpeting)	5-7 years
Land Improvements (Fences, Sidewalks, Landscaping)	15 years

These assets qualify for bonus depreciation, allowing investors to accelerate deductions rather than waiting years to claim them.

With cost segregation, let’s assume an additional $60,000 in first-year depreciation deductions. On the lifetime of smaller components.

‍

Step 4: Final Taxable Income Calculation

Now, applying both standard and accelerated depreciation:

$15,409 (taxable income) - $60,000 (bonus depreciation) = $0 taxable income (the remaining will write off the other income)

Not only does this eliminate taxes on the rental income, but the remaining deductions can be used to offset other sources of income, reducing your overall tax burden.

With these deductions, taxable income is much lower, and real estate investors often pay little to no tax on their rental income.

Key Takeaways

W-2 income is taxed the highest due to payroll taxes.
Capital gains taxes are much lower, making investments a tax-efficient strategy.
Rental income, when leveraged correctly, can significantly reduce taxable income through deductions and depreciation.

By understanding these differences, you can strategically allocate your income sources to minimize taxes and maximize wealth-building opportunities.

Looking for more such tax strategies?

Connect with our experts today!

Link Button Book A Call