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Tax Strategy Audit

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

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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

A 401(k) or traditional IRA lowers this year’s taxable income by whatever you put in. The Roth version works the opposite way: you pay tax on the money now, then never pay tax on it again, growth included. It’s for anyone with a paycheck — the one real tax break you earn just by saving.

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

The movePut in enough to get your full employer match first — that’s free money. Then work toward the yearly limit. Pick Roth if you’d rather pay the tax now and be done with it; pick traditional if you want the deduction today.

The HSA — the only triple-tax-free account

A Health Savings Account skips tax three times over: no tax going in, none while it grows, none coming out for medical bills. No other account does that. Fund it through payroll and it also skips the 7.65% Social Security and Medicare tax. After 65 it works like a regular retirement account. The one requirement is a high-deductible health plan that qualifies.

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

The moveAt open enrollment, compare the HSA-eligible plan to your other options. Contribute the max, invest it instead of leaving it as cash, and pay small medical bills out of pocket — keep the receipts, since you can reimburse yourself years later, whenever you want the cash back tax-free.

The backdoor Roth IRA

This is for anyone who earns too much to contribute to a Roth IRA directly. The workaround: put money into a traditional IRA without deducting it, then convert that IRA to a Roth a few days later. The IRS has confirmed this is legal. Once it’s in the Roth, it grows and comes out tax-free for good.

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

The moveWatch for one trap. If you already have other traditional IRA money, the IRS makes you convert a slice of that too, and taxes it. Roll any old traditional IRA balances into your 401(k) first to clear the way, then contribute and convert new money every January.

Tax-loss harvesting

This works for anyone with a taxable brokerage account. Sell an investment that’s down, and you lock in a loss you can use on your taxes — then buy a similar, but not identical, fund right away so your money stays in the market. The loss cancels out any capital gains you have first, then wipes out up to $3,000 of regular income a year, and whatever’s left carries forward to future years.

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

The moveEach December, look for positions showing a loss and sell them, replacing each with a similar fund. Many brokerages will do this for you automatically. Just don’t buy back the identical investment within 30 days — the wash-sale rule disallows the loss if you do.

Harvest gains in the 0% bracket

This is for anyone whose taxable income falls under roughly $48k single or $97k married in a given year — often someone between jobs, an early retiree, or a student. At that income, long-term capital gains are taxed at zero, not just low. Sell a winning investment, owe nothing on the gain, and — unlike with a loss — buy the same thing right back afterward. What you’ve really done is raise your cost basis, the number the IRS later subtracts from your sale price, so that gain is off the books for good.

  • Typically worthThe 15% you’d have owed on every gain you clear
  • DifficultyModerate
  • You need firstA year with taxable income under the 0% line

The moveNear the end of the year, add up what your taxable income will be. Sell winners up to the top of the 0% band, then stop — every dollar past it gets taxed. Buy the investment back right away if you want to keep holding it.

Give appreciated stock through a donor-advised fund

This is for people who already give to charity and also hold stock that’s gone up in value. Donate shares you’ve held over a year, instead of cash, and two things happen: you deduct what the shares are worth today, and you never pay tax on the growth. A donor-advised fund lets you take that deduction in one year — bunching two or three years of giving together so the total is big enough to beat the standard deduction — while the money reaches charities on whatever schedule you set afterward.

  • 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 with appreciated shares in your highest-income year, take the deduction, and grant the money out to charities over time. If you want to keep your original position, use the cash you’d have donated to buy the shares back.

The §121 home-sale exclusion

This applies to anyone selling the home they live in for a profit. The first $250k of that profit is never taxed — $500k if you’re married filing together. The rule that decides it: you have to have owned and lived in the home for two full years out of the last five. Fall short, even by a month, and the whole profit becomes taxable.

  • Typically worthUp to $250k of profit tax-free, $500k married
  • DifficultyEasy
  • You need firstTwo of the last five years living in the home

The moveCount the months before you list the house. If you’re short, it’s often worth waiting it out. Also dig up receipts for work you did on the place — a new roof, a remodel — since those add to what the IRS treats as your purchase price, shrinking the profit on paper and helping keep you under the cap.
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

This is for anyone who runs a business from home — freelancers, consultants, side-hustlers — and has a space used only for that work. It converts a slice of your rent or mortgage interest, utilities, insurance, and repairs into a deduction, based on how much of your home the space takes up. For sole proprietors it also trims self-employment tax. You’re not spending anything new; you’re claiming costs you already pay.

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

The moveMeasure the space, take a photo showing it’s used only for business, and keep the utility bills on file. Documented facts hold up in an audit; good intentions don’t.

The 20% pass-through (QBI) deduction

This is for owners of LLCs, S-corps, partnerships, and sole proprietorships — most small businesses, since their profit lands on the owner’s personal tax return. You get to knock 20% off that profit before any tax is figured, and it doesn’t cost you a dime to earn it. It was set to expire, then the 2025 law made it permanent — and it’s one of the most commonly missed deductions, especially among people who file their own returns.

  • Typically worth20% of profit, straight off the top
  • DifficultyEasy
  • You need firstBusiness profit on your own return, under the limits for service work

The movePull up last year’s return and look for Form 8995. Had profit but no form? You left it on the table. File an amended return — you get three years to go back and claim it.

Put your kids on the payroll

This is for self-employed parents who can find real work for their kids to do. Pay your child a wage for it, and that income shifts out of your bracket and into theirs, where the standard deduction wipes out tax on roughly the first $16k a year. Paid through a parent’s sole proprietorship, a child under 18 owes no payroll tax either — and because it’s earned income, it can fund a Roth IRA that then has decades to grow tax-free.

  • 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 for the same work.

The Augusta Rule — rent your home to your business

This is for business owners who need a place to hold meetings or planning days. You can rent out your home for up to 14 days a year and owe no tax on the income — and the law never asks who the renter is. So your own business can rent your house for the day, at whatever a real venue would charge. The business deducts the rent as a normal cost, and you keep the money with no tax owed on either side.

  • 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 a real meeting with an agenda and minutes, and have the company pay you by invoice. It holds up cleanest through an S-corp or partnership.

The S-corporation election

This is for self-employed people whose profit has grown past roughly $50k a year. Your LLC can elect to be taxed as an S corporation with a single form. You then pay yourself a reasonable salary for the work you do, and take the rest of the profit as a distribution — and distributions skip the 15.3% self-employment tax that a salary doesn’t. For most owners, that tax costs 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 calculate a salary the IRS would consider reasonable — set it too low and the IRS can reclassify your distributions back into wages, canceling the savings. File the election by March 15 to have it apply to the current year.

Solo 401(k) on business income

This is for anyone self-employed with no employees. Because you’re both the business and the worker, you contribute two ways: up to about $24,500 as the “employee,” plus roughly 20% of your business profit as the “employer” — far more room than a typical workplace 401(k) gives you. The honest catch: the regular version only delays the tax bill, and you might retire in a higher bracket than you’re in now. The same plan holds a Roth option, and that growth is never taxed again.

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

The moveSettle your business structure first, since an S-corp election changes how the employer half is figured. Then open the plan and lean toward the Roth option if you can — that’s what turns a delay into real, permanent 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

This applies to any real, active business. Once a cost has a genuine business purpose — travel, equipment, meals, education, a share of the car and phone — it comes out of pre-tax dollars instead of what’s left over after tax. The mindset shift: don’t go hunting for deductions, run a real business and the deductions show up on their own.

  • 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 write down the business purpose as you spend the money, not months later. A deduction you can’t back up with real documentation doesn’t survive an audit.

Hire your family and your first employees

This is for owners ready to bring on help, whether that’s a family member or your first outside hire. All wages are deductible. Pay your children for real work and that income lands in their near-zero bracket instead of yours. As you add real employees, their pay, benefits, and training become deductible costs of a growing business too.

  • 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 rates you could defend if asked — and layer in benefit plans as the team grows.

Structure your entities as a system

This is for owners with enough profit to justify more than one legal entity. The right container changes the tax: an S-corp cuts self-employment tax, a partnership lets income be split differently from how ownership is split, and a limited partnership lets you hand value to your children while keeping control. Stacked together, they 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 your goals. Then build it once, with a CPA who’ll model the numbers.

Build the shield with the tax plan, not after it

This matters for any owner choosing, or rethinking, a legal structure. 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 can also hold up when someone sues you personally instead of the company. 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

This is for owners with profit big enough to push into the top brackets, and family members who can genuinely hold ownership. 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 across several low brackets instead of piling into 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, taxed at a flat 21%, or pay a separate entity you own for real work it does.

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

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

Investment tax credits — R&D, hiring, equipment

This is for any business owner, and it’s worth knowing the difference: a credit cuts your tax bill dollar for dollar, worth more than a deduction of the same size. The tax code saves 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 without ever claiming them.

Employer retirement & benefit plans

This is for owners whose business consistently makes more than they need to live on. A business can sponsor retirement plans far bigger than any IRA — a 401(k) with profit-sharing, or, especially for an older owner, a defined-benefit or cash-balance plan that can shelter six figures a year — while deducting every dollar it contributes.

  • 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 for you.

Get your sales tax reviewed before a state does

This matters for any business that sells products or services, especially online or across state lines. Sales and property tax carry as many exemptions as 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 — not 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”

This is for businesses operating in more than one state. Because each state taxes differently, doing business across state lines 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 how the states’ rules interact.

  • 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

This is for anyone who owns a rental property. The IRS treats a building as wearing out over time, so it lets you deduct a piece of its value every year — a loss on paper, even while the building hands you real rent. The deduction runs off the full purchase price, not just what you paid in cash, so a property bought mostly with a mortgage still gets depreciated in full.

  • 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 one of the main reasons you’re investing, not a footnote.

Cost segregation + 100% bonus depreciation

This is for rental owners willing to pay for an engineering study. Normally a building’s cost comes off your taxes in slivers, spread over 27.5 years. A cost segregation study splits the building into its parts — flooring, fixtures, parking lot, landscaping — and each gets its own, much shorter schedule, some as short as five or 15 years. Today’s law lets you deduct 100% of those pieces in year one, and it still counts for the part the bank paid for.

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

The moveOrder the study the same year you put the property into service. Then make sure the loss has somewhere to land — see the passive-loss strategy below.

Escape the passive-loss cage

This is for anyone sitting on rental losses, like the depreciation above, that aren’t doing anything for them. The IRS labels rental losses “passive,” meaning they can only cancel out other passive income, not your paycheck — so those big depreciation deductions just sit there unused. Two doors open the cage: rent the place in short stays and manage it yourself, with guests averaging seven days or less, or log enough hours to count as a real estate professional. Either one lets the losses offset your regular income.

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

The movePick a path and track it from day one — guest-stay dates for the short-term-rental route, your own hours for real-estate-professional status. The records are the strategy; without them you have nothing.

Protest the assessment on every property you own

This applies to anyone who owns property, whether or not it’s turning a profit. Property tax is charged on a value some assessor picked, and 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 assessed 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

This is for real estate investors selling one property to buy another. A 1031 exchange rolls the gain from one property straight into the next, deferring the tax indefinitely — start with a single-family home, exchange up into apartments, then into a triple-net-lease building, and never trigger a bill along the way.

  • 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 once it starts.

Energy — oil, gas, and renewables

This is for accredited investors who can stomach real risk. Back exploratory drilling and roughly 80% of the investment deducts in year one, plus an ongoing depletion allowance for as long as the well produces. Renewables carry large credits of their own, and equipment used in the business is often 100% deductible. Both categories carry genuine investment risk — the tax break should never be the only reason to invest.

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

The moveThis isn’t a website checkout. Confirm you meet accredited-investor requirements, talk to a specialist, and judge the investment on its own merits first.

Step up at death; borrow, don’t sell

This is for investors holding property or investments that have gone up a lot. Hold an appreciated asset until death and its basis resets to market value — every dollar of gain, and any depreciation you took along the way, is forgiven, and your heirs can sell it tax-free. Need cash before then? Borrow against it instead of selling: loan proceeds aren’t taxed as income.

  • 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 your most appreciated assets for the step-up.

Title your assets into a trust

This is for anyone who’d rather their estate get settled privately and quickly than through probate court, which is slow, costly, and public record — anyone can look up what you owned and who inherited it. Anything titled to a living trust skips probate entirely, 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 account registrations into it. An unfunded trust is a stack of paper that does nothing.

Give discounted shares while they’re still small

This is for owners of a growing business or asset who want to pass value to their children early. Put the asset in a limited partnership. You take the general-partner seat, so you still run everything. Your children hold limited shares, so they own the value but control nothing — and a share with no control and no easy buyer is worth less than the math says. An appraiser marks it down: a 20% slice of a $500,000 business might come in near $60,000. Gift it while it’s small and everything it grows into later grows outside your estate.

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

The moveGet a real appraisal for every transfer and give in small yearly slices to stay under gift-tax limits. If the asset is big and you still need income from it, look at a charitable remainder trust instead — it pays you for life, sends what’s left to charity, keeps the asset out of your estate, and gives you a deduction 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. Real estate gets a third option: trade up instead of cashing out. A 1031 exchange rolls the gain from one property straight into the next, so the tax stays deferred through every trade — single-family into apartments, apartments into a bigger building.
  4. The full position keeps compounding, and if the borrowed money goes into an investment or a business, the interest may be deductible too.
  5. 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 — however you got there.
What it’s worth

An asset that doubled twice — or a string of properties traded up through years of 1031 exchanges — 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. And a 1031 exchange runs on a strict clock — miss the 45-day identification window or the 180-day close, and the deferred gain comes due all at once.
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.
S → B

The family payroll stack

A business owner or self-employed parent with kids old enough to do real work.

  1. Give each child real tasks the business actually needs — filing, social media, packaging — and write it up like a job description.
  2. Pay them at the rate you’d pay a stranger for the same work, on the books, with a time log kept as you go.
  3. Paid by a parent’s sole proprietorship or a partnership of the parents, a child under 18 owes no payroll tax, and the standard deduction wipes out income tax on roughly the first $16k.
  4. As the business grows, extend the same move to a spouse and to your first outside hires — real roles, real pay, layered with benefit plans.
  5. Route part of each child’s wage into a Roth IRA in their name. Decades of tax-free growth start before they’ve had any other paycheck.
What it’s worth

The book’s example: one family ran $387,000 of profit through the household this way and kept every dollar at 12% or below. A teenager earning real wages can turn part of them into a Roth IRA with sixty years to compound before retirement even starts.

The tripwire

The work has to be real, the pay has to match what you’d pay a stranger, and the time log has to exist from day one — not reconstructed the following April. The under-18 payroll-tax exemption works cleanest inside a sole proprietorship or a partnership where both owners are the child’s parents; route it through an S-corp or C-corp and the exemption disappears.

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.