10 Strategies for High W-2 Earners to Pay Less in Taxes (Part 1)

Warren Buffett is one of the richest men in America with a net worth of over $100B.

In 2012, he noticed that his secretary, Debbie Bosanek paid taxes at a tax rate that was more than DOUBLE his own.

The tax code in America is rigged in favor of business owners and investors.

That means regular salaried W-2 employees get the worst deal — and if you earn a high W-2 salary, you pay more in taxes than literally everyone else.

However, there are still a lot of things you can do to reduce your tax bill.

This article breaks down my favorite strategies:

The closest thing to “free money” in personal finance is the employer match portion of your 401k.

Most high earners already know this — and typically contribute the fully allowed $23,500 as an employee contribution, and potentially get a dollar for dollar match on the entire amount leading to an annual $47,000 401k contribution.

However, the maximum overall allowed limit for contributions to a 401k in 2025 is $70,000!

That means you could potentially have an unused $23,000 that you can still contribute to to fully max out your 401k.

How can you take advantage of this?

Over a high earning career that could span decades, the post-tax impact of fully contributing to a 401k for you and your spouse compounds to millions of extra dollars in retirement.

Most high earners have never heard of a Non-Qualified Deferred Compensation Plan (let’s call it an NQDC for short) but in the right circumstances this can be a phenomenal way to save money on taxes.

Here’s how an NQDC works:

This can turn out to be fairly efficient tax arbitrage since it prevents some additional dollars from being taxed at the highest marginal tax rates — while letting pre-tax money compound.

Talk to your employer and see if they can offer this — most Fortune 500 companies have a plan in place to support this for employees earning many hundreds of thousands of dollars a year.

However, unlike a qualified retirement plan, dollars in an NQDC are NOT protected from creditors in case the company goes bankrupt!

Deferring your compensation at Microsoft for an NQDC may be prudent, but at a tiny startup, it’s likely not worth the risk.

The 2017 Tax Cuts and Jobs Act (TCJA) rolled out significant tax incentives for investing in historically underdeveloped areas called “Opportunity Zones”.

These opportunity zones are scattered across most major metropolitan areas — and if you are willing to invest in improving real estate or a local business that is physically present in an OZ, you unlock a host of tax incentives.

The two relevant big ones are:

Here’s the kicker:

Most of these opportunity zones were created using old census data — and in several fast-growing cities, you have opportunity zones in incredibly trendy areas.

For example, I live in Brooklyn. You have parts of Williamsburg, Greenpoint and Bushwick denoted as an opportunity zone despite being potentially great places to buy real estate and start a local business:

The delaying of capital gains taxes also doe not discriminate on short-term vs long-term capital gains taxes. If you are facing an expensive short-term capital gains tax bill (taxed as ordinary income), an OZ investment could be a last resort to delay this bill.

If you are interested in starting or investing in a local business, it could make sense to look up what the nearest opportunity zones are around you.

I’m not in the business of speculating on politics — but it’s worth nothing that there’s a lot of recent chatter about new legislation to further extend opportunity zone timing.

The HSA may be the single most misunderstood tax-advantaged account for wealthy people.

Despite the name, an HSA is not a savings account — or even a health spending account. It’s sneakily one of the most powerful wealth building accounts in America today.

An HSA is triple tax-advantaged, which means it has more tax benefits than literally any other account in America:

And when you are of retirement age, you can access the dollars inside your HSA for literally any expense.

Here’s the mistake most people make though:

They spend down their HSA without letting it grow or compound.

Here’s how I recommend using an HSA instead (if you have extra cash lying around):

The secret “best feature” about an HSA is as long as you have relevant receipts you can reimburse yourself at any point in the future… even decades later!

The number of things you can reimburse from an HSA is also growing rapidly — and now includes all kinds of wellness products and experiences, and not just medical treatments. Store your receipts!

Remember: you do need a high-deductible health plan (HDHP) to be eligible for an HSA.

But this account is so powerful, I’ve only stuck to HDHP’s for the last few years so that I can keep maxing it out.

Tax-loss harvesting is a powerful way to reduce your tax liability every year.

Here’s how it works:

Since you only pay taxes on the net capital gain in a given year, you can “harvest” losses by selling any stock positions of yours that are down.

You can then either:

The latter two scenarios describe “tax-loss harvesting” — taking tax losses on your portfolio, while retaining a somewhat neutral market position.

If you harvest enough in losses to balance out any capital gains, you could end up paying zero in capital gains taxes for the year. If your losses exceed your gains, you can deduct $3,000 from your ordinary income and carry over any losses beyond that to the next year.

You can also start getting really smart about this by choosing the specific “tax lots” you sell to harvest the most in losses.

For example, if you buy shares in the same stock at different times and different prices, you can pick the “tax lot” with the highest price to take the maximum loss upfront. Pretty cool, right?

Direct indexing is an investment strategy that maximizes tax-loss harvesting for wealthy investors.

Instead of buying a single Vanguard fund to track the the stock market, I “direct index” into the S&P 500 and other related indices by buying every single company individually.

By owning every single company directly, I can take advantage of the increased volatility. Even if the overall stock market goes up, only some of the underlying companies have gone up, while some others likely would have gone down at the same time.

I can then “harvest” each losing position and book a capital loss for tax reasons, while eventually re-buying into the index to roughly retain the same net performance as owning an index fund or ETF.

This can end up being incredibly significant!

In a year like 2024, the S&P 500 was up 20%+ but largely driven by a few large companies.

A Vanguard fund or ETF would have given me no losses, but a direct indexed portfolio would have spun out a large amount of usable losses as a lot of companies were down for the year!

Studies have shown that direct indexing can typically generate up to 40% of your initial investment as usable tax losses.

You may be wondering… are there any reasons to NOT direct index?

Typically, these are the frequent criticisms against it:

While there’s an element of truth in all those criticisms, I find it entirely worth it for my portfolio since I’m investing enough dollars that the tax savings more than pay for it.

I use a platform that only charges me 0.10% a year and handles all the complexity. I contribute fresh dollars to my direct indexed portfolio every month so we never run out of potential losses to harvest.

If you are interested in learning how I set my direct indexing portfolio up, reply to this email and I’ll make it one of the next few articles.

Part 1 is done!

We are somehow only halfway through the strategies and Part 2 will uncover a lot of powerful tax saving strategies like:

Stay tuned!