A tax return teardown: $11,000 a year missed by a W-2 household

0:00 This is a real tax return. Household income is $380,000. They're two W-2 earners, they have two kids, a house in New Jersey. And sitting inside this return is about $11,000 of missed money. Not from anything aggressive, not from any loophole, from three ordinary lines that got filed on autopilot. Now, quick disclosure, this is a composite of real client returns. Names are obviously changed and numbers are rounded, but the math is real and I do this exact review for a living. Now, you're probably asking yourself, why should you care about someone else's tax return? Because if your household makes over $250,000 per year on W-2 income, there's a very good chance at least one of these three lines is wrong on your return as well. So, here's the plan. Three finds, smallest to biggest. For each one, I'm going to show you the line, I'm going to show you the math. I'm also going to tell you exactly how to check it with your own return tonight. And stay until the end because after the $11,000, there's a fourth find on this return that's worth more than the other three combined. And it's not even a deduction. Let's open it up. Welcome to the first tax return teardown. The format's going to be simple. It's a real household and every dollar that we can legally find with the math on screen the whole way.

0:50 And by the way, the best way to watch this video is with your own return sitting next to you. First, we're going to meet the household. He's an enterprise sales, base plus commission, about $220,000. She's a director at a healthcare company, about $160,000, which is $380,000 combined, all W-2. There's no business, there's no rentals, there's no side income. They have a CPA that files the return every March for 600 bucks. And I want to say this clearly up front. The CPA did nothing wrong. Every number on this return is accurate. The filing is clean. Problem is that nobody was doing the planning, because nobody was hired to do the planning. That difference is basically this entire video. Now, planning happens during the year. It's a separate service and most households at this income have never been told that second service even exists. There are two numbers you need before we start finding money. First is what they actually paid. After their 401k contributions and the standard deduction, this household's federal bill came out to roughly $62,000 last year. That's an effective rate around 16.5%. Now, write your own version of that number down at the end because it's a score we're trying to lower. Now, second is their tax bracket. This household's taxable income puts them in the 24% federal bracket. Now, hold on to that number because 24% is a multiplier on everything we find today. Every $1 of deduction we uncover puts 24 cents back in their pocket. And here's where it gets interesting for the high earners watching. If your household makes more than this one, your multiplier might be 32 or even 35%. Every find in this video can be worth more on your return. Let's start with this W-2, which is box 12, code D. That's his 401k contributions for the year, $24,500. Maxed out, which is perfect. Now, take a look at hers, which is the same box, $6,500. She's

2:07 contributing 5% of her salary because 5% is what gets her full company match. And that's where she stopped, and that's where almost everyone stops because contributing enough to get the match is the only piece of advice that everyone's heard. Now, here's where people get it wrong. The max this year is at $24,500, and she's putting in $6,500, which leaves $18,000 of unused space. Every dollar of that space would have come straight off their taxable income. Let me show you the math. $18,000 * 24% is 4320 per year, and this isn't a one-time miss. Retirement account space doesn't roll over. Every January 1st, the meter resets, and whatever you didn't use last year is gone for good. Now, this only works if your cash flow can actually absorb $18,000 more going into retirement. For this household, it easily can. They have the money, it's sitting in the checking account earning basically nothing. But if maxing a second 401k would push you into credit card debt to cover this month, you're not ready for this one, and that's fine. Fix cash flow first. And if the number still feels big, look at it per paycheck. $18,000 per year is about $690 per bi-weekly check. And because it goes in pre-tax, it'll take home only draws the value about $525. That's a real cost. Now, look at what it buys. $18,000 per year invested inside that account for 15 years at normal market returns is somewhere around $450,000. The $4,320 is the tax savings, the $450,000 is the actual price. So, here's how you can check both of yours today. Pull both W-2s, box 12, code D. If neither number is under $24,500 and your savings can handle it, that's your first fix. So, the counter is at $4,320. Now, find number two is the one that genuinely

3:24 frustrates me because this family is already paying for the thing they're not using. Here's her health insurance enrollment. Look at the plan type. High deductible health plan. They picked it because the premiums were cheaper. Now, look at the W-2, box 12 again. There should be code W there, HSA contributions, but there's nothing. Being on a high deductible health plan is exactly what qualifies you for a health savings account, and theirs is empty. They bought their gym membership and never walked in. And I want you to hear how normal this is. Open enrollment happens during a busy week in the fall. You pick the cheaper premium, the confirmation email mentions an HSA somewhere in paragraph four, you skim it, and life moves on. That's the whole story of how thousands of dollars per year in tax benefits go unclaimed by people who already qualify for them. This family did that for 3 years in a row. That's over $6,000 of misses before we ever sat down. So, what does HSA say? The family contribution limit this year is $8,750, and it's the only account in the entire tax code with a triple tax advantage. The money goes in before tax, and it comes out with no tax when you spend it on medical costs, which let's be real, every family with kids eventually does. Your 401k gives you two out of those three. This gives you all three. Now, let's do the math. $8,750 * 24% is $2,100 off this year's federal bill.

4:22 For those counting at home, we're at $6,420. And there's actually a bonus on this one that even the 401k doesn't get. When HSA money goes through payroll, it also skips social security and Medicare tax. That's another 7.65% on top for most people, roughly $670 more per year on a full family contribution. So, the real number on this find is closer to $2,800. I kept the counter conservative, but you should know the full picture. Now, there are two upgrades that most people miss even when they have the account. First, invest the balance. About nine out of 10 HSA accounts in this country have nothing invested. The money just sits in cash, and the growth part of the triple tax advantage never actually happens. Now, second, if your cash flow allows it, pay your smaller medical bills out of pocket and keep the receipts. The IRS lets you reimburse yourself from the HSA years later, so the money can keep compounding untouched, and you can pull it out all tax-free down the road. That one move quietly turns HSA into another retirement account. Now, here's how to check yours. If your insurance card says HDHP and box 12 of your W-2 has no code W, that's find number two. Now, real quick, everything I'm doing to this return right now, I do live and in a lot more depth this week in my free masterclass. It's live, and you can ask me questions about your situation at the end, and you can register for free in the description and in the pinned comment. You can save your seat right now and then come right back because find number three is going to be the biggest one on this return, and it only exists because of a law that changed this year. Line 12 of the 1040 is the deduction line. This return shows a standard deduction of $32,200 for a married couple. The software just defaulted to it. Everyone signed, and it was done. And for most of the last 8 years, that was actually the right call

5:39 because the old law capped state and local tax deductions at $10,000. And that made itemizing pointless for a lot of households. But the law changed. Starting this year, the cap on deducting state and local taxes went from $10,000 to $40,000. It literally quadrupled. And nobody went back and re-ran this family's numbers after the rule changed. So, let's re-run it right now on screen line by line. Let's first start with the state income tax. New Jersey on $380,000 of household income takes about $19,000. It's right on their W-2s, box 17. Until this year, most of that was invisible to their federal return. Next is their property taxes, which a four-bedroom house in New Jersey is $15,000 per year. So, that's $34,000 in state and local taxes. And under the new $40,000 cap, every dollar of it now counts. Under the old cap, only $10,000 of that $34,000 would have counted. Now, you add in mortgage interest. They bought in 2022 with a decent-sized loan, which is about $13,000 in interest this year, which is fully deductible. And their giving, which is $6,000 to their church and a couple charities. A new rule for this year, charitable deductions only count above half a percent of your income. So, the $6,000 counts for about $4,100. You add it up and that's $51,100 in itemized deductions versus the $32,200 standard deduction they took. They left $18,900 of deductions on the table. At 24%, that's $4,500 per year. Now, counters just add $11,000 every single year. And understand what the $11,000 actually is.

6:50 A refund is the IRS giving back money you over-withheld. This is different. This is tax that never needed to exist. $11,000 per year, and if you redirect it into the accounts from finds one and two, it starts compounding on its own. You miss it for 10 years and you didn't lose $11,000, you lost nearly $110,000 plus everything it would have grown to. Now, here's how to check yours. Line 12 of last year's 1040 form, if it says $32,200 and you live in a high state tax with a mortgage, run the math I just showed you. And timing matters on this one as well. If you're watching this before the end of the year, you can still control some of these numbers like when you make your charitable gifts. If it's already spring, this becomes your plan for the current year instead. Either way, run the math right now and not in April. And I promise you a fourth find, and this is the one that changes this family's next 20 years. Everything so far cuts this year's tax bill. The fourth find is different, and I found it in a document that most people never open, our 401k plan summary, which are two phrases, "after-tax contributions allowed" and "in-service conversions allowed." Our plan supports what's called the mega backdoor Roth. That means you can contribute past the normal of $24,500 max up to a total ceiling of $72,000 this year including the match and then flip the extra into a Roth where it grows tax-free for life. So, that's $72,000 ceiling minus her $24,500 once she's maxed minus roughly $9,000 of employer match which leaves about $30,500 per year of extra space so you can fill and convert. Her plan has allowed this the entire time she's worked there. The document was sitting in her benefits portal nine pages down.

8:03 Now, one tip if your plan has this, convert the after-tax money to Roth quickly ideally as soon as it goes in. If it just sits there growing for months before you convert, gets taxed on conversion as well. Convert fast and there's basically nothing to tax. Some plans will even automate the conversion for you so ask whether yours does. And one more thing they got wrong, they assume they make too much for the Roth accounts entirely which is true for the front door but the back door Roth IRA, a completely standard two-step gets each of them $7,500 per year in any way which is $15,000 as a couple. Now, one caution, if you have a big pre-tax IRA balance, the pro rata rules complicates this one so check that before you start. That's the difference between a return with no mistakes and a return with a strategy. $11,000 per year missed tax plus a wealth engine that was installed and never turned on. After you run all the checks and real money shows up, bring it to my free live masterclass this week where I'm going to go deeper on everything from this video. Plus, I'm going to go over the strategies that didn't fit and because it's live, you can ask me directly about your own numbers. The link to register is below.

8:50 If you found this video helpful, make sure to give it a like, subscribe and I'll see you in the next one.