EP 125 Maximizing “Use It or Lose It” Tax Breaks for High Earners

We challenge the idea that lower is always better for taxes and show how “use it or lose it” deductions and credits vanish when income is either too high or too low. We map the sweet spots that unlock SALT, QBI, and child credits, and share moves to land there on purpose.

• standard vs itemized deductions and why timing matters
• SALT cap expansion and the $500k–$600k AGI phaseout
• AGI-reducing vs taxable-income-reducing strategies
• QBI rules, SSTB phaseouts, and the ~$395k MFJ target
• stacking SALT and QBI for outsized savings
• when adding income beats cutting it, including Roth conversions
• child tax credit thresholds and why MAGI control matters
• state nonconformity to bonus depreciation and planning implications
• practical levers: retirement deferrals, cost seg, oil and gas, expense timing

👉 Want to see how much you could save on taxes?
Get a free custom projection at ProsperlCPA.com/OpportunityReport
Complete a quick 5-minute survey, and we’ll send you a personalized video breaking down what tax strategies may apply to you — and how much you could save this year.

Chapters

• 0:00 The “Use It or Lose It” Idea
• 2:30 Finding the Taxable Income Sweet Spot
• 4:50 Standard vs Itemized: Timing Matters
• 6:20 New SALT Cap Math and Phaseouts
• 9:40 Why AGI Reductions Beat Charitable Deductions Here
• 11:20 Strategy Stack: Business, Rentals, Oil & Gas
• 12:50 QBI Basics and SSTB Phaseouts
• 15:30 Hitting ~$395k Taxable to Unlock QBI
• 18:20 Stacking QBI with SALT for Big Wins
• 20:30 When Income Is Too Low: Add Income Intentionally
• 22:30 Roth Conversions to Use Deductions
• 24:00 Child Tax Credit Mechanics and Phaseouts
• 26:10 Targeting ~$400k MFJ: Credits + Deductions
• 28:10 Practical Plays for $500k–$600k AGI
• 30:00 State Nonconformity and Bonus Depreciation

Transcript

SPEAKER_00: 0:00

What if I told you that bringing your income down for taxes could actually be a big mistake, forcing you to miss out on key tax deductions and tax credit. On the other side of the spectrum, you could find that your taxable income is then too high to capture those same exact tax credit and deductions. So believe it or not, there's this sweet spot within the tax code. And as we advise our clients, we want to understand what we call use it or lose it deductions. There are instances where you make too little to capture them or too much. And when you navigate the tax law and you're trying to make key decisions, such as when do these events occur? When do these expenses occur? What strategies we use, and how much do we deploy those strategies? By being strategic, we can optimize and maximize these use it or lose it deductions. And this can result in hundreds of thousands of tax savings over your life of either tax planning or collaborating with a tax planner. So we what we are going to do today is we are going to dive into what I call use it or lose it tax deductions. We're going to walk through what these are and how you can be strategic to capture and maximize these use it or lose it deductions. So we can drive your income below enough so you're not phased out and you're not earning so much that the government doesn't give you the tax credits or the tax deductions. And also how we can get to the point where our income isn't so low and too low to capture these write-offs that are gone forever if you don't take advantage of it in the current year. Now, I imagine most of you are surprised or at least a little bit finding this a little bit different from what we usually talk about here. Because usually we're talking about creating massive write-offs and accelerating depreciation and driving down your top your taxes. And you may find lots of TikTok reels about paying no taxes year after year after year and writing off everything. Well, that's not really the name of the game if you really want to be smart and strategic about your taxes. It's about timing this properly and slowly releasing and properly releasing the recognition of your income at the right times based on what's going on in the tax law. So I'm going to walk you through what this all means. Now, I'm about to throw a lot of information and scenarios, and you're going to really find this helpful if you are earning at least$400,000 a year. I would say it's going to be even more if you're like between$400,000 and around$400,000 and up in income. And if you want to get some key details, just message me or just put a comment in our YouTube channel, the word use it or lose it, and I will send you a free guide, a cheat sheet of what these use it or lose it deductions are and the thresholds to help you best take advantage of these key tax savings opportunities before the end of the year. All right, so let's get into it. So our three use it or lose it deductions that we are going to cover today are our itemized and standard deductions, our tax credits for the uh the child care tax credits and the qualified business income tax deduction. Now, here is a really powerful. I wouldn't say it's so powerful, but it's really important that we know about this. Here is we have our standard deductions and our itemized deductions. In 2025, we have$15,000 of a tax credit if we are single. Sorry,$15,000 standard deduction if we're single, if we're married filing joint, that amount is$30,000. This is a really important user or lose deduction. If you maybe incentive, think that you're incentivized or you may desire to have zero dollars of taxable income, and this may be possible with some of the strategies that you could implement. Maybe we do a cost segregation study with a rental property and it can offset all your W-2 income and wipe it all out. Well, that sounds fantastic if we have zero dollars of income to pay taxes on, but we have, let's say, you're married filing joint. If you have no income, you're not going to be able to recognize this$30,000 standard deduction. And unlike business deductions, a standard deduction is not going to carry forward. So now we missed the opportunity for this$30,000 standard deduction, which we might have appreciated the ability to use in the future because you may not always be in that zero dollar tax bracket. Now, what we're going to find can create more opportunities to time here is our itemized deductions. You either use standard deductions or itemized deductions. That's going to include medical over 7.5% of your adjusted gross income, which is really just a collection of your income, state and local taxes, mortgage interest, and charitable deductions. And now let's dive into why we want to think about this concept here of the use it or lose it deductions as it applies to itemized. And here is where we can start really being strategic. There was just a change in the One Big Beautiful Bill Act. So before the One Big Beautiful Bill Act, the most that you conduct of can deduct the state and local taxes against your federal is$10,000. But that amount of salt, state and local tax, that we can deduct against our federal taxes was increased to$40,000. However, that amount is phased out between$500 and$600,000 of income. So if you are paying a lot of state taxes, you may want to think to yourself, how can I create this tax deduction? Now think about this. Let's say we're paying more than$40,000 of state taxes, and we want to take advantage of this new opportunity. As soon as our income our adjusted gross income exceeds$600,000, we're not going to be able to take it anymore. The way that it works is they've added that additional$30,000 salt deduction to get to$40,000, and it is phased out and it phases out really, really fast. Between$500 and$600,000, you lose 30 cents of that deduction. So that$30,000 additional salt deduction from$10,000 to$40,000, it's phased out from$500,000 to$600,000. So what that means for you, if you want to take advantage of this, but if you are at$600,000 of adjusted gross income, not taxable income, but adjusted gross income. And I'll tell you why that's important in a little bit, why we distinguish between the two. The adjusted gross income is just the collection of your income before we look at standard or itemized deductions. If your adjusted gross income is$600,000, every dollar deduction you get, it's really like a dollar and 30 cents of a tax deduction. Okay, let me say that again. If we can go from$600,000 where we have only a$10, we go from$600,000 of adjusted gross income where we can only write off$10,000 of state and local taxes down to$500,000 where we get a$40,000 salt cap. So that means we're bringing our taxable income down by not just the$100,000 reduction from$500 to$600, but by an additional$30,000 because we also bring in that additional state and local tax deduction of the additional$30,000. So a$100,000 tax deduction is actually a$130,000 tax deduction. This is a nice win for some of you guys that can get you within this threshold. You may think to yourself, well, you know, I'm not that crazy about tax deferrals, but it's deferring my taxes if I want to put more money into a 401k or an IRA actually results in permanent tax reduction because it opens up this additional deduction by bringing in more of the state and local tax deduction. And I'm not gonna have to pay that back like I normally do have to pay back taxes when I pull money out of the retirement account. Now this sweetens the deal. And by being aware of this and being strategic with your advisor, you can capitalize on this opportunity. Every dollar deduction gets you a dollar 30 in tax deduction. Now this has to be an AGI reducing deduction. What I mean by that, it has to be something that reduces your income, not your taxable income. So if you want to use a charitable strategy, that's not going to help you out at all. You need to have a business deduction or something that reduces the taxation on your ordinary income, or anything that can reduce your capital gains income. So some examples of how we would strategize is maybe we put more into that oil and gas. Maybe we frontload some of our expenses. Maybe we prepay some of our expenses in our short-term rentals. Maybe we could do a cost seg that can bring us down there if we have a short-term rental and we could use those losses to offset the W-2s, or we have real estate professional tax status. Maybe we can find other opportunities for expenses. There are so many ways to look at this. But overall, any of these ideas, you want to be cognizant of this opportunity you have to really put you in that sweet spot. Now, here's another huge one, especially for those of you who are specialized services service, who are a specialized service trader business. So for those of you who are consultants, doctors, dentists, accountants, lawyers, a lot of white-collar jobs fall into this category of specialized service trader businesses. This is incredibly important that you think about your qualified business income tax deduction. And by being aware of these use it or lose it deductions, where you, if you don't take it this year, it's pretty much gone forever. So by strategizing to maximize this out, you can create a really nice amount of additional tax savings. Let me illustrate this for you. So this qualified business income tax deduction for the group that we're talking about here, it's going to be deduction of 20% of your income from what we call qualified business income. For most of you listening, where this applies, that's either income as a sole proprietor or an S corporation, the profits that you have, net of any payroll or any officer's comp you pay yourself. Okay. Now there's a threshold whereby which we phase out. If you are if you are married filing joint, once you hit$395,000 of what we I would say taxable income before factoring in the QBI, you start to see a phase out where you start at first, you're entitled to that full 20% of your income, and as your income goes between$395,000 and let me just refine our numbers here. And by the way, if you're listening past 2025, we would expect this amount to increase over time with inflation, but essentially between$395,000 and$545, so you have a$150,000 phase out by which you lose this qualified business income tax deduction. What that means for you is when we have an income of$395,000, we get the full 20% QBI. That's an$80,000 tax deduction that we can unlock by bringing your income down to$395. And QBI, qualified business income deductions, this 20% tax deduction, it's a lot easier to get you down to that threshold because we are not looking at just reducing your AGI, we're looking at your taxable income. So other ways we can do this, if we strategize and we use the right type of charitable deduction strategies, and maybe we're layering in all of our other strategies and the timing and the proper utilization of our entities. If we can get you down to$395,000 of taxable income and we have more than that amount of profit from your S-Corp or sole prop, we're in a really good place. That is gonna unlock an$80,000, roughly an$80,000 qualified business income tax deduction. And you're also gonna be at the point if it's you may find that you're also able to have that additional$30,000 salt deduction. So if we can stack these two ideas together, think about how powerful this is. When when you see this come together, imagine you're making$800,000. We do some charitable strategies and write-off strategies. If we can just bring you down here to$400,000 of income before factoring in the QBI, you're only paying taxes on around$320,000 of income. And what you're gonna see here is the ratio of your taxes compared to your actual income that you're making, what that marginal rate is, it's really low. It's like you're really in a sweet spot if you're married filing a joint and you're around that$400,000 sweet spot if you're an entrepreneur. And then I would say how this would apply if you're single, just cut those numbers in half.$200,000 is a great sweet spot to open up a$40,000 qualified business income to that tax deduction. Now, if you're not a specialized service trader business, if you're a real estate agent, architects fall into that line, home services, your qualified business income deduction once you exceed those phase outs can be as much as 50% of your officer's comp. So if you're paying yourself$60,000, that's a$30,000 tax deduction. It gets a little bit tricky navigating that space and seeing the ROI. But for a lot of you guys, especially your white-collar workers out there, that$400,000 of income is that magical sweet spot. And we want to look at our stack of strategies and when we're evaluating how much am I gonna put into all these different combinations of strategies and the timing of events, we want to target that magical sweet spot where maybe we're at 420 before we factor in our state and local taxes and our and our interests and our and our mortgage interest, maybe like 4440, 420, 440, and then those deductions kick in, and then that allows us to bring in the QBI, and all of a sudden you're gonna find that you're in a really, really favorable sweet spot. Now, let's say we're on the other side of the spectrum here. We have an opportunity to create tons of amount, tons of bonus depreciation. We have lots of assets, we're we've eliminated, you know, we're down to like$200,000 of total income. In fact, I was just talking to a client about it. I was like, this sounds really good, but you're missing out on something here because this is where it gets interesting, because you are only gonna get$40,000 of that QBI because it's based on a percentage of your income. And your tax rate is you're not paying a lot of taxes, but you're not really winning the game because you're not fully utilizing this tax deduction. So for a lot of these clients, where our strategies take them so low, we say, hey, let's bring in some income here. If we bring your income up, we're gonna not pay taxes on 80 on 20% of that. We're gonna write off it, we're gonna write off 20% of it, and we're still in a really reasonable bracket here. So we'll actually push some income in that year if our strategies are so strong that your income is so low that you can't optimize these tax deductions. So, what we can do now, and we just did this with the client, we encouraged him to do a$170,000 Roth conversion because we knew he was only gonna pay taxes on 80% of it because it was gonna be eaten up. 20% was gonna get eaten up by that qualified business income tax deduction that we brought in to the 1040. Isn't that so awesome? By we're we're telling the client we actually want to increase your taxable income to give you additional tax deductions against it before they so we can fully utilize this qualified business income tax deduction. Now, we also have let's go back to that standard deduction here, and we have the state and local tax deduction. If we have a file, let's sometimes we'll have a client who has like let's just say their wife had real estate professional and they just bought tons of assets, they have no taxable income at all. Well, we want to think of and let's say QBI is in a factor, let's talk about standard deduction. That's$30,000. And if you don't use that$30,000 deduction, that's a standard deduction if you're married filing a joint, you lose it. So at the very least, let's roll$30,000 from your 401k or IRA into the Roth, and it'll be eaten up by that standard deduction at the very least. Because if we don't do that, we're eventually gonna pay taxes on it. We don't know if it's not like that unused$30,000 deduction is gonna carry forward into the future. So we want to use it now or it's gone forever. And why not? It's a free tax deduction, it's free tax savings. So as you can see, this stuff can be really powerful as it accumulates over time, and now with this client, he's paying very little taxes in relation to his income, and we just moved$170,000 into the tax-free bucket. And if we ignored this opportunity, that 401k or Roth IRA would grow and accumulate and compound, and it becomes harder and harder to offset and to move into the Roth without paying lots of taxes, but now it's going to continue to grow and grow and grow in that tax-free bucket. How awesome is that? Now, here is a really important one that I also want you to think about here. Especially, and this is the one for those of you with children, and that is the child tax credit. I think I said the child care tax credit. Sorry, the child tax credit. What this is, it's a$2,200 tax credit and it's non-refundable. So going back to the earlier example where I said if you don't use it, you lose it. We if you have children and you have zero dollars of income, not only do you miss out on that itemized or standard deduction, you also will miss out on the child tax credit. Because if you're not paying any taxes, you don't have any credits to use because the credit is the return of your taxes. So with these child tax credits, this is the way it works. If you have one child, it's it's gonna be$2,200 per child. So if you have two children, that's$4,400. However, there is a phase out. It's another use it or lose it deduction here. And that phase out starts at$200,000 if you're single and$400,000 if you're married filing joint. Again, think about this. Actually, let's go back a little bit, tell you a little more about this details. Now, this is based on your modified adjusted gross income. And for most of you listening, that's gonna be just what your income is: your write-offs, your business income, your profits, your capital gains, dividend income, and your W-2. So we cut, we see again this what I'm gonna say, this magic number again of$400,000, where not only do you get the$80,000 qualified business income to tax deduction, you're qualified for a full$30,000 states and local tax deduction, but we can also get the child tax credit. Again, this is why I say like if you are an entrepreneur, especially not only do we get the salt, estate and local tax maxed out, but then we get the qualified business income, that's 20%, and we can get the child tax credit. You're gonna be amazed by how low we can drive your taxes. And so that's why we're targeting the sweet spot. So think about this. You have two kids, that's another$4,400 of tax credit, but it phases out. And essentially, those use and and again, if you make too much, it's not like that credit can be carried forward to used in a later date. Now, uh, the calculation for how you phase out the child tax credit, you're probably not gonna absorb this as I explain it, but essentially, what you would do if you had two children and you're married filing joint, you would it pretty much go away. Let's look here. Um, it gets phased out for uh every essentially the way that this works here is that each child um is a$44,000 cutoff for every child. So as you go from$400,000 to$444,000, you lose your first child tax credit. If you have two children, you gradually lose your child tax credit as you go from$400 to$488. Again, that's a$4,400 tax credit that you lose as you go from$400,000 to$488. Just like with the state and local tax deduction, you see this spike in your income. So when you go from$400 to$480,$488, not only do we increase your taxes by$88,000, let's say you're at a 30% tax bracket, right? That's$24,000. That's not actually, it's not like we're actually adding$24,000 more than$24,000, we're actually adding closer to$29,000. So whatever your income is with that marginal rate, plus the loss of the$4,400 tax credit. So understanding this and navigating you through this can make you'll say to yourself, wait a second, you know, I'm not that crazy about putting money into my IRA in 401k, but because I gotta take the money out, and eventually, when I take the money out, I pay taxes on it. That's not exciting. But wait a second, this actually gives me an additional tax credit of$4,400. And this actually gives me can get me into this other magical number that gives me the qualified by business income tax deduction of$80,000. Now this is starting to make sense. Maybe I do this, or maybe I put a little more into the strategy, maybe I put more into these renovations, maybe this is the time to invest into a little more of that oil and gas strategy. Or maybe we we put a little more investment into this charitable strategy. Actually, the charitable is not going to work for this because remember, it's an AGI reduction strategy, not taxable income. So there's lots of different ways where we can utilize this strategy. So to give you some more examples here, if you are married and you are making between five and six hundred thousand dollars, this is a no-brainer. If you have something that can reduce your adjusted gross income, be aware of this opportunity here. So for what what and the easiest quick fix to open up that use it or lose it, which would be an extra$15,000 of state and local taxes, assuming you live in a state that has state taxes, oil and gas. Now, obviously, you're taking on risk, no one's guaranteeing profit, but just think about how advantageous this is from a tax deduction. Where every write-off you get, every dollar you write off gets you a dollar thirty. And you don't need to materially participate if you don't have time to start a side business and do all these other things we talk about as strategies for W-2s. Oil and gas is simple. You can likely put in like sixty thousand dollars to bring your W your adjusted gross income down to$500,000, and that can unlock additional state and local tax deductions. How awesome is that? And you know, I can riff on oil and gas all day. I love it because when the money comes in, it's tax advantage, you're not paying payroll taxes on it, and you get a paper loss deduction, which is uh what we would call depletion deduction. And the depletion deduction makes it so that you're not even paying taxes on all the money that hits your bank account. Uh, another scenario you will you'll want to think about here is if you are, I mean, just look at the mix here, right? If we have escort profits or sole proprietorship profits, and we have the children, and we're paying a decent amount of state taxes, this is really powerful stuff. Now, this is also going to be applicable for a lot of you there who are using bonus depreciation strategies because it's not gonna hit your state taxes as much as it is the federal. So let's say you make$800,000 and you use a strategy most popular that we've ripped on is short-term rentals or real estate professional tax status to bring you down to drive down your taxes. Well, it's not gonna bring down your state taxes as much because states are unlikely to conform to bonus depreciation. So while it'll drive down your federal tax, it's not gonna drive your state taxes down nearly as much. So you may find that you're still paying lots of state taxes. So here is an even greater incentive to use these bonus depreciation strategies, maybe stack it on top of something else, maybe put a little more into your 401k or whatever it is you can do to get into that$500,000 AGI threshold, the income threshold, to unlock an additional state and local tax deduction. And when you put it all together, this can be a really powerful tool for timing the recognition of your income, being strategic with putting money in and out of the retirement accounts, and just utilizing and properly optimizing and knowing how much to put in to your stack of strategies. Now, if you feel a little overwhelmed, I totally understand. I know I just threw a lot at you here. But what's important to realize is if you make too little, there are tax saving opportunities such as a child tax credit, such as a standard deduction, itemized deduction, and the qualified business income tax deduction, where if you make too little, you're not going to be able to fully utilize it or utilize it all. And if you make too much, you're phased out, and the government is saying you're too rich to take it. So, what you need to do here is really work with a tax professional and be aware of these who is aware of these use it or lose it deductions. They can help you properly optimize and time and understand what strategies work for you, what strategies are gonna align with your goals and business incentives and objectives and risk tolerance to allow you to properly, and that's gonna allow them to collaborate with you to determine the optimal amounts to deploy into these strat this a strategy or collection of strategies to maximize the use it or lose it deductions. And at the end of the day, when this is properly implemented, you're gonna find yourself in a place where you look at your tax return and you look at how much you're paying in taxes compared to how much you earn, and you're gonna be really, really happy with the end results. Now, if you want to see how this can work out for you and how what other strategies may apply to you, and you want a free projection of how much you can save, I will deliver a custom opportunity report video breaking down what may be possible for you. If you want this, go to prosperalcpa.com slash opportunity report. It's prosper with an LCPA.com slash opportunity report. It'll take five minutes to complete a survey, and then we will use that information and leverage an interview with some notes to share with you what may be possible. Now we only have now if you're listening to this most recently, we don't have a lot of time, so you might want to hurry on this. So go to prosperalcpa.comslash opportunity report to learn more. Hope you enjoyed the conversation and stay tuned. We got more great stuff coming your way.