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I get a lot of questions from W-2 employees asking, “How can I save money on taxes?”
Many people know that business owners have a lot of flexibility to lower their tax bill, but what about W-2 workers? I’ll skip some of the more “obvious” strategies, like:
Here are some other ones you might want to think about:
Commuter benefits
Some companies offer pre-tax commuter benefits that can be used for transportation expenses such as transit passes or parking.
In simple terms, say you earn $1,000/mo. You pay ~$150 in taxes, leaving $850. From that $850, you spend $100 on monthly parking.
With commuter benefits, you would earn $1,000, subtract $100 pre-tax for parking, pay roughly $135 in taxes, and take home $765, compared to $750 in the prior example. Of course, the exact tax amounts will vary, but you got the idea.
In short, you save taxes on commuting expenses you would have paid anyway with after-tax dollars.
Mega Backdoor Roth
Some employers allow employees to contribute after-tax dollars to a 401(k) and then roll those funds into a Roth IRA or Roth 401(k). While you do not receive an immediate tax deduction, the growth is tax-free and qualified withdrawals are also tax-free.
High earners can potentially contribute $35,000+ per year to Roth accounts. For example:
The total of pre-tax, after-tax and employer match limits is $72,000 in 2026.
That $24,500 could also go into a Roth 401(k), but for high earners it is often better to prioritize pre-tax contributions.
If you are currently investing in a taxable brokerage account, check whether your plan allows a Mega Backdoor Roth. Compared to a brokerage account, it offers:
The primary drawback is reduced liquidity, which is important to analyze, especially if you are young.
NQDC
High earners may have access to a Nonqualified Deferred Compensation (NQDC) plan. This is a contractual agreement with your employer to defer a portion of your income until a future date (e.g. 5 or 10 years). These plans are typically offered to executives or highly compensated employees.
Deferred amounts can be invested, and taxes are paid upon withdrawal, similar to a pre-tax 401(k). The goal is tax rate arbitrage. For example, you defer income at a 37% marginal tax rate and withdraw it later at a 24% rate.
NQDC plans can be especially attractive if you expect to retire within the next 5 years, as future income is more predictable.
Unlike a 401(k), NQDC assets are subject to employer credit risk. If the company goes bankrupt, you could lose all your NQDC assets.. Company stability should be evaluated.
Tax Loss Harvesting
While not specific to W-2 employees, tax-loss harvesting is an easy way to generate up to a $3,000 annual deduction against ordinary income.
If the market declines and you have unrealized losses in stocks or ETFs, you can sell them to realize the loss and reinvest in a similar (but not identical!) security to avoid wash sale rules.
I discussed this one more in depth in my recent post.
Real Estate
If you earn less than $100,000 (modified adjusted gross income) you can claim a real estate loss deduction of up to $25,000 and apply it to your W-2 income. If you earn between $100,000 and $150,000, the maximum deduction of $25,000 is reduced proportionally.
This real estate loss is a paper loss generated by bonus depreciation and a cost segregation strategy.
If you want to bypass these income limits, your spouse could qualify for a “real estate professional” status. W-2 workers typically can’t qualify on their own due to the time requirements.
Or another approach could be to get into short-term rentals. Because short-term rentals aren’t “passive” by default, as long as you materially participate, you could generate some tax savings there.
Any questions? Comment below!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
It’s funny to hear you say “check whether your plan allows a Mega Backdoor Roth,” since its very name suggests it is a loophole not specifically authorized anywhere.
To me the following always seemed like a too good to be true loophole for W2 peeps. Those earning too much money to qualify for traditional or Roth IRAs, might be able to reduce their Adjusted Gross Income (AGI) with contributions to their defined contribution plans and Health Savings Accounts (HSA), making them eligible for IRA contributions.
For example, If you are a single filer earning $180,000, maxing out a Traditional 401(k) ($24,500) and a self-only HSA ($4,400) would drop your MAGI to $151,100. This puts you back into the “Full Contribution” range for a Roth IRA.
But then there’s always the backdoor Roth IRA, which makes sense as long as you don’t have (much) money in a traditional IRA.
Right. I did have some tax clients that did that.
Could you expand on the short term rentals tips? Context is we are considering converting a rental property to a short term rental property, now that a long term tenant has given notice. The property is fully depreciated, so a sale would generate a substantial capital gain.
Regarding the commuter benefits, there’s an issue of happiness due to financial simplicity.
My employer makes it easy to fund an account pretax and get reimbursed for commuting expenses, so I do it.
My wife’s employer not so much, so we don’t do it because the aggravation isn’t worth the savings.
Great list! Everyone with W-2 income should read it.