EP 134 - California W-2 & RSU Taxes Explained - Why High Earners Pay 50% & What to do

We unpack why California’s tax system punishes high W‑2 earners with RSUs, then map out a stack of strategies that convert stock-based pain into lasting tax savings. We share how to use charitable deductions, credits, and timing to push your effective rate down.

• RSUs as taxable income and cash flow squeeze
• California marginal brackets and 13.3 percent top rate
• Nonconformity on real estate professional status and bonus depreciation
• Excess business loss limits against W‑2 wages
• The SALT “sweet spot” between $600k and $500k income
• Advanced charitable structures offsetting 30–60 percent of AGI
• Solar and other tax credit strategies to reduce federal liability
• Withholding adjustments to fund strategies mid‑year
• Selling RSUs and pairing gains with losses for liquidity
• Why ongoing planning with a strategist compounds savings

Go to prosperlcpa.com/opportunityreport  for a free customized video from me showing how much you can save 

Transcript

Why High W‑2s Hurt In California

SPEAKER_00 0:00

If you're a high W-2 in California, you're likely finding that you're paying way too much in state taxes and probably federal taxes as well. Here now, this episode is going to be dedicated to those of you with high W-2s, and in particular, those of you with RSUs in California paying loads of money in state taxes. We're going to dive into why this is so challenging for you? What are the obstacles that we face? And how do we overcome these obstacles to win the tax game and create permanent tax savings and wealth creation with advanced tax reduction planning? So if you're a high W-2 in California and you're paying tons of money taxes, and even on money that you haven't even received yet because they're RSUs, pay close attention because this stuff could potentially save you a fortune. Now, if you're a high income earner or W-2, you're likely to find a lot of these concepts relevant as well. So let's go into the challenges we face as California residents. Now we have tons and tons of clients who come to us working at tech companies in California, and they're just paying crazy amounts of taxes as high as 50% on their income. And a lot of the times, these are tech workers or workers at big corporations, and they're being paid in the form of RSUs. And the thing that we like about RSUs is it's great to have that stock, sure, but you're going to be paid taxes on the value of the RSUs. And when you have an RSU, which stands for reserve stock unit, the company is paying you in the form of stocks. So let's say they're paying you $100,000 of stocks. Well, you're going to pay taxes on $100,000 of income. And that tax is going to come out of your W-2. It's going to be taken out of your paycheck to cover the bill. But you're not making any more money. So let's say you make $500,000 and $100,000 of that is RSUs. Well, you're paying taxes on all that income from the RSUs that's coming out of your paycheck, but you're not making any more cash to afford that extra taxes. So you're getting very little of your take home. Another challenge here is the California tax brackets. And it's one of the most unique things in California. You don't really see as much of a robust system of taxing its residences in California. Most states have a flat tax, and some states like California and Texas have no income tax. California is way different. It has a marginal tax bracket.

RSUs Explained And Cash Flow Squeeze

SPEAKER_00 2:47

It starts as low as 1% and then 2% and then 4%. Looking at the marginal rates here, if you're married filing joint, here's where it gets really, really pr problematic. When you're making over $141,000, that income is taxed at 9.3%, which is pretty heavy. Then when you're making over $721,000, it's 10.3%. Then once you're making over $1.4 million, any income over that threshold is going to be taxed at 12.3%. And any income over a million, you're also going to pay what's called a mental health tax. That's an additional 1% tax. So for some of you, making high incomes, that means you're paying 13.3% taxes on your income. That doesn't include that you're paying high property taxes and you're likely paying 37% taxes at the federal level. So just on the income tax alone, if you're paying 37% of your income to the federal government and then another 13.3% to California, we're talking about more than 50% of your income going to the government at certain thresholds. That's gotta be so painful. And the thing about California that makes it hard is you have to make a lot of money in California to live because such it is such an expensive state. So it can be really tricky for you guys. Now here's some other challenges we have with California. So you need you need to make more money just to live in California and to afford your property taxes and everything else. California makes it harder for you to benefit from other tax incentives. The real estate professional tax status, which I talk about all the time, which is an amazing strategy, and I'm not saying you shouldn't use it if you live

California Brackets And 13.3 Percent Bite

SPEAKER_00 4:40

in California, but the real estate professional tax status doesn't conform in California. What I mean by that is if you are looking to invest in real estate to reduce your taxes, and you often this is done by having your spouse work full-time in real estate, that works in just about every other state I know. It'll offset your federal taxes. It also creates deductions against your state taxes. California does not recognize this real estate professional tax status, meaning you're not going to be able to use these losses from your real estate to offset your state taxes in California. It'll only create savings at the federal level. Another challenge here, and this is with most states, is that California will not conform to bonus depreciation. So you may find that you're you can write off if you're trying to create write-offs like trucks or heavy equipment, it'll you'll write off all of it now in 2026 and 2025, write off the whole asset, but you're gonna write it over time, write off over time in California, you're not gonna see the immediate benefit of that tax deduction. Now, the population of California generally makes a lot of money, a lot more money than the rest of the country simply because they need it. So it's you have it's almost like you have a different currency standard, and you're gonna need more write-offs. Well, there's something called the excess business loss limitation. So if you're trying to use real estate professional tax status or short-term rentals or any other business loss strategy to offset those high W-2s, you're gonna find some roadblocks because there's the excess business loss limitation that limits how much of a deduction you can create against your W-2s. Now, if you're married filing joint, that amount was $630 in 25. Now it's dropping to $512,000. $512,000 is the maximum amount of tax write-offs you can of business tax write-offs that you can create against your W-2. So if you're using real estate uh to reduce your taxes, is gonna if you if you're using long-term rentals with real estate professional tax status, it's only gonna offset the federal, not even in the state, and you're capped at 512. And then if you're using short-term rentals, you're only gonna offset you can create a deduction against your state taxes, but you're still capped at that 512 deduction. And we know that as a California resident, you need more than that. Many of you listening, and many of our clients are making as much as 1 million, 2 million, 5 million dollars when you factor in all the pay they're making and those RSUs. So here let's talk about. So now that we know how tricky it is, let's talk about solutions and pay close attention because there are solutions. There is an answer, okay? And it's a different answer for all of you, for each of you. It can be very personalized, but here are some of the things that we are considering with our clients.

State Nonconformity And Loss Limits

SPEAKER_00 7:36

And we have many of them paying high taxes because of their high W-2s. Typically, we're seeing them as 750 and up. We have lots of clients in the seven figures. Um, but this is what we're doing here for those of you, and uh we so one of the things we can do here is if we can't eliminate the California tax, let's see if we can at least use the California tax as a deduction. So there's something that we call the salty sweet spot as among us tax planners, where they just allowed you to create a tax write-off uh of more than $10,000 of state taxes against federal. And this is another reason why California is so rough. So those taxes, you can only write off $10,000 maximum of state taxes against federal. That's not very exciting. So you um, but if your income is below half a million dollars, you can create an additional $30,000 of state and local tax deductions against your federal taxes, and that amount phases out at $600,000. So if we're doing strategies that create business losses, such as oil and gas, such as real estate, such as maybe equipment rentals or things of that nature, where we have some sort of business, create a business or an investment that creates a business loss that hits our 1040. If we can get you down to that sweet spot, that that beautiful $500,000 of income, then we open up an additional $30,000 of state and local tax deduction. So every dollar you deduct between $600,000 and $500,000 is actually a dollar and 30 cent deduction. That's really exciting. Now, some of you won't be able to even get that low because of the excess business loss limitation, but that's okay. We got you covered. There's other things that you can do here to optimize your situation and still create significant savings here in spite of these high California taxes. What you want to do here is you want to look at the stack you so a lot of our California clients don't stop with these foundational strategies that you may see promoted. They're not just doing short-term rentals, they're not just doing some of the searchable basic things you see online, they're doing more sophisticated and more advanced strategies, and they're layering them on top of each other, and then we're taking them further as we continue to work with our clients year after year. So, one of the most common things that I like to do to mitigate your California taxes is through advanced charitable deduction strategies. And there are several ways we can do this. We can create charitable deductions to offset anywhere from 30 to 60 percent of your income. And oftentimes, the costs to create the charitable deduction is less than the savings, and the charitable deduction will offset both your federal and your California taxes. We're not worrying about that bonus phase outs and the excess business loss limitations. Our limits are going to be based on a percentage of your adjusted gross income, which is often going to give you a higher deduction than the business losses we can create from the oil and gas and the real estate deductions and all the other things we do. So, in many instances here, we can invest in real estate that creates

The SALT “Sweet Spot” Opportunity

SPEAKER_00 10:58

a terrible deduction that can offset up to 50% of your California and federal taxes. There are also other ways where we can time the payment of a charitable deduction and get a deduction up front to offset up to 30% of your taxes. There are estate planning strategies that can offset up to 30% of your income as well. And all these things are gonna really deliver a powerful punch when we consider the fact that we're chipping away not only an income tax at 37%, but also an income tax at as high as 13.3%. So really powerful stuff here. Another thing that we layer in is tax credit strategies. So we are able to invest and rent out solar panels that give you access to tax credits in addition to the business losses, and this is very popular for our high W 2 folks. So in this instance, we can eliminate even more of your federal taxes. So instead of worrying about that cap of the 520 deduction, we'll hit that cap, we'll get all the business write-offs, but we'll also bring in some tax credits along the way to offset just under 75% of our clients' federal taxes in the current year is what we typically find. Um, as far as how much we can really take, it's 75% of the federal taxes in excess of $25,000 for those of you who are high incomers on the federal side. And the losses will also offset your your California taxes. So we're layering these in tax credits, investments that create charitable deductions and business losses, and looking at the collection of these concepts to drive down your taxes as much as you can. Now, a lot of these things do uh obviously require cash outlay. And because you're getting all these RSUs and you're getting paid in all in all this stock, you don't even have cash hidden in your bank account. You're wondering how am I going to do this? Well, there's a few things that we do here. One of the things we will do is once we know what strategy best aligns with your goals and investment opportunities and liquidity needs and risk tolerance. Once we get in the rhythm of things, we will adjust

Layering Advanced Strategies

SPEAKER_00 13:20

your withholdings to account for the savings what we'll create. So now you have the cash to invest into the vehicles that will create the tax savings. You're not you're not restrained by lack of capital. So if you need $100,000 to save $150, we can we can reduce the money that comes out of your paycheck to the government, we can give you more of your paycheck back, and you can now put it into the vehicles that will give you the tax savings. And also, not only can we afford the tax reduction strategies, we don't have to wait until the following year for the tax return to be processed and the IRS to give us our refund to see the benefits of all this activity that we're doing. And then another opportunity that we can consider to give you the liquidity that you need is just selling the RSUs. You say, This is great, I appreciate that you're giving me this stock, but I really need the cash right now so I can invest into my future and there's better things I can do. I while I love the idea of taking part in the appreciated value of a stock, I'm gonna see a greater ROI by investing into these tax strategies that create immediate tax savings. Where for you may even find for every dollar invested into a certain vehicle, you'll save two dollars in taxes. No stock is ever gonna really give you that besides the fact capital gains is taxed, tax savings is long-term permanent wealth creation. So you can sell the RSUs. Now you may when you if you get an RSU value at $100,000 and you sell it for $100,000, there's no taxes. You've already paid taxes on the receiving on when upon receiving the RSUs, the reserve stock units in your company. Now,

Charitable Deduction Structures

SPEAKER_00 15:07

if you have found that some of these RSUs have increased in value, there may be cap gains back taxes, but you also may find that some of the RSUs recently received have reduced in value, and you can sell those to offset the capital gains. So you can net them together. And there's always capital gains tax planning opportunities. There's a world of things we can do to mitigate your capital gains here. So what's really important for you as a California resident getting hit in the head with taxes because you need to make more money, but you're just you're paying more taxes on that money, and then you have all these RCUs, you really need to be strategic and you got to take your tax planning to the next level. Just doing your online research and seeing what you can find in some even my stuff in the YouTube is not going to be adequate. You need a close relationship with the tax strategist. Now, if you want to feel for just what may be past and possible for you, especially if you're a high incomer, and by high incomer in this instance, I mean $750 and up. Ideally, you know, well, I wouldn't say ideally, but we have lots of clients doing multi-millions in California with these RSUs and major tax burdens. But if you if you're in that situation, you're gonna find that your investment into a tax plan is gonna produce the highest ROI of anything out there, more than any stock or real estate, because of the immediate and the predictable return and the tax advantage nature by which you receive it. So if you're interested in learning more on how this may apply to you, I will personally send you a video, as I always do. Just go to prosperoca.com slash opportunity report. Okay, that's prospero with an LCPA.com slash opportunity report. You'll answer a few quick questions and you'll we'll review what you got, and then I will be able to personally provide for you an opportunity report, explain to you what might be possible if we start being a little more strategic to help you drive down your tax. All right, I hope this was valuable to those of you in California paying lots in taxes, and to anybody else who has

Tax Credits And Solar Investments

SPEAKER_00 17:20

a high W-2 and needs to think about some more advanced solutions to drive down their tax bill. All right, stay tuned. I got more great stuff coming your way to help you out in protecting yourself from overtaxation. Happy taxes and have a wonderful day.