Upper Middle Class After Almost Failing College

[hwereson]

32M, Living in Houston for a couple of years now. ChemEng working in industry (not O&G).

I created a budget when I first started working just to make sure I stayed within my boundaries, but as I increased my income over the years, I stopped tracking individual items. This is the first year I broke down my budget like this. And I used Fidelity's FullView tool, which is already linked to my 401k, so it gave me a good breakdown of all my spending habits and made this breakdown a lot easier to do.

I think this year I finally kind of relaxed a little on my spending and spent more to increase my lifestyle (getting food delivered, a little more lavish vacations, etc).

Bought my house in 2022 right when interest rates started to rise, ~3% rates. ~$350k for 3bed3.5bath 1650sq ft.

I was unemployed for a full year after college because I almost failed out and had a terrible GPA (2.6ish). Very luckily got hired by a very small engineering consulting firm (

 

[danieldf]

@hwereson Nice man, we’re pretty similar, I think I’m just in a much more LCOL area. Just grinding it out. I’m 33, started at like maybe 30-40k? Somewhere in there after college. Up to 120k now.

I was also actually expelled from college due to issues with alcohol. Took a year to refocus, reapplied to a new school, started over.

Just gotta keep climbing up man. Best of luck!

 

[hwereson]

@danieldf Good job man, it's really impressive when I look back at it to see where I am now. I still kick myself for not doing what I should have done back then but it all worked out.

 

[resjudicata]

@hwereson It's CRAZY to me the difference between how much you pay in taxes being self employed vs w2 and using some of the tax loopholes.

 

[gergely]

@resjudicata It's not "tax loopholes". The government uses tax benefits to incentivize the things that it wants.

• Why do you get to deduct mortgage interest from your taxes? Because the government wants people to buy homes.
• Why are their tax benefits with marriage? Because the government wants people to get married.
• Why are their tax benefits to being self-employed? Because when you're self employed, you're essentially running a business. And the government wants people to create businesses.

 

[godisnotreal6969]

@gergely

Why are their tax benefits with marriage? Because the government wants people to get married.

That's actually a pretty new thing. Until 2017 most couples paid more taxes if they filed together and high earners still do.

 

[resjudicata]

@gergely True. But still loopholes.

 

[dahveed]

@resjudicata But they’re not loopholes, they’re incentives, thats the point

 

[resjudicata]

@dahveed What is the "incentive" for cost segregations to accelerate depreciation? Thats one of the best loopholes there is. I think you are arguing semantics. Maybe its an incentive to you, but for me its a loophole. I structure our finances specifically around the best tax benefits because they are loopholes to me, and benefits I would not have received had I not found out about them and structured things in a way to take advantage of them.

Its the reason I buy a new property every year. Instead of paying the IRS I just buy another asset and deduct the costs and depreciation. Incentive AND loophole.

 

[amo2]

@resjudicata Tax loopholes? Please elaborate. As a W2 employee I pay less than 1099, but not sure what tax loopholes exist with mostly salary compensation.

 

[resjudicata]

@amo2 There's a bunch. But being self employed allows you to deduct business expenses before taking out taxes. You pay taxes on what's left vs W2 pay taxes and then their bills. Examples for be would be deductions for a home office, car expenses, phone, internet, mileage, etc. Buying a business use vehicle for example allows you to depreciate the vehicle's use.

Second would be buying real estate. If you invest your money into a rental property you can accelerate depreciation on it through a cost segregation.

Then there's the regular deductions: IRA, HSA, 401K. Using all of those can drastically reduce your income on paper. All completely legal and available to everyone. It's just knowing where to put your money.

 

[amo2]

@resjudicata Those aren’t really “loopholes,” they’re deductions that are clearly outlined in the tax code.

Not trying to be semantic, was just trying make sure I was missing something obvious. I wouldn’t call deducting business expenses a tax loophole (especially if you have to pay increased self employment taxes anyway), nor would I consider mortgage interest/depreciation a “loophole” as much as it is an intentional government subsidy.

I guess my question was really not about taking your normal deductions like traditional 401ks or itemizing business expenses, but more towards things like Backdoor Roth conversions.

 

[resjudicata]

@amo2 It's a loophole if you strategize on how to apply them. Knowing the rules helps you turn them into a loophole. For example, my wife runs a home based business. That's done intentionally in order to get additional write offs. Obviously she makes money too.

That's also a business that only takes a few hours a week. We learned the "loophole" about being a real estate professional and writing off real estate losses against other income. Well she's not a realtor. But to qualify you need to have real estate be more than 50% of your work and spend at least 750hrs over the course of the year. So she now manages our contractors, buys supplies, helps with landscaping and renovations. We track her time spent. And viola...now we were able to do a cost segregation on a property last year and take $200k of income down to $80k (along with the other deductions).

None of that is technically a loophole... until you restructure your life and finances so that you can take advantage of it.

 

[godisnotreal6969]

@resjudicata

take $200k of income down to $80k

...by subtracting a 120k real estate loss. I'm not seeing a loophole, I'm just seeing a silly bit of overregulation forcing you to jump through hoops to properly claim a loss against income.

 

[resjudicata]

@godisnotreal6969 I won't argue that. Although that's why accelerating depreciation is one of the best tax advantages. There's only a loss on paper. The property actually made a pretty strong profit

 

[cypress88]

@resjudicata How many times are you going to say, "loophole," then have people cite (rightfully so) that it's not a "loophole," but simply the tax code?

You don't know what a loophole is.

 

[resjudicata]

@cypress88 Yeah I guess the books I read like Tax Loopholes in Real Estate and Tax Strategies for the Savvy real estate pro, which talks extensively about loopholes, also just don't understand.

Even when I googles tax loopholes I got this weird explanation: Tax loopholes are provisions in the tax code that allow taxpayers to lower their tax liability. You should follow your own advice based on your user name.

But you're probably right.

 

[cypress88]

@resjudicata Taking advantage of the tax code, to lower your tax liability, is not a loophole. Stop watching CNN or Fox News and get your head out of your rear end.

Tax code is tax code. If you are honest and follow the tax code, you can lower your tax burden.

By your definition, anyone who has a child and receives the $2000 child tax credit is taking advantage of a "loophole."

 

[resjudicata]

@cypress88 Don't get mad at me, get mad at Google and then change your name

 

[cypress88]

@resjudicata Is that all you've got? Do you think you're the first one to disagree with me, be wrong, and then just try to mock my name? You don't deserve the benefits of the tax code if this is your outlook in life. Go be a peasant and pay normal taxes like everyone else.