40 year old A and J makes 1M a year. What is the best investment to save on tax?
"There is nothing legal you can do in the United States to avoid the tax burden of income earned as an employee other than offsetting it with pre-tax contributions (which it sounds like you're already doing), making charitable contributions, or incurring investment losses (which is cutting off your nose to spite your face).  So that $660K can't be helped. As for the $80K in stock dividends, you could move those investments into ""growth"" companies rather than ""value"" companies.  Growth companies are those that pay less in dividends, where the primary increase in wealth occurs only in share price increase.  This puts off your tax bill until you finally sell your shares, and (depending on how the tax laws are at that time) your tax bill will be lower on those capital gains than they are currently on these dividends. Regarding rental income I know nothing, but I think you're entitled to depreciate your property's value over time and count that against the taxes you owe on the rents.  And you can deduct all the upkeep expenses.  As with employment income, intentionally incurring rental losses to lower your tax bill is not logical:  for every dollar you earn, you only have to give about 50 cents to the government, whereas for every dollar you lose, you've lost a dollar."
"A good question -- there are many good tactical points in other answers but I wanted to emphasize two strategic points to think about in your ""5-year plan"", both of which involve around diversification: Expense allocation: You have several potential expenses. Actually, expenses isn't the right word, it's more like ""applications"". Think of the money you have as a resource that you can ""pour"" (because money has liquidity!) into multiple ""buckets"" depending on time horizon and risk tolerance. An ultra-short-term cushion for extreme emergencies -- e.g.  things go really wrong -- this should be something you can access at a moment's notice from a bank account. For example, your car has been towed and they need cash. A short-term cushion for emergencies -- something bad happens and you need the money in a few days or weeks. (A CD ladder is good for this -- it pays better interest and you can get the money out quick with a minimal penalty.) A long-term savings cushion -- you might want to make a down payment on a house or a car, but you know it's some years off. For this, an investment account is good; there are quite a few index funds out there which have very low expenses and will get you a better return than CDs / savings account, with some risk tolerance. Retirement savings -- $1 now can be worth a huge amount of money to you in 40 years if you invest it wisely. Here's where the IRA (or 401K if you get a job) comes in. You need to put these in this order of priority. Put enough money in your short-term cushions to be 99% confident you have enough. Then with the remainder, put most of it in an investment account but some of it in a retirement account. The thing to realize is that you need to make the retirement account off-limits, so you don't want to put too much money there, but the earlier you can get started in a retirement account, the better. I'm 38, and I started both an investment and a retirement account at age 24. They're now to the point where I save more income, on average, from the returns in my investments, than I can save from my salary. But I wish I had started a few years earlier. Income: You need to come up with some idea of what your range of net income (after living expenses) is likely to be over the next five years, so that you can make decisions about your savings allocation. Are you in good health or bad? Are you single or do you have a family? Are you working towards law school or medical school, and need to borrow money? Are you planning on getting a job with a dependable salary, or do you plan on being self-employed, where there is more uncertainty in your income? These are all factors that will help you decide how important short-term and long term savings are to your 5-year plan. In short, there is no one place you should put your money. But be smart about it and you'll give yourself a good head start in your personal finances. Good luck!" "You may be considered a resident for tax purposes. To meet the substantial presence test, you must have been physically present in the United States on at least: 31 days during the current year, and       183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count:           All of the days you were present in the current year, and           One-third of the days you were present in the first year before the current year, and           One-sixth of the days you were present in the second year before the current year. If you are exempt, I'd check that ending your residence in Germany doesn't violate terms of the visa, in which case you'd lose your exempt status. If you are certain that you can maintain your exempt status, then the income would definitively not be taxed by the US as it is not effectively connected income: You are considered to be engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant on an ""F,"" ""J,"" ""M,"" or ""Q"" visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in ""F,"" ""J,"" ""M,"" or ""Q"" status is treated as effectively connected with a trade or business in the United States. and your scholarship is sourced from outside the US: Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. I would look into this from a German perspective. If they have a rule similiar to the US for scholarships, then you will still be counted as a resident there." The PPF and NSC can broadly be compared as below; PPF is public provident scheme with initial period of 15 years and can be extended by 5 yrs blocks. There is a minimum investment of Rs 500 every year and a maximum of Rs 1,50,000 per year for 2014-15 financial year. The gains from PPF are also exempt from any and all capital gains tax. NSC is like fixed deposits for a period of 6 years. They can be purchased from Post office in multiples of Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000 & Rs. 10,000. There is no maximum limit of purchase, however tax rebate is only to the extent of Rs 1,50,000 on 2014-15 financial year.  Interest Rate: Both currently offer 8.75% interest rate. Incase of PPF the interest rate is declared every year and is applicable to the entire invested corpus. In case of NSC, the interest is fixed for the tenure of the investment, changes in interest are applicable for next investments. The interest is compounded   Account Operation:   Withdrawals: In PPF the first withdrawal is possible in the 7 years, for 50% balance of the 4th year and like wise for subsequent years. In NSC there is no premature withdrawal, however one can get loan from Banks by Hypothecation of the certificates.   Tax Benefits: Both PPF and NSC enjoy tax benefits under 80C. However the PPF follows what is called an EEE regime, under which the Investment is exempt from tax, the interest accrued is exempt from tax and the withdrawal is also exempt from tax. The NSC however only the investment is exempt from tax, the interest earned has to be shown as income and would be treated as invested. On withdrawal, the interest would be taxed accordingly. The best benefit of PPF account cannot be attached by court of law in case one comes under financial liability. IE the money in the PPF account can only be used by you. Hence it would make more sense to invest in PPF "**[Corporate taxes suffocate growth](http://mises.org/daily/3024)**  Mises Daily: Wednesday, July 09, 2008 by Sterling T. Terrell  ........  Lower corporate taxes are associated with economic growth. This can be shown a priori and empirically.  A Priori  Corporate taxes reduce the profits of business owners. This is true because net income is reduced by the tax rate. For example, Firm X, with a $100 investment, earning a 7% return has an income — before taxes — of $7. With a 10% corporate tax rate, net income — after taxes — is $6.30. Firm X now has earned a 6.3% return. In contrast, a corporate tax rate of 40% reduces net income after taxes by $2.80 to $4.20, or a 4.2% after-tax return. **This rise in taxes, on the margin, reduces the profit-seeking incentive to take business risks. Why risk starting a biotech company when inflation-protected T-bill's will give you the same return? Entrepreneurs and venture capitalists less willing to take risk means less innovation and fewer innovative ideas being economically viable. This results in less economic growth. Conversely, higher returns on invested capital encourage investment and savings. All of this leads to more capital savings, more innovation, better technology, and higher wages.**  Further, the above example of Firm X is true if the firm does not have the pricing ability to transfer the tax to its customers. If the ability does exist, an increase in the corporate tax rate is really a tax on customers of the firm. In this case, consumers now have less to spend and save and the end result is the same.  Finally, a firm unable to pass on a tax increase or bear the reduced profit will either attempt to cut costs by reducing wages (among other costs) or be forced to go out of business.  **The main point is this: by definition, corporations do not pay taxes — people pay taxes. A corporate tax is either a tax on shareholders of the firm, customers of the firm, or employees of the firm. Less corporate tax means more innovation, capital savings, and spending by these groups — also known as economic growth.**  **Empirically**  After theory and logic tell us what is true, empiricism can confirm our result.  Thankfully, Professors Young Lee (Hanyang University) and Rodger Gordon (UC — San Diego) have done the work for us. In a 2005 journal article they concluded,  ""This paper finds that the corporate tax rate is significantly negatively correlated with economic growth in a cross-section data set of 70 countries during 1970–1997, controlling for many other determinants/covariates of economic growth.""  More specifically, they continue, ""The estimates suggest that cutting the corporate tax rate by 10 percentage points can increase the annual growth rate by around 1.1%.""[3]  Using these figures, Andrew Chamberlain of the Tax Foundation opines,  **""by cutting the U.S.'s combined federal and average state corporate tax rate from roughly 40 percent to 30 percent we could boost U.S. economic growth by around 1.1 percent per year — enough to double our nation's wealth every 63 years.[4]""**  **Even better, a cut from the actual corporate tax rate of 35% to a rate of 10% would double our nation's wealth every 30 years.**  **Life Savers moved production to Canada. Nabor Industries and Tyco International moved to Bermuda. Halliburton has announced a move to Dubai. In a globalizing economy, is it really a puzzle that firms prefer to operate in lower-taxing, less-regulated environments?**  These are examples of what can be seen. As Frédéric Bastiat reminds us, however, it is imperative to also account for what cannot be seen. What would the wealth of our nation be today if the corporate tax rate had always been 10% or less? What creature comforts would have been innovated? What new technologies brought to market? What diseases cured?  Due to a history of high corporate taxes these answers are not known, and we are worse off because of it.  Sterling T. Terrell is a Ph.D. candidate in the department of agricultural and applied economics at Texas Tech University." The math works out so that the 401k is still a better deal in the long term over a taxable account because of the tax-deferred growth. Let's assume you invest in an S&P 500 index fund in either a taxable investment account or a 401k and the difference in fees is .5%. I used an online calculator and a hypothetical 1k/year investment over 30 years with 4.5% tax-deferred growth vs 5% taxable and a 25% tax bracket. After 30 years the tax-deferred 401k account will have $67k and the taxable account will have $58k. The math isn't perfect -- I'm sure I'm missing some intricacies with dividends/capital gains distributions and that you'll then pay income tax on the 401k upon retirement as you drawn down, but it still seems pretty clear that the 401k will win in the long run, especially if you invest more than the 1k/year used in my example. But yeah, .84% expenses on an index fund is robbery. Can you bring that to the attention of the HR department? Maybe they'll want to look for a lower-fee provider and it's in their best interest too, if they also participate. So a interesting note is that this doesn't seem to take into account cost of living arbitrage OR investments. The reason it's so good to make that money isn't so you can spend it on sports cars and cheap (read: expensive) women. If you invest you can put away like 50k/year, which will probably net you at least 5% return per year (more if you're risky) . So you make 100k for like 5 years, put away 250k and get like 20k from doing nothing. "Exactly. I'll ""retire"" from teaching in two years and will be given the chance to take half of my retirement in one lump sum payment and take home $1,000 a month, or take nothing and bring home 2,000 a month. The other thing to remember is the 30% tax payment that next April. That's tough.   This looks like a no-brainer because in just seven years, I'd eclipse the cash out. However, I might do it because I'll take the money and possibly pay off a rental home. With a rental, I'll be able to raise the rent if inflation kicks in. Of course, if deflation continues, that might be a bad move. The thing is, I'll be able to decide." "I'll add 2 observations regarding current answers.  Jack nailed it - a 401(k) match beats all. But choose the right flavor account.  You are currently in the 15% bracket (i.e. your marginal tax rate, the rate paid on the last taxed $100, and next taxed $100.) You should focus on Roth. Roth 401(k) (and if any company match, that goes into a traditional pretax 401(k). But if they permit conversions to the Roth side, do it) You have a long time before retirement to earn your way into the next tax bracket, 25%. As your income rises, use the deductible IRA/ 401(k) to take out money pretax that would otherwise be taxed at 25%.  One day, you'll be so far into the 25% bracket, you'll benefit by 100%   traditional. But why waste the opportunity to deposit to Roth money   that's taxed at just 15%? To clarify the above, this is the single rate table for 2015:  For this discussion, I am talking taxable income, the line on the tax return designating this number. If that line is $37,450 or less, you are in the 15% bracket and I recommend Roth. Say it's $40,000. In hindsight on should put $2,550 in a pretax account (Traditional 401(k) or IRA) to bring it down to the $37,450. In other words, try to keep the 15% bracket full, but not push into 25%.  Last, after enough raises, say you at $60,000 taxable. That, to me is ""far into the 25% bracket."" $20,000 or 1/3 of income into the 401(k) and IRA and you're still in the 25% bracket. One can plan to a point, and then use the IRA flavors to get it dead on in April of the following year.  To Ben's point regarding paying off the Student Loan faster - A $33K income for a single person, about to have the new expense of rent, is not a huge income. I'll concede that there's a sleep factor, the long tern benefit of being debt free, and won't argue the long term market return vs the rate on the loan. But here we have the probability that OP is not investing at all. It may take $2000/yr to his 401(k) capture the match (my 401 had a dollar for dollar match up to first 6% of income). This $45K, after killing the card, may be his only source for the extra money to replace what he deposits to his 401(k). And also serve as his emergency fund along the way."