High Tax Bill? It’s Your Own Fault!

We recently discussed one of the situations that gets Poor Old Joe complaining about taxes, but it’s not the only one. I constantly hear high-earning pilots complain about their overall tax burden.

At my airline, those pilots constantly advocate for a variety of programs aimed at reducing that burden. Many want to return to an old style pension. (Thank goodness that’s not going to happen!) Others want a delayed compensation plan. Somewhat common in corporate America, this type of plan allows an employee to elect to receive current-year earnings a few years in the future…after they have retired and have no other active income. Others want annuities (yuck!) or a variety of other deals.

The problem with all of these ideas is that they depend on: 1) someone else setting up the plan for you, and 2) the US government approving that plan. If you are a fan of Pilot Math, I hope you’ve realized that neither of these strategies offers a recipe for success. If you want to reduce your tax bill, it’s up to you to take appropriate action. Thankfully, there are many ways to do it.

We won’t even attempt to cover all the ways to reduce your taxable income. Instead, we’ll focus on one specific type of investment. Thankfully, you can access these investments all on your own, without having to wait for Uncle Sam or your union to hook you up.

Once you realize how accessible these investments are, and how powerfully they can reduce your taxable income, you will never have any reason to complain about your taxable income again.

Pork Barrel Politics and the US Tax Code

News flash: the United States’ tax system is extremely unfair.

Many years ago, the US government had to be a lot more deliberate about taxes. When Uncle Sam finally sold Americans on an income tax, the idea was that it would only take from the rich to feed the poor. Robin Hood is always an easy sell.

Sadly, it didn’t stay that way for long. Over time, the tax code gradually expanded to the point where it would fill volumes of 3-ring binders. The tax burden spread to middle and even lower-class earners.

In the meantime, the rich were the only people with the money to hire lobbyists and connections to advocate for exemptions…loopholes in the tax code. Today, the richest people in our country pay the smallest percentage of their income in taxes.

Leave it to pork barrel politics to alleviate the tax burden for the rich while hanging the rest of the country out to dry. Although major airline pilots enjoy fantastic salaries, most of us have incomes that put us at the tippy-top of the highly-taxed middle class. Many of us pay tens of thousands of dollars a year in taxes, and it hurts!


While some people complain about pork barrel politics, the advocates for these loopholes do a great job justifying their exemptions. The tax breaks they enjoy allow them to build the business and infrastructure that you and I use every day.

Like it or not, tax breaks are a critical part of the US economy.

If you think that taxes exist to get money for the government, you’re (partially…maybe mostly) wrong. Taxes exist to incentivize specific behaviors.

The US government gives tax breaks to rich real estate investors so that they’ll tie up millions of dollars of their money in building houses for people like us to rent and buy. The government gives tax breaks to small business owners, knowing that 80% or more will fail, so that people like us can have restaurants to eat at, tradespeople to build and fix our houses, and entertainment venues to visit. Uncle Sam offers a $7,500 electric car tax credit so that American automakers will thrive, so that we’ll reduce our dependence on foreign oil, and to reduce pollution and the costly health problems that come with it.

I wrote that last paragraph as though pilots were nothing more than consumers. For poor schmucks like Poor Old Joe, this is absolutely the case. However, if you’re willing to put a little effort into education and networking, you can get on the other side of that equation. You can invest in the businesses getting all those sweet tax breaks, and profit from Poor Old Joe’s outrageous spending habits.

What? You haven’t heard about any investment opportunities with amazing tax benefits? Don’t be surprised; remember that many small business ventures fail. Uncle Sam tries to protect the average American from losing their life savings in risky investments. One way he does this is by limiting access to certain types of investments to people who are wealthy enough to lose. The Department of the Treasury refers to these people as Accredited Investors.

Are You an Accredited Investor?

Simply put, an accredited investor is a person (or couple) who meets either of these criteria:

  1. An individual or couple who has a net worth over $1,000,000…or
  2. An income of at least $200,000 per year (single) or $300,000 per year (married)

Most major airline pilots hit #2 pretty quickly. Heck, regional airline pay rates are so high right now that regional captains could realistically hit #2. If you apply the principles I outline in Pilot Math Treasure Bath an airline pilot can’t help but hit #1 in just a few years.

If you meet one (or both) of these criteria, the US government figures you can afford to invest in a slightly more risky venture. If you lose money, you’ll recover. If you make money, you’re just helping our economy run.

Since these investments are so restricted, they aren’t advertised nearly as well as regular stocks, bonds, and mutual funds. In fact, some of them fall under very strict rules that only allow you to find out about them by word of mouth.

The advantage is that if you can get into these investments, they can give you both a great overall return, and enormous tax deductions.

The Power Of Tax-Advantaged Investments

If you read the last post in this series, you saw how much effect tax deductions can have. Let’s consider an example here.

Let’s say you invest $100,000 with a company building low income housing. The US government can’t get enough of this housing, and a few years ago Congress passed a bill allowing builders to accelerate the depreciation of any houses they build.

Normally, the IRS assumes a house will last for about 39 years. So, if a builder puts up a bunch of houses, he or she could deduct 1/39th of the value of those houses from their taxable income each year. That’s not a terrible deal, but it’s a long time to recoup that part of your investment. Frequently, the government uses accelerated depreciation to incentivize pet projects. This means a builder might be able to take several (or even all 39) years of that depreciation as a single deduction in the first year after the home is built.

What a great deal, right? If the investor puts $15M into the project, they might be able to deduct that same $15M from their taxable income. For this example, $100K of that $15M is money you invested. If your effective tax bracket is 15%, being able to deduct $100K this year saves you $15K in taxes! That’s like getting a 15% investment return in the first year of your investment, plus any payments you get from rent paid by your tenants. Good luck getting that kind of return in the stock market this year!

The higher your marginal tax rate, the more money you save on each dollar invested. Most of these investments pay you rent, dividends, or royalties over time, plus return all of your original capital to you at the end of a specific term.

I know, this sounds too good to be true, but they aren’t. I don’t love pork barrel politics, but it’s hard to argue when it benefits me. Here are a couple investments I’ve been involved with myself:

Two Example Investments from My Life


Example #1 was presented to me by a Certified Financial Planner (CFP) who manages some of our family’s investments. We had plenty of stocks and bonds, and we had a high family income with an accordingly high tax bill. We asked our CFP to find us some alternative investments to continue making us money while reducing our tax burden.

Our guy, Tom, brought us an offer from the US Energy Corp, a company that mines for oil and gas in the US. Our country has an insatiable demand for fossil fuels. Setting up the equipment to mine a gas field in outrageously expensive. The only way a company can fund those startup costs is with the help of investors, like me.

USNRG offers investors a cut of the proceeds from every cubic meter of gas mined from an oil field when they invest. They hire very skilled geologists to identify those fields that will produce more than enough gas over their lifetime to offer investors (and the company) an excellent return on their investment. On it’s own, investing with USNRG was a good deal, but it got even better.

Since oil has national importance and USNRG is a big, powerful company, they hired lots of fancy lobbyists to get Congress to approve a tax loophole for their investors. For the deal Tom brought me, I would have been able to deduct 69-92% of the money I invested in the first year of my investment, and upwards of 15% per year every year after that. Over the course of the investment, I would have been able to deduct more than 100% of the amount of money I invested in the venture.

In the first year alone, this would have been worth $15-25K in tax savings thanks to these deductions. I’d also expect a significant percentage in royalties on gas sold per year. Over the course of the investment, I’d expect to more than double my capital investment, not even counting the tax advantages.

We ended up passing on this opportunity because we’re not thrilled with the environmental costs of this type of operation. We were finishing up military assignments in West Texas and knew too many private land owners who’d been screwed over by fracking companies who ruined their land and never paid as much as they promised.

If you’re bullish on petroleum production though, this type of opportunity is ripe for your investing.

Real Estate Syndication

I did recently invest in a real estate deal. Some Air Force friends knew that I’m interested in investing and approached me about a deal run by a friend of theirs.

Their friend had just left a big real estate firm to branch out on his own. He found an off-market deal for 3 different apartment complexes all owned by the same person. The owner had enjoyed many years of collecting rent from these apartments before passing away. The owner’s heirs didn’t want to deal with the business and chose to sell all three complexes in one package.

The heirs netted several million dollars, and the investors (including me) got a sweet deal. The main investor has a plan to refurbish all three complexes and group them under a single brand. Eventually, rents will rise (they’ve been well below market for years) and they’ll become more profitable than ever.

Thanks to the unique situation of this purchase, the property will be worth far more than its purchase price the moment it’s improved. We’ll collect a few years of rent before selling it off to a bigger institutional investor like BlackRock.

The deal gets even better though!

Although the investor could have chosen the long road of depreciation, which would have been passed on to us individual investors over the course of many years, they got to use some tax loopholes to accelerate depreciation.

It turns out that IRS rules allow certain parts of building improvements to be depreciated faster than others. A new roof might only last for 15 years. New tile might be good for 10 years, but new carpet is only good for a few years at most. There is a whole litany of depreciation schedules for individual parts of a piece of real estate.

By doing what’s called a “cost segregation study” the main investor will be able to deduct the value of most of the improvements they do right away. In fact, we expect to be able to deduct more than our initial investment in just the first year. Then we’ll get a nice dividend every year from rents collected. Then, when the main investor sells the company to BlackRock, we’ll get a share of the profits proportional to our initial investment. It’s likely to be quite a bit more money than we initially put in.

Big Picture Math

So, let’s say I’m trying to reduce my taxable income by $100,000 this year and I invest it in a similarly tax-advantaged bean farm.

Thanks to government incentives, I’ll be able to deduct more money than I invested ($107,000) from my taxable income in this year alone. That’ll reduce my tax bill by upwards of $25,000, and I still own a share in the bean farm worth $107,000.

Then, every year for the next five years, the farm owners will give me part of the profits they make from selling beans. Their goal is 8% per year, though it could be more or less. At that percentage, I’ll get $8,560 per year, for a total of $42,800 over five years.

Then, expecting the value of the farm to have increased by 20% over that time, the farmer will sell her fields to a big corporate farm. All of us investors will get our initial investment back, plus that 20% for a total of $128,400.

Over the course of the five years, I’ll have received:

$25,000 in tax savings
+ $42,800 in bean royalties
+ $128,400 from selling the appreciated farm, for a total of:

$196,200 on $100,000 invested. That’s a stellar 96% Return on Investment.

This investment accomplished at least three goals. It:

  1. Reduced my taxable income this year, and
  2. Provided an excellent investment return, and
  3. Provided me with a way to delay receiving some of my income, and space income out over time.

Item #3 there is especially attractive for senior airline pilots. As senior widebody captains, they make all kinds of money. However, when they hit age 65, their income will drop to zero. Poor Old Joe has to pay extremely high taxes on his income this year, then will have to immediately start drawing from retirements to fund his living expenses on the day he retires.

A more savvy pilot with this type of investment will have reduced their tax burden this year, and will have set up an income stream that kicks in when they retire, starting 5 years from now.

Yes, ideally a savvy investor will end up with a large chunk of money when this investment returns their capital, with appreciation, a few years from now. However, since you’re already a savvy investor you’ve no doubt identified a new bean field, or mineral deposit, or apartment complex with similar tax advantages to sink your money right back into. You’ll only have to pay taxes on any portion of that money you use to pay for your everyday living expenses (or do important things with like buy airplanes). However, you get 100% control over how much money you want to use for those purposes.

There is no need to wait on your company, your union, or the government to set up a delayed compensation plan, pension, or annuity for you. Investments like this are readily available. You can make them happen for yourself and fill up your own Treasure Bath without relying on anyone else.


Now, before you rush off looking for bean farmers let’s curb our enthusiasm a little bit. Remember, Uncle Sam restricts these types of opportunities to accredited investors because they’re more risky than boring old stocks and bonds.

It’s possible that a swarm of genetically-modified locusts could appear out of nowhere and eat all of my farm’s beans, eliminating my 8% targeted annual return for a year or more. Or, it could be flooding, war, or just Americans loosing their taste for taste for legumes. If any of these happens, it could reduce the overall value of my land in the long run, while eliminating my annual returns. I might get my tax deductions this year, but still lose money overall!

This leads us to a very important point:

This Investment Comes Last!

Despite my overwhelming optimism, I believe that most pilots should max-out their other tax-advantaged investing opportunities before pursuing riskier investments. (As always, this is only my opinion, NOT tax or investing advice. If you want advice, go pay a pro for it.)

This means that any given pilot should be maximizing contributions to their HSA, IRA, TSP, 401K, MBCBP, emergency savings, and any other tax-advantaged plan every year. You should only pursue fancier investments if you’ve hit the limits on all of those things and still have money left over.

Don’t worry, if you spend far less than you earn while investing the rest, as a major airline pilot you’ll be able to dive into the world of accredited investments before you know it. Be patient. Take care of the basics. You won’t be sorry.

Finding Tax Advantaged Investing Opportunities

If you’re like me, you’re probably still chomping at the bit to get into some of these fancy investments. I have no doubt that some of you already max out all of your other investments and meet my criteria for pursuing this new money making avenue. If so, you may find yourself frustrated at first that the opportunities aren’t just knocking on your door.

Sorry, but you’re going to have to put in at least a little effort.

Don’t worry, it’s not that much effort.

I got into my apartment complex deal through Networking. I’d flown combat missions with the guy who brought me in. I went to school with his wife, and she helped deliver one of our kids. We got access to that deal because of our pre-existing, long-standing relationship.

The most fundamental way to get into deals like this is to start mentioning your interest to people you already know. You’d be surprised at who already has something available. If they don’t, they may know someone who does. Don’t be afraid to ask your friends.

Are all your friends on the path to becoming clones of Old Joe? I guess it’s time to start adding new friends. You probably fly with a different airline pilot every trip. Bringing up personal finances can be a minefield, but you might be able to find ways to broach the subject safely.

If not that, start asking around at your kids’ school, at church, your gym, or at other organizations in town. Most cities have meetups for real estate investors. If you can’t find a meetup, hop on the BiggerPockets forums and ask around. I suspect you can find some venue frequented by like-minded investors.

Worst case, if you suck at networking so much that you can’t find anything, you could always do the rich airline pilot thing and buy a friend…in the form of a CFP. These people specialize in networking to find these types of deals, and since they get a cut of anything you invest, they’ll be happy to do some digging on your behalf.

No Excuses

The bottom line is that if you can’t find access to the types of investments that offer good returns while also reducing your tax burden, it’s your own damn fault.

I firmly believe that with most things in life it’s up to each of us to make our own stars align.

You do not need a union, an airline, or a government to coddle you into financial wellbeing. In fact, I assert that most of those organizations are so terrible with money that relying on them for your financial welfare would be ludicrous.

Next time Poor Old Joe starts whining about his tax burden you need to ask him if he’s pursued any accredited investing opportunities that allow large current-year tax deductions with the potential of good future returns. Ten bucks says he either gives you a blank stare, or starts whining about how that kind of thing has never fallen in his lap. (And that’s so unfair, just like the time the company stole his pension! But I digress….)

When this happens, text him a link to this article. It’s easy to rag on Old Joe, but the whole reason I write about this stuff is to help him rise above his issues, and prevent the rest of us from turning into him in the first place. If this short novel isn’t enough to get Old Joe started, I’d be glad to help point him in the right direction.

Taxes suck. We can convince ourselves we’re helping our country while reducing our tax bills and getting closer to financial independence…all at the same time. We have an amazing career, and it’s a wonderful time to be alive. Put your resources to good use, and enjoy flying while you do.

Thanks for reading.


(Feature image by Henry Becerra on Unsplash)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.