Nine Tax Optimization Strategies That Are Legally Sound and Actually Work

Preston Seo has built a reputation as a trusted financial educator through his popular podcast The Legacy Investing Show, and his approach to tax planning centers on one key principle: working within the legal tax code rather than around it. After initially owing over $30,000 in taxes on top of his regular withholdings, Seo discovered how to legally structure his income to significantly reduce his tax burden. “Now my tax bill looks completely different — not because I make less, I actually make more — but because I learned how to legally use the system the way that it was written,” he explained in a recent financial overview. The strategies he uses are all IRS-approved tactics available to anyone willing to implement them correctly. Here are nine legitimate tax-reduction approaches that accountants and tax professionals recognize as sound financial planning.

1. Health Savings Accounts: The Hidden Retirement Asset

If you have a high-deductible health plan, you qualify for a Health Savings Account (HSA), and this account operates as one of the most powerful tax-advantaged tools available. The mechanics are straightforward: contributions reduce your taxable income, the account grows tax-free, and qualified medical withdrawals incur no tax liability. The key strategy many financial professionals employ is maximizing contributions annually while paying medical expenses out-of-pocket and keeping detailed receipts. This allows the HSA to compound untouched for decades.

“I pay those out-of-pocket and keep the receipts,” Seo noted. “That lets my HSA compound untouched, and years from now, I’ll be able to reimburse myself, tax-free, with decades of growth on top. It’s like a hidden retirement account, only better.” This approach is completely legal and aligns with IRS regulations for qualified medical expenses.

2. Backdoor Roth Contributions for High-Income Earners

The Backdoor Roth IRA represents a legitimate strategy for high-income earners who exceed direct contribution limits. For 2025, single filers with income above $150,000 and joint filers earning more than $236,000 cannot make full direct Roth contributions under IRS rules. However, this strategy allows them to contribute to a Traditional IRA and then convert it to a Roth IRA, enabling tax-free growth.

The implementation is straightforward: contribute to a Traditional IRA, execute the conversion to Roth status, and watch the funds grow without tax liability. “Every single year, I max out my IRA contributions, convert them, and now I have money growing completely tax-free,” Seo shared. This conversion strategy is explicitly recognized by the IRS and used by millions of taxpayers annually.

3. Solo 401(k) Plans for Self-Employed Professionals

Self-employed individuals and business owners without full-time employees can establish a Solo 401(k) retirement plan. This applies to freelancers with consulting income, Airbnb hosts, online sellers, or anyone running a side business. The contribution limits are significantly higher than traditional IRAs, allowing business owners to shelter more income from taxation while building retirement savings.

Seo utilizes this structure through one of his business entities: “I use mine through one of my LLCs, and it’s a great way to reduce tax on side income while also building wealth.” Solo 401(k) plans are fully compliant with IRS regulations and provide legitimate income-sheltering opportunities for qualifying self-employed professionals.

4. S Corporation Election: Reducing Self-Employment Tax Obligations

For LLCs generating $50,000 or more in annual profit, electing S Corporation tax status can produce substantial tax savings. When you operate as an S Corp, you can pay yourself a reasonable salary and take remaining profits as distributions—and crucially, distributions are not subject to self-employment tax. This distinction can represent significant annual savings.

Seo implemented this strategy once his business crossed the profitability threshold: “The first year alone, that saved me nearly $20,000 in taxes,” he reported. This approach requires coordination with a tax professional to ensure salary levels are reasonable and compliant with IRS guidelines, but it’s a widely-recognized tax optimization strategy.

5. Home Office Deduction for Business Owners

If you operate a business from home and maintain a dedicated workspace, you can deduct the proportional costs of your housing, including mortgage or rent, utilities, and home repairs. This requires exclusive business use of that space and proper documentation including photographs and floor plans.

For example, a 300-square-foot dedicated office in a typical home might represent roughly 6% of total square footage, allowing annual deductions exceeding $7,000 in housing-related expenses. Seo maintains this documentation carefully: “I just keep the documentation, like photos and floor plans, in case I ever get asked.” The IRS recognizes this deduction for qualifying self-employed individuals and business owners.

6. Employing Family Members: Building Wealth Within Tax Brackets

If you own a business, you can legally employ your children to perform legitimate work tasks. This strategy requires the work be real, age-appropriate, documented through timesheets, and tracked thoroughly. Since children often earn below the standard deduction threshold, they pay minimal or no income tax while you receive a business deduction.

Seo employs his son for content assistance and administrative tasks: “The key here is the work must be real, age-appropriate and documented. We track the hours, use time sheets and keep everything above board. Since he earns under the standard deduction threshold, he pays no income tax. I get the deduction, and he learns real financial responsibility. It’s a great way to shift income into a 0% bracket, and also build wealth inside your family legally.” This approach is compliant with IRS regulations when properly documented.

7. The Augusta Rule: Renting Your Home Tax-Free

The Augusta Rule is an IRS provision allowing homeowners to rent their property for up to 14 days annually without reporting the rental income as taxable. The strategy involves renting your home to your own business for strategy sessions, filming days, internal retreats, or other business purposes.

“If you have any strategy sessions, filming days or internal retreats, you can use your home and have your business pay you,” Seo explained. “I do this several times a year. I receive income without paying a dime of tax on it.” This approach is explicitly codified in IRS regulations and represents a legitimate tax deferral mechanism.

8. Short-Term Rental Depreciation and Cost Segregation

Real estate investors who actively manage short-term rental properties (stays under 7 days with 500+ annual management hours) can utilize cost segregation and bonus depreciation strategies. These approaches allow depreciation losses to offset other active income sources, creating significant tax reductions.

Seo manages multiple short-term rentals with stays under seven days and puts in over 500 hours per year managing them. “That lets me treat the income as active, meaning I can use cost segregation and also bonus depreciation to reduce taxes on my other businesses,” he noted. “One year, I wiped out over $50,000 in taxable income using the strategy.” These depreciation strategies are IRS-sanctioned approaches for qualifying real estate businesses.

9. 1031 Exchanges: Deferring Capital Gains Indefinitely

The 1031 exchange is an IRS-approved tax deferral mechanism allowing real estate investors to sell one investment property and reinvest proceeds into a “like-kind” property without immediate capital gains tax liability. The tax obligation can be deferred indefinitely through subsequent exchanges.

When Seo sold two four-plexes, he executed this strategy: “I rolled the equity into a 24-unit commercial building and paid no tax on the gains. That single move preserved hundreds of thousands of dollars.” This tax deferral strategy is explicitly outlined in Section 1031 of the IRS tax code and has been used by real estate investors for decades to preserve capital.

The Verification Factor: Why Proper Implementation Matters

All nine strategies mentioned above are legal, documented in IRS regulations, and used by accountants and tax professionals regularly. What distinguishes successful implementation from problematic approaches is adherence to documentation requirements, reasonable business practices, and accurate reporting. Preston Seo’s approach emphasizes maintaining records, working with qualified tax professionals, and ensuring all income is properly reported.

The strategies work not because they exploit loopholes, but because the U.S. tax code provides these legal mechanisms for taxpayers willing to structure their finances accordingly. Whether you’re running a side business, managing rental properties, or optimizing retirement contributions, these approaches provide legitimate pathways to reduce your tax burden while remaining fully compliant with IRS regulations. The key is implementation through proper documentation and professional guidance.