If your investments don’t require material participation, and if someone who has zero ordinary income can invest on behalf of you, you could save more than $40,000 for $120,000 passive income. The potential candidates could be retired parents, stay-at-home relatives, or children. SEC doesn’t place an age restriction on the accreditation requirements. He can be a 1-year-old baby who was born in a rich family where father deposited $1M into his savings account to grant an accreditation status.

$250K Base Income @CA (Married Filing Jointly)

Tax Brackets Rate Tax
Federal Tax $0 – $65,000 32% $20,800
$65,000 – $120,000 35% $19,250
Medicare Tax $0 – $120,000 3.8% $4,560
California Income Tax $0 – $120,000 9.3% $11,160
Total Tax
$250K Base Income @CA $55,770

This is an example of adding $120k passive income on top of $250k ordinary income. His marginal tax rates for federal income tax are 32% for the first $65k and 35% for the remaining $55k. He also has to pay the 3.8% Medicare tax on the lesser of (1) $120,000 net investment income, or (2) the amount of AGI exceeds the $250,000 threshold. California state income tax will be 9.3% for the entire income. His total income tax is $55k.

No Income @Tax-Free State (Married Filing Jointly)

Tax Brackets Rate Tax
Federal Tax $0 – $24,000 0% $0
$24,000 – $43,050 10% $1,905
$43,050 – $101,400 12% $7,002
$101,400 – $120,000 22% $4,092
Medicare Tax $0 – $120,000 0% $0
State Income Tax $0 – $120,000 0% $0
Total Tax
No Income @Tax-Free State $12,999

If his only income is $120k from passive investment and there’s no income from other sources, his income tax rate will be much less. After $24k standard deduction, his federal income tax will be $13k. And this is his total income tax as the assumption is he is a resident of a tax-free state. This will be a great tax savings scheme.