Making a high income can be a blessing. However, it also means paying higher taxes. Fortunately, with proactive planning and smart investments, high earners can reduce their tax liability. This allows you to keep more of your hard-earned money to save, invest, or spend.
Below are 10 effective tax strategies high-income earners can utilize:
Harvest Tax Losses
1. What Is Tax-Loss Harvesting?
Tax-loss harvesting involves strategically selling investments at a loss to offset capital gains tax. For example, if you realized $10,000 in capital gains this year, you would owe taxes on that amount. However, if you also realized $10,000 in capital losses, they would cancel out the gains and you would owe nothing.
2. How It Benefits High Earners
High-income investors who realize substantial capital gains can use tax-loss harvesting to minimize their tax bill. Paying less in taxes means having more money to save and invest.
Make 401(k) Contributions
401(k) plans allow taxpayers to contribute pre-tax dollars towards retirement. In 2023, you can contribute up to $22,500 ($30,000 if over 50). As a high earner, maximizing 401(k) contributions can significantly reduce taxable income.
Plus, the money grows tax-deferred. You only pay income tax when making withdrawals in retirement. For high earners in their peak earning years, diverting income into 401(k)s can be a savvy tax play.
Fund an HSA
A Health Savings Account (HSA) offers triple tax benefits. Contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are untaxed.
In 2023, individuals can contribute up to $3,850 to an HSA account and families can contribute $7,750. As a high earner, fully funding an HSA allows you to reap sizable tax breaks. It also gives you more tax-advantaged space to pay for healthcare.
Make Charitable Donations
Charitable donations are tax-deductible, allowing you to reduce taxable income. As a high earner, you can benefit greatly from strategic charitable giving.
For example, donating appreciated investments allows you to avoid capital gains tax and receive an income tax deduction. Bundling multiple years’ worth of donations into one year can also be beneficial for high earners looking to reduce tax liability.
Invest in Opportunity Zones
Opportunity Zones provide tax incentives for investing in certain low-income areas. Investors can defer paying tax on capital gains reinvested into a Qualified Opportunity Fund for up to 10 years.
Plus, if you hold the investment for at least 10 years, any appreciation escapes capital gains tax completely. This offers high-income investors a way to potentially reduce taxes on their capital gains.
Open an IRA
Traditional and Roth IRAs provide tax-advantaged retirement savings opportunities. In 2023, you can contribute up to $6,500 ($7,500 if over 50).
As a high earner, contributing to one or both IRA account types allows you to shield income from taxes. It also helps you save more for retirement in a tax-efficient manner.
Claim Above-the-Line Deductions
Above-the-line deductions reduce your adjusted gross income. Prime examples include educator expenses, HSA contributions, IRA contributions, and more.
High earners can qualify for substantial above-the-line deductions. Take advantage of these to effectively decrease taxable income. The lower your AGI, the less overall tax you’ll pay.
Expense Business Costs
If you have business income, strategically utilizing business expenses can reduce your tax liability. Business expenses like equipment, supplies, vehicles, and even home offices are generally deductible.
High earners with side businesses or investments can offset earnings with properly documented business expenses. Tracking all expenses and making strategic purchases before year-end are smart tax plays.
Leverage Tax Credits
Tax credits directly reduce your tax bill, making them especially valuable. Take advantage of all credits available to you, such as electric vehicle credits, residential energy credits, child tax credits, dependent care credits, and more.
As a high earner, staying abreast of the latest federal and state-level tax credits allows you capitalize on evolving incentives. Tax credits effectively help you retain more of your income.
Hire a Tax Professional
Managing taxes for high earners can prove challenging. An experienced CPA can help you navigate complex situations to minimize tax liability.
They can also inform you of the newest tax code changes, ensure accurate filing, and even represent you in case of an audit. For high-income taxpayers, a skilled tax preparer is an advisor well worth the investment.
In Summary
With savvy planning, proactive tax management is very feasible even for high earners. Take advantage of the many deductions, credits, tax-advantaged accounts, and planning strategies available.
The less you pay in taxes, the more money you have available to improve your long-term financial position. Partnering with an expert tax professional can also optimize your situation. Use these 10 tips to maximize after-tax income.
