Tax Reduction Strategies for High-Income Earners

Paying taxes is a part of life, but without careful attention, you could be paying more tax than you need to. You’ve worked hard to amass your net worth, and tax-saving strategies are essential. 

High-income earners can save money with many tax-saving strategies, but knowing which suits your situation is vital to make the right decision. Partnering with a trusted financial advisor can help ensure you and your family get the most from your money. 

What Is a High-Income Earner?

The term “high-income earner” refers to anyone in the top three of the seven IRS tax brackets. 

You qualify as a high-income earner if you earn more than $170,050 per year as a single person, a married person filing separately, or a single head of household. Married couples filing jointly qualify as high-income earners with a combined annual income of $340,101 or more. 

9 Tax-Saving Strategies for High-Income Earners

A high income comes with a considerable tax burden, so knowing how to reduce taxable income for high earners makes good financial sense. High-income earners can save money with some of the following strategies:

1. Contribute the Maximum Amount to Your Retirement Accounts

Retirement accounts are an excellent way to reduce your taxable income. Contributions to an employer-based account like a 401(k) or 403(b) come from your pre-tax pay, reducing your annual taxable income. Your income will be lower once you’re no longer drawing a salary, putting you in a lower tax bracket. You can end up paying a much lower tax rate if you wait until retirement to make withdrawals from your 401(k). 

You can also leverage your retirement accounts by contributing the maximum amount, preventing this portion of your income from being taxable until you need it. In 2023, your 401(k) contribution limit is $22,500. If you’re 50 or older, you can contribute $30,000. 

2. Consider Roth IRA Conversions

Roth individual retirement accounts (IRAs) can also reduce your tax burden. Since contributions to Roth IRAs come from your post-tax income, you won’t pay any taxes on the withdrawal. If you earn any income from your Roth IRA, you can withdraw it tax-free.

You can also move money from a traditional IRA or 401(k) into a Roth IRA for the same benefits. 

3. Take Advantage of Tax Deductions and Credits

Tax deductions are the expenses you can deduct from your taxable income. You can also use various credits to reduce your dollar-for-dollar tax liability. While more deductions and credits are available for businesses, employees may be able to claim some as well. 

Many tax deductions and credits disappear as you move through the income brackets. However, you can still claim some as a high-income earner, including interest on your mortgage or your child’s college education. 

4. Buy Municipal Bonds

Like other tax-exempt bonds, municipal bonds can benefit high-income earners. Buying municipal bonds consists of the following:

• Purchasing the bond involves you lending money to the issuer in exchange for fixed interest payments for the bond’s duration. 
• The bond matures at the end of the predetermined period and the issuer returns the initial investment to you. 

While municipal bonds earn less income than taxable alternatives, they’re exempt from all income tax. In some cases, the interest payments from the income may also be exempt. 

5. Sell Inherited Real Estate

Inheriting real estate makes you liable for property tax, but selling the property quickly lets you save on property taxes and make the most of your usable inheritance. 

You can also mitigate the effects of capital gains tax by rolling the income from the sale into another real estate investment, provided you complete the transaction within 180 days. 

6. Make Charitable Donations

Donating to charity exempts you from capital gains tax. You can donate cash or other valuable assets such as real estate, stocks, and bonds without owing taxes on the profits. You can claim a tax deduction for the donation if the recipient charity is a qualified charitable organization under federal tax law. 

7. Create a Donor-Advised Fund

As discussed above, donating money to charity provides opportunities for tax deductions. Setting up a donor-advised fund could grant you a deduction for several years of contributions in a single year. 

Donor-advised funds are charitable funds that let you decide how and when to donate to different charities. You can make contributions in one year and take the entire tax deductions in the same year, reducing your tax. After the first year, you can decide how much money to donate from your donor-advised fund each year and which charity will receive your donations. 

When you fund your donor-advised fund, you receive your tax deduction, which could be particularly valuable in years when your income is higher. 

8. Use a Health Savings Account

A health savings account (HSA) is an excellent way to make the most of your tax deductions and ensure you can cover all your essential medical expenses. HSA contributions are only possible if you have a high-deductible insurance plan. The annual HSA contribution limit in 2023 is $3,850 for individuals and $7,750 for families, though you may contribute an additional $1,000 annually if you are 55 or older. 

An HSA lets you save for retirement while addressing some of your immediate health care needs. If you need to withdraw money from the account for health and dental expenses, you won’t have to pay tax on the withdrawals. However, the money is taxable if you withdraw for a non-health-related expense. 

The money you put into an HSA is yours forever. You don’t have to spend it during the tax year, making it an attractive option for high-income earners. 

9. Invest in Companies That Pay Dividends

As a high earner, you pay a high-income tax rate but a lower capital gains rate, which means that earning capital gains has tax benefits. When searching for investment options for high earners, look for companies that pay qualified dividends. 

While ordinary dividends count toward your taxable income, qualified dividends count as capital gains. These dividends must meet the following requirements:

• They must come from a U.S. corporation or a qualified foreign company. 
• You must hold the stock for more than 61 days.

Get the Most From Your Money With HSC Wealth Advisors

Negotiating your tax responsibilities can be challenging. The first step is balancing your obligations and managing your money effectively. With the help of a trusted and unbiased financial advisor, you can choose the most helpful methods for your unique lifestyle. 

HSC Wealth Advisors is a fee-only firm — we give objective advice to our customers without the bias of representing a specific investment firm. Our CERTIFIED FINANCIAL PLANNERS™ pride themselves on helping you make the most beneficial decisions for you and your money. 

We can help you find the most profitable way to manage your taxes. Please reach out to us today to learn more about how we can help and get started on making the most of your tax opportunities.