11 Tax-Saving Strategies for High-Income Earners
If you are in one of the 3 highest IRS income tax brackets (ranging from $182,101 to $578,126+ per year in total positive income for single filers), it’s a good idea to consider your tax strategy as a high-income earner. Earning this much per year can lead to significantly higher taxation, making tax deductions and other strategies essential for those looking to reduce their tax bill, build more wealth, and enjoy financial security. In this guide, we’ll go over everything you need to know about tax tips for high-income earners.
- There are many tax strategies for high-income earners to reduce their tax burden.
- High-grossing earners should claim deductions wherever possible to reduce their tax bill.
- Tax reduction vehicles like 401(k) plans, IRAs, and HSAs can all help lower your tax bill.
- Other tax reduction strategies like residency planning and IRA conversion can save even more money.
Table of Contents
- 11 Ways to Reduce Taxable Income for High Earners
- Tax Planning Strategies for High Earners
- Streamline Your Tax Preparation With FreshBooks
- Frequently Asked Questions
11 Ways to Reduce Taxable Income for High Earners
Tax strategy is an essential skill, especially for those who are considered high-income earners in the eyes of the IRS. Here are the top strategies to keep in mind to help you save money this tax year.
1. Charitable Contributions and Donations
Making a donation to a qualifying tax-exempt charitable organization is a great way to support good causes and lessen your tax liability at the same time. The IRS allows you to deduct charitable cash donations of up to 60% of your adjusted gross income (AGI). If you contribute a non-cash asset, you can also deduct up to 30% of it from your return.
2. State and Local Tax (SALT) Deductions
Will you itemize your tax deductions this year? If so, you should be able to deduct a portion of the taxes you pay to state and local governments using the State and Local Tax (SALT) deduction. The maximum deductible amount is currently at $10,000, which can make a big difference in your final tax liability.
3. Mortgage Interest Deductions
Most homeowners are able to deduct all of their mortgage interest paid using this useful deduction. Your interest payments are 100% deductible up to a home loan of $750,000. If you took out your home mortgage prior to December 16, 2017, the loan limit is higher, sitting at $1 million.
4. Retirement Contributions
Tax-advantaged retirement plans and accounts can be a big help for high-income earners trying to lower their tax liability. Contributing to plans such as a 401(k), traditional or Self-Employed Pension (SEP), Individual Retirement Account (IRA), or Health Savings Account (HSA) can all reduce your taxable income. Maxing out your contributions for the year and deducting them will minimize your tax burden.
5. Medical Expenses and Healthcare Costs
If your unreimbursed medical expenses in a year exceed 7.5% of your adjusted gross income (AGI), you can deduct them from your federal income tax. Almost all kinds of healthcare and medical services qualify for this deduction, including physical therapy, doctor check-ups, hospital bills, dental care, massage therapy, and more, so save your receipts.
6. Consider a Roth Conversion
If you earn too much in yearly income to contribute to a Roth IRA, consider converting traditional IRA assets to a Roth IRA. While this will cost you money in taxes for the year you convert these assets, it’s ultimately a smart tax strategy, allowing you to make qualified withdrawals from your Roth IRA without having to pay income tax on each distribution. The best approach is to do the conversion in a year when your tax rate is low.
7. Investment Strategies for Tax Efficiency
When it comes to preserving wealth for high-income earners, not all investments are created equal. Some investments will be much more advantageous for deferring taxes and reducing tax liability, such as cash-value life insurance and annuities. These both allow your investment to accumulate tax-free, reducing your tax liability in the process.
8. Business Expenses
If you own a business, be sure to track and organize the expenses it incurs throughout the year. Office supplies, advertising, business bank account fees, professional fees, business vehicle expenses, depreciation, business startup costs, and more can all be deducted from your tax return, meaning you’ll pay less at tax time.
9. Deductible Contributions to an HSA
Are you enrolled in a Health Savings Account (HSA)? Contributing to an HSA is a useful way to reduce your tax liability. These plans also have the added benefit of allowing tax-free withdrawals for medical expenses, making them doubly useful when you enter retirement.
10. Deductible Traditional IRA Contributions
If your adjusted gross income (AGI) is less than $83,000 as a single filer who is covered by a retirement plan at work, you may be able to claim a partial deduction on contributions to your Traditional IRA plan. If you are not covered by a retirement plan at work, however, you can take a full deduction up to the amount of your IRA contribution limit. This is great for any IRA assets you haven’t yet converted to a Roth IRA.
11. Tax Residency Planning
If you own properties in multiple states, you can use it to your advantage when planning for tax residency. Some states have higher state income tax than others, while others don’t require you to pay tax on income at the state level at all. A professional accountant or tax planner can advise you on the pros and cons of establishing a primary residence in one of these states to significantly lower your tax liability.
Tax preparation doesn’t need to be a chore—check out the video below to learn how FreshBooks takes the pain out of tax planning and prep.
Tax Planning Strategies for High Earners
With careful planning regarding deductions, tax-advantaged savings accounts and retirement plans, and deliberate investment choices, high-income earners can save significant amounts on their federal income tax.
Generally speaking, you should look for tax vehicles to lessen your taxable income as well as grow your investments tax-free in the meantime. Converting Traditional IRA assets to Roth IRAs, investing in a HSA, and contributing to a 401(k) plan can all be great ways to do this.
It’s recommended that high-grossing earners work with tax prep professionals and/or accountants to help manage the moving parts of these tax strategies and ensure compliance with tax code throughout the year.
Streamline Your Tax Preparation with FreshBooks
Tax preparation is an essential part of making the most of each year’s tax strategy and deductions, ensuring you’re saving as much money as possible when it comes time to pay your tax bill. By using an intentional, well-thought-out approach to your tax preparation, you’ll be in a more advantageous tax situation once you file.
If you’re looking for a way to help manage the finer details of your tax strategy, consider using FreshBooks accounting software. This tool helps you track and categorize expenses, tax credits, contributions, and itemized deductions throughout the year, helping you optimize your tax strategy and save as much money as possible. Try FreshBooks free today.
Curious to learn more about tax strategy for business owners? Read our guide on small business tax deductions.
FAQs About Tax-Saving Strategies for High-Income Earners
Do you have more questions on saving money on income taxes as a high-income earner? Read our list of frequently asked questions on tax benefits for high-income earners below.
Do charitable contributions reduce AGI?
If you donate to a qualifying, tax-exempt, 501(c)(3) charitable organization, you can claim part of your donation as an itemized tax deduction. This ultimately helps to reduce your adjusted gross income (AGI) and therefore reduces your federal taxes.
What is the adjusted income limit?
Your adjusted gross income (AGI) is defined as your total gross income minus any income adjustments, such as student loan interest, alimony payments, or contributions to retirement accounts. Your AGI will never exceed the amount of your gross total income.
Do tax deductions reduce taxable income?
Yes, deducting expenses from your taxes reduces your taxable income, meaning you’ll ultimately pay less in income tax than you otherwise would. There are countless deductions available, particularly for business owners and retirement plan contributors.
Does a Roth 401(k) reduce taxable income?
Typically, you cannot deduct contributions to your Roth 401(k) like you can with a traditional 401(k). However, you won’t have to pay taxes when you eventually make a withdrawal from your Roth 401(k), which can be advantageous depending on the income bracket you expect to be within later in life.
How can I avoid a higher tax bracket?
There are many tax strategies to reduce your taxable income for the year and get into a lower tax bracket. Some of them include maxing out contributions to your HSA, IRA, or traditional 401(k), making charitable donations to qualifying non-profits, taking all deductions you’re eligible for, and restructuring your business entity.
Can I deduct mortgage interest on multiple properties?
The IRS allows mortgage interest deductions on a second home, but not on any additional properties. You can do the same for a rental property, but the rules, regulations, and process are a little different. The limit on mortgage interest deductions is shared between your primary and secondary homes, sitting at $750,000 for joint filers who took out their mortgage after December 16, 2017.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .