Akash Sharma CPA

Tax Saving Strategies for High-Income Earners 2023

Tax Saving Strategies for High-Income Earners 2023

Tax seasons are always stressful and make you feel anxious. But, paying taxes is an essential responsibility of the citizens. However, when you have a high income, then you may feel a little shiver. Well, it should not be the case, as there are multiple tax saving strategies for high-income earners. Different individuals have different earning resources. So, it is very important to understand which strategy will be applicable to you.

In the following post, AS Tax and Accounting will talk about tax reduction strategies for high-income earners. After employing these strategies, individuals can surely save a big chunk of their hard-earned money.

Tax Saving Strategies for High-Income Earners

Every US citizen should pay their fair share of taxes, but on the other hand, they should find legal ways to prevent the tax money. Here are a few best strategies if you are looking for tax deductions on your high income. Individuals can perform a few methods on their own, and some may require professional assistance. Here are a few tax-saving strategies for high-income earners.

tax reduction strategies for high income earners

1. Open a Health Savings Account

It is one of the top tax deferral strategies for high-income earners. Three important tax advantages come from contributing to a health savings account:

You Can Deduct Your Contributions

The installment is deducted and transferred directly into HSA from your payroll. So, it will not be counted in your gross income. Hence, they are not subject to taxes.

Your Money Can Grow Tax-Free

Your HSA will accrue interest if you let your money sit there. Since this interest is tax-free and accumulates over time, you’ll have more money to put toward legitimate medical costs.

You Can Withdraw Money Without Paying Taxes

If you use your HSA withdrawals for eligible medical costs, you are exempt from federal taxes. But keep in mind that you can only do this if you’re younger than 65.

The maximum yearly contribution limits for

  • Individual coverage is $3650.
  • For family, coverage is $7,300.

2. Contribute to a Retirement Account

In the case of high-wage earners, the smart way to minimize your taxes is by contributing to retirement plans. People with Individual Retirement Account (IRA) or with 401(k) account can get extreme benefits on savings. Similar to a health savings account, your amount keeps increasing with deferred taxes.

It is one of the best retirement tax-saving strategies for high-income earners. The capital gains through the retirement plan only are applied when you withdraw the amount. The tax rate depends on the withdrawal scenario. So, the taxes will be different in case of withdrawal before or after maturity. 

3. Roth IRA Conversions

Even if you are in one of the highest tax brackets, Roth IRAs can help you lower your tax liability and save money on your taxes. While qualifying Roth IRA withdrawals are tax-free, whereas traditional IRA withdrawals are subject to regular income taxation. If you are owning a Roth IRA for at least five years and are over the age of 59 and a half, you can easily withdraw money from it. The same advantages apply when you convert funds in a regular IRA or 401(k) to a Roth IRA.

The greatest times to convert your Roth IRA are when your income is lower than it was the year before or when you are retired and are in a lower tax band.

4.   Business Tax Deductions

In case you are a sole proprietor or have a high income without a proper business structure, then it is surely going to benefit you.

If you create an LLC to manage your personal investments and assets, you can begin deducting any necessary business expenses, potentially reducing your tax liability by thousands of dollars annually.

All business owners should be aware of the deductions available for tax write-offs for high-income earners. For instance, the section 199A deduction (added in 2018) enables you to write off up to 20% of the profits from your small business or rental property. Another tactic for minimizing taxes is by renting out your house for corporate gatherings and meetings. You can avoid paying taxes on the rental income. Also, you can save tax amount by providing travel expenses.

5.   Get Itemized Tax Deductions for High Earners

Following the determination of your AGI, you can calculate itemizing deductions. The following tax hack for high earners is a good way to reduce tax liabilities, but after the passing of TCJA 2017, it is difficult to gain benefits. However, there is a good chance that itemizing your deductions will further lower your tax if you prepare ahead.

The standard deduction in 2022 is $25,900 for married couples filing jointly, $12,950 for single people, and higher for blind people and people over 65.

6.   Invest in Qualified Opportunity Zones

The Qualified Opportunity Zone (QOZ) program was established by the 2017 Tax Cuts and Jobs Act to offer a tax credit for private, long-term investments in economically struggling localities. Growth on QOZ investments is tax-free.

When there is an investment in a QOZ, then within 180 days of investment, investors in these programs have the chance to postpone paying taxes on such gains.

7.   Tax Saving Strategies for High Income Earners: Real Estate Exemptions

Depending on how you use the property, there are a few basic strategies to minimize or postpone taxes in real estate. If you sell your principal residence after living there for more than two years, you may be able to deduct up to $250,000. If you’re married and filing jointly, then you can save up to $500,000.

You can use any losses from this year’s market turbulence to reduce any realized capital gains for 2022. To use this tactic, add up your profits and then liquidate any losing trades by the same amount. You are allowed to deduct up to $3,000 of ordinary income if your losses outweigh your gains.

tax strategies for the high-income individual

You can also perform a 1031 exchange if it is a rental property. A 1031 exchange is a tax avoidance strategy for high earners that allows them to structure the sale of their current property and use the proceeds to buy a new one right away. By doing this, you would be able to postpone the gain on the original asset and postpone paying taxes until you eventually sell the newly acquired asset.

8.   Ask Your Employer to Defer Income

This tax-saving strategy for high-income earners is only for business owners. If you are an employer, then you may request your employees to differ in income for a year. From the employee perspective, it works best if you’re expecting a sizable year-end bonus. Delaying income until the following year may help the business owner to pay less in taxes by moving it into a lower tax band. Although you can’t do this every year, it can be incredibly helpful when your income increases in the upcoming year.

9.   529 Plan for Education

A hack that you can use to pay for education costs is a 529 college savings plan. The money in the account grows tax-deferred, and withdrawals are tax-free when you use it for qualified educational costs. Federal tax deductions are not available for the money you contribute, while certain states may provide a tax benefit for 529 donations.

Your income tax situation may not change as a result of your contribution to a 529 plan, but your estate tax burden may decrease. There are no annual contribution caps, but beginning in 2022, contributions that exceed $16,000 for each donor and beneficiary will be deducted from the lifetime exemption for estate and gift taxes. For instance, you can make a single 529 contribution that is up to five times the yearly gift tax exclusion amount.

10. Invest in Tax-Exempt Bonds

Another tax mitigation strategy is tax-exempt bonds. Tax-exempt bonds often provide a lower interest rate in exchange for a single or double tax-free payment. It’s crucial to balance your bond allocation between tax-exempt and “ordinary” bonds. Federal income tax and the Medicare surtax are not applied to interest income from tax-exempt bonds. Moreover, interest on municipal bonds acquired in your place of residence is exempt from federal and state income taxes.

11. Mortgage Interest Deduction

If you currently rent an apartment or have a sizable balance on your credit cards, you might think about buying a property or refinancing with cash out to benefit from the tax deduction for mortgage interest. The deduction is eligible for mortgage interest on homes worth up to $750,000 after the passing of the 2017 Tax Cuts and Jobs Act (TCJA).

12. Tax-Loss Harvesting Method

The tax-loss harvesting method ensures that tax losses partially offset any investment profits. As a result, you can choose to cling to a stock that has significantly decreased in value rather than sell it when doing so could result in a big profit. The objective behind tax-loss harvesting is to use these losses to offset any realized gains and up to $3k in regular income on your tax return to reduce your tax burden while preserving an ideal asset allocation. Losses that are not used in the current year can be carried over to the following ones.

13. Tax Saving Strategies for High Income Earners: Medical Expenses Deductions

Keeping an accounting of your medical costs is among good tax strategies for the high-income individual. Even though you might be in good health, you might be able to deduct some of your medical costs if you have a larger family or a special medical need. You may be able to write off the cost of your own healthcare as well as that of your spouse and dependents in some situations. Only eligible expenses that exceed 7.5% of your AGI can be written off if you want to file an income tax return.

14. Donate Stocks to Avoid Capital Gains

Giving stock directly to a charity is another efficient and easy method. If you hold stocks or any other investments that have seen a considerable increase in value over time, you may be subject to a sizable capital gains tax. If you donate the shares to the organization and let it sell the stock, you can completely avoid paying those taxes. Appreciated stock donations are only eligible for limited itemized deductions of up to 30% of AGI. Any excess over the 30% AGI cap may be carried over to subsequent tax years.

15. Make Charitable Donations

You are permitted to deduct charitable cash contributions equal to up to 60% of your adjusted gross income under IRS regulations. There are several tax saving strategies for high-income earners from charitable deductions. Making a direct cash donation to a qualified charity is one option. Other options include creating a charitable lead trust or a donor-advised fund.

Who Falls Under High-Income Earners?

Any taxpayer who declares $200,000 or more in total positive income (TPI) on their tax return will be a high-income earner, according to the IRS. The total of all positive sums indicated for various courses of income recorded on an individual tax return is referred to as total positive income.

You are liable to heavy taxes when your income exceeds a specific threshold. These taxes might reach rates of more than 50% of your total income. Moreover, this can seriously affect your financial situation, especially if the majority of your investment is non-liquid assets.

The proportion of tax you owe the IRS based on your taxable income depends on your federal tax bracket. The highest conceivable tax rate for 2022 is 37%. Thus, proper tax planning for high-income earners is essential to save money.

Frequently Asked Questions

Can high-income earners benefit from Child Tax Credit?

If you are a high-wage earner and your income is under $400,000, you are eligible for a child tax credit. It is a dollar-for-dollar tax deduction for each kid you have. The deduction is $2,000 for each child.

What elements are important for efficient tax planning for high-income earners?

The sources of income, such as salaries and investment earnings, are important factors. Also, the possibility of having educational, medical, or childcare costs, are all things to take into account for efficient tax planning.

Do people with high incomes benefit from investing in mutual funds and exchange-traded funds?

Yes, a tax-efficient index mutual fund or ETF for taxable accounts may assist in lowering the yearly taxes you pay on your assets. Moreover, actively managed funds can sometimes be more tax-efficient than index funds and ETFs.

How might harvesting losses reduce high-income earners’ taxes?

You can use any losses from this year’s market turbulence to reduce any realized capital gains for 2022. To use this tactic, add up your profits and then liquidate any losing trades by the same amount. You are allowed to deduct up to $3,000 of ordinary income if your losses outweigh your gains.

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