A higher income may result in increased federal and state tax obligations. You might believe that your tax burden will increase because you earn more money, but that isn’t necessarily the case. Several high-income earners’ tax-saving tactics can help you pay less in taxes overall. Knowing which ones to use depends on your particular financial position. A financial advisor can assist you in maximizing your financial strategy to reduce your tax burden.

Who Is a High-Income Earner?

According to the IRS, any taxpayer who declares $200,000 or more in total positive income (TPI) on their tax return is considered a high-income earner. The total of all positive sums indicated for various courses of income recorded on an individual tax return is called total positive income. Understanding this is crucial since you might believe that high earners are those who make $400,000, $500,000, or more annually. Yet, you can meet the IRS’s definition of a high-income earner without even being aware of it.

How High-Income Earners Can Find Tax Deductions?

Applying tax-saving measures for high-income earners requires understanding your current income situation. The higher your income, the sooner some tax incentives end. Knowing whatever tax bracket you are in is also crucial. The proportion of tax you owe the IRS based on your taxable income is represented by your federal tax bracket. Your adjusted gross income, less any personal exemptions and itemized deductions you take, is your taxable income. You must confirm that your income qualifies for certain deductions before you may choose the appropriate ones. The highest conceivable tax rate for the 2023 tax year is 37%. Single taxpayers with taxable income over $578,125 ($539,900 in 2022) and married couples filing jointly with taxable income over $693,750 ($647,850 in 2022) are subject to this bracket.

Tax Savings Techniques for High-Income Individuals

Reducing your tax burden typically requires many strategies when you make more money. Instead, try a variety of strategies to reduce your bill. Some of these you may do on your own, while others might need the assistance of your financial advisor. Here are some of the finest strategies for lowering high-income people’s taxes.

1. Completely fund tax-favored accounts

Your taxable income for the year can be decreased by funding tax-advantaged accounts to the maximum. It might be simpler to drop one or two tax brackets the less taxable income you have to report. You might think about maxing out some of the accounts, like:

• 401(k) or another workplace-related plan
• Health Savings Accounts (HSAs) in traditional or self-employed IRAs

Remember that you can contribute catch-up amounts to IRAs and employment plans if you are 50 or older. HSA catch-up contributions are accepted starting at age 55. Also, remember that whether you are eligible for a workplace retirement plan will affect the amount of traditional IRA contributions you can deduct.

2. Think about converting to a Roth.

100% tax-free qualified distributions are possible with Roth IRAs throughout retirement. If you earn more than a particular amount, you might not be eligible to contribute to a Roth IRA if you have a high income. However, you can transfer assets from a standard IRA to a Roth IRA. When the conversion is finished, the tax would need to be paid. But coming forward, you’d be allowed to distribute money from your Roth account in a way that doesn’t subject you to income tax. You would not be forced to take needed minimum distributions once you turn 72 (73 in 2023).

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3. Contribute funds to a 529 account

A tax-advantaged tool that can help you pay for education costs is a 529 college savings plan. Unfortunately, federal tax deductions are unavailable for the money you contribute, while certain states may provide a tax benefit for 529 donations. However, when used for qualified educational costs, the money in the account grows tax-deferred, and withdrawals are tax-free. Your income tax situation may not change due to your contribution to a 529 plan, but your estate tax burden may decrease. For instance, you can make a single 529 contribution that is up to five times the yearly gift tax exclusion amount. These donations would then no longer be included in your overall taxable estate.

4. Increase charitable giving

Making charitable contributions is among the most well-liked ways for high-income individuals to reduce their tax burden. You can deduct charitable contributions equal to up to 60% of your adjusted gross income under IRS regulations. The maximum deduction for contributions of non-cash assets is 30%.

There are several methods to benefit from charitable deductions, such as:

• Directly donating money to an eligible charity
• Donating non-cash assets with increased value, such as stocks, may enable you to avoid paying capital gains tax.
• Creating a charitable remainder or lead trust
• Establishing a donor-advised fund
• Using an IRA to make a qualified charitable distribution (QCD)

Consider the last option if you wish to postpone RMDs from a regular IRA and are 72 or older (73 in 2023). A QCD allows IRA owners over 70.5 to give up to $100,000 annually, which can lower their taxed income. However, remember that you cannot deduct the same sum for charitable purposes. Additionally, Schedule A must itemize any donations of cash or non-monetary assets if you wish to deduct them.

5. Examine and modify the allocation of your assets.

It’s crucial to make sure you’re allocating assets in the proper places because some investments may be more tax-efficient than others. For instance, saving higher tax funds for your 401(k) or IRA makes sense while keeping more tax-efficient mutual funds and exchange-traded funds (ETFs) in a taxable account. Another option for lowering taxes is to invest in municipal bonds exempt from federal and state taxes. As a result, the Medicare surtax and the federal income tax are not applied to the interest these bonds receive. In addition, taxes on state income may not apply to municipal bonds. Additionally, keep in mind that tax loss harvesting is on your side. Harvesting losses entails offsetting capital gains in your portfolio by selling investments at a loss. Losses up to $3,000 can also be written off against your regular income. You may carry forward any losses you don’t use up in the current tax year.

6. Keep alternative investments in mind

You can postpone taxes if you make certain investments and earn more money. For instance, cash-value life insurance enables you to accrue cash value. As a result, the accumulated wealth increases tax-free. In addition, when withdrawals don’t exceed the total of your premium payments, they are not subject to taxation. Another element of your tax management plan can include annuities. For instance, in a deferred annuity, you buy the contract with payments starting later. The annuity’s value increases while being tax-deferred. If you anticipate being in a lower tax bracket when you retire, this technique may pay off even if you’ll have to pay income tax on withdrawals later.

7. Increase All Other Deductions

The interest paid on a mortgage for a home is deductible. In addition, state and local taxes on the property are also deductible. Although the tax savings from deducting these costs may not be significant, every dollar works towards lowering your taxable income. If you itemize, you can additionally write off medical expenses that total more than 7.5% of your adjusted gross income. That could be a valuable deduction if you have considerable medical costs for yourself or a household member throughout the year.

Conclusion

Applying tax-saving tips for high earners may enable you to pay the IRS less money each year. However, it’s crucial to remember that the tax code is constantly evolving. Therefore, what is successful this year could not be successful – or even conceivable – in three or five years. You may prevent losing out on savings by routinely checking your tax situation.

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We bring together knowledgeable and astute investors who, under our direction, can take advantage of the group’s superior financial strength as a whole to invest in carefully selected, high-performing deals.

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