Excellent Tax Planning Strategies for High-Income Earners
Taxes make a significant part of your monthly income. This is where the importance of tax planning strategies for high income earners comes. The individuals should do thorough tax research and planning to reduce tax liabilities. You can take the help of a financial advisor to help you plan the taxes more efficiently.
It is, however, possible to plan your taxes yourself. Moreover, a guide on how to reduce taxable income for high earners will also help you when you work with an accountant. Let us dive into the most excellent tax strategies for high-income individuals and tax reduction tactics.
Importance of Tax Planning for High-Income Earners
Let us first begin with defining which individuals fall under the high-income earner category. An individual who earns USD 2 million or more comes in the high-earning section of society, as per the IRS.
Tax planning services are vital to minimize the tax bills for high-earning individuals. This can make a significant difference in the tax bill of these individuals.
- By making contributions to qualifying retirement and employee benefit accounts, one can avoid or postpone taxes on some incomes.
- You can reduce the taxes by deducting losses on investments.
- The tax rates are low for long-term capital gains.
- Federal income tax includes municipal bond interest.
The Best Tax Planning Strategies for High-Income Earners
High-earning individuals can sometimes receive a shock at the end of the financial year when they see a voluptuous tax amount. Therefore, it is crucial to plan your taxes throughout the year. However, this guide will make you ready to save on tax reduction tactics.
Remember that tax laws and regulations can change, so it’s essential to consult with a qualified tax professional to tailor these strategies to your specific financial situation and stay up-to-date with the latest tax laws. These strategies can help high-income earners optimize their tax planning and keep more of their hard-earned money.
Here are the handpicked tax strategies for high-income individuals.
1. Add to Your Retirement Contribution
One of the finest tax planning strategies for high income earners is maxing out on retirement contributions. This allows you to plan for the golden years of your life and comes with some spectacular tax benefits. The employer-based accounts like 401(k) and 403(b) account help individuals reduce their taxable income. The money put in these accounts is not taxed until you withdraw it, reducing the total tax burden on you.
When you retire and attempt to withdraw the money from a 401(k) account, you will fall into a lower income category as you will no longer be employed. This will reduce your tax rate, and you will end up paying substantially lower taxes in the later stage of your life. Therefore, the individuals can take advantage of the maximum contribution allowed to the 401(k) and 403(b) accounts. Moreover, other options exist, such as catch-up contributions for individuals older than 50.
2. Use a Health Savings Account
One of the most significant tax reduction tactics for high-income individuals is saving money in a health savings account. Any contributions made to the health savings account are tax-free. Moreover, if the amount is not used for medical expenses, they convert it into tax deferred. If you utilize the amount for qualified medical expenses, no taxes will be levied on the distributions either. Therefore, the health savings accounts are tax-deductible, grow tax-deferred when not utilized, and are tax-free when used for qualified medical expenses. The Health Savings Accounts thus offer a high-income earner triple tax advantage.
3. Donate to Charity
Donating to charity brings a double-fold benefit to the individual. It is a fabulous way to give back to society and also cut your tax expenses. The high-income earners should explore donor-advised funds or sell out property in charitable remainder trust (CRT). One can also donate their low-basis shares directly to the 501(c)(3) charity at the fair market value. The amount will convert to deductions on your taxes.
Donor-advised taxes are recommended for those who plan to donate a large amount of money over a span of years. Bunching the charitable amount is one of the best tax strategies for high-income individuals. In bunching, the individual can make a large donation in one year, claim large tax deductions, and then slowly give out the rest. Moreover, instead of contributing smaller amounts every year, the individual can alternate between large and small donations to benefit from more significant tax deductions.
Selling a property in a charitable remainder trust (CRT) is another way to reduce the tax bills for high-income earners. These properties can be real estate, memorabilia, antiques, etc. Selling through CRT excludes the capital gain trust, and therefore, you can max out the donated amount.
4. Maximize the Deductions
You should take advantage of the available tax deductions to reduce the taxable bill at the end of a financial period. The deductible expenses include mortgage interest, property taxes, medical expenses, etc. Moreover, self-employed individuals can benefit from deductions for home office, equipment, vehicle write-offs, etc. Moreover, charitable donations offer tremendous tax reduction opportunities. These deductions reduce your tax liabilities.
5. Switch to a Roth IRA
A Roth IRA is a tax-free retirement account a high-income earner can utilize to reduce their tax bills. However, Roth IRAs differ from traditional IRAs because the taxes are levied when you contribute, not when you withdraw the money. No taxes are applied to the income earned in a Roth IRA. The Roth IRA presents enormous benefits for the higher tax brackets of individuals.
Therefore, consider converting your traditional IRA or 401(k) account into a Roth IRA. The recommended time to convert to a Roth IRA is in a year when you experienced less income than the last. You can also convert into a Roth IRA after you retire.
6. Purchase Municipal Bonds
When asked how to reduce taxable income for high earners, we always suggest buying tax-exempt bonds. In a municipal bond, you’ll be lending the money to the borrower in terms of the agreed interest rates and time period. Once the bond matures, you receive your amount back and the interest.
The tax-exempt bonds mean that the amount will be free of any taxes from federal, state, or local governments. Moreover, there are chances that there might be no taxes levied on the interest paid by the borrower. Municipal bonds earn less payments as compared to the taxable bonds. However, this is one of the most advised tax strategies for high-income earners.
7. Invest in Qualified Dividends
Ordinary dividends don’t offer the opportunity to reduce the taxable amount and are taxed as ordinary income. However, the qualified dividends are different in regards that the taxes applied on them max out at 20 percent. This is substantially lower than the taxes on the ordinary dividends, which max out at 37 percent. Therefore, you should invest in stocks that pay qualified dividends, which are subject to capital gains tax rate.
However, if you are just beginning to invest in stocks, you should talk to a broker and be careful about the stocks you are placing your money on. The stock investments are subject to risk, and you might end up losing a great part of your principal. For the high-income earners who invest in stocks, we suggest investing in companies that offer qualified dividends to save on tax expenses.
8. Employ your Children
If you own a business, you can add the names of your children to your business payroll. It means you can hire your older kids to save on the business expenses. First, you will be able to reduce their salary in the form of business expenses and substantially lower the taxable income for your business. If your child is below 18, you won’t be required to pay the Medicare or Social Security tax on their wages.
In this way, you can directly shift a significant amount from your tax bracket to your child’s tax bracket. Your children wouldn’t have to pay any taxes as long as their salary isn’t higher than USD 13,850. It is one of the best tax reduction tactics for business owners. You can work with a payroll tax analyst to develop the best strategy for doing so.
Maximize Non-Taxable Income With Us!
Sound tax planning strategies for high-income earners can help them to maximize their non-taxable income. Go through these tax reduction tactics listed above to help you get ready to save on taxes. If an accountant or a team manages your accounts and expenses, work with them to ensure you take advantage of all the opportunities available to reduce the taxable income. Take advantage of tax-free accounts such as IRA, 401(k), and health savings accounts and claim large tax deductions on charity donations.
If you want to plan your taxes yourself, our expert accountants can help you in no time. Our tax preparation and planning advisors are proficient in helping you manage the taxes and develop customized strategies as per your income plan to reduce tax bills. Outsourcing tax planning to us costs less than an accountant and provides a high-quality service. With the help of the most cutting-edge software and a knowledgeable team of experts, we ensure our clients benefit from the best services.
To start planning your taxes right now, give us a call at 1800 580-5375!